Losses and loss adjustment expenses 99,124 93,971 86,622 75,980 79,308 General operating expenses 14,156 14,527 14,935 12,742 12,451 Amortization expenses 30,820 29,304 27,039 22,695 22,283 Total expenses 144,100 137,802 128,596 111,417 114,042
Dividends declared per share $ 0.28 $ 0.24 $ 0.24 $ 0.18 $ 0.00
Underwriting ratios (statutory basis): Loss and loss adjustment expense ratio 69.2% 69.8% 69.4% 70.8% 72.7% Expense ratio 31.0 32.0 32.4 32.3 32.6 Combined ratio 100.2% 101.8% 101.8% 103.1% 105.3%
(1) The 1995 and 1994 investments reflect the Company's adoption of SFAS No. 115 (See Note 1 of the Notes to the Consolidated Financial Statements).
On December 29, 1995, Meridian Mutual entered into an indemnity reinsurance agreement with Celina Mutual Insurance Company ("Celina"), covering a book of commercial lines business. Under this agreement, Celina will transfer approximately $6 million of its Pennsylvania commercial lines annual premiums to Meridian Mutual along with access to approximately 80 independent insurance agents located in the state of Pennsylvania. Since this transaction occurred at the end of the year, it had no impact on the Company's 1995 statement of income. Meridian Mutual's underwriting results related to this business will be pooled with Meridian Security's.
During 1996, the Company expects to install an automated personal lines underwriting system that will enable policies meeting certain criteria to be issued without manual review, thus reducing costs without increasing risk. If an application for certain types of policies receives a passing grade electronically, the policy will be automatically issued. If the application is "kicked out" electronically for any number of reasons, it is then passed on to an underwriter for further review. We believe this is how automation can be used to assure consistent underwriting compliance and cost- effectively leverage the experience of senior underwriters.
The Company has made substantial progress in automated agency interface. Meridian began uploading private passenger automobile and homeowners policy information from 121 agencies during 1995. Information is entered on the agencies' computer systems and then transmitted directly to Meridian's computer system. Uploading and downloading reduce the duplication of efforts by both agency and company personnel for processing policies. By the end of 1995, over 300 agencies were receiving policy information downloaded directly from Meridian's mainframe computer. Plans for 1996 include adding approximately 200 more upload agencies and 75 more download agencies.
Net premiums earned for 1995 reflected 6.6 percent growth to $143.9 million from 1994's $135.0 million. This growth was attributed to nearly all major lines of business. Meridian's personal lines production for 1995 experienced growth of 8.7 percent. This was primarily attributed to the homeowners and private passenger automobile lines of business, which reflected earned premium growth of 9.7 percent and 7.6 percent, respectively. Farmowners achieved earnings growth of 10.2 percent, while Meridian's commercial lines of business grew 3.1 percent over the 1994 level. The increase in commercial lines was attributed primarily to 8.9 percent growth in the commercial automobile line and 6.7 percent increase in voluntary workers' compensation business. Depressing the commercial lines growth was a reduction of nearly $600,000 in assumed earned premiums from the National Workers' Compensation Pool ("NWCP"). This partially resulted from actions taken by Meridian to control the type of workers' compensation business it would accept in states where the NWCP was unprofitable. The commercial lines growth was also hampered by soft market conditions, primarily in the state of Michigan where premium volume declined from the 1994 level. Meridian has addressed its products, rates and personnel in the state of Michigan and will continue to monitor these actions for improved results. Total policy count, on a pooled basis, for 1995 increased by approximately 7,000 policies, or 3.0 percent, over the 1994 total.
General operating expenses incurred during 1995 of $14.2 million decreased 2.6 percent from $14.5 million reported for 1994. Lower state income taxes, reduced assessments from the NWCP and certain economies of scale were the primary contributors to the expense reduction. The reduced expenses, combined with a slight reduction in the Company's average commission rate, produced a statutory expense ratio of 31.0 percent for the current period compared to 32.0 percent for the prior year. Amortization expenses of $30.8 million for the 1995 period increased 5.2 percent from $29.3 million, corresponding with the Company's growth in premium volume.
The Company's net premiums earned in 1994 increased 7.2 percent to $135.0 million from the $125.9 million reported in 1993. Commercial lines growth of $5.1 million came primarily from the workers' compensation and commercial package products. Personal lines premiums grew $3.5 million in 1994, with the majority of growth seen in the personal automobile and homeowners lines of business. Farmowners products reported growth of $0.5 million. Total 1994 year-end policy count for all Meridian lines increased 3.1 percent over 1993.
Net investment income of $14.0 million represents an improvement of 3.1 percent over the 1993 total of $13.6 million. The Company's effective investment yield for 1994 declined to 6.4 percent from 7.0 percent in 1993. A greater emphasis on the purchase of tax-exempt municipal bonds and equity securities produced a lower average portfolio yield. Realized gains of $0.3 million declined from the $0.9 million reported at year-end 1993.
The Company's statutory loss and loss adjustment expense ratio deteriorated slightly from the 69.3 percent reported in 1993 to 69.8 percent for 1994. The year-end loss ratio for commercial auto was 80.0 percent compared to 65.4 percent reported in 1993. Increase in liability claim frequency accounts for the higher ratio in this line. However, improvement was seen in the voluntary workers' compensation results from the 69.6 percent reported in 1993 to 50.7 percent reported at year-end 1994, due to both an increase in earned premiums and a decline in the average loss payment. Meridian continues to monitor the legislative environment for workers' compensation in our operating states to optimize underwriting results.
General operating expenses totaled $14.5 million, a slight decrease from the $14.9 million reported in 1993. Reduced commission expenses were partially offset by an increase in state income taxes. Higher deferred acquisition costs relating to increased premium volume caused the Company's amortization expense to grow by 8.4 percent to $29.3 million from the $27.0 million reported in 1993.
The Company's effective tax rate for 1994 was 20.9 percent compared to 23.7 percent for 1993. A larger proportion of tax exempt interest and the dividends received deduction contributed to the effective rate reduction.
On February 8, 1996, the Company announced that it has entered into a letter of intent to acquire Citizens Security Group, Inc. of Red Wing, Minnesota for approximately $29 million in cash. The transaction is subject to the execution of a definitive acquisition agreement and approvals by state regulatory authorities, the companies' boards of directors and Citizens' common and preferred shareholders. It is anticipated that the acquisition will be completed by mid-1996. Approximately 60 percent of the cash will be generated from the sale of a portion of Meridian Security's investment portfolio with the balance likely to be financed with bank debt. Such acquisition financing has not yet been finalized. This acquisition is expected to generate approximately $35 to $40 million of net premium writings in seven states, four of which the Company does not currently operate in.
Beginning in 1994, state insurance regulators required companies to calculate Risk Based Capital ("RBC"). RBC is the capital required to cover the varying degrees of risk inherent in a company's assets, loss reserves, underwriting, and reinsurance. The "company action level" RBC is the minimum amount of capital required in order to avoid regulatory action. Meridian Security's adjusted capital of $89.4 million in 1995 is over four times the required minimum.
To the Shareholders and Board of Directors of Meridian Insurance Group, Inc.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Meridian Insurance Group, Inc., and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company changed its method of accounting for certain investments in debt and equity securities in 1994, and its method of accounting for income taxes in 1993.
Premiums earned $143,865,821 $135,001,881 $125,902,355 Net investment income 14,563,820 13,995,984 13,568,919 Net realized investment gains 1,538,281 285,701 890,052 Other income (expense) (146,345) 54,623 (114,865)
Income before taxes and change in accounting method 15,722,039 11,536,063 11,649,965 Income taxes (benefit) Current 3,554,000 2,574,000 3,368,000 Deferred 551,000 (159,000) (603,000)
Income before change in accounting method 11,617,039 9,121,063 8,884,965 Cumulative effect of change in accounting method: Accounting for income taxes -- -- 525,804 Net income $ 11,617,039 $ 9,121,063 $ 9,410,769
LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $123,577,240 $123,754,650 Unearned premiums 64,558,695 59,663,286 Other post-employment benefits 1,298,378 1,101,155 Reinsurance payables 6,863,626 5,890,675 Other liabilities 8,047,610 6,743,826 Total liabilities 204,345,549 197,153,592
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the Years Ended December 31, 1995, 1994 and 1993
Meridian Insurance Group, Inc. ("the Company"), was organized in 1986 as a subsidiary of Meridian Mutual Insurance Company ("Meridian Mutual"), an Indiana mutual insurance company that currently owns 46.5 percent of the outstanding common shares of the Company. The Company is a regional holding company principally engaged in the business of underwriting property and casualty insurance through its wholly-owned subsidiary, Meridian Security Insurance Company ("Meridian Security"), which owns 100 percent of Vernon Fire & Casualty Insurance Company ("Vernon"). The Company also has two non-insurance subsidiaries, Meridian Service Corporation, a service support company, and MarketMasters Agency, Inc., an insurance agency. During the periods presented, the results of operations of the Company's non-insurance subsidiaries were not significant. The Company participates in the underwriting gain or loss on business written by Meridian Mutual pursuant to a reinsurance pooling agreement between Meridian Mutual and Meridian Security which covers all of the property and casualty business of the two companies. (See Note 4.)
Meridian Mutual writes a broad line of property and casualty insurance, including personal and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Business is written through approximately 925 independent insurance agencies in the states of Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee, and Wisconsin. During the fourth quarter of 1995, Meridian Mutual was granted licenses to write insurance in the states of Iowa, Minnesota and Pennsylvania; however, no direct premiums were written in these three states during 1995. Meridian Security is licensed in all states in which Meridian Mutual is licensed with the exception of Pennsylvania, for which an application is currently pending. During 1995, Meridian Security wrote personal and farm lines policies in Indiana, Kentucky, Ohio, Tennessee, and Wisconsin through approximately 400 independent insurance agencies, many of which are cross-licensed with Meridian Mutual.
The Company regularly evaluates its investments based on current economic conditions, past credit loss experience and other circumstances of the Company. A decline in a security's net market value that is not a temporary fluctuation is recognized as a realized loss, and the cost basis of that security is reduced.
The Company's goodwill represents the excess of cost over the fair value of identifiable net assets acquired from business acquisitions and is being amortized on a straight-line basis over a 25-year period.
Accounting For Stock-Based Compensation In November 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" to become effective for financial statements for fiscal years beginning after December 15, 1995. This Statement encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on the fair value method of accounting. The Company intends to continue to value its stock option plans under the existing accounting rules contained in Accounting Principles Board Opinion No. 25. The Company intends to disclose the pro- forma impact of SFAS No. 123 on net income and earnings per share, the effect of which has not yet been determined. See Note 10 for a detailed description of the Company's incentive stock plans.
Held-to-maturity securities (those securities which the Company has the ability and positive intent to hold to maturity) are carried at amortized cost. The Company may only dispose of such securities under certain unforeseen circumstances, such as issuer credit deterioration or regulatory requirements.
In 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes", which requires that deferred income taxes be calculated using the liability method. Companies establish deferred tax liabilities or assets estimating the future tax effects of temporary differences between the tax basis of an asset or liability and the basis recorded in financial statements. Changes in future tax rates thus cause immediate adjustments to deferred taxes. The cumulative effect of adopting this statement resulted in a tax benefit for the Company of $525,804, representing an increase in the net deferred tax asset as of January 1, 1993. The cumulative effect of this reporting change increased the Company's income per share by $0.08 for the year ended December 31, 1993.
The fixed maturity portfolio at December 31, 1995 consisted entirely of securities classified as available for sale. At December 31, 1994, the portfolio was made up of both securities that were expected to be held to maturity and those classified as available for sale. The amortized cost and estimated market values of investments in fixed maturity securities at December 31, 1995 and 1994, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value December 31, 1995 Available for sale: Government and agency domestic bonds $ 8,127,012 $ 600,241 $ 3,790 $ 8,723,463 Municipal bonds 72,356,941 2,649,867 371,703 74,635,105 Corporate bonds 40,484,745 1,633,386 5,580 42,112,551 Mortgage-backed securities 57,037,770 1,425,970 158,915 58,304,825 Sinking fund preferred stocks 35,809,142 803,950 352,264 36,260,828 Total fixed maturity securities $213,815,610 $ 7,113,414 $ 892,252 $220,036,772
The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrower's may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value Available for sale: Due in one year or less $ 818,008 $ 692,263 Due after one year through five years 31,104,759 31,960,828 Due after five years through ten years 46,709,065 49,029,337 Due after ten years through fifteen years 53,417,983 55,177,084 Due after fifteen years 24,728,025 24,872,435 Subtotal 156,777,840 161,731,947 Mortgage-backed securities 57,037,770 58,304,825 Total fixed maturity securities $213,815,610 $220,036,772
Unrealized appreciation resulting from changes in the valuation of equity securities at December 31, 1995 totaled $4,158,392, representing $4,907,598 of gains on certain securities and $749,206 of losses on other securities.
3.Distribution of Proceeds From Public Offering On May 5, 1993, Meridian Insurance Group, Inc., completed a second stock offering of 1,725,000 common shares at $12 per share. Total proceeds received from this offering, net of commissions, were $19,458,000; related underwriting expenses totaled $494,040. This stock offering allowed the Company to contribute $18,000,000 to its principal subsidiary, Meridian Security Insurance Company, thus increasing Meridian Security's surplus and enabling it to assume a greater volume of business under the reinsurance pooling agreement. (See Note 4.)
4.Related Party Transactions Meridian Security and Meridian Mutual are parties to a reinsurance pooling agreement ("pooling agreement") structured such that Meridian Security cedes all of its insurance business to Meridian Mutual and in turn receives back a percentage participation in all of the business written by both companies. All losses and loss adjustment expenses as well as other underwriting expenses are shared by Meridian Mutual and Meridian Security based on 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 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.
Premiums earned $130,405,000 Losses and loss adjustment expenses 90,428,000 General operating expenses 15,420,000 Amortization of deferred acquisition costs 27,385,000 Underwriting gain (loss) $ (2,828,000)
For the year ended December 31, 1995, approximately 90 percent of the Company's total premium volume was derived from its participation in the pooling agreement. In 1994 and 1993, approximately 84 percent and 87 percent, respectively, was derived from the pooling arrangement.
Meridian Security has no employees and is dependent on the business and operations of Meridian Mutual. Meridian Mutual has a defined pension plan covering substantially all employees and a non-tax qualified retirement plan for certain key employees. Related pension costs allocated to the Company in 1995 were approximately $100,000. The Company also participates in the multi-employer plan for other post-retirement benefits offered by Meridian Mutual to employees, including medical benefits for early retirees (eligible upon attainment of age 55 and five years of service up to age 65) and group term life insurance that phases out over a five year period from the retirement date. Related costs allocated to the Company were approximately $102,000, $84,000 and $100,000 for 1995, 1994 and 1993, respectively.
Balance at beginning of period $123,754,650 $119,763,925 $ 95,105,928 Less reinsurance recoverables 31,815,440 30,133,606 23,099,968 Net balance at beginning of period 91,939,210 89,630,319 72,005,960 Incurred related to: Current year 104,584,909 99,444,243 92,995,660 Prior years (5,461,060) (5,473,714) (6,373,769) Total incurred 99,123,849 93,970,529 86,621,891 Paid related to: Current year 61,791,602 55,216,000 48,107,000 Prior years 36,898,679 36,445,638 20,890,532 Total paid 98,690,281 91,661,638 68,997,532 Net balance at end of period 92,372,778 91,939,210 89,630,319 Plus reinsurance recoverables 31,204,462 31,815,440 30,133,606 Balance at end of period $123,577,240 $123,754,650 $119,763,925
Approximately 99 percent of the Company's ceded reserves for losses and loss adjustment expenses are with Michigan Catastrophic Claims Association, Employers Reinsurance Corporation and General Reinsurance Corporation. Reinsurance recoveries recognized for the years ended December 31, 1995, 1994 and 1993 were $1,547,000, $2,758,000 and $4,685,544, respectively. The effect of reinsurance on premiums written and earned for the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993 Premiums written: Direct $152,596,128 $144,084,372 $144,272,466 Assumed 7,269,782 6,132,096 6,005,502 Ceded (11,102,025) (14,026,543) (14,121,576) Net $148,763,885 $136,189,925 $136,156,392
Premiums earned: Direct $149,748,331 $141,275,894 $134,021,523 Assumed 5,222,170 5,744,277 5,690,972 Ceded (11,104,680) (12,018,290) (13,810,140) Net $143,865,821 $135,001,881 $125,902,355
On December 29, 1995, Meridian Mutual entered into an indemnity reinsurance agreement with Celina Mutual Insurance Company regarding commercial line business in the state of Pennsylvania. This transaction was recorded as assumed written premium, which will be earned over the next twelve months. Renewals of these policies will be recorded as direct business of Meridian Mutual. Through the pooling agreement, Meridian Security assumed premiums written of approximately $2,100,000 and ceding commissions of approximately $409,000, all of which have been deferred until the premiums are earned.
Deferred, beginning of period $11,977,429 $11,972,069 $9,612,192 Additions: Commissions 25,797,651 23,444,057 23,403,068 Ceding commission 409,350 621,494 2,491,893 Premium taxes 1,625,370 2,108,746 1,586,490 Other 4,236,409 3,007,189 1,789,111 32,068,780 29,181,486 29,270,562 Amortization expense 30,691,609 29,176,126 26,910,685 Deferred, end of period $13,354,600 $11,977,429 $11,972,069
Tax at statutory rate $ 5,403,000 $ 3,813,000 $ 3,849,000 Tax-exempt interest (1,005,000) (897,000) (827,000) Dividends received deduction (598,000) (593,000) (581,000) Salvage and subrogation fresh start (7,000) (20,000) (130,000) Nondeductible expenses 109,000 74,000 75,000 Other 203,000 38,000 379,000 Total income taxes $ 4,105,000 $ 2,415,000 $ 2,765,000
The Company has paid income taxes during the last three preceding years that exceed the recorded deferred income tax asset generated by operations.
9.Statutory Information Subsidiary retained earnings available for distribution as dividends to the Company are limited by law to the statutory unassigned surplus of the subsidiaries on the previous December 31, as determined in accordance with the accounting practices prescribed or permitted by insurance regulatory authorities of the State of Indiana (statutory basis). Subject to this limitation, the maximum dividend that may be paid during a 12-month period, without prior approval of the insurance regulatory authorities, is the greater of ten percent of statutory capital and surplus as of the preceding December 31 or net income for the preceding calendar year determined on a statutory basis. Meridian Security declared and paid dividends to the Company of $2,400,000 in 1995, $2,200,00 in 1994 and $500,000 in 1993. As of December 31, 1995, approximately $11,0000,000 was available for distribution to the Company without prior approval of the insurance regulatory authorities.
In 1994 and early 1995, options with respect to 268,280 common shares were granted to 13 key employees of Meridian Mutual. These options have a term of ten years with one-third of the shares granted to each employee becoming exercisable annually beginning on the first anniversary of the date of grant, at $11.875 per share. As of December 31, 1995, none of these options had been exercised and 19,099 of these options had been forfeited.
In 1995, options with respect to 26,000 common shares were granted to 26 key management/professional personnel of Meridian Mutual. These options have a term of 10 years. One-half of the options granted to each employee will become exercisable on November 30, 1996, and one-half on November 30, 1997, at $15.28 per share subject to the individual's employment on the vesting date. As of December 31, 1995, none of the options had been exercised and 2,000 of the options had been forfeited.
Net income per share $ 0.41 $ 0.19 $ 0.50 $ 0.62
Net income per share $ 0.05 $ 0.26 $ 0.39 $ 0.65