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 March 31, 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
7,259,661 Common Shares at March 31, 1999
The Index of Exhibits is located at page 19 in the sequential
numbering system.
Total pages: 19
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 months ended March 31, 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 March 31, 1999 and December 31, 1998
March 31, December 31,
1999 1998
ASSETS (Unaudited)
Investments:
Fixed maturities--available for sale, at market
(cost $231,410,000 and $234,632,000) $ 235,844,567 $ 241,993,962
Equity securities, at market
(cost $48,625,000 and $48,338,000) 63,831,363 64,020,661
Short-term investments, at cost,
which approximates market 2,134,061 6,431,482
Other invested assets 1,342,042 1,375,463
Total investments 303,152,033 313,821,568
Cash 2,555,803 854,522
Premiums receivable, net of allowance for bad debts 6,732,999 5,625,470
Accrued investment income 2,918,785 2,950,290
Deferred policy acquisition costs 18,368,131 17,671,856
Goodwill 14,598,846 14,775,426
Reinsurance receivables 43,498,500 41,803,624
Prepaid reinsurance premiums 3,559,170 3,362,441
Due from Meridian Mutual Insurance Company 9,416,769 7,528,333
Other assets 284,668 463,990
Total assets $ 405,085,704 $ 408,857,520
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses $155,632,872 $ 154,252,671
Unearned premiums 83,980,872 81,223,095
Other post-retirement benefits 1,973,998 1,935,616
Bank loan payable 9,750,000 10,125,000
Payable for securities 38,465 3,061,898
Reinsurance payables 10,423,388 9,811,976
Other liabilities 3,375,020 6,478,431
Total liabilities 265,174,615 266,888,687
Shareholders' equity:
Common shares, no par value, authorized 20,000,000 shares;
issued 7,488,095 and 7,456,512, outstanding 7,259,661 and
7,243,712 at March 31, 1999 and December 31, 1998,
respectively (including 10% stock dividend issued on
January 6, 1999, 658,493 shares) 44,704,162 44,336,679
Treasury shares, at cost; 228,434 and 212,800
shares, respectively (3,577,758) (3,277,781)
Contributed capital 26,002,756 25,923,462
Retained earnings 59,845,433 59,796,235
Accumulated other comprehensive income 12,936,496 15,190,238
Total shareholders' equity 139,911,089 141,968,833
Total liabilities and shareholders' equity $ 405,085,704 $ 408,857,520
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 months ended March 31, 1999 and 1998
(Unaudited)
Three Months Ended
March 31,
1999 1998
Premiums earned $47,715,360 $47,989,638
Net investment income 4,155,279 4,227,863
Realized investment gains 942,433 381,401
Other income 28,193 33,712
Total revenues 52,841,265 52,632,614
Losses and loss adjustment expenses 36,500,943 33,819,821
General operating expenses 4,301,197 4,381,138
Amortization expenses 10,882,003 10,901,806
Interest expense 152,974 183,982
Total expenses 51,837,117 49,286,747
Income before taxes and change in
accounting method 1,004,148 3,345,867
Income taxes (benefit):
Current 124,000 705,000
Deferred (44,000) 124,000
Total income taxes 80,000 829,000
Income before change in accounting
method 924,148 2,516,867
Cumulative effect of change in
accounting method, net of tax (293,700) 0
Net income $ 630,448 $ 2,516,867
Weighted average shares outstanding 7,248,849 7,293,266
Per share results:
Basic earnings per share before
change in accounting method $ 0.13 $ 0.35
Accounting change, net of tax,
per share (0.04) 0.00
Basic earnings per share $ 0.09 $ 0.35
Diluted earnings per share before
change in accounting method $ 0.13 $ 0.34
Accounting change, net of tax,
per share (0.04) 0.00
Diluted earnings per share $ 0.09 $ 0.34
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 three months ended March 31, 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 at January 1, 1998 $44,110,416 $(2,308,188) $15,058,327 $60,684,448 $14,349,232
Comprehensive income:
Net income -- -- -- 2,516,867 -- $ 2,516,867
Other Comprehensive
income, net of tax:
Unrealized gain on securities,
net of reclassification
adjustment -- -- -- -- 3,698,473 3,698,473
Comprehensive income (loss) -- -- -- -- -- $ 6,215,340
Dividends ($0.07 per share) -- -- -- (531,321) --
Issuance of 14,665 restricted
common shares 195,703 -- -- -- --
Balance at March 31, 1998 $44,306,119 $(2,308,188) $15,058,327 $62,669,994 $18,047,705
Balance at January 1, 1999 $44,336,679 $(3,277,781) $25,923,462 $59,796,235 $15,190,238
Comprehensive income:
Net income -- -- -- 630,448 -- $ 630,448
Other comprehensive
income, net of tax:
Unrealized (loss) on securities,
net of reclassification
adjustment -- -- -- -- (2,253,742) (2,253,742)
Comprehensive income (loss) -- -- -- -- -- $(1,623,294)
Dividends ($0.08 per share) -- -- -- (581,250) --
Repurchase of 15,634 common
shares -- (299,977) 79,295 -- --
Issuance of 3,104 restricted
shares 57,618 -- -- -- --
Exercise of 28,189 common
shares 304,301 -- -- -- --
Issuance of 290 common
shares 5,564 -- -- --
Balance at March 31, 1999 $44,704,162 $(3,577,758) $26,002,756 $59,845,433 $12,936,496
</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 three months ended March 31, 1999 and 1998
(Unaudited)
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 630,448 $ 2,516,867
Reconciliation of net income to net cash used
by operating activities:
Amortization 10,882,003 10,901,806
Deferred policy acquisition costs (11,411,122) (10,389,938)
Deferred income taxes (44,000) 124,000
Increase (decrease) in unearned premiums 2,757,777 (1,810,767)
Increase (decrease) in losses and loss
adjustment expenses 1,380,201 (1,343,095)
Increase in amount due from Meridian
Mutual Ins. Co. (1,888,436) (1,668,569)
Decrease (increase) in reinsurance
receivables (1,694,876) 1,851,669
Decrease (increase) in prepaid reinsurance
premiums (196,729) 308,547
Decrease in other assets 179,428 84,462
Increase in other post-employment benefits 38,382 38,382
Increase in reinsurance payables 611,412 468,289
Decrease in accrued commissions and other
expenses (1,548,865) (1,299,046)
Increase in payable for federal income taxes 124,000 1,596,400
Increase (decrease) in other liabilities 29,479 (945,316)
Net realized investment gains (942,433) (381,401)
Issuance of restricted common stock 57,618 65,209
Cumulative effect of change in accounting
method 293,700 --
Other, net (1,927,242) (235,953)
Net cash used by operating activities (2,669,255) (118,454)
Cash flows from investing activities:
Purchase of fixed maturities (11,533,492) (35,731,596)
Proceeds from sale of fixed maturities 9,126,605 29,801,199
Proceeds from calls, prepayments and maturity
of fixed maturities 5,575,696 6,436,775
Purchase of equity securities (8,158,626) (2,973,405)
Proceeds from sale of equity securities 9,003,224 3,357,185
Net increase in short-term investments 4,297,421 (2,140,099)
Decrease (increase) in other invested assets 33,421 (38,655)
Increase (decrease) in payable for securities (3,023,539) 1,039,976
Net cash provided (used) by investing activities 5,320,710 (248,620)
Cash flows from financing activities:
Dividends paid (579,497) (530,149)
Repayment of bank loan (375,000) (375,000)
Repurchase of common shares (299,977) --
Exercise of stock options 304,300 130,494
Net cash used by financing activities (950,174) (774,655)
Increase (decrease) in cash 1,701,281 (1,141,729)
Cash at beginning of period 854,522 1,188,423
Cash at end of period $ 2,555,803 $ 46,694
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 months ended March 31, 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 March 31, 1999 and 1998 total 74 percent.
2. Reinsurance
For the three months ended March 31, 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
March 31,
1999 1998
Premiums written:
Direct $54,180,706 $50,177,777
Assumed 162,688 179,388
Ceded (4,066,987) (3,869,747)
Net $50,276,407 $46,487,418
Premiums earned:
Direct $51,375,116 $51,956,039
Assumed 206,556 211,894
Ceded (3,866,312) (4,178,295)
Net $47,715,360 $47,989,638
Losses and loss adjustment expenses:
Direct $40,994,699 $34,980,160
Assumed (248,031) 29,620
Ceded (4,245,725) (1,189,959)
Net $36,500,943 $33,819,821
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 month
periods ended March 31, 1999 and 1998:
Three Months Ended
March 31,
1999 1998
Basic net income per share computation:
Numerator (net income)
before change in accounting method $ 924,148 $2,516,867
Denominator:
Common shares outstanding 7,248,849 7,293,266
Basic earnings per share before
change in accounting method $ 0.13 $ 0.35
Cumulative effect of change
in accounting method (0.04) 0.00
Basic earnings per share $ 0.09 $ 0.35
Diluted net income per share computation:
Numerator (net income) before
change in accounting method $ 924,148 $7,376,170
Denominator:
Common shares outstanding 7,248,849 7,293,266
Stock options 95,725 82,904
Total shares 7,344,574 7,376,170
Diluted earnings per share before
change in accounting method $ 0.13 $ 0.34
Cumulative effect of change in
accounting method (0.04) 0.00
Diluted earnings per share $ 0.09 $ 0.34
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
March 31, 1999 and 1998 consist of the following:
Three Months Ended
March 31,
1999 1998
Unrealized holding gains (losses)
before deferred income taxes $(2,292,435) $6,676,269
Deferred income tax (expense) or benefit 802,000 (2,327,000)
Less: Reclassification adjustment for
realized gains 1,175,307 986,796
Income tax expense related to
realized gains (412,000) (336,000)
Net unrealized gains (losses) on
securities $(2,253,742) $3,698,473
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. 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>
March 31, 1999
<CAPTION>
Segment Non-segment
Personal Farmowners Commercial Total Total Total
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 27,986,185 $ 2,746,182 $16,982,993 $47,715,360 $ --- $47,715,360
Net investment income 2,437,169 239,151 1,478,959 4,155,279 --- 4,155,279
Net realized gains --- --- --- --- 942,433 942,433
Other income --- --- --- --- 28,193 28,193
Total revenues 30,423,354 2,985,333 18,461,952 51,870,639 970,626 52,841,265
Loss and LAE expense 21,845,713 2,112,133 12,543,097 36,500,943 --- 36,500,943
General operating expense 2,296,275 255,213 1,749,709 4,301,197 --- 4,301,197
Interest expense --- --- --- --- 152,974 152,974
Amortization expenses 5,809,565 645,687 4,426,752 10,882,003 --- 10,882,003
Total expenses 29,951,552 3,013,033 18,719,558 51,684,143 152,974 51,837,117
Income (loss) before taxes
and accounting change 471,802 (27,700) (257,606) 186,496 817,652 1,004,148
Income taxes (benefit) 37,588 (2,207) (20,523) 14,858 65,142 80,000
Income (loss) before
accounting change 434,214 (25,493) (237,083) 171,638 752,510 924,148
Cumulative effect of
change in accounting
method, net of tax --- --- --- --- 293,700 293,700
Net income (loss) $ 434,214 $ (25,493) $ (237,083) $ 171,638 $ 458,810 $ 630,448
March 31, 1998
Segment Non-segment
Personal Farmowners Commercial Total Total Total
Premiums earned $26,953,836 $2,726,616 $18,309,186 $47,989,638 $ --- $47,989,638
Net investment income 2,374,619 240,214 1,613,030 4,227,863 --- 4,227,863
Net realized gains --- --- --- --- 381,401 381,401
Other income --- --- --- --- 33,712 33,712
Total revenues 29,328,455 2,966,830 19,922,216 52,217,501 415,113 52,632,614
Loss and LAE expense 19,750,222 1,014,202 13,055,397 33,819,821 --- 33,819,821
General operating expense 2,282,806 266,021 1,832,311 4,381,138 --- 4,381,138
Interest expense --- --- --- --- 183,982 183,982
Amortization expenses 5,680,421 661,954 4,559,431 10,901,806 --- 10,901,806
Total expenses 27,713,449 1,942,177 19,447,140 49,102,765 183,982 49,286,747
Income before taxes
and accounting change 1,615,006 1,024,653 475,076 3,114,736 231,131 3,345,867
Income taxes 400,147 253,877 117,709 771,733 57,267 829,000
Income before
accounting change 1,214,859 770,776 357,367 2,343,003 173,864 2,516,867
Cumulative effect of
change in accounting
method, net of tax --- --- --- --- --- ---
Net income $ 1,214,859 $ 770,776 $ 357,367 $ 2,343,003 $ 173,864 $ 2,516,867
</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:
March 1999 March 1998
Personal Lines:
Automobile $ 21,160,212 $ 19,616,765
Homeowners 6,163,504 6,625,056
Other 662,469 712,015
Total Personal Lines $ 27,986,185 $ 26,953,836
Commercial Lines:
Automobile $ 4,353,137 $ 4,449,907
Worker's Compensation 5,309,433 6,039,310
Commercial Multi-Peril 6,213,675 6,658,155
Other 1,106,748 1,161,814
Total Commercial Lines $ 16,982,993 $ 18,309,186
Farm Lines:
Farmowners 2,746,182 2,726,616
Total Farm Lines $ 2,746,182 $ 2,726,616
Total All Lines Combined $ 47,715,360 $ 47,989,638
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 of 1998 the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement is effective for fiscal years
beginning after June 15, 1999. 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 March
31, 1999 were $405.1 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 from
$7.4 million at December 31, 1998 to $4.4 million at March
31, 1999. This reduction resulted primarily from an
increase in the interest rate environment. Short-term
investments declined to $2.1 million at the end of the
1999 first quarter from $6.4 million at December 31, 1998,
due primarily to the timing of paying certain liabilities.
Total liabilities at March 31, 1999 of $265.2 million were
slightly lower in comparison to the $266.9 million
reported at December 31, 1998. The decline in total
liabilities resulted primarily from the payment of certain
liabilities, partially offset by an increase in the
Company's reserves for losses and loss adjustment expenses
and unearned premiums. The $1.4 million increase in
reserves for losses and loss adjustment expenses resulted
from an increase in the amount of catastrophe related
property claims. Unearned premium reserves were up due to
increased premium volume for the quarter.
The Company's shareholders' equity at March 31, 1999
declined 1.5 percent to $139.9 million compared to the
December 31, 1998 total of $142.0 million. The primary
factor leading to this decrease was unrealized
depreciation of investment securities, net of deferred
income taxes, of $2.3 million. The Company's book value
per share at March 31, 1999 was $19.27, compared with
$19.60 at year-end 1998.
Results of Operations
For the three months ended March 31, 1999, the Company
recorded net income of $0.6 million, or $0.09 per common
share for both basic and diluted earnings. This compares
to net income of $2.5 million, or $0.35 basic earnings per
share and $0.34 diluted earnings per share for the
corresponding 1998 period. The Company's combined ratio
for the 1999 first quarter increased to approximately 107
percent, compared to approximately 102 percent for the
same 1998 period. This was due to a higher loss ratio.
The Company's total revenues for the 1999 first quarter
were $52.8 million compared to $52.6 million for the
corresponding 1998 period. A slight decline in earned
premiums largely resulted from management actions taken by the
Company to improve underwriting profitability and from
continued competitive market conditions, particularly in
commercial lines. The Company had an earned premium
increase of 3.6 percent in personal lines, offset by a
7.3 percent reduction in commercial lines of business.
For the three months ended March 31, 1999, written
premiums increased 7.0 percent when compared to 1998's
first quarter. The growth in written premiums was aided
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 emphasized in
the Meridian Citizens operations.
Net investment income of approximately $4.2 million for
the 1999 first quarter declined slightly in comparison to
the same 1998 period, due to a bit lower asset allocation
to fixed maturity investments and a higher allocation of
investment expenses. For the quarter ended March 31, 1999,
the Company realized net gains on the sale of investments of
approximately $0.9 million, or $0.08 per share after tax,
compared to approximately $0.4 million or $0.03 per share
after tax for the first quarter of 1998. The 1999
realized gains largely resulted from the sale of certain
common stocks.
The Company's total incurred losses and loss adjustment
expenses for the 1999 first quarter increased to $36.5
million from $33.8 million for the comparable 1998
quarter. The loss and loss adjustment expense ratio
increased 6.0 percentage points from 70.5 percent in the
1998 first quarter to 76.5 percent for the first quarter
of 1999. Net weather-related catastrophe losses incurred
by the Company during the first three months of 1999 were
estimated to be $4.2 million. Such claims largely
resulted from January winter storms in the midwest. For
the comparable 1998 first quarter, approximately $3.2
million in weather-related catastrophe losses were
incurred by the Company. The impact of such catastrophes
on the Company's loss ratio for the 1999 and 1998 periods
was estimated to be approximately 8.8 and 6.6 percentage
points, respectively. The 1999 first quarter catastrophe
claims hit the property coverages in the homeowners,
farmowners and commercial lines of business all of which
produced higher loss ratios than during the first quarter
of 1998. While still profitable, the loss ratios for
personal automobile and worker's compensation business
increased over last year's excellent first quarter.
Commercial automobile was the line of business showing the
most first quarter 1999 improvement.
The Company's total expenses, which includes general
operating, amortization, and interest expenses, of $15.3
million for the 1999 first quarter decreased slightly
compared to the 1998 total of $15.5 million. The decrease
in expenses resulted from certain operational
efficiencies.
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 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 impact, 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 no later than September 1, 1999
with the majority scheduled by July 1, 1999.
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 will be performed. This extensive
analysis will begin during the second quarter and will
encompass applications which were previously understood to
be compliant. These applications will be 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. As a contingency, the Company does have the
option to transfer related policy processing to the
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, and expects
to incur an additional $300,000 in 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, Mutual and Security's (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.
The focus now turns 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 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, and 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 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 should take place, what needs to be tested, and
when the testing should occur. Upon extensive review,
these plans will encompass the necessary steps to verify
the functionality or 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.
From an enterprise perspective, the Company feels well
positioned for the change in the millennium although they
will continue to monitor the progress of various projects
such as the Meridian Citizens remediation closely.
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 Year 2000 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 form 8-K's were filed
during this time period.
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: April 26, 1999 By: /s/ Norma J. Oman
Norma J. Oman, President and
Chief Executive Officer
DATE: April 26, 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 March 31, 1999
Index to Exhibits
Exhibit Number
Assigned in Regulation S-K
Item 601
Description of Exhibit
(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: April 26, 1999 By:
Norma J. Oman, President and
Chief Executive Officer
DATE: April 26, 1999 By:
Steven R. Hazelbaker,
Vice President, Chief Financial
Officer and Treasurer
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<DEBT-HELD-FOR-SALE> 235,845
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