The principal office space for the operations of Citizens Security Group is located in Red Wing, Minnesota and is being leased by Citizens Security Mutual. The space consists of approximately 30,000 square feet with the lease expiring on December 31, 2002. In August, 1996, Citizens Security Mutual subleased approximately 8,200 square feet of this office space to VIS'N, Inc. Citizens Security Mutual also leases an additional office in Red Wing, Minnesota, consisting of approximately 3,300 square feet under a lease that expires on June 30, 1998. In September, 1996, approximately 2,900 square feet of this office space was subleased to Design Ink Plus, Ltd.
Basic earnings per share $ 1.04 $ 0.86 $ 1.72 $ 1.35 $ 1.53
Balance sheet data at end of period: Total investments $308,427 $281,689 $254,694 $219,461 $221,197 Total assets 413,586 397,798 322,588 291,406 285,936 Total liabilities 281,692 275,624 204,346 197,154 191,490 Shareholders' equity 131,894 122,174 118,243 94,252 94,447 Shareholders' equity per share $ 19.90 $ 18.02 $ 17.45 $ 13.98 $ 14.02
Overview: The 1997 year has been a period of positioning for Meridian Insurance Group, Inc. New product enhancements, systems automation, and underwriting programs implemented during 1997 enable the Company to move forward into 1998 with renewed momentum. Rate action taken in 1997 for several lines of business should help to improve loss ratio results for 1998. The Company continually evaluates rate adequacy for all lines of business. The Company recently began to integrate the Citizens Security claims operations with the home office claims division. This integration is expected to reduce overall claims- related expenses while providing high quality service. The Company is also focused on reducing its expense ratio with a stringent review of all underwriting expenses.
Automation continues to play an integral part in positioning the Company for future success. During 1997 the Company completed development of an automated Personal Lines Underwriting System for the homeowners and auto lines of business. This allows risks that meet specific underwriting parameters to be processed by the system with little or no manual intervention. The system will "kick out" policies that fail the underwriting criteria. By allowing those policies with good experience to "pass through" the system, the Company's underwriters can concentrate their review on those policies that have loss experience or exposure beyond the specified parameters, thereby allocating more of their time to those risks that need additional analysis. It is anticipated that such underwriting and workflow enhancements will enable the Company to expand its business without increasing the employee base. The Company continues to examine new ways for automation to enhance the workflow processes and increase overall efficiency.
The Year 2000 Automation Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. By early 1996, the Company's Year 2000 project plan was developed and change efforts were underway. Both internal and external resources are utilized in reprogramming, replacing, and/or testing the software for Year 2000 modifications. Much progress has been made and the Company expects its core business processing system to be completely Year 2000 compliant before the end of 1998. The Company estimates it has incurred incremental costs to address the Year 2000 Issue of approximately $350,000 and $150,000 in 1997 and 1996, respectively. Estimates of incremental costs to complete the project in 1998 are $350,000.
The Company has initiated communications with its agents to determine the extent to which the Company is vulnerable to those parties' potential failure to remediate their own Year 2000 issues. There can be no guarantee that the systems of agents or other third parties will be timely converted, or that a widespread failure to convert by others would not adversely affect the Company. 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.
standard automobile products through other insurers. The non-standard product is expected to be offered in as many as eight states over the course of 1998. Similar to the direct response business, non-standard automobile writings will be retained by Meridian Mutual outside of the reinsurance pooling agreement during the start-up phase.
The Company continues to focus on its core business, while remaining competitive in the dynamic marketplace. The 1996 Citizens Security Group acquisition allowed for the opportunity to spread underwriting risk over more states. In 1998, the Company will focus efforts on policy rating, agency profitability management, and enhanced underwriting efforts to improve the operating results. State expansion will complement other efforts underway to grow the Company's business competitively while continuing to manage risk exposure. Expansion into the state of Virginia is anticipated 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 companies 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.
The Company's largest source of revenue, net earned premiums, increased 16.3 percent in 1996 to $167.3 million compared to $143.9 million for 1995. Aside from the 10.2 percent increase in premium volume that resulted from the Citizens Security Group acquisition, premiums earned by the Meridian operation increased approximately 6.1 percent, or $8.8 million, over the 1995 total. The Meridian growth was attributed to nearly all lines of business, with personal lines production increasing 6.8 percent, commercial lines 5.6 percent and farmowners achieving growth of 2.8 percent in earned premium volume. Commercial and personal automobile and homeowners were the primary lines of business contributing to the increased premium volume. Depressing the commercial lines growth was a reduction of approximately $1.2 million in assumed earned premiums from the National Workers' Compensation Pool.
Net investment income of $14.9 million in 1996 increased 2.4 percent over 1995's total of $14.6 million. The pre-tax net investment yield declined slightly to 5.9 percent from 6.1 percent in 1995. The reduced portfolio yield resulted primarily from a greater proportion of assets being invested in equity securities and tax-exempt bonds. The average yield of the fixed maturity portfolio is 6.8 percent. The investment income generated from the acquired Citizens Security Group investment portfolio was partially offset by a reduction in the Meridian portfolio to help fund the purchase. In 1996, the Company realized net gains of $3.8 million on the disposition of invested assets, or $0.37 per share net of tax, compared to $1.5 million, or $0.15 per share after tax, for the 1995 period. Nearly all of the realized gains recognized in 1996 were generated from the sale of equity securities which are expected to have little impact on future investment yields.
The Company's general operating and amortization expenses of $50.2 million for the year ended December 31, 1996 were 11.6 percent higher than the $45.0 million reported for 1995. Relative to earned premium volume, the Company's expense ratio for 1996 improved to 30.0 percent from 31.3 percent for the prior year. Factors leading to the reduced expense ratio include certain economies of scale and decreases in employee incentive compensation, agent profit-sharing and assessments from certain boards and bureaus. As a result of the Citizens Security Group acquisition, the Company incurred approximately $252,000 of additional expense in 1996 for goodwill amortization and incurred interest expense of approximately $308,000 on the related bank loan.
The Company's primary need for liquidity is to pay shareholder dividends, and its main source of liquidity is the receipt of dividends from its subsidiaries. The Company's subsidiaries are subject to state laws and regulations which restrict their ability to pay dividends. During 1997, Meridian Security declared and paid dividends to the Company of $5.0 million. In 1996 and 1995, dividends paid to the Company were $3.9 million and $2.4 million, respectively. The principal need of the Company's insurance subsidiaries for liquid funds is the payment of claims and general operating expenses in the ordinary course of business. The funds of the Company's insurance subsidiaries are generally invested in securities with maturities intended to provide adequate cash to pay such claims and expenses without forced sales of investments. The average duration of the fixed maturity portfolio is approximately 4.3 years. Over the next year, a relatively small portion of the Company's bond portfolio is scheduled to mature. Given the current interest rate environment, reinvestment of the matured proceeds is likely to be at somewhat lower yields.
Approximately 81 percent of the Company's investment assets are held in fixed maturities, substantially all of which are believed to be readily marketable. Within the fixed maturity portfolio, the Company holds approximately 17 percent in mortgage-backed pass-through securities and collateralized mortgage obligations. The Company has attempted to reduce the prepayment risks associated with mortgage- backed securities by investing a majority of the collateralized mortgage obligations in planned amortization and very accurately
On May 6, 1997, the Company announced that its Board of Directors had authorized the repurchase of up to 350,000 common shares, or approximately five percent of the Company's outstanding common stock. As of December 31, 1997, the Company had repurchased 154,500 shares, or approximately 44 percent of the authorized total, at a cost of $2.3 million.
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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Losses and loss adjustment expenses 149,218,731 130,101,192 99,123,849 General operating expenses 16,505,515 13,766,868 14,155,631 Interest expense 732,047 307,887 --- Amortization expenses 42,893,857 36,442,635 30,820,058
December 31, 1997 1996 ASSETS Investments: Fixed maturities--available for sale, at market value (cost $239,662,000 and $234,356,000) $248,404,304 $238,343,040 Equity securities, at market (cost $41,430,000 and $33,779,000) 54,378,947 40,629,633 Short-term investments, at cost, which approximates market 3,996,232 1,326,634 Other invested assets 1,647,102 1,390,176 Total investments 308,426,585 281,689,483
Cash 1,188,423 3,128,154 Premium receivable, net of allowance for bad debts 4,343,157 4,674,984 Accrued investment income 3,130,712 3,241,125 Deferred policy acquisition costs 17,651,544 16,690,275 Goodwill 15,479,456 16,848,829 Reinsurance receivables 48,850,066 45,850,830 Prepaid reinsurance premiums 3,861,507 5,020,605 Due from Meridian Mutual Insurance Company 7,723,277 8,973,672 Other assets 2,931,077 11,679,744 Total assets $413,585,804 $397,797,701
Shareholders' equity: Common shares, no par value, Authorized-20,000,000 Issued-6,781,364 and 6,779,375, Outstanding- 6,626,864 and 6,779,375 at December 31, 1997 and 1996, respectively 44,110,416 44,077,846 Treasury shares, at cost; 154,500 shares (2,308,188) --- Contributed capital 15,058,327 15,058,327 Unrealized appreciation of investments, net of deferred income taxes 14,349,232 7,141,846 Retained earnings 60,684,448 55,895,962 Total shareholders' equity 131,894,235 122,173,981 Total liabilities and shareholders' equity $413,585,804 $397,797,701
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the Years Ended December 31, 1997, 1996 and 1995
Cash flows from investing activities: Purchase of fixed maturities (54,141,776) (47,518,736) (39,897,557) Proceeds from sale of fixed maturities 26,135,592 38,131,207 17,111,272 Proceeds from calls, prepayments and maturity of fixed maturities 22,393,353 24,843,739 14,404,070 Purchase of equity securities (33,956,533) (19,794,358) (15,735,622) Proceeds from sale of equity securities 31,160,867 18,633,656 9,556,180 Net (increase) decrease in short-term investments (2,669,598) 3,300,088 1,641,491 Decrease (increase) in other invested assets (256,926) (336,271) 31,366 Acquisition of subsidiary --- (30,262,442) --- Increase (decrease) in securities payable 401,707 (1,533,830) 1,117,355 Net cash used in investing activities (10,933,314) (14,536,947) (11,771,445)
Cash flows from financing activities: Repurchase of common stock (2,308,188) (22,080) (77,033) Exercise of stock options --- 23,241 222,996 Proceeds from bank loan --- 12,000,000 --- Repayment of bank loan (500,000) (125,000) --- Dividends paid (2,144,839) (2,101,426) (1,826,933) Net cash provided by (used in) financing activities (4,953,027) 9,774,735 (1,680,970)
Nature of Operations: 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 47.5 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 subsidiaries, Meridian Security Insurance Company ("Meridian Security"), Citizens Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("ICO"). Both Citizens Fund and ICO, along with their holding company, Citizens Security Group Inc. ("CSGI"), were acquired by the Company on July 31, 1996. CSGI was subsequently dissolved on February 7, 1997.
Effective August 1, 1996, Citizens Fund, ICO and Citizens Security Mutual Insurance Company ("Citizens Security Mutual"), the former majority shareholder of CSGI, became participants in a reinsurance pooling arrangement with Meridian Mutual and Meridian Security, in which the underwriting income and expenses of each entity are shared. The participation percentages of the Company's insurance subsidiaries total 74 percent. Prior to the change, Meridian Security and Meridian Mutual were the only participants in the reinsurance pooling arrangement, of which Meridian Security assumed 74 percent of the combined underwriting income and expenses of the two companies. (See Note 5-Related Party Transactions.)
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 1,075 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Ohio, Pennsylvania, Tennessee, and Wisconsin. Meridian Security writes primarily personal and farm lines through approximately 625 independent insurance agencies, many of which are cross-licensed with Meridian Mutual. Meridian Security is licensed to write business in all states in which Meridian Mutual is licensed, except for the state of Washington. Citizens Security Mutual offers a variety of personal and commercial insurance products in the states of Illinois, Indiana, Iowa, Minnesota, Missouri, North Dakota, Ohio, South Dakota, Tennessee, and Wisconsin through a network of approximately 400 independent insurance agencies. Citizens Fund writes primarily personal lines through approximately 80 independent insurance agencies in the states of Iowa, Minnesota, North Dakota, Ohio, South Dakota, and Wisconsin. In 1997, ICO discontinued writing business in the state of Ohio. The in-force business previously written by ICO is currently being renewed in Meridian Security.
Principles of Consolidation: The consolidated financial statements include the accounts of Meridian Insurance Group, Inc., and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Investments: Fixed maturity investments include bonds, notes, mortgage backed pass-through securities, collateralized mortgage obligations, other asset backed securities and sinking fund preferred stocks. The fixed maturity portfolio is invested entirely in securities classified as available for sale and is carried at quoted market values. Equity securities, consisting of unaffiliated common and perpetual preferred stocks, are reported at quoted market values. Short-term investments are recorded at cost, approximating market value. Other investments include limited partnerships recorded on the equity method and a mortgage loan stated at the aggregate unpaid balance.
Realized gains or losses on disposition of investments are determined on a specific identification basis. Unrealized gains and losses resulting from changes in the valuation of both equity securities and fixed maturities available for sale are recorded as a component of shareholders' equity, net of applicable deferred income taxes.
Deferred Policy Acquisition Costs: 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 Citizens Fund 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.
Goodwill: 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. The Company continually monitors the value of its goodwill based on estimates of future earnings of the subsidiaries that were acquired. If it is determined that changes in such projected earnings no longer supports the recoverability of goodwill over the remaining amortization period, the carrying value would be reduced with a corresponding charge to expense or the amortization period would be shortened. As of December 31, 1997, no material changes have occurred.
1997 1996 1995 Interest on fixed maturities: Tax-exempt securities $ 3,909,985 $ 3,875,822 $ 3,578,156 Taxable securities 9,905,146 8,686,144 8,727,315 Dividends on redeemable preferred stock 2,078,536 2,489,104 2,402,974 Dividends on equity securities 879,579 773,238 560,390 Interest on short-term investments 156,128 243,837 247,272 Other investment income 187,159 93,861 84,873 Total investment income 17,116,533 16,162,006 15,600,980 Investment expenses 744,822 1,253,721 1,037,160 Net investment income $16,371,711 $14,908,285 $14,563,820
Net change in unrealized appreciation (depreciation): Fixed maturities, available for sale $ 4,755,339 $(2,234,493) $16,313,966 Equity securities 6,098,280 2,692,197 5,104,315 Limited partnerships 235,767 83,897 59,688 Deferred income tax expense (3,882,000) (242,000) (7,354,000) Net change in unrealized appreciation $ 7,207,386 $ 299,601 $14,123,969
Net change in unrealized depreciation of fixed maturities, held to maturity $ --- $ --- $ (367,533)
The amortized cost and estimated market values of investments in fixed maturity securities at December 31, 1997 and 1996, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value 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
December 31, 1996 Available for sale: Government and agency domestic bonds $ 11,441,004 $ 317,830 $ 50,708 $ 11,708,126 Municipal bonds 73,550,278 1,954,019 302,450 75,201,847 Corporate bonds 61,810,087 1,141,551 152,224 62,799,414 Mortgage-backed securities 54,090,640 714,993 155,481 54,650,152 Sinking fund preferred stocks 33,464,362 1,080,656 561,517 33,983,501 Total fixed maturity securities $234,356,371 $5,209,049 $1,222,380 $238,343,040
The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1997, 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.
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 6.375 percent and 6.09375 percent at December 31, 1997 and 1996, respectively. The bank loan will mature on August 1, 2003. The Company is required to make principal payments in accordance with the following schedule:
The principal balance of the bank loan as of December 31, 1997 approximates its market value. Interest paid on the loan during 1997 and 1996 amounted to $732,047 and $187,887, respectively. The bank debt includes certain financial covenants, the most significant of which concern the amounts of risk based capital, statutory policyholders' surplus, total debt, debt to capitalization and debt service coverage (the relationship of dividends available from the Company's insurance subsidiaries to required principal and interest payments).
For the year ended December 31, 1997, approximately 88 percent of the Company's total premium volume was derived from its participation in the pooling agreement. In 1996 and 1995, approximately 88 percent and 90 percent, respectively, was derived from the pooling arrangement.
Balance at beginning of period $161,309,239 $123,577,240 $123,754,650 Less reinsurance recoverables 41,819,308 31,204,462 31,815,440 Net balance at beginning of period 119,489,931 92,372,778 91,939,210
Net balance at end of period 120,928,862 119,489,931 92,372,778 Plus reinsurance recoverables 48,872,464 41,819,308 31,204,462 Balance at end of period $169,801,326 $161,309,239 $123,577,240
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. (The 1996 limit for both windstorms and earthquakes was $65,000,000.) Two other catastrophe reinsurance treaties provided coverage when losses sustained from multiple catastrophic events aggregate beyond a specified retention. Under these two treaties, the combined retention was 2.5 percent of subject earned premiums, plus five percent of losses up to the $22,000,000 contractual limit.
Premiums earned: Direct $211,105,812 $176,718,644 $149,748,331 Assumed 1,232,165 6,425,316 5,222,170 Ceded (17,751,345) (15,839,546) (11,104,680) Net $194,586,632 $167,304,414 $143,865,821
Losses and loss adjustment expenses incurred: Direct $168,173,120 $154,237,419 $100,670,392 Assumed 1,355,214 2,857,470 5,127,784 Ceded (20,309,603) (26,993,697) (6,674,327) Net $149,218,731 $130,101,192 $ 99,123,849
Deferred, beginning of period $16,690,275 $13,354,600 $11,977,429 Additions: Commissions 32,391,959 30,593,227 25,797,651 Equity in acquired unearned premium reserve --- 2,312,841 --- Ceding commission --- --- 409,350 Premium taxes 2,375,996 2,458,670 1,625,370 Other 8,707,111 3,956,708 4,236,409 Total additions 43,475,066 39,321,446 32,068,780 Amortization expense 42,513,797 35,985,771 30,691,609 Deferred, end of period $17,651,544 $16,690,275 $13,354,600
A 7.0 percent weighted average discount rate was used to determine the accumulated post-retirement benefit obligation at December 31, 1997. Net periodic post-retirement pension costs for the year ended December 31, 1997 included the following:
Service costs $ 107,313 Interest costs 75,838 Amortization of prior unrecognized gain (29,704) Total net periodic costs $ 153,447
The assumed rate of future increases in per capita cost of health care benefits was 8.0 percent for the first year and 6.0 percent for all years thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point would increase the accumulated post-retirement benefit obligation by approximately $213,000 and the aggregate of the service and interest cost components of net periodic post- retirement benefit cost by approximately $34,000.
The Tax Reform Act of 1986 allowed for a fresh start deduction for reserve discounting requirements, which was to be amortized over the life of the reserve. This produced an aggregate tax benefit of approximately $900,000. The remainder of the unamortized fresh start was fully recognized in 1997, resulting in a tax reduction of approximately $134,000. In 1996, the tax effect on the recognized amortization amounted to approximately $17,000 and no amortization was recognized in 1995.
Under SFAS No. 109, "Accounting For Income Taxes", the Company recorded a net deferred tax liability in 1997 and a deferred tax asset in 1996 and 1995. The net deferred tax asset/liability at December 31, 1997, 1996 and 1995, is comprised of the following:
The Company has paid income taxes during the last three preceding years of $1,110,000 in 1997, $1,678,000 in 1996 and $3,248,000 in 1995.
Income Shares Per Share (Numerator) (Denominator) Amount December 31, 1997 Basic earnings per share Income available to common stockholders $ 6,921,123 6,683,536 $ 1.04 Effect of dilutive securities Stock options --- 45,923 Diluted earnings per share Income available to common stockholders $ 6,921,123 6,729,459 $ 1.03
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. 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 $5,000,000 in 1997, $3,900,000 in 1996 and $2,400,000 in 1995. As of December 31, 1997, approximately $10,200,000 was available for distribution to the Company without prior approval of insurance regulatory authorities.
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. As of December 31, 1997, no preferred shares have been granted or issued.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". 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 continues to account for stock options in accordance with Accounting Principles Board Opinion No. 25. Had compensation cost been determined using the fair value of the options at the grant dates in accordance with SFAS No. 123, the Company's net income and earnings per share for the periods ended December 31, 1997, 1996 and 1995 would have been reduced by the following pro-forma amounts: $640,000, $143,000 and $53,000 and $0.10, $0.02 and $0.01, respectively. The weighted average grant date fair value of options granted during the year was estimated to be $20.89, $18.24 and $18.22 using the Black-Scholes model with the following assumptions for 1997, 1996 and 1995, respectively: risk free interest rates of 6.29 percent, 6.55 percent and 6.70 percent; dividend yield of 2.29 percent, 2.15 percent and 2.35 percent; and volatility of 26.38 percent, 31.38 percent and 35.77 percent. As of December 31, 1997, options outstanding under these plans had an exercise price that ranged from $11.88 to $18.75 and a remaining weighted average contractual life of 6 years.
Stock options granted by the Company for the periods ended December 31, 1997, 1996 and 1995 are summarized in the following table:
1997 1996 1995 Weighted Weighted Weighted Price Shares Price Shares Price Shares
Quarter Ended March 31 June 30 September 30 December 31 Revenues $ 52,908 $ 54,527 $ 54,592 $ 54,451 Net income $ 310 $ 1,802 $ 3,019 $ 1,790 Basic earnings per share $ 0.05 $ 0.27 $ 0.46 $ 0.27 Diluted earnings per share $ 0.05 $ 0.27 $ 0.45 $ 0.27
Revenues $ 41,400 $ 43,262 $ 48,990 $ 52,917 Net income $ 595 $ 702 $ 1,806 $ 2,697 Basic earnings per share $ 0.09 $ 0.10 $ 0.27 $ 0.40 Diluted earnings per share $ 0.09 $ 0.10 $ 0.26 $ 0.39