The headquarters building of the Company is owned by Meridian Mutual and is located near downtown Indianapolis, Indiana. The building is a multi-level structure containing approximately 205,000 square feet of office space. Expansion efforts completed in 1995, have allowed the Company and Meridian Mutual to consolidate the two Indianapolis satellite offices, two regional claim offices, and the information resources function for Meridian Citizens Mutual previously in Red Wing, Minnesota into the home office facility.
The principal office space for the operations of Meridian Citizens Security and Meridian Citizens Mutual is located in Red Wing, Minnesota. The space consists of approximately 28,000 square feet with the lease expiring on December 31, 2002. Approximately 10,325 feet of this space is subleased to the Red Wing Hotel Corporation.
Year Ended December 31, 1998 1997 1996 1995 1994 (In thousands, except per share data and ratios)
Losses and loss adjustment expenses 136,620 149,219 130,101 99,124 93,971 General operating expenses 16,686 16,505 13,767 14,156 14,527 Interest expense 672 732 308 --- --- Amortization expenses 42,918 42,894 36,443 30,820 29,304 Total expenses 196,896 209,350 180,619 144,100 137,802
Income before taxes and change in accounting method 16,821 7,128 5,950 15,722 11,536 Income taxes 4,670 207 150 4,105 2,415 Net income $ 12,151 $ 6,921 $ 5,800 $ 11,617 $ 9,121
Basic earnings per share* $ 1.67 $ 0.94 $ 0.78 $ 1.56 $ 1.23
* Retroactively restated to reflect the 10 percent stock dividend declared in December 1998.
Results of operations improved significantly during 1998 despite a record level of weather-related catastrophe losses. This improvement results in large part from actions taken in 1997 and 1998 to improve underwriting profitability. Such efforts included underwriting programs related to proper risk selection, certain premium rate changes, and various agency management actions. These actions were necessary, even though in the short- term they negatively affected growth in premium revenue. Given the improved underwriting profitability of the Company's core business, the focus is now on a number of growth initiatives including state expansion, the continued roll-out of the non-standard auto product and affinity group marketing.
Marketing products through independent agents has always been the Company's primary source of distribution. The Company continues to build these relationships, increasing the independent agency count from 1,300 to 1,370 during 1998. The Company's growth strategy requires adding additional distribution methods. Meridian recently established an affinity marketing relationship with a bank in Virginia and is actively seeking affiliations with additional banks and other affinity partners, through which it will use direct response techniques.
In addition to growth initiatives, the Company is working to increase profitability through consistent exercise of underwriting discipline, sound investment management, enhanced customer service and cost control. Enhanced use of automated tools, such as the personal lines automated underwriting system, is expected to add efficiency.
As part of the readiness program, the Company also recognized the impact that significant outside vendors, agents, and other business associates could have on the ability to transact business. As a result, the Company has reviewed vendor associated software and hardware products utilized within the organization to determine the Y2K effort that would be necessary to achieve readiness. The Company also identified specific hardware and software that needed to be replaced as a result of the Y2K issue. It is anticipated that the replacement process will be completed in early 1999. Most are currently in compliance, scheduled for upgrade, or in the process of being eliminated. In addition, the Company also established contact with agents and certain vendors to highlight this issue. This contact was established with the purpose of reasonably ascertaining the Y2K impact. Where possible, the Company has reviewed plans received by outside providers for their Y2K compliance effort. In some cases, these entities have a lower level of readiness and preparation and as a result are not able to provide this type of information. Should an agent be non-compliant for Y2K, the Company's contingency plan is the current ability to process or underwrite policies on a manual basis. While this may have a direct impact on the timeliness of policy processing, the operating systems do have the ability to process such data. Third party vendors which have critical impact on the ability to process are currently anticipated to be Y2K compliant. However, there can be no guarantee that the systems of agents or other third parties will be 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 fail to be Y2K compliant will impact the ability to complete necessary work processes. No contingency plan is in place for these non-critical business vendors at this time.
The Company does not issue insurance policies covering risks related to the Year 2000 issue. However, there can be no certainty regarding future judicial or legislative interpretations of coverage.
While the Company has utilized significant resources to secure its critical operating systems, there are no contingency plans for things which effect the general public such as electrical power, water, and etc. Failure for these providers to perform Y2K compliance could be detrimental to company operations.
Statements in this 10-K document 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.
Net income for 1998 grew 76 percent to $12.2 million, or $1.65 diluted earnings per share, up from $6.9 million, or $0.93 per diluted share for 1997. This improvement was achieved in spite of more than double the amount of weather-related catastrophe losses in 1998, compared with 1997. Net catastrophe losses were approximately $14.7 million in 1998 versus approximately $7.3 million for 1997. The Company's combined ratio improved to 102.9 percent for 1998 from 107.1 percent in 1997. Realized investment gains for 1998 increased to $7.3 million, or $0.65 per share after tax, from $4.5 million, or $0.40 per share after tax, for 1997.
Loss and loss adjustment expenses decreased from the $149.2 million reported at year-end 1997 to $136.6 million in 1998. The improvement was achieved despite the high level of weather-related catastrophe losses which hit the midwest. Many of the Company's operating states reported significant weather-related damage. Most significantly, industry statistics indicated Minnesota, the largest state of operation for the Meridian Citizens companies, incurred more such losses in 1998 than in the last 49 years combined. This caused the Meridian Citizens companies to incur approximately half of the Company's consolidated catastrophe losses, while generating less than 20 percent of the Company's premium volume. The Company estimated weather-related losses to approximate $14.7 million in 1998 compared to $7.3 million in 1997. Despite the record level of catastrophe weather-related claims, the statutory loss and loss adjustment expense ratio improved for nearly all lines of business when compared to 1997. The personal lines loss ratio of 75.8 percent improved 7.6 percentage points from 1997. Personal automobile, the Company's largest line of business, had a 1998 loss ratio of 69.2 percent, compared to 78.7 percent for 1997. The 1998 commercial lines loss ratio of 66.3 percent is also an improvement over the 1997 result of 68.8 percent. Worker's compensation continues to be very profitable for the Company reporting a 49.5 percent loss ratio in 1998 versus 52.5 percent for 1997. Much of the improvement in the Company's core book of business is attributed to underwriting actions implemented in late 1997 and early 1998. The Company generally experienced favorable trends during 1998 in both the frequency and severity of claims incurred.
General operating and amortization expenses of $59.6 million in 1998 slightly increased from the $59.4 million recorded during 1997. Relative to earned premium volume, the Company's 1998 expense ratio increased to 31.5 percent compared to 30.5 percent for 1997. The reduction in premium volume over which to spread fixed costs was a factor behind this increase, as were costs to initiate new growth strategies. During the fourth quarter of 1998, the Company consolidated two regional claims centers and the Meridian Citizens information systems into the Company's Indianapolis location. While expected to produce cost savings beginning in 1999, incremental costs to implement these changes were estimated at approximately $0.04 per share after tax in 1998.
The Company's total revenues for 1997 increased 16.0 percent to $216.5 million from $186.6 million for 1996. Premiums earned increased 16.3 percent to $194.6 million for 1997 in comparison to $167.3 million for the previous year. The acquisition of the Citizens Security Group accounted for approximately $25.0 million of the increase. Aside from the acquisition, net premiums earned from the Meridian book of business increased approximately 3.3 percent, excluding its participation in the National Workers' Compensation Pool ("NWCP"). Personal and farm lines of business were the primary contributors to the increase with 6.1 percent growth, offset partially by a 1.7 percent decline in commercial lines. Commercial lines of business continue to be affected by highly competitive market conditions in the Company's operating territory. The earned premium volume in the Company's workers' compensation line was reduced by an approximately $2.6 million decline in assumed earned premiums from its involuntary participation in the NWCP. This was principally due to reduced participation in the assigned risk pools for the states of Kentucky and Tennessee. Partially offsetting the NWCP reduction was a refund of premiums previously ceded to the Minnesota Workers' Compensation Reinsurance Association of approximately $863,000. Direct written premiums for the Meridian and Citizens Security insurance companies during 1997 experienced growth of 3.1 percent and 1.8 percent, respectively, when compared to 1996 volume.
Losses and loss adjustment expenses incurred of $149.2 million for 1997 were 14.7 percent higher than the previous year's $130.1 million. Approximately $33.8 million of the 1997 incurred amount relates to the operations of Citizens Security Group, versus approximately $9.1 million for the five months of operations in the 1996 total. The statutory loss and loss adjustment expense ratio of the Citizens Security companies for the 1997 period was 85.1 percent compared to 70.9 percent for the five months of operations in 1996. Deteriorations in the Citizens Security homeowners, private passenger automobile and commercial multi-peril lines of business were the primary factors in the loss and loss adjustment expense increase. Partially offsetting these increases were improved experience in the commercial automobile and workers' compensation lines. Exclusive of Citizens Security's operations, incurred losses and loss adjustment expenses for the Meridian book of business reflected a 4.6 percent reduction from approximately $121.0 million in 1996 to $115.4 million in 1997. The Meridian lines of business for 1997 produced a statutory loss and loss adjustment expense ratio of 74.7 percent, a 4.0 percentage point improvement from 78.7 percent for 1996. Meridian's farmowners, homeowners and commercial multi-peril lines of business were the major contributors to the reduced loss and loss adjustment expense ratio, due largely to a reduction in weather-related catastrophe losses. The impact of such catastrophes on the Company's loss ratio in 1997 and 1996 was estimated to be 3.7 and 6.4 percentage points, respectively.
The Company's fixed income investment portfolio consists almost entirely of investment grade securities, the average quality of which is rated Aa / AA. The Company currently holds all of its fixed maturity investments in the "available-for-sale" category carried at market value. The Company at December 31, 1998 recorded unrealized gains in the bond portfolio of approximately $4.8 million, net of deferred income taxes. At year-end 1997, the Company recorded unrealized gains on the bond portfolio of approximately $5.7 million, net of deferred income taxes. The Company's equity security portfolio, which accounts for approximately 20.4 percent of invested assets, produced unrealized gains, net of deferred income taxes, of approximately $10.2 million in 1998, compared to approximately $8.4 million in 1997. Net unrealized appreciation of investments added $2.10 to the Company's $19.60 book value per share at December 31, 1998. Net unrealized appreciation added $1.97 per share to the $18.09 book value at December 31, 1997.
The Company does not own or currently utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its bank debt. Meridian, through its outside professional portfolio managers, employs traditional investment management tools and techniques to address the yield and valuation exposures of its invested assets. The long term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through adequate diversification and the purchase of investment grade securities. Reinvestment rate risk is controlled through asset- liability matching practices and by addressing call characteristics in security selection. Market value risk is addressed through maturity selection. The market value of the Company's long term fixed maturity investment portfolio is sensitive to fluctuations in the level of interest rates. The impact of interest rate movements on the long term fixed maturity investment portfolio generally affects net realized gains or losses when securities are sold. The Company estimates that a 100 basis point increase in interest rates from current levels would result in a possible decline in the $242.0 million market value of the long term fixed maturity investment portfolio of approximately 4.0 percent, or $9.7 million. With regard to its $64.0 million equity security portfolio, the Company does not own nor engage in any type of option writing. A 10% decrease in the U.S. equity market prices could result in a decrease of $6.4 million in the market value of the Company's common equities. These possible declines in values for the bond and stock portfolios would, net of deferred income taxes, negatively affect the common shareholders' equity at any point in time, but would not necessarily result in the recognition of realized investment losses as long as operating cash flow and the ongoing emergence of bond maturities continued to provide sufficient funds to meet obligations to policyholders and claimants, as well as debt service and cash dividend requirements at the holding company level.
To the Board of Directors and Shareholders of Meridian Insurance Group, Inc.
Premiums earned $189,188,422 $194,586,632 $167,304,414 Net investment income 17,245,684 16,371,711 14,908,285 Net realized investment gains 7,342,074 4,477,580 3,793,778 Other income (expense) (59,017) 1,042,350 562,198
Losses and loss adjustment expenses 136,619,991 149,218,731 130,101,192 General operating expenses 16,686,387 16,505,515 13,766,868 Interest expense 672,630 732,047 307,887 Amortization expenses 42,917,642 42,893,857 36,442,635
Per share data: Basic earnings per share $ 1.67 $ 0.94 $ 0.78
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET as of December 31, 1998 and 1997
December 31, 1998 1997 ASSETS Investments: Fixed maturities--available for sale, at market value (cost $234,632,000 and $239,662,000) $241,993,962 $248,404,304 Equity securities, at market (cost $48,338,000 and $41,430,000) 64,020,661 54,378,947 Short-term investments, at cost, which approximates market 6,431,482 3,996,232 Other invested assets 1,375,463 1,647,102 Total investments 313,821,568 308,426,585
Treasury shares, at cost; 212,800 and 154,500 shares at December 31, 1998 and 1997, respectively (3,277,781) (2,308,188) Contributed capital 25,923,462 15,058,327 Retained earnings 59,796,235 60,684,448 Accumulated other comprehensive income 15,190,238 14,349,232 Total shareholders' equity 141,968,833 131,894,235 Total liabilities and shareholders' equity $408,857,520 $413,585,804
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the Years Ended December 31, 1998, 1997 and 1996
Cash flows from investing activities: Purchase of fixed maturities (99,643,783) (54,141,776) (47,518,736) Proceeds from sale of fixed maturities 78,138,240 26,135,592 38,131,207 Proceeds from calls, prepayments and maturity of fixed maturities 29,141,214 22,393,353 24,843,739 Purchase of equity securities (21,960,794) (33,956,533) (19,794,358) Proceeds from sale of equity securities 21,316,297 31,160,867 18,633,656 Net (increase) decrease in short-term investments (2,435,250) (2,669,598) 3,300,088 Decrease (increase) in other invested assets 271,640 (256,926) (336,271) Acquisition of subsidiary --- --- (30,262,442) Increase (decrease) in securities payable 3,071,384 401,707 (1,533,830) Net cash provided by (used in) investing activities 7,898,948 (10,933,314) (14,536,947)
Policy acquisition costs, principally commissions, premium taxes, and variable underwriting and policy issue expenses, have been deferred. Such costs are amortized as premium revenue is earned. The method used in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, and also considers the effects of anticipated investment income, losses and loss adjustment expenses, and certain other costs anticipated to be incurred as the premium is earned. In connection with the acquisition of Meridian Citizens Security and ICO, the Company allocated a portion of its cost to an asset representing the estimated equity in the unearned premium reserve of the acquired book of business. The asset was amortized in 1996 and 1997 as the related premium revenue was recognized.
Deferred income taxes are provided to reflect the estimated future tax effects of temporary differences between the tax basis of an asset or liability and the basis recorded in financial statements. The deferred tax asset or liability is measured by using enacted tax rates expected to apply to future taxable income in the periods in which the temporary differences are expected to be recovered or settled. Accordingly, changes in future tax rates cause immediate adjustments to deferred taxes.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement for all companies with complex capital structures. SFAS No. 128 also replaces the presentation of primary earnings per share with a basic earnings per share computation and eliminates the modified treasury stock method and the three percent materiality provision as was required under the Accounting Principles Board Opinion No. 15. This Statement became effective for financial statements with fiscal years ending after December 15, 1997. All prior period information presented has been restated.
SOP 97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" is effective for financial statements with fiscal years beginning after December 15, 1998. 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 anticipates that an additional liability and a charge to the statement of income of approximately $300,000 net of income tax will be recognized upon implementation in the first quarter of 1999.
The Company's net investment income for the periods ended December 31, 1998, 1997 and 1996 are summarized as follows:
Net realized and unrealized gains on investments are summarized as follows:
1998 1997 1996 Realized gains (losses): Fixed maturities $ 2,628,256 $ 14,108 $ (456,602) Equity securities 6,263,104 5,052,295 4,559,381 Other investments (701,038) --- --- Total realized investment gains 8,190,322 5,066,403 4,102,778 Investment expenses 848,248 588,823 309,000 Net realized investment gains $ 7,342,074 $ 4,477,580 $ 3,793,778
The amortized cost and estimated market values of investments in fixed maturity securities at December 31, 1998 and 1997, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value December 31, 1998 Available for sale: Government and agency domestic bonds $ 3,681,320 $ 107,949 $ 9,855 $ 3,779,414 Municipal bonds 42,585,763 1,669,262 143,068 44,111,957 Corporate bonds 123,432,824 3,797,535 334,305 126,896,053 Mortgage-backed securities 44,234,647 789,650 95,072 44,929,225 Sinking fund preferred stocks 20,697,205 1,622,315 42,207 22,277,313 Total fixed maturity securities $234,631,759 $7,986,711 $624,507 $241,993,962
December 31, 1997 Available for sale: Government and agency domestic bonds $ 9,992,300 $ 494,746 $ 13,916 $10,473,130 Municipal bonds 71,000,487 3,345,436 118,097 74,227,826 Corporate bonds 82,661,920 2,381,660 7,448 85,036,132 Mortgage-backed securities 42,479,390 972,915 99,833 43,352,472 Sinking fund preferred stocks 33,528,199 1,822,517 35,972 35,314,744 Total fixed maturity securities $239,662,296 $9,017,274 $275,266 $248,404,304
The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Unrealized appreciation of equity securities at December 31, 1998 totaled $15,682,983 representing $19,023,288 of gains on certain securities and $3,340,305 of losses on other securities.
The Company's other comprehensive income consists solely of net unrealized gains (losses) on securities. The total net unrealized gain (losses) on securities for the periods ending December 31, 1998 and 1997 consist of the following:
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. All prior period information presented has been restated to conform with this pronouncement.
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 the 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.
Personal Lines: Automobile $ 79,438,864 $ 78,609,066 $ 67,326,591 Homeowners 25,649,226 26,262,790 21,072,110 Other 2,718,432 2,929,743 2,469,302 Total Personal Lines $ 107,806,522 $ 107,801,599 $ 90,868,003
Commercial Lines: Automobile $ 17,666,781 $ 17,826,255 $ 14,215,305 Worker's Compensation 22,442,522 25,586,297 24,437,027 Commercial Multi-Peril 25,983,425 28,041,002 22,879,659 Other 4,410,290 4,766,669 4,881,296 Total Commercial Lines $ 70,503,018 $ 76,220,223 $ 66,413,286
Farm Lines: Farmowners 10,878,882 10,564,810 9,998,705 Total Farm Lines $ 10,878,882 $ 10,564,810 $ 9,998,705
The consolidated financial statements include the results of operations of the acquired entities from the date of acquisition. Unaudited pro-forma condensed consolidated results of operations presented below assume the acquisition and financing of the transaction had occurred January 1, 1996:
Premiums earned $185,808,000 Total revenues $206,201,000 Net income $ 4,138,000 Basic and diluted earnings per share $ 0.56
These unaudited pro-forma results are not necessarily indicative of the results of operations that would have occurred had the acquisition taken place at January 1, 1996.
Fair value of assets acquired $77,440,427 Cash paid 30,262,442 Liabilities assumed $47,177,985
The Citizens Security Group acquisition was funded in part through a $12,000,000 bank loan. The debt has a variable interest rate of LIBOR plus 50 basis points, which was 5.7388 percent and 6.375 percent at December 31, 1998 and 1997, respectively. The bank loan will mature on August 1, 2003. The Company is required to make principal payments in accordance with the following schedule:
Meridian Security, Meridian Citizens Security, ICO, Meridian Mutual and Meridian Citizens Mutual are parties to a reinsurance pooling agreement ("pooling agreement") under which essentially all premiums, losses and loss adjustment expenses as well as other underwriting expenses are shared by the companies on the basis of their percentage participation defined in the pooling agreement. Other expenses are allocated on the basis of specific identification or estimated costs. Amounts either due to or due from Meridian Mutual and Meridian Citizens Mutual result from these transactions, and are normally reimbursed on a monthly basis. Management believes that such expenses would not be materially different if incurred directly by each company.
Effective January 1, 1997, the Company became the employer of all employees that were formerly employed by Meridian Mutual and Meridian Citizens Mutual. This transfer of employees allowed for the integration of benefit plans, thus increasing management efficiencies and allowing for enhanced benefit options, such as the use of the Company's common stock as compensation.
Also as a result of the employee transfer, the Company assumed the operations of the previously established benefit plans of Meridian Mutual. Included in these benefit plans was a non-contributory pension plan that covers substantially all employees, a non-tax qualified supplemental retirement plan for certain key employees, and a multi-employer plan for other post-retirement benefits. (See Note 11-Pension and Other Post-Retirement Benefit Plans) The Company also assumed a 401(k) plan whereby employees can contribute up to 16 percent of their compensation, with the Company contributing 50 percent of the employee contribution on the first 6 percent. Costs related to these benefit plans are allocated to each company in accordance with their percentage participation under the pooling agreement.
Balance at beginning of period $169,801,326 $161,309,239 $ 123,577,240 Less reinsurance recoverables 48,872,464 41,819,308 31,204,462 Net balance at beginning of period 120,928,862 119,489,931 92,372,778
Incurred related to: Current year 145,328,331 165,576,734 137,817,367 Prior years (8,708,340) (16,358,003) (7,716,175) Total incurred 136,619,991 149,218,731 130,101,192 Paid related to: Current year 93,790,286 97,447,542 93,199,000 Prior years 51,307,350 50,332,258 30,470,408 Total paid 145,097,636 147,779,800 123,669,408
The reinsurance purchased includes contracts under which certain types of policies are automatically reinsured up to the contract limits ("treaty reinsurance") and contracts which provide reinsurance on an individual risk basis which require a specific agreement of the reinsurer as to limits of coverage provided ("facultative reinsurance"). Meridian Mutual, Meridian Security, Meridian Citizens Mutual, Meridian Citizens Security, and ICO were each named as insured parties under the treaty reinsurance contracts, and the coverage under those contracts applied to all risks written by each of the companies. Treaty coverage was purchased to cover property and liability exposures in excess of $200,000 and $350,000, respectively, up to the limits set forth in the individual treaty. (In 1997, the retention was $200,000 for property and $250,000 for liability.) Facultative reinsurance was purchased to cover exposures on both property and liability coverages from losses over and above the limits provided by the treaty reinsurance.
Catastrophe reinsurance provided coverage for multiple losses caused by a single catastrophic event such as a windstorm or earthquake. The combined retention under this contract was $6,000,000 plus five percent of losses up to contractual limits for windstorms of $65,000,000 and for earthquakes of $115,000,000. Two other catastrophe reinsurance treaties provided coverage for 95% of losses sustained from multiple catastrophic events which aggregated beyond specified retentions and per event deductibles up to the contractual limits.
1998 1997 1996 Premiums written: Direct $204,046,222 $210,393,552 $181,680,624 Assumed 486,305 718,004 3,730,504 Cede (16,461,276) (16,592,247) (16,216,479) Net $188,071,251 $194,519,309 $169,194,649
Losses and loss adjustment expenses incurred: Direct $151,184,461 $168,173,120 $154,237,419 Assumed 624,892 1,355,214 2,857,470 Ceded (15,189,362) (20,309,603) (26,993,697) Net $136,619,991 $149,218,731 $130,101,192
The following table presents a reconciliation of the funded status for the Company's defined benefit pension plan and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1998 and 1997 per FASB 132 requirements:
1998 1997 Reconciliation of benefit obligation: Obligation at January 1 $23,432,716 $20,402,465 Service cost 1,067,292 953,881 Interest cost 1,608,088 1,484,846 Plan amendments 1,131,954 --- Actuarial loss 1,165,040 1,783,756 Benefit payments (1,287,468) (1,192,232) Obligation at December 31 $27,117,622 $23,432,716
Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $31,582,957 $28,482,573 Actual return on plan assets 4,105,537 4,292,616 Benefit payments (1,287,468) (1,192,232) Fair value of plan assets at December 31 $34,401,026 $31,582,957
Funded Status Funded status at December 31 $7,283,404 $8,150,241 Unrecognized asset obligation (7,015,956) (7,548,032) Unrecognized prior service cost 1,058,321 --- Unrecognized gain (603,345) (208,920) Accrued asset at December 31 $ 722,424 $ 393,289
Service costs $ 789,796 $ 705,872 Interest costs 1,189,985 1,098,786 Expected return on assets (1,884,093) (1,701,956) Amortization of asset obligation (393,736) (393,736) Amortization of prior-service cost 54,488 --- Net periodic benefit cost/(income) $ (243,560) $ (291,034)
Funded Status Funded status at December 31 $(1,909,278) $(1,952,474) Unrecognized gain (loss) (26,338) 72,418 Accrued liability at December 31 $(1,935,616) $(1,880,856)
The Revenue Reconciliation Act of 1990 required insurance companies to accrue future recoveries of salvage and subrogation on a discounted basis. A fresh start of 87 percent of the beginning 1990 discounted balance was provided for by that act, which was to be amortized over the life of the reserves. The impact of this provision resulted in an aggregate tax benefit of approximately $923,000.
1998 1997 1996 Deferred tax assets: Unearned premium reserves $ 5,450,000 $ 5,528,000 $ 5,533,000 Loss and loss adjustment expense reserves and salvage and subrogation 5,414,000 6,248,000 6,336,000 Other post-employment benefits 677,000 677,000 496,000 Other 258,000 1,431,000 875,000 Total deferred tax assets 11,799,000 13,884,000 13,240,000 Deferred tax liabilities: Deferred policy acquisition costs 6,185,000 6,178,000 5,842,000 Investments 209,000 144,000 327,000 Unrealized appreciation on investment securities 8,183,000 7,731,000 3,849,000 Other 54,000 56,000 425,000 Total deferred tax liabilities 14,631,000 14,109,000 10,443,000
The following table reflects 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 years ended December 31, 1998, 1997 and 1996.
December 31, 1998 Basic earnings per share Income available to common stockholders $12,150,545 7,292,077 $ 1.67 Effect of dilutive securities Stock options --- 82,675 Diluted earnings per share Income available to common stockholders $12,150,545 7,374,752 $ 1.65 December 31, 1997 Basic earnings per share Income available to common stockholders $ 6,921,123 7,351,890 $ 0.94 Effect of dilutive securities Stock options --- 50,515 Diluted earnings per share Income available to common stockholders $ 6,921,123 7,402,405 $ 0.93 December 31, 1996 Basic earnings per share Income available to common stockholders $ 5,799,952 7,457,212 $ 0.78 Effect of dilutive securities Stock options --- 30,982 Diluted earnings per share Income available to common stockholders $ 5,799,952 7,488,194 $ 0.77
In May 1997, the Shareholders of Meridian Insurance Group, Inc. approved an amendment to the Company's Articles of Incorporation to increase the number of authorized shares from 20,000,000 to 20,500,000, with the additional shares being preferred stock. The amendment provides that the preferred shares may be issued from time to time in one or more series. The Board of Directors, without further approval of the holders of common shares, would be authorized to fix the dividend rights and terms, liquidation preferences, sinking funds and any other rights, preferences, privileges, and restrictions applicable to each such series of preferred shares. On September 8, 1998, the Board of Directors of Meridian Insurance Group Inc., adopted a Shareholders Rights Plan. Under the Plan, a dividend of one preferred share purchase right was paid to shareholders of record on September 28, 1998 for each outstanding common share. Each Right entitles the holder to purchase one-thousandth of a share Series A Junior Participating Preferred Stock of the Company at a price of $75.00 per one- thousandth of a Preferred Share. If a person or group acquires 20% or more of the outstanding Common Shares (thereby becoming an Acquiring Person), each holder of a Right (except those held by the Acquiring Person and its affiliates and associates) will generally have the right to purchase Common Shares having equal to two times the purchase price of the Right. In other words, the Right's holders, other than the Acquiring Person, may purchase common shares or their equivalent at a 50 percent discount. The Rights will expire on September 18, 2008, unless the expiration date is extended by amendment or unless the Rights are earlier redeemed or exchanged by the Company.
On December 9, 1998, the Board of Directors of Meridian Insurance Group, Inc. declared a ten percent stock dividend. Each shareholder of record as of December 21, 1998 received one additional share of the company's common stock for every ten shares held on that date. The ten percent stock dividend was distributed on January 6, 1999 with the Company issuing 658,493 shares. Fractional shares were paid by the Company in cash. All share and prior per share amounts have been retroactively restated to give effect for the stock dividend.
The Company also has a Director's Stock Plan that provides for an aggregate maximum of up to 150,000 common shares to be issued upon the exercise of stock options granted to outside directors, who are defined as non-employee directors of the Company or Meridian Mutual. Each outside director will automatically be granted an option to purchase 1,000 common shares on the date of each annual meeting of shareholders up until termination of the plan. The exercise price per share for each option will be equal to the fair market value of a common share on the date of grant. Each option will be exercisable commencing one year after the date of the grant and will expire no later than 10 years after the date of the grant. As of December 31, 1998, total options with respect to 64,000 shares have been granted.