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, 1999.
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:
7,250,844 Common Shares at June 30, 1999
The Index of Exhibits is located at page 21 in the sequential
numbering system.
Total pages: 21
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, 1999, 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 June 30, 1999 and December 31, 1998
June 30, December 31
1999 1998
(Unaudited)
ASSETS
Investments:
Fixed maturities, available for sale at market
(cost $225,544,000 and $234,632,000) $ 224,645,208 $ 241,993,962
Equity securities, at market
(cost $50,209,000 and $48,338,000) 68,713,592 64,020,661
Short-term investments, at cost, which
approximates market 5,636,838 6,431,482
Other invested assets 1,412,757 1,375,463
Total investments 300,408,395 313,821,568
Cash 1,924,040 854,522
Premium receivable, net of bad debt allowance 8,595,424 5,625,470
Accrued investment income 3,054,352 2,950,290
Deferred policy acquisition costs 19,487,942 17,671,856
Goodwill 14,422,724 14,775,426
Reinsurance receivables 42,740,514 41,803,624
Prepaid reinsurance premiums 3,673,887 3,362,441
Due from Meridian Mutual Insurance Company 9,222,449 7,528,333
Other assets 2,003,008 463,990
Total assets $ 405,532,735 $ 408,857,520
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses $ 152,097,206 $ 154,252,671
Unearned premiums 88,720,963 81,223,095
Other post-employment benefits 2,012,380 1,935,616
Bank loan payable 9,375,000 10,125,000
Payable for securities 0 3,061,898
Reinsurance payables 8,447,401 9,811,976
Other liabilities 4,798,002 6,478,431
Total liabilities 265,450,952 266,888,687
Shareholders' equity:
Common shares, no par value, Authorized 20,000,000 shares;
issued 7,496,295 and 7,456,512; outstanding 7,250,844 and
7,243,712 at June 30, 1999 and
December 31, 1998, respectively
(including 10% stock dividend issued
on January 6, 1999, 658,493 shares) 44,793,300 44,336,679
Treasury Shares, at cost; 245,451 and
212,800 shares, respectively (3,851,478) (3,277,781)
Contributed capital 25,923,462 25,923,462
Retained earnings 61,543,445 59,796,235
Accumulated other comprehensive income 11,673,054 15,190,238
Total shareholders' equity 140,081,783 141,968,833
Total liabilities and shareholders' equity $ 405,532,735 $ 408,857,520
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the three and six months of June 30, 1999 and 1998
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Premiums earned $ 49,955,752 $ 47,131,856 $ 97,671,112 $ 95,121,494
Net investment income 4,084,476 4,381,075 8,239,755 8,608,938
Realized investment gains 1,674,579 2,830,864 2,617,012 3,212,265
Other income 45,763 1,026 73,956 34,738
Total revenues 55,760,570 54,344,821 108,601,835 106,977,435
Losses and loss adjustment expenses 37,131,731 35,977,829 73,632,674 69,797,650
General operating expenses 4,053,093 4,243,131 8,354,290 8,624,269
Amortization expenses 11,374,235 10,650,092 22,256,238 21,551,898
Interest expenses 117,237 159,443 270,210 343,424
Total expenses 52,676,296 51,030,495 104,513,412 100,317,241
Income before taxes and change
in accounting method 3,084,274 3,314,326 4,088,423 6,660,194
Income taxes (benefit):
Current 526,000 419,000 650,000 1,124,000
Deferred 278,000 401,000 234,000 525,000
Total income taxes (benefit) 804,000 820,000 884,000 1,649,000
Income before change in accounting
method 2,280,274 2,494,326 3,204,423 5,011,194
Cumulative effect of change in
accounting method, net of tax 0 0 (293,700) 0
Net Income $ 2,280,274 $ 2,494,326 $ 2,910,723 $ 5,011,194
Basic average shares outstanding 7,256,423 7,305,671 7,252,733 7,299,503
Weighted average shares outstanding 7,330,153 7,398,706 7,338,257 7,384,320
Per share results:
Basic earnings per share before
change in accounting method $ 0.31 $ 0.34 $ 0.44 $ 0.69
Accounting change, net of tax, per share 0.00 0.00 (0.04) 0.00
Basic earnings per share $ 0.31 $ 0.34 $ 0.40 $ 0.69
Diluted earnings per share before
change in accounting method $ 0.31 $ 0.34 $ 0.44 $ 0.68
Accounting change, net of tax, per share 0.00 0.00 (0.04) 0.00
Diluted earnings per share $ 0.31 $ 0.34 $ 0.40 $ 0.68
</TABLE>
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 six months ended June 30, 1999 and 1998
(Unaudited)
<CAPTION>
Accumulated
Other
Common Treasury Contributed Retained Comprehensive Comprehensive
Shares Shares Capital Earnings Income (Loss) Income (Loss)
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 $ 44,110,416 $ (2,308,188) $ 15,058,327 $ 60,684,448 $ 14,349,232
Comprehensive income:
Net income -- -- -- 5,011,194 -- $ 5,011,194
Other comprehensive
income, net of tax:
Unrealized gain on securities,
net of reclassification
adjustment -- -- -- -- 1,340,132 1,340,132
Comprehensive income -- -- -- -- -- $ 6,351,326
Dividends ($0.14 per share) -- -- -- (1,062,644) --
Issuance of 3,666 restricted
shares 65,209 -- -- -- --
Issuance of 10,989 common
shares 130,494 -- -- -- --
Balance at June 30, 1998 $ 44,306,119 $ (2,308,188)$ 15,058,327 $ 64,632,998 $ 15,689,364
Balance January 1, 1999 $ 44,336,679 $ (3,277,781)$ 25,923,462 $ 59,796,235 $ 15,190,238
Comprehensive income:
Net income -- -- -- 2,910,723 -- $ 2,910,723
Other comprehensive
income, net of tax:
Unrealized loss on securities,
net of reclassification
adjustment -- -- -- -- (3,517,184) (3,517,184)
Comprehensive loss -- -- -- -- -- $ (606,461)
Dividends ($0.16 per share) -- -- -- (1,163,513) --
Repurchase of 32,651 common
shares -- (573,697) -- -- --
Issuance of 3,104 restricted
shares 57,618 -- -- -- --
Exercise of stock options for
36,389 common shares 393,439 -- -- -- --
Issuance of 290 common
shares 5,564 -- -- -- --
Ending balance at June 30, 1999 $ 44,793,300 $ (3,851,478)$ 25,923,462 $ 61,543,445 $ 11,673,054
</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 six months ended June 30, 1999 and 1998
(Unaudited)
June 30,
1999 1998
Cash flows from operating activities:
Net income $ 2,910,723 $ 5,011,194
Reconciliation of net income to net cash
provided by operating activities:
Amortization 22,256,238 21,551,898
Deferred policy acquisition costs (23,799,276) (21,546,562)
Deferred income taxes 234,000 525,000
Increase (decrease) in unearned premiums 7,497,868 (583,946)
Increase (decrease) in losses and
loss adjustment expenses (2,155,465) 1,397,528
Increase in premium
receivables (2,969,954) (335,296)
Increase in amount due
Meridian Mutual Ins. Co. (1,694,116) (1,993,110)
Decrease (increase) in reinsurance
receivables (936,890) (6,726,390)
Decrease (increase) in prepaid
reinsurance premiums (311,446) 291,616
Decrease (increase) in other assets (837,273) 973,000
Increase in other
post-employment benefits 76,764 76,764
Increase (decrease) in reinsurance payables (1,364,575) 3,057,023
Decrease in accrued commissions and
other expenses (436,312) (842,182)
Decrease in payable for
federal income taxes (325,000) (600)
Increase (decrease) in other
liabilities 586,374 (1,034,519)
Net realized investment gains (2,617,012) (3,212,265)
Issuance of restricted common stock 57,618 65,209
Issuance of common stock 5,564 ---
Cumulative effect of change in
accounting method 293,700 ---
Other, net (1,230,850) 518,642
Net cash used by operating activities (4,836,084) (2,806,996)
Cash flows from investing activities:
Purchase of fixed maturities (27,240,272) (50,223,777)
Proceeds from sale of fixed maturities 24,666,870 41,795,113
Proceeds from calls, prepayments and maturity
fixed maturities 11,352,109 14,343,845
Purchase of equity securities (12,446,911) (8,811,270)
Proceeds from sale of equity securities 13,690,234 9,175,201
Net decrease (increase) in
short-term investments 794,644 (1,823,268)
Decrease (increase) in other invested assets (8,169) 189,917
Decrease in payable for securities (2,811,898) (999,995)
Net cash used in investing activities 7,996,607 3,645,766
Cash flows from financing activities:
Dividends paid (1,160,747) (1,062,642)
Repayment of bank loan (750,000) (625,000)
Repurchase of common shares (573,697) ---
Exercise of stock options 393,439 130,494
Net cash used in financing activities (2,091,005) (1,557,148)
Increase (decrease) in cash 1,069,518 (718,378)
Cash at beginning of period 854,522 1,188,423
Cash at end of period $ 1,924,040 $ 470,045
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, 1998. 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, 1999 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 June 30, 1999 and 1998 total 74 percent.
2. Reinsurance
For the three and six months ended June 30, 1999 and 1998, the effects
of reinsurance on the Company's premiums written, premiums earned and losses
and loss adjustment expenses are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Premiums written:
Direct $ 58,293,034 $ 52,511,112 $ 112,473,740 $ 102,688,889
Assumed (418) 120,764 162,270 300,152
Ceded (3,711,489) (4,290,130) (7,778,476) (8,159,877)
Net $ 54,581,127 $ 48,341,746 $ 104,857,534 $ 94,829,164
Premiums earned:
Direct $ 53,556,870 $ 51,249,317 $ 104,931,986 $ 103,205,356
Assumed (400) 155,739 206,156 367,633
Ceded (3,600,718) (4,273,200) (7,467,030) (8,451,495)
Net $ 49,955,752 $ 47,131,856 $ 97,671,112 $ 95,121,494
Losses and loss adjustment expenses:
Direct $ 39,510,992 $ 46,218,306 $ 80,505,691 $ 81,198,466
Assumed 53,513 60,183 (194,518) 89,803
Ceded (2,432,774) (10,300,660) (6,678,499) (11,490,619)
Net $ 37,131,731 $ 35,977,829 $ 73,632,674 $ 69,797,650
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 computation reported on the Consolidated Statement of Income
for the three and six month periods ended June 30, 1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Basic earnings per share computation:
Numerator (net income) before change
in accounting method $ 2,280,274 $ 2,494,326 $ 3,204,423 $ 5,011,194
Denominator:
Weighted average common
shares outstanding 7,256,423 7,305,671 7,252,733 7,299,503
Basic earnings per share
before change in
accounting method $ $ $ $
Cumulative effect of change
in accounting method --- --- (0.04) ---
Basic earnings per share $ 0.31 $ 0.34 $ 0.40 $ 0.69
Diluted earnings per share computation:
Numerator (net income) before change
in accounting method $ 2,280,274 $ 2,494,326 $ 3,204,423 $ 5,011,194
Denominator:
Weighted average common
shares outstanding 7,256,423 7,305,671 7,252,733 7,299,503
Stock options 73,730 93,035 85,524 84,817
Total shares 7,330,153 7,398,706 7,338,257 7,384,320
Diluted earnings per share
before change in
accounting method $ 0.31 $ 0.34 $ 0.44 $ 0.68
Cumulative effect of change
in accounting method --- --- (0.04) ---
Diluted earnings per share $ 0.31 $ 0.34 $ 0.40 $ 0.68
The 1998 earnings per share information in the above table reflects a ten
percent stock dividend declared on December 9, 1998, and issued on
January 6, 1999.
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,
1998. 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
June 30, 1999 and 1998 consist of the following:
Six Months Ended
June 30,
1999 1998
Unrealized holding gains (losses)
before deferred income taxes $(2,349,756) $ 6,612,732
Deferred income tax (expense) or benefit 822,000 (2,305,000)
Less: Reclassification adjustment for
realized gains 3,061,428 4,551,600
Income tax expense related to
realized gains (1,072,000) (1,593,000)
Net unrealized gains (losses)
on securities $(3,517,184) $ 1,340,132
5. Segment Information
The Company has adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes
standards for the reporting and displaying of business segments.
SFAS No. 131 became effective for financial statements with
fiscal years beginning after December 15, 1997.
The following tables display the Company's reportable segments, a
reconciliation of segment data to total consolidated financial
data, and related disclosure information concerning revenues as
required by SFAS No. 131 for the six months ended June 30, 1999 and
1998. Segments were defined based upon the Company's structure and
decision making processes. Personal, commercial, and farm lines are
segmented within all internal reporting mechanisms to aid chief
decision makers in achieving profitable results within each business
segment. Amortization was allocated by segment based upon a ratio
of premium. Investment income was determined consistent with statutory
modeling requirements for the Insurance Expense Exhibit. These
guidelines rely on historical reserve patterns by line of
business. Asset information by reportable segment is not
reported, since the Company does not internally produce such
information.
<TABLE>
June 30, 1999
<CAPTION>
Segment Non-segment
Personal Farmowners Commercial Total Total Total
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 57,569,212 $ 5,616,800 $ 34,485,100 $ 97,671,112 $ --- $ 97,671,112
Net investment income 4,856,668 473,846 2,909,241 8,239,755 --- 8,239,755
Net realized investment gains --- --- --- --- 2,617,012 2,617,012
Other income (expense) --- --- --- --- 73,956 73,956
Total revenues 62,425,880 6,090,646 37,394,341 105,910,867 2,690,968 108,601,835
Loss and LAE 46,975,917 4,911,143 21,745,614 73,632,674 --- 73,632,674
General operating expenses 4,460,096 495,704 3,398,490 8,354,290 --- 8,354,290
Interest expense --- --- --- --- 270,210 270,210
Amortization expenses 11,881,915 1,320,580 9,053,743 22,256,238 --- 22,256,238
Total expenses 63,317,928 6,727,427 34,197,847 104,243,202 270,210 104,513,412
Income (loss) before taxes
and accounting change (892,048) (636,781) 3,196,494 1,667,665 2,420,758 4,088,423
Income taxes (benefit) (207,807) (148,342) 744,639 388,490 495,510 884,000
Income (loss) before
accounting change (684,241) (488,439) 2,451,855 1,279,175 1,925,248 3,204,423
Cumulative effect of change
in accounting method,
net of tax --- --- --- --- (293,700) (293,700)
Net income (loss) $ (684,241) $ (488,439) $ 2,451,855 $ 1,279,175 $ 1,631,548 $ 2,910,723
June 30, 1998
Premiums earned $ 53,653,742 $ 5,447,001 $ 36,020,751 $ 95,121,494 $ --- $ 95,121,494
Net investment income 4,855,913 492,979 3,260,046 8,608,938 --- 8,608,938
Net realized investment gains --- --- --- --- 3,212,265 3,212,265
Other income (expense) --- --- --- --- 34,738 34,738
Total revenues 58,509,655 5,939,980 39,280,797 103,730,432 3,247,003 106,977,435
Loss and LAE 43,130,215 3,869,302 22,798,133 69,797,650 --- 69,797,650
General operating expenses 4,493,703 523,662 3,606,904 8,624,269 --- 8,624,269
Interest expense --- --- --- --- 343,424 343,424
Amortization expenses 11,229,686 1,308,623 9,013,589 21,551,898 --- 21,551,898
Total expenses 58,853,604 5,701,587 35,418,626 99,973,817 343,424 100,317,241
Income (loss) before taxes
and accounting change (343,949) 238,393 3,862,171 3,756,615 2,903,579 6,660,194
Income taxes (benefit) (85,158) 59,024 956,237 930,103 718,897 1,649,000
Income (loss) before
accounting change (258,791) 179,369 2,905,934 2,826,512 2,184,682 5,011,194
Cumulative effect of change
in accounting method,
net of tax --- --- --- --- --- ---
Net income (loss) $ (258,791) $ 179,369 $ 2,905,934 $ 2,826,512 $ 2,184,682 $ 5,011,194
</TABLE>
As required by SFAS No. 131, the following table delineates the Company's
products and revenues in a manner which is consistent with segment
reporting:
June 1999 June 1998
Personal Lines:
Automobile $ 43,635,647 $ 39,063,202
Homeowners 12,613,890 13,182,940
Other 1,319,675 1,407,600
Total Personal Lines $ 57,569,212 $ 53,653,742
Commercial Lines:
Automobile $ 8,859,028 $ 8,863,294
Workers Compensation 10,829,101 11,639,009
Commercial Multi-Peril 12,519,696 13,254,525
Other 2,277,275 2,263,923
Total Commercial Lines $ 34,485,100 $ 36,020,751
Farm Lines:
Farmowners 5,616,800 5,447,001
Total Farm Lines $ 5,616,800 $ 5,447,001
Total All Lines Combined $ 97,671,112 $ 95,121,494
6. Changes in Accounting for Insurance-Related Assessments
Effective January 1, 1999, the Company adopted SOP 97-3
"Accounting by Insurance and Other Enterprises for Insurance-
Related Assessments." This statement requires that a liability
for insurance-related assessments be recognized when the
assessments have been imposed or it is probable that an
assessment will be imposed, the event obligating the Company has
occurred, and the amount can be reasonably estimated. SOP 97-3
requires that a liability for the current calendar year
experience be recognized and that the initial application be
treated as a cumulative effect type accounting change. The
Company recorded an additional liability and a charge to the
statement of income of $293,700 net of income tax, to reflect the
cumulative effect of the accounting change in the first quarter
of 1999.
7. Accounting for Derivative Instruments and Hedging Activities
In June 1998 the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In July 1999, the FASB released SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.
133, An Amendment of FASB Statement No. 133." SFAS No. 137
defers the effective date of this pronouncement to fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments
(including derivative instruments that are embedded in other
contracts) and hedging activities. All items that are required
to be recognized must be displayed according to accounting
standards in the statement of financial position at fair value.
The Company does not hold any derivative instruments and does not
currently participate in hedging activities. The Company does
not anticipate a material impact upon adoption of this statement.
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, 1999 were $405.5 million, a slight decrease from the
December 31, 1998 total of $408.9 million. This change
was largely due to a decrease in unrealized appreciation
of fixed maturity investments. The Company's unrealized
appreciation on its fixed maturity portfolio declined by
$8.3 million from December 31, 1998 to June 30, 1999.
This resulted primarily from a rising interest rate
environment. We estimate that a 100 point movement in
interest rates would affect the Company's fixed maturity
market values by around 4.5 percent. The effective duration
of the Company's fixed maturity portfolio is approximately
4.7 years.
Total liabilities at June 30, 1999 of $265.5 million were
slightly lower in comparison to the $266.9 million
reported at December 31, 1998. The decline in total
liabilities resulted from decreases in several
liabilities, including a $2.2 million reduction in loss
and loss adjustment expenses. These decreases were
partially offset by an increase in the Company's unearned
premium reserves due to increased premium volume for the
quarter.
The Company's shareholders' equity at June 30, 1999
declined 1.3 percent to $140.1 million compared to the
December 31, 1998 total of $142.0 million. The primary
factor leading to this decrease was net unrealized
depreciation of investment securities of $3.5 million.
The Company's book value per share at June 30, 1999 was
$19.32, compared with $19.60 at year-end 1998.
Results of Operations
Quarter
For the three months ended June 30, 1999, the Company
recorded net income of $2.3 million, or $0.31 per common
share for both basic and diluted earnings. This compares
to net income of $2.5 million, or $0.34 earnings per share
for both basic and diluted earnings for the corresponding
1998 period. Net income was lower because of a reduction
in realized investment gains quarter to quarter. Earnings
per share included operating earnings of $0.16 versus
$0.09 a year ago and net realized investment gains were
$0.15 compared with $0.25 in the second quarter of 1998.
The Company's statutory combined ratio for the 1999 second
quarter improved to approximately 103.4 percent, compared
with 107.9 percent for the same 1998 period. The loss,
loss adjustment expense and underwriting expense ratios
each improved during the quarter.
The Company's total revenues for the 1999 second quarter
were $55.8 million compared to $54.3 million for the
corresponding 1998 period. The Company had a 6.0 percent,
or $2.8 million, increase in earned premiums compared to
the same quarter of 1998. For the three months ended June
30, 1999, written premiums increased 12.9 percent when
compared to 1998's second quarter. The growth in written
premiums was largely generated by growth initiatives with
the non-standard automobile product and sales to Sam's
Club members through an arrangement with GROUPadvantage.
Favorable trends were also experienced in sales of
commercial lines products, particularly to associations, a
market niche for Meridian.
Net investment income of approximately $4.1 million for
the 1999 second quarter declined in comparison to $4.4
million for the same 1998 period. This decline is
attributable to a number of factors including a reduction
in fixed maturity investments due both to cash flows and a
bit higher asset allocation to equities; a slight
reduction in yield; and a slightly higher allocation of
investment expenses. For the quarter ended June 30, 1999,
the Company realized net gains on the sale of investments
of approximately $1.7 million, or $0.15 per share after
tax, compared to approximately $2.8 million or $0.25 per
share after tax for the second quarter of 1998. The 1999
realized gains largely resulted from the sale of six
common stocks. The 1998 second quarter gains also
resulted from the sale of several common stocks, as well
as $0.05 million resulting from the sale of certain fixed
maturity securities sold for purposes of tax positioning.
The Company's total incurred losses and loss adjustment
expenses for the 1999 second quarter increased to $37.1
million from $36.0 million for the comparable 1998
quarter. The loss and loss adjustment expense ratio
decreased 2.0 percentage points from 76.3 percent in the
1998 second quarter to 74.3 percent for the second quarter
of 1999. Net weather-related catastrophe losses incurred
by the Company during the second quarter of 1999 were
estimated to be $6.6 million. Such claims largely resulted
from an April hailstorm in Northern Indiana. For the
comparable 1998 quarter, approximately $6.8 million in
weather-related catastrophe losses were incurred by the
Company. All commercial lines of business were profitable
for the quarter, with commercial package and
businessowners lines showing particular improvement
compared with the second quarter of 1998.
The Company's total of general operating, amortization,
and interest expenses of $15.5 million for the 1999 second
quarter increased slightly compared to the 1998 total of
$15.1 million. Relative to earned premiums, general
operating and amortization expenses represented 30.9
percent of earned premiums in the second quarter, an
improvement from the 31.6 percent relationship for the
second quarter of 1998. The Meridian Citizens personal
lines processing was successfully integrated into the
Company's Indianapolis headquarters early in the second
quarter. The Meridian Citizens commercial lines will be
similarly consolidated before year-end. These efforts are
expected to save approximately $1.1 million of annualized
facility, personnel and other costs beginning in 2000.
Six Months
For the six months ended June 30, 1999, the Company
recorded net income of $2.9 million, or $0.40 per common
share for both basic and diluted earnings. This compares
to net income of $5.0 million, or $0.69 basic earnings per
share and $0.68 diluted earnings per share for the
corresponding 1998 period. Deterioration in the Company's
loss and loss adjustment ratio to 75.4 percent in 1999
compared to 71.3 percent in 1998 was the primary factor in
the decreased earnings. Realized gains on investments
were $2.6 million, or $0.23 per basic and diluted share in
1999, compared to $3.2 million or $0.29 per basic share
and $0.28 per diluted share, recorded for the same six
month period of 1998.
The Company's total revenues for the six months ended June
30, 1999 were $108.6 million compared to $107.0 million
for the corresponding 1998 period. The Company's earned
premium increased $2.5 million, or 2.7 percent compared to
the same period of 1998. This included an increase of 7.3
percent in personal lines, a 3.1 percent increase in farm
lines, offset by a 4.3 percent decrease in commercial
lines. For the six months ended June 30, 1999, net
written premiums increased 9.4 percent when compared to
1998's same period. The growth in written premiums was
largely due to growth initiatives with the non-standard
automobile product and sales to Sam's Club members through
an arrangement with GROUPadvantage, along with modest
commercial lines growth, with a slight decline in core
personal and farm lines of business.
Net investment income of approximately $8.2 million for
the first six months of 1999 declined slightly in
comparison to the same 1998 period, due to a slightly
lower asset allocation to fixed maturity investments and a
slightly higher allocation of investment expenses.
The Company's total incurred losses and loss adjustment
expenses for the six months of 1999 increased to $73.7
million from $70.0 million for the comparable 1998 period.
The loss and loss adjustment expense ratio increased from
71.3 percent in 1998 to 75.4 percent in 1999. Net weather-
related catastrophe losses incurred by the Company during
the first six months of 1999 were estimated to be
approximately $9.8 million. Such claims largely resulted
from January winter storms and the April hailstorm. For
the comparable 1998 period, approximately $10.0 million in
weather-related catastrophe losses were incurred by the
Company. The catastrophe claims hurt the results of the
property coverages in the homeowners, farmowners and
commercial lines of business, while all casualty lines are
profitable and performing well.
The Company's total expenses, which includes general
operating, amortization, and interest expenses, of $30.9
million for the first six months of 1999 increased
slightly compared to the 1998 total of $30.5 million.
Relative to earned premiums, general operating and
amortization expenses represented 31.3 percent of earned
premiums through June 30, 1999, and improved somewhat over
the 31.7 percent relationship for the first half of 1998.
Effective January 1, 1999, the Company adopted SOP 97-03,
"Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments". This resulted in a non-
recurring charge of $0.3 million after tax, or $0.04
basic and diluted earnings per share, representing the
cumulative effect of a change in accounting method.
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. In
1996, it was also determined that the Meridian Citizens
project team would operate independently utilizing
contracted personnel to complete the project. Such
personnel, our former contracted outside automation
services providers, were under contract to complete and
test the Y2K programming efforts as well as provide daily
systems support.
The next stage of the process was to identify those
systems and programs that contained date sensitive fields
throughout the operating systems. The internal approach
taken to address the issue was field expansion. This
expansion 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 field expansion and "windowing"
would be the best approach to solving the Y2K dilemma.
The "windowing" approach utilizes a two digit year
currently in the date fields and assumes the two digit
century field falls within an established "window". For
example, any result over 50 signifies the 20th century and
any under fifty, the 21st century.
Since the inception of the project, the Company 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
the policy processing systems which required renewal
processing as early as November 1, 1998. Extensive
reprogramming now allows the internal policy processing
systems to recognize the difference between the 20th and
the 21st century. Updated policy processing systems have
been in production and compliant since November 1997.
During the third quarter of 1998, code remediation was
also completed for the Meridian management reporting
systems and front-end client server applications. The
Meridian Citizens companies, which operate under a
different platform, largely achieved Y2K compliance as
certified by the outside services provider in August 1998
and have been in production since that time. Mainframe,
front-end client server, and critical network programming
have also been completed. The remediated policy
processing systems have been tested and are processing
policies with Y2K expiration dates. While no policies
have been processed with a Y2K inception date, the Company
has successfully tested such business in the Quality
Assurance test environment. It is anticipated that
testing will continue throughout 1999 to assure
compliance. The remaining programming efforts for non-
critical systems are targeted for completion in the third
quarter of 1999. The Company is also evaluating the
purchase of new Y2K compliant purchasing and fleet
automobile tracking software to replace its current
systems.
During the fourth quarter of 1998, the Information Systems
operations of the Meridian Citizens companies were moved
to the Indianapolis home office location. This change
allowed for certain cost savings and a more consistent
application of programming discipline throughout the
organization. Prior to the move, Y2K remediation efforts
were completed by an outside vendor for the Meridian
Citizens companies. While reviewing other processing
issues, internal personnel discovered instances in which
remediation efforts had not correctly been completed.
These issues have been resolved when discovered. The
manner in which these systems are constructed or designed
does not provide for a test environment. Therefore, a
more detailed analysis is being performed by a project
team consisting of both internal and external resources.
This extensive analysis will encompass applications which
were previously understood to be compliant. These
applications are being reviewed for date sensitive related
code to determine that the Y2K remediation was completed
correctly. Re-programming efforts, if required, will be
performed to obtain Y2K compliance. This project is
expected to take approximately 600 hours of work and cost
approximately $25,000 which has been included in the
Company's total cost estimates below. As a contingency,
the Company does have the option to transfer related
policy processing to the Meridian mainframe systems which
have been fully tested and found compliant, should that be
necessary.
Costs for the Y2K remediation are anticipated to
approximate $1.3 million upon completion. Such
incremental costs have been estimated at approximately
$200,000 in 1996, $400,000 in 1997 and 1998, with an
additional $300,000 expected for 1999. The Company was
able to manage the cost of its Y2K effort because of the
early start of the project and the overall approach of
hiring additional internal resources as opposed to
extensively utilizing outside programmers. Approximately
50 percent of the total costs relate to programming
personnel. The remainder of these costs relate to the
replacement of software applications, hardware costs, and
outside consulting fees. Due to the complexity and
importance of the Y2K project, the Company engaged
independent consultants to review the planning and methods
utilized within the project for all subsidiaries. The
written report received for the independent consultants
contained comments and suggestions which were implemented
and incorporated into the final Y2K action plans. Y2K
costs have been funded through operating revenues and
represent less than 10 percent of the information systems
annual budgets. Costs for the Meridian Citizens
remediation were included under the automation programming
charges incurred by the Company on a monthly basis and
were therefore not distinguishable from normal programming
fees. At this time, Meridian Mutual and Meridian Security
policy processing and management reporting systems have
been remediated, tested by our Quality Assurance team and
moved into full production. Actual policies have been
issued which are affected by the Y2K issue.
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.
During the first quarter the focus turned to applications
such as E-mail and the automated underwriting system, as
well as to the re-testing of applications that have been
modified since the original Y2K testing. The automated
underwriting systems have been remediated while conversion
of products such as E-mail are currently underway. The
Company's network management team is focusing on the
replacement and installation of non-compliant software and
hardware which is anticipated to be completed well before
the end of this year. While these products help the
Company to perform its tasks in the desired manner, they
are not considered critical to the ability to process
business and service customers. These additional tasks
have been prioritized by assessing their overall benefit
to the Company.
Additionally, the Company established contact with agents
and certain vendors to highlight the Y2K issue. This
contact was established for the purpose of reasonably
ascertaining the Y2K impact. The Company has worked
diligently to inform its independent agents of the
necessity of Y2K compliance. At this time, it is
anticipated that the larger, more automated agents will be
compliant. The smaller, less automated agents, may not be
compliant but could readily return to manual processing
until they are able to achieve full compliance. While
this may have a direct impact on the timeliness of policy
processing, the operating systems do have the ability to
process such data.
The most critical suppliers are the utility companies.
While the Company cannot be assured that these suppliers
will be Y2K compliant, contact has been established. The
Company currently has the same limited assurances as the
general public. 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,
etc. Failure for these providers to perform Y2K
compliance could be detrimental to company operations.
Hardware and software vendors are required to provide
certification of Y2K compliance for all products or
services afforded to the enterprise. All vendor products
purchased within the last two years have been certified
and documented. In addition, testing has taken place for
each product in a pseudo Y2K environment prior to moving
to production. Any product already in production that
failed the Y2K testing has been or will be removed from
internal systems or will be upgraded to be compliant by
September 1, 1999. The Company has also addressed the
facilities Y2K issues by evaluating the HVAC, security
systems, elevators, the automobile fleet, etc., to
ascertain compliance and adjustments have been made as
necessary. Third party vendors which have critical impact
on the ability to process business are currently
anticipated to be Y2K compliant. However, there can be no
guarantee that the systems of agents or other third
parties will be converted on a timely basis, 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 may fail to be Y2K
compliant will impact the Company's ability to complete
necessary work processes.
Contingency planning is underway by all management of the
Information Systems Department. These plans include what
activities will take place, what needs to be tested, and
when the testing should occur. These plans encompass the
necessary steps to verify the functionality and to
validate the compliance of each system. Contingency
planning includes the use of the Company's business
resumption/disaster recovery "hot site" in Chicago. This
hotsite has been tested and is prepared to run mainframe
applications with very little lag time should all other
contingencies fail. While these mainframe applications do
not currently include the Meridian Citizens platforms,
policies could be converted over to this application
should the need arise. Testing performed at the hot site
in April 1999 was successful. Additional testing at the
hotsite is planned for October 1999. While the April
testing validated individual systems, the October testing
will encompass such issues as data connection between
systems and all mainframe applications. The Company's
Information Systems Department will meet with all
departments during the fourth quarter to establish the
minimum requirements needed to function should the need
arise to activate the contingency plans.
The Company is planning its year-end closing schedule to
facilitate completing back-ups of data and running month-
end processing cycles. There are plans in place to have
key personnel in at work during the holiday weekend
beginning December 31, 1999. Hardware, operating systems,
support software, and data connections will be verified to
insure a smooth transition into the year 2000. The first
processing cycle of the year 2000 will be closely
monitored and reviewed by the team.
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.
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 Y2K efforts.
Statements in this Form 10-Q that are not strictly
historical may be "forward looking" statements which
involve risks and uncertainties. Risk factors include the
ability of the Company, suppliers, and agency
representatives to handle the Y2K computer issue;
variation in catastrophe losses due to changes in weather
patterns or other natural causes; changes in insurance
regulations or legislation that may affect the Company;
and economic conditions or market changes affecting
pricing or demand for insurance products or the ability to
generate investment income. Growth and profitability have
been and may be affected by these and other factors.
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.
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 22, 1999 By: /s/ Norma J. Oman
Norma J. Oman, President
and
Chief Executive Officer
DATE: July 22, 1999 By: /s/ Steven R. Hazelbaker
Steven R. Hazelbaker,
Vice President,
Chief Financial Officer and
Treasurer
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
FORM 10-Q
For the quarter ended June 30, 1999
Index to Exhibits
Exhibit Number
Assigned in Regulation S-K
Item 601 Description of Exhibit
(3) 3.01 Articles of Amendment to
the Articles of Incorporation of
Meridian Insurance Group, Inc.
(27) 27.01 Financial Data Schedule
AMDTMIGI-3
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
MERIDIAN INSURANCE GROUP, INC.
The undersigned officers of Meridian Insurance Group, Inc.
(hereinafter referred to as the "Corporation") existing pursuant
to the provisions of the Indiana Business Corporation Law as
amended (hereinafter referred to as the "Act"), desiring to give
notice of corporate action effectuating amendment of certain
provisions of its Articles of Incorporation, certify the
following facts:
ARTICLE I
Amendment(s)
Section 1. The date of incorporation of the corporation is
October 3, 1986.
Section 2. The name of the corporation following this amendment
to the Articles of Incorporation is Meridian Insurance Group,
Inc.
Section 3. The exact text of Article IV of the Articles of
Incorporation is now as follows:
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.
Section 4. Date of each amendment's adoption: May 14, 1997.
ARTICLE II
Manner of Adoption and Vote
Section 1. Action by Directors:
The Board of Directors of the Corporation duly adopted a
resolution proposing to amend the terms and provisions of Article
IV of the Article of Incorporation and directing a meeting of the
Shareholders, to be held on May 14, 1997, allowing such
Shareholders to vote on the proposed amendment.
The resolution was adopted by vote of the Board of Directors at a
meeting held on March 19, 1997, at which a quorum of such Board
of Directors was present.
Section 2. Action by Shareholders:
The Shareholders of the Corporation entitled to vote in
respect of the Articles of Amendment adopted the proposed
amendments. The amendment was adopted by vote of such
shareholders during the meeting called by the Board of Directors.
The result of such vote is as follows:
Shareholders entitled to vote: 6,779,375
Shareholders voted in favor: 4,464,663
Shareholders voted against: 840,375
Section 3. Compliance with Legal requirements.
The manner of the adoption of the Articles of Amendment and
the vote by which they were adopted constitute full legal
compliance with the provisions of the Act, the Articles of
Incorporation, and the By-Laws of the Corporation.
I hereby verify subject to the penalties of perjury that the
statements contained herein are true this _______ day of
________________, 1997.
________________________________
J. Mark McKinzie
Senior Vice President,
General Counsel, and Secretary
<TABLE> <S> <C>
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