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 September 30, 1998.
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:
6,643,519 Common Shares at September 30, 1998
The Index of Exhibits is located at page 17 in the sequential
numbering system.
Total pages: 17
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 nine months ended September 30,
1998, are not necessarily indicative of the results to be
expected for the entire year.
These quarterly interim financial statements are
unaudited.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of September 30, 1998 and December 31, 1997
September 30, December 31,
1998 1997
(Unaudited)
ASSETS
Investments:
Fixed maturities--available for sale, at market
(cost $229,964,000 and $239,662,000) $240,951,681 $ 248,404,304
Equity securities, at market
(cost $46,913,000 and $41,430,000) 54,344,279 54,378,947
Short-term investments, at cost, which
approximates market 5,121,228 3,996,232
Other invested assets 1,398,135 1,647,102
Total investments 301,815,323 308,426,585
Cash 3,604,545 1,188,423
Premiums receivable, net of allowance for bad debts 4,816,585 4,343,157
Accrued investment income 2,768,126 3,130,712
Deferred policy acquisition costs 17,999,004 17,651,544
Goodwill 14,951,090 15,479,456
Reinsurance receivables 50,441,485 48,850,066
Prepaid reinsurance premiums 3,473,099 3,861,507
Due from Meridian Mutual Insurance Company 8,734,841 7,723,277
Other assets 1,477,921 2,931,077
Total assets $ 410,082,019 $ 413,585,804
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses $ 165,908,439 $ 169,801,326
Unearned premiums 83,110,699 82,839,333
Other post-retirement benefits 2,048,327 1,933,181
Bank loan payable 10,500,000 11,375,000
Reinsurance payables 7,508,694 9,078,076
Other liabilities 4,689,599 6,664,653
Total liabilities 273,765,758 281,691,569
Shareholders' equity:
Common shares, no par value, authorized 20,000,000 shares;
issued 6,798,019 and 6,781,364, outstanding 6,643,519 and
6,626,864 at September 30, 1998 and
December 31, 1997,respectively 44,336,679 44,110,416
Treasury shares, at cost; 154,500 shares (2,308,188) (2,308,188)
Contributed capital 15,058,327 15,058,327
Retained earnings 67,041,828 60,684,448
Accumulated other comprehensive income 12,187,615 14,349,232
Total shareholders' equity 136,316,261 131,894,235
Total liabilities and shareholders' equity $ 410,082,019 $ 413,585,804
The accompanying notes are an integral part of the consolidated
financial statements.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the three and nine months ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Premiums earned $ 47,286,104 $ 49,489,744 $142,407,598 $146,129,824
Net investment income 4,225,102 4,062,313 12,834,040 12,170,112
Realized investment gains 2,288,443 998,272 5,500,708 2,760,074
Other income 33,584 41,943 68,322 967,032
Total revenues 53,833,233 54,592,272 160,810,668 162,027,042
Losses and loss
adjustment expenses 35,013,465 35,643,183 104,811,115 111,521,677
General operating expenses 4,067,499 4,030,990 12,691,768 12,731,726
Amortization expenses 10,596,595 10,831,023 32,148,493 31,828,277
Interest expense 172,362 195,648 515,786 549,026
Total expenses 49,849,921 50,700,844 150,167,162 156,630,706
Income before income taxes 3,983,312 3,891,428 10,643,506 5,396,336
Income taxes (benefit):
Current 722,000 558,117 1,846,000 785,117
Deferred 321,000 314,000 846,000 (520,000)
Total income taxes
(benefit) 1,043,000 872,117 2,692,000 265,117
Net income $ 2,940,312 $ 3,019,311 $ 7,951,506 $ 5,131,219
Weighted average shares
outstanding 6,642,889 6,626,259 6,638,263 6,702,634
Per share results:
Basic earnings per share $ 0.44 $ 0.46 $ 1.20 $ 0.77
Diluted earnings per share $ 0.44 $ 0.45 $ 1.18 $ 0.76
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the nine months ended September 30, 1998 and 1997
(Unaudited)
Accumulated
<CAPTION> Other
Common Treasury Contributed Retained Comprehensive Comprehensive
Shares Shares Capital Earnings Income (Loss) Income (Loss)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 44,077,846 $ 0 $ 15,058,327 $ 55,895,962 $ 7,141,846
Comprehensive income:
Net income -- -- -- 5,131,219 -- $ 5,131,219
Other Comprehensive
income, net of tax:
Unrealized gain on securities,
net of reclassification
adjustment -- -- -- -- 7,576,886 7,576,886
Comprehensive income (loss) -- -- -- -- -- $ 12,708,105
Dividends ($0.24 per share) -- -- (1,602,489) -- --
Issuance of 1.989 common
shares 32,570
Repurchase of 154,000
common shares -- (2,308,188) -- -- --
Balance at Sept. 30, 1997 $ 44,110,416 $(2,308,188) $ 15,058,327 $ 59,424,692 $ 14,718,732
Balance at January 1, 1998 $ 44,110,416 $(2,308,188) $ 15,058,327 $ 60,684,448 $ 14,349,232
Comprehensive income:
Net income -- -- -- 7,951,506 -- $ 7,951,506
Other comprehensive
income, net of tax:
Unrealized gain on securities,
net of reclassification
adjustment -- -- -- -- (2,161,617) (2,161,617)
Comprehensive income -- -- -- -- -- $ 5,789,889
Dividends ($0.24 per share) -- -- -- (1,594,126) --
Issuance of 16,655
common shares 226,263 -- -- -- --
Balance at Sept. 30, 1998 $ 44,336,679 $(2,308,188) $ 15,058,327 $ 67,041,828 $ 12,187,615
</TABLE>
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 nine months ended September 30, 1998 and 1997
(Unaudited)
September 30,
1998 1997
Cash flows from operating activities:
Net income $ 7,951,506 $ 5,131,219
Reconciliation of net income to net cash
provided by operating activities:
Amortization 32,148,493 31,828,277
Deferred policy acquisition costs (31,967,587)(33,028,158)
Increase in unearned premiums 271,366 3,770,554
Increase (decrease) in losses and
loss adjustment expenses (3,892,887) 1,130,000
Increase in amount due from Meridian
Mutual Ins. Co. (1,011,563) (1,194,520)
Decrease in reinsurance receivables (1,591,419) 1,373,483
Decrease in prepaid reinsurance premiums 388,408 913,119
Decrease in other assets 1,075,752 6,738,257
Increase in other post-employment benefits 115,146 80,985
Increase (decrease) in reinsurance payables (1,569,382) 434,168
Increase in payable for federal income taxes 152,400 111,382
Decrease in other liabilities (1,108,142) (1,959,591)
Net realized investment gains (5,500,708) (2,760,074)
Issuance of restricted common stock 65,209 --
Other, net (841,265) (264,764)
Net cash provided (used) by operating
activities (5,314,673) 12,304,337
Cash flows from investing activities:
Purchase of fixed maturities (65,048,378)(50,774,254)
Proceeds from sale of fixed maturities 58,950,677 26,135,592
Proceeds from calls, prepayments and maturity
of fixed maturities 17,742,809 18,430,466
Purchase of equity securities (14,592,189)(17,970,146)
Proceeds from sale of equity securities 13,860,639 14,538,847
Net increase in short-term investments (1,124,996) (1,969,235)
Decrease (increase) in other invested assets 248,966 (271,297)
Increase in payable for securities 5 806,089
Net cash used in investing activities 10,037,533 (11,073,938)
Cash flows from financing activities:
Dividends paid (1,592,792) (1,614,690)
Repayment of bank loan (875,000) (375,000)
Repurchase of common shares -- (2,308,188)
Exercise of stock options 161,054 --
Net cash used in financing activities (2,306,738) (4,297,878)
Increase (decrease) in cash 2,416,122 (3,067,479)
Cash at beginning of period 1,188,423 3,128,154
Cash at end of period $ 3,604,545 $ 60,675
The accompanying notes are an integral part of the consolidated
financial statements.
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, 1997. 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 nine
months ended September 30, 1998 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 Citizens Security
Insurance Company (formerly Citizens Fund Insurance Company) and
Insurance Company of Ohio. Since August 1, 1996, the companies
have participated in a pooling arrangement with Meridian Mutual
Insurance Company ("Meridian Mutual"), the principal shareholder
of the Company, and Meridian Citizens Mutual Insurance Company
(formerly Citizens Security Mutual Insurance Company), in which
the underwriting income and expenses of each entity are shared.
The participation percentages of the Company's insurance
subsidiaries for the periods ended September 30, 1998 and 1997
total 74 percent.
2. Reinsurance
For the three and nine months ended September 30, 1998 and 1997,
the effects of reinsurance on the Company's premiums written,
premiums earned and losses and loss adjustment expenses are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Premiums written:
Direct $ 51,589,853 $ 54,540,746 $154,278,743 $162,325,957
Assumed 63,666 (176,124) 363,818 562,762
Ceded (4,132,568) (4,043,100) (12,292,446) (12,075,225)
Net $ 47,520,951 $ 50,321,522 $142,350,115 $150,813,494
Premiums earned:
Direct $ 51,425,210 $ 53,545,307 $154,630,567 $158,047,724
Assumed 101,999 (103,281) 469,631 1,070,444
Ceded (4,241,105) (3,952,282) (12,692,600) (12,988,344)
Net $ 47,286,104 $ 49,489,744 $142,407,598 $146,129,824
Losses and loss adjustment expenses:
Direct $ 38,293,655 $ 39,658,435 $119,504,386 $120,906,330
Assumed 654,436 81,468 753,747 870,113
Ceded (3,934,626) (4,096,720) (15,447,018) (10,254,766)
Net $ 35,013,465 $ 35,643,183 $104,811,115 $111,521,677
3. Earnings Per Share
The following table represents the reconciliation of the
numerators and denominators of the Company's basic earnings per
share and diluted earnings per share computations reported on the
Consolidated Statement of Income for the three and nine month
periods ended September 30, 1998 and 1997:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Basic earnings per share computation:
Numerator (net income) $ 2,940,312 $ 3,019,311 $ 7,951,506 $ 5,131,219
Denominator:
Common shares
outstanding 6,642,889 6,626,259 6,638,263 6,702,634
Basic earnings
per share $ 0.44 $ 0.46 $ 1.20 $ 0.77
Diluted earnings per share computation:
Numerator (net income) $ 2,940,312 $ 3,019,311 $ 7,951,506 $ 5,131,219
Denominator:
Common shares
outstanding 6,642,889 6,626,259 6,638,263 6,702,634
Stock options 82,248 46,689 78,802 32,741
Total shares 6,725,137 6,672,948 6,717,065 6,735,375
Diluted earnings
per share $ 0.44 $ 0.45 $ 1.18 $ 0.76
4. Comprehensive Income
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income",
which establishes standards for the reporting and displaying of
comprehensive income and its components. All items required to
be recognized as components of comprehensive income must be
reported in a financial statement that is displayed with the
same prominence as other financial statements. SFAS No. 130
became effective for financial statements with fiscal years
beginning after December 15, 1997. All prior period information
presented has been restated to conform with this pronouncement.
The Company's other comprehensive income consists solely of net
unrealized gains (losses) on securities. The total net
unrealized gains (losses) on securities for the periods ended
September 30, 1998 and 1997 consist of the following:
Nine Months Ended
September 30,
1998 1997
Unrealized holding gains (losses)
before deferred income taxes $ 3,917,225 $14,956,960
Deferred income tax (expense)
or benefit (1,372,000) (5,235,000)
Less: Reclassification adjustment
for realized gains 7,243,842 3,045,074
Income tax expense related to
realized gains (2,537,000) (900,000)
Net unrealized gains (losses)
on securities $(2,161,617) $ 7,576,886
5. Segment Information
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131,"Disclosures about Segments of an Enterprise and
Related Information", which establishes standards for the
financial statement reporting of information regarding operating
segments. SFAS No. 131 also sets standards for related
disclosures about products and services, activities in
geographic areas and reliance on major customers.
As permitted by SFAS No. 131, the Company has elected not to
disclose the segment information for the interim periods in the
initial year of implementation. The Company plans to adopt SFAS
No. 131 in the fourth quarter of 1998. Interim period
information will be included for comparative purposes beginning
in 1999.
6. Shareholder Rights Plan
On September 8, 1998, the Board of Directors of Meridian
Insurance Group, Inc., adopted a Shareholder Rights Plan. Under
the Plan, a dividend of one preferred share purchase right was
paid to shareholders of record on September 28, 1998 for each
outstanding common share. Each Right entitles the holder to
purchase one one-thousandth of a share of Series A Junior
Participating Preferred Stock of the Company at a price of
$75.00 per one-thousandth of a Preferred Share.
If a person or group acquires 20% or more of the outstanding
Common Shares (thereby becoming an Acquiring Person), each
holder of a Right (except those held by the Acquiring Person and
its affiliates and associates) will generally have the right to
purchase Common Shares having value equal to two times the
purchase price of the Right. In other words, the Rights'
holders, other than the Acquiring Person, may purchase common
shares or their equivalent at a 50 percent discount. The rights
will expire on September 18, 2008, unless the expiration date is
extended by amendment or unless the Rights are earlier redeemed
or exchanged by the Company. (A full description and terms of
the Rights Plan are set forth in a Rights Agreement between the
Company and Harris Trust and Savings Bank, as Rights Agent.)
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 September
30, 1998 were $410.1 million, a decrease of 0.8 percent from
$413.6 million reported at December 31, 1997. The decrease
was primarily the result of the third quarter's general
stock market decline. As of September 30, 1998, the Company
recorded unrealized appreciation before deferred income
taxes on equity securities of approximately $7.4 million
compared to $12.9 million at year-end 1997. The Company's
unrealized appreciation on its fixed maturity portfolio was
$11.0 million at the end of the 1998 compared to $8.7
reported at December 31, 1997.
Total liabilities at September 30, 1998 of $273.8 million
were 2.8 percent less than the $281.7 million reported at
December 31, 1997. A decrease of $3.9 million in loss
reserves was the primary factor. Such decrease was
attributable to loss experience and the timing of claim
payments. Reinsurance payables also decreased to $7.5
million from the $9.1 million reported at year-end 1997.
The Company's shareholders' equity at September 30, 1998
grew 3.2 percent to $136.3 million compared to the December
31, 1997 total of $131.9 million. The primary factor
leading to the improvement was net income of $8.0 million,
partially offset by unrealized depreciation of investment
securities, net of deferred income taxes, of $2.2 million.
The Company's book value per share at September 30, 1998 was
$20.52, an increase of $0.62 from the $19.90 book value per
share at year-end 1997.
Results of Operations
Quarter
For the three months ended September 30, 1998, the Company
recorded net income of $2.9 million, or $0.44 per share for
both basic and diluted earnings. This compares to net
income of $3.0 million, or $0.46 basic earnings per share
basic and $0.45 diluted earnings per share, for the
corresponding 1997 period. Realized gains were $1.3 million
higher in the third quarter of 1998 than in the preceding
year, accounting for $0.22 of diluted earnings per share in
this year's third quarter compared with $0.10 for the third
quarter of 1997.
The Company's total revenues for the 1998 third quarter were
$53.8 million, compared to $54.6 million reported for the
corresponding 1997 period. Consolidated earned premiums
declined by approximately $2.2 million. The largest factor
was a $2.2 million decline in direct premium volume of the
Meridian Citizens companies, involving most of its major
lines of business. Compounding the soft market and
competitive factors was the effect on premium production of
a number of underwriting and agency management actions taken
in prior months to improve the loss experience of this book
of business. Personal and farm lines grew modestly for the
Meridian book of business compared to the prior year third
quarter. Meridian's commercial lines earned premium
decreased by 3.9 percent due to largely continuing soft
market conditions. The new non-standard automobile line of
business, introduced earlier in 1998, produced $1.6 million
of premium during the quarter.
Net investment income of approximately $4.2 million for the
1998 third quarter increased 4.0 percent in comparison to
$4.1 million for the same 1997 period. A slight increase
in the Company's pre-tax net investment yield as well as a
larger investment base for much of the quarter, were
contributors to the increased investment income. For the
quarters ended September 30, 1998 and 1997, the Company
realized net investment gains of approximately $2.3 and $1.0
million, respectively. The current quarter's realized gains
resulted from the sale of certain equity securities, as well
as from certain municipal bond sales motivated by tax
planning strategies.
The Company's total incurred losses and loss adjustment
expenses for the 1998 third quarter decreased to $35.0
million from $35.6 million for the comparable 1997 quarter.
However, given the current quarter's due to the lower
premium, the Company reported a 2.8 percentage point
deterioration in its loss and loss adjustment expense ratio
from 71.2 to 74.0 percent. Third quarter catastrophe losses
of $2.9 million, including the continued development of
storms occurring late in the second quarter, added 6.2
percentage points to the Company's loss and loss adjustment
expense ratio.
The Company's total expenses, which includes general
operating, amortization, and interest expenses, of $14.8
million for the 1998 third quarter were down from the $15.1
million reported for the comparable 1997 period. The
decrease was less than the decrease in premium volume,
however, resulting in a one percentage point increase
relative to premium revenue.
For the quarter ended September 30, 1998, the Company
recorded income tax expense of approximately $1.0 million
which corresponds to an effective tax rate of 26.2 percent.
The Company benefits from tax exempt interest and the
dividends received deduction, producing an effective rate
below the statutory income tax rate.
Nine Months
For the nine months ended September 30, 1998, the Company
recorded net income of $8.0 million, or $1.20 basic earnings
per share and $1.18 diluted earnings per share. This
compares favorably to net income of $5.1 million, or $0.77
basic earnings per share and $0.76 diluted earnings per
share for the corresponding 1997 period. Improvement in the
Company's loss and loss adjustment expense ratio was a
primary factor. Also, realized gains on investments were
$5.5 million, or $0.54 per share in 1998, compared to $2.8
million, or $0.27 per share for the same nine month period
in 1997.
The Company's total revenues for the nine months ended
September 30, 1998 decreased to $160.8 million from $162.0
million for the corresponding 1997 period primarily due to a
decrease in earned premium of $3.7 million, partially offset
by higher realized gains. The Meridian book of business
reported a $0.7 million increase in earned premium for the
nine month period when compared to 1997. The higher revenue
was attributable to an increase in personal lines premium
with the automobile line of business $2.2 million above 1997
volume. Farm lines produced growth of $0.3 million or 3.6
percent. The highly competitive commercial lines market,
which continues to be soft, reported a $3.4 million decline
in volume for the first nine months or a 6.1 percentage
point decrease. Net earned premium volume from the Meridian
Citizens operations reflected a decrease of 14.8 percent for
the first nine months of 1998, in comparison to the same
1997 period. In addition to competition and the soft
market, the Meridian Citizens premium production was
negatively affected by a number of underwriting actions
taken to improve the loss ratio.
Net investment income of approximately $12.8 million for the
nine months ended September 30,1998 increased 5.5 percent in
comparison to $12.2 million for the same 1997 period. The
Company has replaced a portion of its tax-advantaged
investment portfolio with taxable securities, favorably
affecting the investment yield.
The Company's total incurred losses and loss adjustment
expenses for the nine months ended September 30, 1998
decreased 6.0 percent to $104.8 million from $111.5 million
for the comparable 1997 period. The year-to-date loss and
loss adjustment expense ratio was 73.6 percent at September
30, 1998 compared to 76.3 percent for the 1997 period. The
improvement was achieved in spite of the higher level of
catastrophe losses this year, which have added 9.1
percentage points to the loss ratio through September 30,
1998, compared with 4.4 percentage points through September
of last year. Consolidated net weather-related catastrophe
losses for the Company were estimated to be $13.0 million
through September which compares to $6.4 million during
1997. Minnesota, Meridian Citizen's largest state of
operation, has been particularly hard hit with record levels
of property damage losses arising from tornadoes, hail, and
heavy straight line winds.
The Company's total expenses, which includes general
operating, amortization, and interest expenses, of $45.4
million for the nine months ended September 30, 1998
increased slightly from the $45.1 million reported through
the comparable 1997 period. This represents an increase of
approximately one percentage point relative to premiums
earned.
For the nine months ended September 30, 1998, the Company
recorded income tax expense of approximately $2.7 million
which corresponds to an effective tax rate of 25.3 percent.
This compares to a $0.6 million benefit recorded for the
corresponding 1997 period. The 1998 effective tax rate
varies from the statutory tax rate due to the relative
impact of tax exempt interest and the dividends received
deduction.
Year 2000 disclosures
As we near the end of the century, many information
technology products will not recognize the year 2000. As a
result, businesses are at risk for possible calculation
errors or system failures which could cause a disruption in
their operations. This is known as the Year 2000 ("Y2K")
issue.
In 1995, Meridian began the initial planning phase to ensure
that all systems were Y2K compliant. As a result of this
planning, it was determined that Meridian would utilize
internal resources to complete the necessary remediation.
This would allow Meridian to contain costs and maintain
control as well as provide consistency in system
applications. As a result of this decision, a team of
programmers was hired under the direction of experienced
internal management to address the issue. It was also
determined that the Meridian Citizens project team would
operate independently utilizing contracted personnel to
complete the project. Such personnel, our contracted
outside automation services providers, were under contract
to complete and test the Y2K programming efforts. This
process was supervised by internal Meridian staff to
maintain consistency.
The next stage of the process was to identify those systems
and programs that contained date sensitive fields throughout
the operating systems. The Meridian approach taken to
address the issue was field expansion. This expansion would
allow the date fields to be expanded and allow programs to
distinguish dates based upon an eight digit code as opposed
to a six digit code. The Meridian Citizens approach
implemented by the outside automation services provider, had
to take into account the various operating platforms used to
process data. It was decided that a combination of methods
would be the best approach to solving the Y2K dilemma. A
combination of field expansion and "windowing" was utilized
to address the issue. The "windowing" approach utilizes a
two digit year currently in the date fields. For example,
any result over 50 signifies the 20th century and any under
fifty, the 21st century.
Three years into the project, Meridian has made significant
progress. Prioritizing the effort was done by reviewing
those systems and programs which would require the effective
date change prior to January 1, 2000 such as policy
processing systems which require renewal processing as early
as November of 1998. Extensive reprogramming now allows
these internal policy processing systems to recognize the
difference between the 20th and the 21st century.
Meridians' remediated policy processing systems have been in
production and compliant since November of 1997. In July of
1998, Meridian also completed code remediation for the
management reporting systems and front-end client server
systems. The Meridian Citizens companies which again
operate on a different platform, achieved Y2K compliance in
August of 1998 and have been in production since that time.
1998 mainframe impact, front-end client server, and
critical network programming have also been completed.
Critical operating systems for the Company have been tested
by our Quality of Assurance Unit and were found to be
compliant. There are a few internal non-critical
programming efforts which are still in the process of
remediation. The majority of these are expected to be
completed and tested by the end of 1998. A few are
targeted for completion during the first and second quarters
of 1999. It is anticipated that these systems will be
remediated, tested, and moved into production also within
that time frame. As the Company has already processed
policies encompassing Y2K dates, the Company does not feel
at risk for Y2K difficulties and as such no contingency
plans are currently in place for the operating systems.
Meridian anticipates that the costs associated with Y2K
remediation will approximate $1.3 million upon completion.
Such incremental costs have been estimated at approximately
$200,000 in 1996 and approximately $400,000 per year for
1997-1998. It is also anticipated that approximately
$300,000 will be spent in 1999. Approximately 50 percent of
the total costs relate to personnel such as custom
programmers. The remainder relates to costs for replacing
certain software applications and equipment. Such costs
have been funded through operating revenues and represent
less than 10 percent of the information systems annual
budgets. Costs associated with the Meridian Citizens
remediation were included under the automation programming
charges incurred by the Company on a monthly basis and were
therefore not distinguishable from normal programming fees.
Due to the complexity and impact of the Y2K project, the
Company engaged independent consultants to review the
planning and remediation methods utilized within the project
for all subsidiaries. The written report received from the
independent consultants contained audit comments or
suggestions which were implemented and incorporated into the
final Y2K action plans. At this time the Company's policy
processing and management reporting systems have been
corrected, thoroughly tested by our Quality Assurance team
and moved into full production. Actual policies have been
processed which are impacted by the Y2K issue. Throughout
1999 and as the century mark nears, the Company will double
check the systems to verify that the infrastructure will
respond correctly to the actual century date change. The
Company has also addressed the facilities Y2K issues by
evaluating HVAC, security systems, elevators, the automobile
fleet, etc., to ascertain compliance.
As part of the readiness program, the Company also
recognized the impact that significant outside vendors,
agents, and other business associates could have on the
ability to transact business. As a result, the Company has
reviewed vendor associated software and hardware products
utilized within the organization to determine the Y2K effort
that would be necessary to achieve readiness. The Company
also identified specific hardware and software that needed
to be replaced as a result of the Y2K issue. It is
anticipated that the replacement process will be completed
in early 1999. Most are currently in compliance, scheduled
for upgrade, or in the process of being eliminated. In
addition, the Company also established contact with agents
and certain vendors to highlight this issue. This contact
was established with the purpose of reasonably ascertaining
the Y2K impact. Where possible, the Company has reviewed
plans received by outside providers for their Y2K compliance
effort. In some cases, these entities have a lower level of
readiness and preparation and as a result are not able to
provide this type of information. Should an agent be non-
compliant for Y2K, the Company's contingency plan is the
current ability to process or underwrite policies on a
manual basis. While this may have a direct impact on the
timeliness of policy processing, the operating systems do
have the ability to process such data. Third party vendors
which have critical impact on the ability to process are
currently anticipated to be Y2K compliant. However, there
can be no guarantee that the systems of agents or other
third parties will be timely converted, or that a widespread
failure to convert by others would not adversely affect the
Company. It is not anticipated that non-critical third
party vendors who fail to be Y2K compliant will impact the
ability to complete necessary work processes. No
contingency plan is in place for these non-critical business
vendors at this time.
The Company does not issue insurance policies covering risks
related to the Year 2000 issue. However, there can be no
certainty regarding future judicial or legislative
interpretations of coverage.
While the Company has utilized significant resources to
secure its critical operating systems, there are no
contingency plans for things which effect the general public
such as electrical power, water, and etc. Failure for these
providers to perform Y2K compliance could be detrimental to
company operations.
No significant information technology projects having a
material effect on the Company's financial position or
results of operations have been deferred as a direct result
of Year 2000 efforts.
Statements in this 10-Q document that are not strictly
historical may be "forward looking" statements which involve
risks and uncertainties. Risk factors include variation in
ability of the Company, suppliers, and agency
representatives to handle the Y2K computer issue. Growth
and profitability could be affected by these factors.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. a. Exhibits. See index to exhibits.
b. A Form 8-K was filed on September 18, 1998.
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: October 26 , 1998 By: /s/ Norma J. Oman
Norma J. Oman, President and
Chief Executive Officer
DATE: October 26 , 1998 By: /s/ Steven R. Hazelbaker
Steven R. Hazelbaker,
Vice President, Chief Financial
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
For the quarter ended September 30, 1998
Index to Exhibits
Exhibit Number
Assigned in Regulation S-K
Item 601 Description of Exhibit
(3) 3.01 Articles of Amendment
(4) 4.01 Text of Certificate for Common
Shares of Meridian Insurance
Group, Inc. (Incorporated by
reference to Exhibit 4.01 to the
registrant's Form S-1 Registration
Statement No. 33-11413.)
4.02 Rights Agreement, dated as of
September 18, 1998, between
Meridian Insurance Group, Inc. and
Harris Trust and Savings Bank, as
Rights Agent. The Rights Agreement
includes the form of Articles of
Amendment setting forth terms of
Series A Junior Participating
Preferred Stock as Exhibit A, the
form Right Certificate as Exhibit B
and the Summary of Rights to
Purchase Preferred Shares as
Exhibit C (incorporated herein
by reference to Exhibit 1 to the
Company's Current Report on Form 8-K
dated September 18, 1998).
(27) 27.01 Financial Data Schedule
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: October 26, 1998 By:
Norma J. Oman, President and
Chief Executive Officer
DATE: October 26, 1998 By:
Steven R. Hazelbaker,
Vice President, Chief Financial
Officer and Treasurer
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 240,952
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<EQUITIES> 54,344
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<TOTAL-INVEST> 301,815
<CASH> 3,605
<RECOVER-REINSURE> 50,441
<DEFERRED-ACQUISITION> 17,999
<TOTAL-ASSETS> 410,082
<POLICY-LOSSES> 165,908
<UNEARNED-PREMIUMS> 83,111
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0
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142,408
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-7-
ARTICLES OF AMENDMENT
setting forth terms of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
MERIDIAN INSURANCE GROUP, INC.
___________________
Pursuant to the Indiana Business Corporation Law (the
"IBCL"), Meridian Insurance Group, Inc., an Indiana corporation
(the "Corporation"), in accordance with the provisions of Section
23-1-25-2 of the IBCL, does hereby certify:
Article I.
The name of the corporation filing these Articles of
Amendment is Meridian Insurance Group, Inc.
Article II.
The Articles of Incorporation of the Corporation are
hereby amended by adding thereto a new Section 4.04A within
Article IV, which new section is as follows:
Section 4.04A. Series A Preferred Stock. In
accordance with the provisions of Section 4.04 of the
Corporation's Articles of Incorporation, the following sets forth
the designation and number of shares, and fixes the preferences,
limitations and relative voting and other rights of a series of
Preferred Shares of the Corporation:
Section 1. Designation and Amount. The shares of such
series of Preferred Shares shall be designated as "Series A
Junior Participating Preferred Stock, no par value" (the
"Series A Preferred Stock") and the number of shares constituting
the Series A Preferred Stock shall be 42,000. Such number of
shares may be increased or decreased by resolution of the Board
of Directors; provided that no decrease shall reduce the number
of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options,
rights or warrants or upon the conversion of any outstanding
securities issued by the Corporation convertible into Series A
Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares
of any series of Preferred Shares (or any similar shares) ranking
prior and superior to the Series A Preferred Stock with respect
to dividends, the holders of shares of Series A Preferred Stock,
in preference to the holders of the Common Shares of the
Corporation, and of any other junior shares, shall be entitled to
receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends
payable in cash on the last day of each fiscal quarter in each
year, or such other dates as the Board of Directors of the
Corporation shall approve (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of
a share or fraction of a share of Series A Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the
greater of (a) $10.00 or (b) subject to the provision for
adjustment hereinafter set forth, 1,000 times the aggregate per
share amount of all cash dividends, and 1,000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or
other distributions, other than a dividend payable in Common
Shares or a subdivision of the outstanding Common Shares (by
reclassification or otherwise), declared on the Common Shares
since the immediately preceding Quarterly Dividend Payment Date
or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Corporation shall at
any time declare or pay any dividend on the Common Shares payable
in Common Shares, or effect a subdivision or combination or
consolidation of the outstanding Common Shares (by
reclassification or otherwise than by payment of a dividend in
Common Shares) into a greater or lesser number of Common Shares,
then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such
event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator
of which is the number of Common Shares outstanding immediately
after such event and the denominator of which is the number of
Common Shares that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in
paragraph (A) of Section 4.04A.2 immediately after it declares a
dividend or distribution on the Common Shares (other than a
dividend payable in Common Shares); provided that, in the event
no dividend or distribution shall have been declared on the
Common Shares during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $10.00 per share on the Series A Preferred
Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative
on outstanding shares of Series A Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue
of such shares, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date,
in which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is
a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares
of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive payment
of a dividend or distribution declared thereon, which record date
shall be not more than 60 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of
Series A Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Preferred Stock
shall entitle the holder thereof to 1,000 votes on all matters
submitted to a vote of the shareholders of the Corporation. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Shares payable in Common Shares, or effect
a subdivision or combination or consolidation of the outstanding
Common Shares (by reclassification or otherwise than by payment
of a dividend in Common Shares) into a greater or lesser number
of Common Shares, then in each such case the number of votes per
share to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which is
the number of Common Shares outstanding immediately after such
event and the denominator of which is the number of Common Shares
that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other
Articles of Amendment creating a series of Preferred Shares or
any similar shares, or by law, the holders of shares of Series A
Preferred Stock and the holders of Common Shares and any other
shares of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of
shareholders of the Corporation.
(C) Except as set forth herein, or as otherwise
provided by law, holders of Series A Preferred Stock shall have
no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of
Common Shares as set forth herein) for taking any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided
in Section 4.04A.2 are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not
declared, on shares of Series A Preferred Stock outstanding shall
have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any
other distributions, on any shares ranking junior
(either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or
make any other distributions, on any shares
ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding
up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A
Preferred Stock and all such parity shares on
which dividends are payable or in arrears in
proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or
otherwise acquire for consideration any
shares ranking junior (either as to dividends
or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock, provided
that the Corporation may at any time redeem,
purchase or otherwise acquire any such junior
shares in exchange for shares of the
Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or
winding up) to the Series A Preferred Stock;
or
(iv) redeem or purchase or
otherwise acquire for consideration any
shares of Series A Preferred Stock, or any
shares ranking on a parity with the Series A
Preferred Stock, except in accordance with a
purchase offer made in writing or by
publication (as determined by the Board of
Directors) to all holders of such shares upon
such terms as the Board of Directors, after
consideration of the respective annual
dividend rates and other relative rights and
preferences of the respective series and
classes, shall determine in good faith will
result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for
consideration any shares of the Corporation unless the
Corporation could, under paragraph (A) of Section 4.04A.4,
purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued
Preferred Shares and may be reissued as part of a new series of
Preferred Shares subject to the conditions and restrictions on
issuance set forth herein, in the Articles of
Incorporation, or in any other Articles of Amendment creating a
series of Preferred Shares or any similar shares or as otherwise
required by law.
Section 6. Liquidation, Dissolution or Winding Up.
Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of
any shares ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received the greater of (i) $1,000 per
share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of
such payment, or (ii) an aggregate amount per share, subject to
the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to
holders of Common Shares, or (2) to the holders of any shares
ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock,
except distributions made ratably on the Series A Preferred Stock
and all such parity shares in proportion to the total amounts to
which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the
Corporation shall at any time declare or pay any dividend on the
Common Shares payable in Common Shares, or effect a subdivision
or combination or consolidation of the outstanding Common Shares
(by reclassification or otherwise than by payment of a dividend
in Common Shares) into a greater or lesser number of Common
Shares, then in each such case the aggregate amount to which
holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under the proviso in clause (1)
of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of
Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger,
combination or other transaction in which the Common Shares are
exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be,
into which or for which each Common Share is changed or
exchanged. In the event the Corporation shall at any time
declare or pay any dividend on the Common Shares payable in
Common Shares, or effect a subdivision or combination or
consolidation of the outstanding Common Shares (by
reclassification or otherwise than by payment of a dividend in
Common Shares) into a greater or lesser number of Common Shares,
then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of
Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A
Preferred Stock shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall
rank, with respect to the payment of dividends and the
distribution of assets, junior to any other series of the
Corporation's Preferred Shares.
Section 10. Amendment. At any time that shares of the
Series A Preferred Stock are outstanding, the Articles of
Incorporation of the Corporation shall not be amended in any
manner which would materially alter or change the powers,
preferences or special rights of the Series A Preferred Stock so
as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of
Series A Preferred Stock, voting together as a single class.
Article III.
These Articles of Amendment were duly authorized by the
Board of Directors of the Corporation at a meeting duly called
and held on September 18, 1998. Pursuant to Section 23-1-25-2(d)
and Section 23-1-38-2(7) of the IBCL, no action by the
Corporation's shareholders was required.
IN WITNESS WHEREOF, these Articles of Amendment are
executed on behalf of the Corporation by its duly authorized
officers this 18th day of September, 1998.
MERIDIAN INSURANCE GROUP, INC.
By: /s/ Norma J. Oman
Norma J. Oman, President
and
Chief Executive Officer
Attest:
By: /s/ J. Mark McKinzie
J. Mark McKinzie, Senior
Vice President, Secretary and
General Counsel
