SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1997.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________
to _______________.
Commission file number 0-11413
MERIDIAN INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1689161
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2955 North Meridian Street
P.O. Box 1980
Indianapolis, IN 46206
(Address of principal executive offices)
Registrant's telephone number, including area code: (317) 931-7000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
6,624,875 Common Shares at June 30, 1997
The Index of Exhibits is located at page 14 in the sequential
numbering system.
Total pages: 14
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. In the opinion of management, the financial
information reflects all adjustments (consisting only of
normal recurring adjustments) which are necessary for a
fair presentation of financial position, results of
operations and cash flows for the interim periods. The
results for the three and six months ended June 30, 1997,
are not necessarily indicative of the results to be
expected for the entire year.
These quarterly interim financial statements are
unaudited.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of June 30, 1997 and December 31, 1996
June 30, December 31,
1997 1996
(Unaudited)
ASSETS
Investments:
Fixed maturities--available for sale, at market
(cost $242,869,000 and $234,356,000) $247,148,383 $238,343,040
Equity securities, at market
(cost $33,674,000 and $33,779,000) 45,028,777 40,629,633
Short-term investments, at cost, which
approximates market 4,851,570 1,326,634
Other invested assets 1,526,586 1,390,176
Total investments 298,555,316 281,689,483
Cash 874,555 3,128,154
Premiums receivable, net of allowance for bad debts 4,436,645 4,674,984
Accrued investment income 3,233,320 3,241,125
Deferred policy acquisition costs 18,065,793 16,690,275
Goodwill 16,483,799 16,848,829
Reinsurance receivables 43,855,591 45,850,830
Prepaid reinsurance premiums 4,016,668 5,020,605
Due from Meridian Mutual Insurance Company 9,777,732 8,973,672
Other assets 3,823,068 11,679,744
Total assets $403,122,487 $397,797,701
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses $164,410,810 $161,309,239
Unearned premiums 86,913,708 84,065,751
Other post-retirement benefits 1,473,236 1,417,814
Bank loan payable 11,625,000 11,875,000
Reinsurance payables 9,113,307 8,664,358
Other liabilities 5,473,872 8,291,558
Total liabilities 279,009,933 275,623,720
Shareholders' equity:
Common shares, no par value, authorized 20,000,000
shares; issued 6,805,955; outstanding 6,624,875 at
June 30, 1997 and 6,779,375 at December 31, 1996 44,077,846 44,077,846
Treasury shares, at cost; 154,500 shares (2,308,188) --
Contributed capital 15,058,327 15,058,327
Unrealized appreciation of investment securities, net
of deferred income tax 10,349,038 7,141,846
Retained earnings 56,935,531 55,895,962
Total shareholders' equity 124,112,554 122,173,981
Total liabilities and shareholders' equity $403,122,487 $397,797,701
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the three and six months ended June 30, 1997 and 1996
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Premiums earned $48,693,566 $38,281,603 $ 96,640,080 $ 75,428,046
Net investment income 4,183,563 3,530,629 8,107,799 7,256,834
Realized investment gains 1,368,947 1,270,172 1,761,802 1,592,250
Other income 280,820 179,157 925,089 384,786
Total revenues 54,526,896 43,261,561 107,434,770 84,661,916
Losses and loss adjustment
expenses 37,566,764 31,610,326 75,878,494 61,117,044
General operating expenses 4,390,759 2,979,835 8,700,736 6,363,623
Amortization expenses 10,660,429 8,285,625 20,997,254 16,326,511
Interest expense 169,100 -- 353,378 --
Total expenses 52,787,052 42,875,786 105,929,862 83,807,178
Income before income taxes 1,739,844 385,775 1,504,908 854,738
Income taxes (benefit):
Current 611,000 (10,000) 227,000 92,000
Deferred (673,000) (306,000) (834,000) (534,000)
Total income taxes
(benefit) (62,000) (316,000) (607,000) (442,000)
Net income $ 1,801,844 $ 701,775 $ 2,111,908 $ 1,296,738
Weighted average shares
outstanding 6,703,952 6,779,375 6,741,455 6,779,191
Per share results:
Net income $ 0.27 $ 0.10 $ 0.31 $ 0.19
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the six months ended June 30, 1997 and 1996
(Unaudited)
Unrealized
Appreciation
(Depreciation)
Common Treasury Contributed of Retained
Shares Shares Capital Investments Earnings
Balance at
January 1,1996 $44,076,685 $ 0 $15,058,327 $ 6,842,245 $52,265,410
Net income -- -- -- -- 1,296,738
Unrealized deprec-
iation of invest-
ment securities,
net of deferred
income taxes -- -- -- (2,340,163) --
Dividends ($0.16
per share) -- -- -- -- (1,084,701)
Exercise of stock
options for 4,042
common shares 23,241 -- -- -- --
Repurchase and
retirement of
1,472 common
shares (22,080) -- -- -- --
Balance at
June 30, 1996 $44,077,846 $ 0 $15,058,327 $ 4,502,082 $52,477,447
Balance at
January 1, 1997 $44,077,846 $ 0 $15,058,327 $ 7,141,846 $55,895,962
Net income -- -- -- -- 2,111,908
Unrealized apprec-
iation of invest-
ment securities,
net of deferred
income taxes -- -- -- 3,207,192 --
Dividends ($0.16
per share) -- -- -- -- (1,072,339)
Repurchase 154,500
common shares -- (2,308,188) -- -- --
Balance at June 30,
1997 $44,077,846 $(2,308,188)$15,058,327 $10,349,038 $56,935,531
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the six months ended June 30, 1997 and 1996
(Unaudited)
June 30,
1997 1996
Cash flows from operating activities:
Net income $ 2,111,908 $ 1,296,738
Reconciliation of net income to net cash provided
by operating activities:
Amortization 20,997,254 16,326,511
Deferred policy acquisition costs (22,007,742) (16,983,796)
Increase in unearned premiums 2,847,957 3,755,009
Increase in losses and loss adjustment expenses 3,101,571 6,369,269
Decrease (increase) in amount due from Meridian
Mutual Ins. Co. (804,060) 11,421
Decrease (increase) in reinsurance receivables 1,995,239 (6,839,463)
Decrease (increase) in other assets 6,358,906 (1,042,387)
Increase in other post-employment benefits 55,422 59,718
Increase in reinsurance payables 448,949 2,039,610
Decrease in accrued commissions and other expenses (1,202,510) (2,631,571)
Increase (decrease) in payable for federal income
taxes 192,578 (1,002,352)
Increase (decrease) in other liabilities (1,669,181) 227,743
Net realized investment gains (1,761,802) (1,592,250)
Other, net 616,439 (622,172)
Net cash provided (used) by operating activities 11,280,928 (627,972)
Cash flows from investing activities:
Purchase of fixed maturities (38,771,536) (19,094,373)
Proceeds from sale of fixed maturities 16,063,001 15,650,720
Proceeds from calls, prepayments and maturity of
fixed maturities 13,994,271 9,339,404
Purchase of equity securities (8,250,865) (8,332,404)
Proceeds from sale of equity securities 10,257,279 7,958,388
Net increase in short-term investments (3,524,936) (6,300,814)
Increase in other invested assets (136,410) (17,966)
Increase in payable for securities 477,557 1,957,950
Net cash provided (used) in investing activities (9,891,639) 1,160,905
Cash flows from financing activities:
Dividends paid (1,084,700) (1,016,727)
Repayment of bank loan (250,000) --
Repurchase of common shares (2,308,188) (22,080)
Exercise of stock options -- 23,241
Net cash used in financing activities (3,642,888) (1,015,566)
Decrease in cash (2,253,599) (482,633)
Cash at beginning of period 3,128,154 935,098
Cash at end of period $ 874,555 $ 452,465
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements should be read in
conjunction with the following notes and with the Notes to
Consolidated Financial Statements of Meridian Insurance Group, Inc.,
for the year ended December 31, 1996. In the opinion of management,
the financial information reflects all adjustments (consisting only
of normal recurring adjustments) which are necessary for a fair
presentation of financial position, results of operations and cash
flows for the interim periods. The results for the three and six
months ended June 30, 1997 are not necessarily indicative of the
results to be expected for the entire year.
1. Related Party Transactions
Meridian Insurance Group, Inc. (the "Company") is an insurance
holding company principally engaged in 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"). Citizens Fund and ICO were purchased by
the Company on July 31, 1996 (see Note 3 below). Effective
August 1, 1996, Meridian Security, Citizens Fund and ICO all
participated in a pooling arrangement with Meridian Mutual
Insurance Company ("Meridian Mutual"), the principal shareholder
of the Company, and Citizens Mutual Insurance Company, the former
majority shareholder of Citizens Security Group, Inc., in which
the underwriting income and expenses of each entity are shared.
Beginning August 1, 1996, 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 aforementioned pooling arrangement, of which
Meridian Security assumed 74 percent of the combined underwriting
income and expenses of the two companies.
2. Reinsurance
For the three and six months ended June 30, 1997 and 1996, the
effects of reinsurance on the Company's premiums written,
premiums earned and losses and loss adjustment expenses ("LAE")
are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Premiums written:
Direct $ 55,505,976 $ 44,207,136 $107,785,211 $ 82,551,768
Assumed 396,742 1,054,333 738,886 2,823,327
Ceded (4,622,510) (3,621,506) (8,032,125) (6,600,532)
Net $ 51,280,208 $ 41,639,963 $100,491,972 $ 78,774,563
Premiums earned:
Direct $ 52,759,164 $ 39,437,623 $104,502,417 $ 77,636,806
Assumed 422,673 2,143,030 1,173,725 3,983,278
Ceded (4,488,271) (3,299,050) (9,036,062) (6,192,038)
Net $ 48,693,566 $ 38,281,603 $ 96,640,080 $ 75,428,046
Losses and LAE:
Direct $ 41,621,253 $ 42,247,983 $ 81,247,895 $ 71,850,549
Assumed 323,450 958,639 788,645 1,929,819
Ceded (4,377,939) (11,596,296) (6,158,046) (12,663,324)
Net $ 37,566,764 $ 31,610,326 $ 75,878,494 $ 61,117,044
<PAGE>
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. 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. The following
unaudited pro-forma condensed consolidated results of operations for the
three and six months ended June 30, 1996 assume the acquisition
and financing of the transaction had occurred at January 1, 1996:
Three months ended Six months ended
June 30, 1996 June 30, 1996
Premiums $ 46,430,000 $ 91,325,000
Revenues $ 51,932,000 $101,585,000
Net income (loss) $ (416,000) $ 198,000
Net income (loss) per share $ (0.06) $ 0.03
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.
4. Earnings Per Share:
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", which requires changes in the
computation, presentation, and disclosure of earnings per share.
This Statement requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all
companies with complex capital structures, regardless of whether
both computations are the same. SFAS No. 128 also replaces the
presentation of primary earnings per share with a basic earnings
per share computation and eliminates the modified treasury stock
method and the three percent materiality provision as was
required under the Accounting Principles Board Opinion No. 15.
This Statement becomes effective for financial statements with
fiscal years ending after December 15, 1997 and does not allow
for early adoption. Management has not yet determined the
impact of this pronouncement, however, it is not expected to
have a material effect on the Company's financial statements.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Financial Position
Total assets for Meridian Insurance Group, Inc. at June 30,
1997 were $403.1 million, an increase of 1.3 percent over
December 31, 1996's $397.8 million. This growth was
primarily attributed to growth in invested assets, including
unrealized appreciation in the fixed maturity and equity
security investments. At June 30, 1997, the Company
recorded net unrealized appreciation before deferred income
taxes of approximately $15.6 million compared to $10.8
million at year-end 1996. Partially offsetting the growth
in invested assets was a decrease in other assets resulting
from the receipt of certain year-end receivables and a
reduction in the Company's deferred federal income tax asset
due to the increase in the unrealized appreciation of the
investment portfolio.
Total liabilities at June 30, 1997 of $279.0 million
increased 1.2 percent from $275.6 million at December 31,
1996. The primary causes of the liability growth were
increased reserves for losses and loss adjustment expenses
and unearned premiums. The higher reserves were reflective
of the Company's increased premium volume.
Shareholders' equity at June 30, 1997 totaled $124.1
million, a 1.6 percent increase from $122.2 million at
December 31, 1996. Net unrealized appreciation of investment
securities and net income were the factors leading to the
increase. On May 6, 1997, the Company announced that its
Board of Directors had authorized the repurchase of up to
350,000 shares, or approximately five percent of the
Company's outstanding common stock. As of June 30, 1997,
the Company had repurchased 154,500 shares, or approximately
44 percent of the authorized total at a cost of $2.3
million. The Company's book value per share at June 30,
1997 totaled $18.73, an increase of $0.71 over the $18.02
reported at December 31, 1996.
Results of Operations
Quarter
For the three months ended June 30, 1997, the Company
recorded net income of approximately $1.8 million, or $0.27
per share. This compares to 1996 second quarter net income
of approximately $0.7 million, or $0.10 per share. A
reduction in the loss ratio from the 1996 second quarter was
the major contributor to the Company's increased earnings
for 1997. The Company's statutory combined ratio for the
1997 second quarter was 107.4 percent compared to 110.4
percent for the same 1996 period.
The Company's total revenues of $54.5 million for the 1997
second quarter increased 26.0 percent over the $43.3 million
reported for the same 1996 period. The increased revenues
were attributed primarily to growth of $10.4 million, or
27.2 percent, in premiums earned to $48.7 million from $38.3
million for the 1996 second quarter. Approximately $9.7
million of this increase resulted from the July 1996
acquisition of Citizens Security Group, Inc. Exclusive of
the acquisition, net premiums earned for the Meridian book
of business for the three-months ended June 30, 1997
increased 1.8 percent when compared to the corresponding
1996 period. This growth was attributed to a 6.1 percent
increase in Meridian's personal and farm lines of business
being partially offset by a 5.3 percent reduction in
commercial lines volume. Commercial lines premiums were
affected by an extremely competitive environment in the Midwest
and a reduction of approximately $0.9 million in assumed premiums
from the Company's involuntary participation in the National
Workers' Compensation Pool ("NWCP").
Net investment income of $4.2 million for the 1997 second
quarter increased 18.5 percent in comparison to $3.5 million
for the same 1996 period primarily because of a larger
invested asset base resulting from the acquisition of
Citizens Security Group. The Company's net realized
investment gains for the second quarter of 1997 were $1.4
million, or $0.13 per share, compared to $1.3 million, or
$0.12 per share, for the same 1996 period. These gains were
taken primarily on the equity security portfolio.
The Company's total incurred losses and loss adjustment
expenses for the three months ended June 30, 1997 were $37.6
million compared to $31.6 million for the same 1996 period.
The increase was attributed primarily to the acquisition of
Citizens Security Group, which had a high loss and loss
adjustment expense ratio of 90.6 percent during the second
quarter, compared to 73.8 percent for the Meridian book of
business. The consolidated loss and loss adjustment expense
ratio for the 1997 second quarter improved 5.4 percentage
points to 77.2 percent in comparison to 82.6 percent for the
corresponding three-month period in 1996. The results for
both periods were affected by severe wind and hail storms,
and the current year second quarter also included claims
related to flooding in the Ohio Valley, Northern Minnesota
and North Dakota. Weather-related catastrophe losses for
the 1997 second quarter were estimated at $3.7 million,
compared to approximately $6.3 million for the same 1996
period.
The Company's general operating and amortization expenses
for the 1997 second quarter were $15.1 million, or 33.6
percent higher than 1996's three month total of $11.3
million. This increase was due principally to the
acquisition of Citizens Security Group. Relative to net
premiums written, the Company's statutory expense ratio was
approximately 30.3 percent for the second quarter of 1997.
Interest expense of $0.2 million in the 1997 second quarter
was recorded on the debt incurred in connection with the
acquisition of Citizens Security Group.
During the three-month period that ended June 30, 1997, the
Company recorded an income tax benefit of $62,000. This
benefit resulted primarily from the amount of tax-exempt
investment income in proportion to the Company's pre-tax
income.
Six Months
For the six months ended June 30, 1997, Meridian Insurance
Group, Inc. recorded net income of $2.1 million, or $0.31
per common share. This compares to net income of $1.3
million, or $0.19 per share, for the corresponding 1996
period. The results for both periods were negatively
impacted by the large volume of property damage claims
associated with severe storms that occurred throughout the
Company's operating territory. The after-tax impact of
weather-related catastrophe claims was estimated to be
approximately $0.60 per share for the first six months of
1997 and $0.81 per share for the same 1996 period.
The Company's total revenues for the six months ended June
30, 1997 were $107.4 million, an increase of 26.9 percent
when compared to same 1996 period's $84.7 million. Premiums
earned, the Company's largest component of revenues,
increased $21.2 million, or 28.1 percent, to $96.6 million
for the first six months of 1997 in comparison with 1996's
$75.4 million. The acquisition of Citizens Security Group
accounted for approximately $19.1 million of the increase.
The remainder was primarily attributed to earned premium growth
in Meridian's major lines of business with the exception of the
workers' compensation line. A decrease in workers' compensation
premium volume resulted from a $1.5 million reduction in
assumed premiums earned from the Company's involvement in
the NWCP. This was principally due to reduced participation
in the assigned risk pools for the states of Kentucky and
Tennessee. For the first half of 1997, direct written
premiums for the Meridian and Citizens Security insurance
companies increased 3.8 percent and 12.7 percent,
respectively.
Total net investment income of $8.1 million for the first
six months of 1997 increased 11.7 percent over the prior
year total of $7.3 million for the same period. Investment
income growth was primarily attributed to a larger invested
asset base resulting from the acquisition of Citizens
Security Group. As of June 30, 1997, the Company had
realized net gains on investments totaling $1.8 million, or
$0.17 per share, versus $1.6 million, or $0.15 per share,
for the same 1996 period.
Total incurred losses and loss adjustment expenses of $75.9
million for the first six months of 1997 were 24.2 percent
higher than the $61.1 million reported for the same 1996
period. Approximately $16.2 million of the current period
total resulted from the acquisition of Citizens Security
Group, which had a loss and loss adjustment expense ratio of
85.1 percent, compared to 76.9 percent for the Meridian book
of business. The Company's consolidated loss and loss
adjustment expense ratio for the 1997 six-month period
reflected a 2.5 percentage point improvement to 78.5 percent
from 81.0 percent for the same period from one year ago.
The reduction in the loss and loss adjustment expense ratio
resulted from better property coverage experience in the
Company's homeowners, farmowners and commercial multiple-
peril lines of business. Partially offsetting these
favorable trends were deteriorations in the personal and
commercial automobile lines of business, resulting from an
increase in claim severity.
The Company's general operating and amortization expenses of
$29.7 million for the six months ended June 30, 1997
resulted in an increase of 30.8 percent over 1996's six-
month total of $22.7 million. This increase resulted
primarily from the acquisition of Citizens Security Group.
Relative to net written premiums, the statutory expense
ratio for the 1997 six-month period was 30.6 percent.
Interest expense of $0.4 million was recorded in 1997 on the
debt incurred in connection with the acquisition of Citizens
Security Group.
For the six months ended June 30, 1997, the Company recorded
an income tax benefit of $607,000 resulting primarily from
the amount of tax-exempt investment income relative to pre-
tax income.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. a. Exhibits. See index to exhibits.
b. No reports on Form 8-K were filed during the
period covered by this statement.
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MERIDIAN INSURANCE GROUP, INC.
DATE: July 24, 1997 By: /s/ Norma J. Oman
Norma J. Oman, President and
Chief Executive Officer
DATE: July 24, 1997 By: /s/ Steven R. Hazelbaker
Steven R. Hazelbaker,
Vice President, Chief Financial
Officer and Treasurer
<PAGE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
FORM 10-Q
For the quarter ended June 30, 1997
Index to Exhibits
Exhibit Number
Assigned in Regulation S-K
Item 601 Description of Exhibit
(4) 4.01 Text of Certificate for Common
Shares of Meridian Insurance Group,
Inc. (Incorporated by reference to
Exhibit 4.01 to the registrant's
Form S-1 Registration Statement No.
33-11413.)
(27) Financial Data Schedule
<PAGE>
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