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, 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:
7,241,544 Common Shares at September 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 nine months ended September 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 September 30, 1999 and December 31, 1998
September 30, December 31
1999 1998
(Unaudited)
ASSETS
Investments:
Fixed maturities, available for sale at market
(cost $234,719,000 and $234,632,000) $ 232,131,029 $ 241,993,962
Equity securities, at market
(cost $52,706,000 and $48,338,000) 64,614,518 64,020,661
Short-term investments, at cost, which
approximates market 5,093,051 6,431,482
Other invested assets 1,157,621 1,375,463
Total investments 302,996,219 313,821,568
Cash 871,631 854,522
Premium receivable, net of bad debt allowance 10,679,758 5,625,470
Accrued investment income 2,935,613 2,950,290
Deferred policy acquisition costs 20,114,616 17,671,856
Goodwill 14,246,602 14,775,426
Reinsurance receivables 36,130,928 41,803,624
Prepaid reinsurance premiums 3,754,898 3,362,441
Due from Meridian Mutual Insurance Company 9,359,240 7,528,333
Other assets 3,950,048 463,990
Total assets $ 405,039,553 $ 408,857,520
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses $ 148,343,924 $ 154,252,671
Unearned premiums 91,320,719 81,223,095
Other post-employment benefits 2,050,762 1,935,616
Bank loan payable 9,000,000 10,125,000
Payable for securities 3,015,750 3,061,898
Reinsurance payables 9,596,083 9,811,976
Other liabilities 5,282,055 6,478,431
Total liabilities 268,609,293 266,888,687
Shareholders' equity:
Common shares, no par value, Authorized 20,000,000 shares;
issued 7,496,295 and 7,456,512; outstanding 7,241,544 and
7,243,712 at September 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; 254,751 and
212,800 shares, respectively (4,005,791) (3,277,781)
Contributed capital 25,923,462 25,923,462
Retained earnings 63,568,333 59,796,235
Accumulated other comprehensive income 6,150,956 15,190,238
Total shareholders' equity 136,430,260 141,968,833
Total liabilities and shareholders' equity $ 405,039,553 $ 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 nine months of September 30, 1999 and 1998
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Premiums earned $ 50,891,817 $ 47,286,104 $ 148,562,929 $ 142,407,598
Net investment income 4,023,052 4,225,102 12,262,807 12,834,040
Realized investment gains 1,838,706 2,288,443 4,455,718 5,500,708
Other income (expense) (37,784) 33,584 36,172 68,322
Total revenues 56,715,791 53,833,233 165,317,626 160,810,668
Losses and loss adjustment expenses 37,362,633 35,013,465 110,995,307 104,811,115
General operating expenses 4,277,213 4,067,499 12,631,503 12,691,768
Amortization expenses 11,653,519 10,596,595 33,909,757 32,148,493
Interest expenses 134,530 172,362 404,741 515,786
Total expenses 53,427,895 49,849,921 157,941,308 150,167,162
Income before taxes and change
in accounting method 3,287,896 3,983,312 7,376,318 10,643,506
Income taxes (benefit):
Current 704,000 722,000 1,354,000 1,846,000
Deferred (18,000) 321,000 216,000 846,000
Total income taxes 686,000 1,043,000 1,570,000 2,692,000
Income before change in accounting
method 2,601,896 2,940,312 5,806,318 7,951,506
Cumulative effect of change in
accounting method, net of tax 0 0 (293,700) 0
Net Income $ 2,601,896 $ 2,940,312 $ 5,512,618 $ 7,951,506
Basic average shares outstanding 7,243,846 7,307,178 7,249,760 7,302,089
Weighted average shares outstanding 7,324,720 7,397,512 7,333,647 7,388,642
Per share results:
Basic earnings per share before
change in accounting method $ 0.36 $ 0.40 $ 0.80 $ 1.09
Accounting change, net of tax, per share 0.00 0.00 (0.04) 0.00
Basic earnings per share $ 0.36 $ 0.40 $ 0.76 $ 1.09
Diluted earnings per share before
change in accounting method $ 0.36 $ 0.40 $ 0.79 $ 1.08
Accounting change, net of tax, per share 0.00 0.00 (0.04) 0.00
Diluted earnings per share $ 0.36 $ 0.40 $ 0.75 $ 1.08
</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 nine months ended September 30, 1999 and 1998
(Unaudited)
<CAPTION>
Accumulated
Other
Common Treasury Contributed Retained Comprehensive Comprehensive
Shares Shares Capital Earnings Income Income
<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 -- -- -- 7,951,506 -- $ 7,951,506
Other comprehensive
income (loss), net of tax:
Unrealized loss on securities,
net of reclassification
adjustment -- -- -- -- (2,161,617) (2,161,617)
Comprehensive income -- -- -- -- -- $ 5,789,889
Dividends ($0.21 per share) -- -- -- (1,594,126) --
Issuance of 3,666 restricted
common shares 65,209 -- -- -- --
Exercise of stock options for 12,989
common shares 161,054 -- -- -- --
Balance at September 30, 1998 $ 44,336,679 $ (2,308,188)$ 15,058,327 $ 67,041,828 $ 12,187,615
Balance January 1, 1999 $ 44,336,679 $ (3,277,781)$ 25,923,462 $ 59,796,235 $ 15,190,238
Comprehensive income:
Net income -- -- -- 5,512,618 -- $ 5,512,618
Other comprehensive
income (loss), net of tax:
Unrealized loss on securities,
net of reclassification
adjustment -- -- -- -- (9,039,282) (9,039,282)
Comprehensive loss -- -- -- -- -- $ (3,526,664)
Dividends ($0.24 per share) -- -- -- (1,740,520) --
Repurchase of 41,951 common
shares -- (728,010) -- -- --
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 -- -- -- --
Balance at September 30, 1999 $ 44,793,300 $ (4,005,791)$ 25,923,462 $ 63,568,333 $ 6,150,956
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<TABLE>
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1999 and 1998
(Unaudited)
<CAPTION>
September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,512,618 $ 7,951,506
Reconciliation of net income to net cash
provided by operating activities:
Amortization 33,909,757 32,148,493
Deferred policy acquisition costs (35,913,353) (31,967,587)
Deferred income taxes 216,000 846,000
Increase in unearned premiums 10,097,624 271,366
Decrease in losses and loss adjustment expenses (5,908,747) (3,892,887)
Increase in premium receivables (5,054,287) (473,428)
Increase in amount due to Meridian Mutual Ins. Co. (1,830,907) (1,011,563)
Decrease (increase) in reinsurance receivables 5,672,696 (1,591,419)
Decrease (increase) in prepaid reinsurance premiums (392,457) 388,408
Decrease (increase) in other assets (747,313) 1,075,752
Decrease in reinsurance payables (215,893) (1,569,382)
Increase (decrease) in accrued commissions and
other expenses 320,002 (641,914)
Increase (decrease) in payable for federal income taxes 379,000 (784,000)
Increase (decrease) in other liabilities 317,051 (1,109,474)
Net realized investment gains (4,455,718) (5,500,708)
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 (837,427) 480,955
Net cash provided (used) by operating activities 1,425,528 (5,314,673)
Cash flows from investing activities:
Purchase of fixed maturities (54,849,116) (65,048,378)
Proceeds from sale of fixed maturities 38,000,779 58,950,677
Proceeds from calls, prepayments and maturity
of fixed maturities 16,251,814 17,742,809
Purchase of equity securities (17,062,794) (14,592,189)
Proceeds from sale of equity securities 18,122,621 13,860,639
Net decrease (increase) in short-term investments 1,338,431 (1,124,996)
Decrease in other invested assets 36,259 248,966
Increase (decrease) in payable for securities (46,148) 5
Net cash provided by investing activities 1,791,846 10,037,533
Cash flows from financing activities:
Dividends paid (1,740,694) (1,592,792)
Repayment of bank loan (1,125,000) (875,000)
Repurchase of common shares (728,010) ---
Exercise of stock options 393,439 161,054
Net cash used in financing activities (3,200,265) (2,306,738)
Increase in cash 17,109 2,416,122
Cash at beginning of period 854,522 1,188,423
Cash at end of period $ 871,631 $ 3,604,545
</TABLE>
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 nine
months ended September 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 September 30, 1999 and 1998
total 74 percent.
2. Reinsurance
For the three and nine months ended September 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Premiums written:
Direct $ 57,549,674 $ 51,589,853 $ 170,023,414 $ 154,278,743
Assumed 104,924 63,666 267,194 363,818
Ceded (4,244,036) (4,132,568) (12,022,512) (12,292,446)
Net $ 53,410,562 $ 47,520,951 $ 158,268,096 $ 142,350,115
Premiums earned:
Direct $ 54,956,223 $ 51,425,210 $ 159,888,209 $ 154,630,567
Assumed 98,619 101,999 304,775 469,631
Ceded (4,163,025) (4,241,105) (11,630,055) (12,692,600)
Net $ 50,891,817 $ 47,286,104 $ 148,562,929 $ 142,407,598
Losses and loss adjustment expenses:
Direct $ 38,968,685 $ 38,293,655 $ 119,474,376 $ 119,504,386
Assumed 315,405 654,436 120,887 753,747
Ceded (1,921,457) (3,934,626) (8,599,956) (15,447,018)
Net $ 37,362,633 $ 35,013,465 $ 110,995,307 $ 104,811,115
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 nine month periods ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Basic earnings per share computation:
Numerator (net income) before change
in accounting method $ 2,601,896 $ 2,940,312 $ 5,806,318 $ 7,951,506
Denominator:
Weighted average common
shares outstanding 7,243,846 7,307,178 7,249,760 7,302,089
Basic earnings per share
before change in
accounting method $ $ $ $
Cumulative effect of change
in accounting method --- --- (0.04) ---
Basic earnings per share $ 0.36 $ 0.40 $ 0.76 $ 1.09
Diluted earnings per share computation:
Numerator (net income) before change
in accounting method $ 2,601,896 $ 2,940,312 $ 5,806,318 $ 7,951,506
Denominator:
Weighted average common
shares outstanding 7,243,846 7,307,178 7,249,760 7,302,089
Stock options 80,874 90,334 83,887 86,553
Total shares 7,324,720 7,397,512 7,333,647 7,388,642
Diluted earnings per share
before change in
accounting method $ 0.36 $ 0.40 $ 0.79 $ 1.08
Cumulative effect of change
in accounting method --- --- (0.04) ---
Diluted earnings per share $ 0.36 $ 0.40 $ 0.75 $ 1.08
The 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
September 30, 1999 and 1998 consist of the following:
Nine Months Ended
September 30,
1999 1998
Unrealized holding gains (losses) before
deferred income taxes $ (8,682,678) $ 3,917,225
Deferred income tax (expense) or benefit 3,039,000 (1,372,000)
Subtotal (5,643,678) 2,545,225
Less: Reclassification adjustment for
realized gains 5,223,604 7,243,842
Income tax expense related to
realized gains (1,828,000) (2,537,000)
Subtotal 3,395,604 4,706,842
Net unrealized gains (losses) on securities $ (9,039,282) $ (2,161,617)
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 nine months ended September 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>
Nine Months Ended September 30, 1999
<CAPTION>
Segment Non-segment
Personal Farmowners Commercial Total Total Total
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 87,727,512 $ 8,356,442 $ 52,478,975 $ 148,562,929 $ --- $ 148,562,929
Net investment income 7,241,279 689,765 4,331,763 12,262,807 --- 12,262,807
Net realized investment gains --- --- --- --- 4,455,718 4,455,718
Other income --- --- --- --- 36,172 36,172
Total revenues 94,968,791 9,046,207 56,810,738 160,825,736 4,491,890 165,317,626
Loss and LAE 69,577,909 7,034,975 34,382,423 110,995,307 --- 110,995,307
General operating expenses 6,743,567 749,494 5,138,442 12,631,503 --- 12,631,503
Interest expense --- --- --- --- 404,741 404,741
Amortization expenses 18,103,367 2,012,045 13,794,345 33,909,757 --- 33,909,757
Total expenses 94,424,843 9,796,514 53,315,210 157,536,567 404,741 157,941,308
Income (loss) before taxes
and accounting change 543,948 (750,307) 3,495,528 3,289,169 4,087,149 7,376,318
Income taxes (benefit) 120,577 (166,320) 774,851 729,108 840,892 1,570,000
Income (loss) before
accounting change 423,371 (583,987) 2,720,677 2,560,061 3,246,257 5,806,318
Cumulative effect of change
in accounting method,
net of tax --- --- (293,700) (293,700) --- (293,700)
Net income (loss) $ 423,371 $ (583,987) $ 2,426,977 $ 2,266,361 $ 3,246,257 $ 5,512,618
Nine Months Ended September 30, 1998
Premiums earned $ 80,782,485 $ 8,161,111 $ 53,464,002 $ 142,407,598 $ --- $ 142,407,598
Net investment income 7,280,269 735,495 4,818,276 12,834,040 --- 12,834,040
Net realized investment gains --- --- --- --- 5,500,708 5,500,708
Other income --- --- --- --- 68,322 68,322
Total revenues 88,062,754 8,896,606 58,282,278 155,241,638 5,569,030 160,810,668
Loss and LAE 63,301,691 6,023,891 35,485,533 104,811,115 --- 104,811,115
General operating expenses 7,186,939 908,233 4,596,596 12,691,768 --- 12,691,768
Interest expense --- --- --- --- 515,786 515,786
Amortization expenses 18,204,654 2,300,572 11,643,267 32,148,493 --- 32,148,493
Total expenses 88,693,284 9,232,696 51,725,396 149,651,376 515,786 150,167,162
Income (loss) before taxes
and accounting change (630,530) (336,090) 6,556,882 5,590,262 5,053,244 10,643,506
Income taxes (benefit) (159,477) (85,005) 1,658,394 1,413,912 1,278,088 2,692,000
Income (loss) before
accounting change (471,053) (251,085) 4,898,488 4,176,350 3,775,156 7,951,506
Cumulative effect of change
in accounting method,
net of tax --- --- --- --- --- ---
Net income (loss) $ (471,053) $ (251,085) $ 4,898,488 $ 4,176,350 $ 3,775,156 $ 7,951,506
</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:
Nine Months Ended
September 30,
1999 1998
Personal Lines:
Automobile $ 67,050,892 $ 59,095,417
Homeowners 18,710,637 19,610,202
Other 1,965,983 2,076,866
Total Personal Lines $ 87,727,512 $ 80,782,485
Commercial Lines:
Automobile $ 13,617,703 $ 13,283,462
Workers Compensation 16,777,474 17,057,251
Commercial Multi-Peril 18,659,508 19,786,311
Other 3,424,290 3,336,978
Total Commercial Lines $ 52,478,975 $ 53,464,002
Farm Lines:
Farmowners 8,356,442 8,161,111
Total Farm Lines $ 8,356,442 $ 8,161,111
Total All Lines Combined $ 148,562,929 $ 142,407,598
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 September
30, 1999 were $405.0 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 the
investment portfolio. The Company's unrealized appreciation
on its fixed maturity portfolio declined by $10.0 million
from $7.4 million of appreciation at December 31, 1998 to
unrealized depreciation of $2.6 million at September 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
4.8 years. Net unrealized appreciation of equity securities
decreased from $15.7 million at December 31, 1998 to $11.9
million at September 30, 1999.
Total liabilities at September 30, 1999 of $268.6 million
were slightly higher in comparison to the $266.9 million
reported at December 31, 1998. The increase in total
liabilities primarily resulted from an increase in the
Company's unearned premium reserves of $10.1 million due to
increased net written premium volume, principally in
personal automobile product lines being generated through
new growth initiatives. This increase was offset by
decreases in several liabilities, the largest being a $5.9
million reduction in loss and loss adjustment expenses. Net
of related reinsurance receivables, such reserves at both
September 30, 1999 and December 31, 1998 slightly exceed
$112 million.
The Company's shareholders' equity at September 30, 1999
declined 3.9 percent to $136.4 million compared to the
December 31, 1998 total of $142.0 million. The primary
factor leading to this decrease was approximately $9.0
million net unrealized depreciation of investment
securities, net of deferred income taxes. The Company's
book value per share at September 30, 1999 was $18.84,
compared with $19.60 at year-end 1998.
Results of Operations
Quarter
For the three months ended September 30, 1999, the Company
recorded net income of $2.6 million, or $0.36 per common
share for both basic and diluted earnings. This compares to
net income of $2.9 million, or $0.40 earnings per share for
both basic and diluted earnings for the corresponding 1998
period. Net income was lower primarily because of a
reduction in realized investment gains quarter to quarter.
Quarterly earnings per share included operating earnings of
$0.20 for both 1999 and 1998. Third quarter net realized
investment gains were $0.16 in 1999 compared with $0.20 in
the third quarter of 1998. The Company's statutory combined
ratio for the 1999 third quarter improved slightly to
approximately 103.9 percent from the 1998 third quarter.
The Company's total revenues for the 1999 third quarter were
$56.7 million compared to $53.8 million for the
corresponding 1998 period. The Company had a 7.6 percent,
or $3.6 million, increase in earned premiums compared to the
same quarter of 1998. For the three months ended September
30, 1999, net written premiums increased 12.3 percent when
compared to 1998's third quarter. The growth in written
premiums was largely generated by growth initiatives in the
non-standard automobile product and sales of personal
automobile coverage to Sam's Club members through an
arrangement with GROUPadvantage. Favorable trends were
also experienced in sales of commercial lines products,
particularly through associations, a market niche for
Meridian. Written premiums for core personal lines of
business, excluding non-standard auto and Sam's Club
production, declined approximately 3.5 percent. The Company
is implementing an action plan designed to stimulate new
standard and preferred personal automobile business.
Net investment income of approximately $4.0 million for the
1999 third quarter declined in comparison to $4.2 million
for the same 1998 period. This decline is attributable to a
number of factors, including slight reductions in yield and
in the average balance of fixed maturity investments held
during the quarter. For the quarter ended September 30,
1999, the Company realized net gains on the sale of
investments of approximately $1.8 million, or $0.16 per
share after tax, compared to approximately $2.3 million or
$0.20 per share after tax for the third quarter of 1998.
The 1999 realized gains largely resulted from the sale of
five common stocks. Included in the net realized gains were
approximately $0.2 million in losses on bond sales. The
sale strategy was to sell lower yielding, shorter duration
securities, which allowed reinvestment into sectors offering
more attractive yields and spreads. The 1998 third quarter
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 1999 third quarter increased to $37.4
million from $35.0 million for the comparable 1998 quarter.
The loss and loss adjustment expense ratio improved slightly
to 73.4 in the 1999 third quarter compared to approximately
74.0 percent for the third quarter of 1998. Personal auto,
the Company's largest line of business at nearly 45 percent
of earned premiums, remained profitable during the quarter.
However, the loss ratio did increase approximately two
percentage points, somewhat consistent with industry trends.
The Company's total of general operating, amortization, and
interest expenses of $16.1 million for the 1999 third
quarter increased 8.3 percent compared to the 1998 total of
$14.8 million. Relative to earned premiums, general
operating and amortization expenses remained relatively
stable for the quarter, representing approximately 31
percent of earned premiums.
Nine Months
For the nine months ended September 30, 1999, the Company
recorded net income of $5.5 million, or $0.76 basic earnings
per share and $0.75 diluted earnings per share. This
compares to net income of $8.0 million, or $1.09 basic
earnings per share and $1.08 diluted earnings per share for
the corresponding 1998 period. Deterioration in the
Company's loss and loss adjustment ratio to 74.7 percent in
1999 compared to 73.6 percent in 1998 was the primary factor
in the decreased earnings. Realized gains on investments
were $4.5 million, or $0.40 basic earnings per share and
$0.39 diluted earnings per share, net of tax in 1999,
compared to $5.5 million or $0.49 per basic share and $0.48
per diluted share, net of tax recorded for the same nine
month period of 1998. The Company's statutory combined
ratio for the nine months ended September 30, 1999 increased
slightly to 104.7 percent compared to 104.3 percent for the
same period in 1998.
The Company's total revenues for the nine months ended
September 30, 1999 were $165.3 million compared to $160.8
million for the corresponding 1998 period. The Company's
earned premium increased $6.2 million, or 4.3 percent
compared to the same period of 1998. For the nine
months ended September 30, 1999, net written premiums
increased 10.7 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.
Exclusive of such growth initiatives, core personal lines of
business declined over 3.0 percent, while commercial lines of
business grew over 5.0 percent.
Net investment income of approximately $12.3 million for the
first nine 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 nine months of 1999 increased to $111.0
million from $104.8 million for the comparable 1998 period.
The loss and loss adjustment expense ratio increased from
73.6 percent in 1998 to 74.7 percent in 1999. Net weather-
related catastrophe losses incurred by the Company during
the first nine months of 1999 were estimated to be
approximately $14.1 million. Such claims largely resulted
from January winter storms in the Midwest and an April
hailstorm in Northern Indiana. For the comparable 1998
period, approximately $13.0 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 $46.9
million for the first nine months of 1999 increased slightly
compared to the 1998 total of $45.4 million. Relative to
earned premiums, general operating and amortization expenses
represented 31.6 percent of earned premiums through
September 30, 1999, and improved slightly over the 31.9
percent relationship for the first three quarters of 1998.
The Meridian Citizens personal lines processing was
successfully integrated into the Company's Indianapolis
headquarters during the second quarter of 1999, with
commercial lines integration to be completed before year-
end. These efforts are expected to save approximately $1.1
million of annualized facility, personnel and other costs
beginning in 2000.
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. It is anticipated that
testing will continue throughout the remainder of 1999 to
assure compliance. The remaining programming efforts for
non-critical systems are now expected to be completed in the
fourth quarter of 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 has been
performed by a project team consisting of both internal and
external resources. This extensive analysis encompassed
applications which were previously understood to be
compliant. These applications were reviewed for date
sensitive related code to determine that the Y2K remediation
was completed correctly. Re-programming efforts, as
required, have been performed to obtain Y2K compliance.
This project is expected to be completed by early in the
fourth quarter and its costs have 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, including $50,000 during the fourth quarter. 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 from 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. 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. Early this year
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 E-mail has been replaced with a Y2K
compliant product. 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. This includes
purchasing software, fleet automobile software, and a
timekeeping system. 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 and manual procedures are in place should they be
necessary.
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. The Company's computers
are on a UPS, or uninterrupted power source. This allows,
should the electricity fail, the Company approximately 30
minutes to perform controlled shut down procedures. 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 continuing by all management of the
Information Systems Department. These plans are being
modified and include what activities will take place, what
will be tested, and when the testing will 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 and October 1999 was successful.
While the April testing validated individual systems, the October
testing encompassed 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 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, litigation 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: October 25, 1999 By: /s/ Norma J. Oman
Norma J. Oman, President and
Chief Executive Officer
DATE: October 25, 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 September 30, 1999
Index to Exhibits
Exhibit Number
Assigned in Regulation S-K
Item 601 Description of Exhibit
(27) 27.01 Financial Data Schedule
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<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 232,131
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 5,093
<EQUITIES> 64,615
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 302,996
<CASH> 872
<RECOVER-REINSURE> 36,131
<DEFERRED-ACQUISITION> 20,115
<TOTAL-ASSETS> 405,040
<POLICY-LOSSES> 148,344
<UNEARNED-PREMIUMS> 91,321
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,000
0
0
<COMMON> 40,788
<OTHER-SE> 95,643
<TOTAL-LIABILITY-AND-EQUITY> 405,040
148,563
<INVESTMENT-INCOME> 12,263
<INVESTMENT-GAINS> 4,456
<OTHER-INCOME> 36
<BENEFITS> 110,995
<UNDERWRITING-AMORTIZATION> 33,910
<UNDERWRITING-OTHER> 13,036
<INCOME-PRETAX> 7,376
<INCOME-TAX> 1,570
<INCOME-CONTINUING> 5,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (294)
<NET-INCOME> 5,513
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.75
<RESERVE-OPEN> 154,253
<PROVISION-CURRENT> 120,238
<PROVISION-PRIOR> (9,243)
<PAYMENTS-CURRENT> 71,535
<PAYMENTS-PRIOR> 39,685
<RESERVE-CLOSE> 148,344
<CUMULATIVE-DEFICIENCY> (9,243)
</TABLE>
