* Retroactively restated to reflect the 10 percent stock dividends declared in December 1999 and 1998.
Net income declined in 1999, in spite of an increase in revenues. The primary factor behind the decrease in earnings was an increase in the loss ratios for several lines of business. While net investment income and realized gains on the sales of investments declined somewhat during 1999, total revenues increased by 4.1 percent, driven by a 5.4 percent increase in premiums earned. Earned premiums are expected to continue to increase in 2000, given the trend in net written premiums, which increased over 9.8 percent in 1999, compared with 1998.
One of the Company's growing lines of business is non-standard automobile coverage. The Company began selling this product in 1998. During 1999 the pool of Meridian companies wrote approximately $21 million in non-standard auto premium. Continued growth is expected in 2000. Non-standard automobile insurance covers drivers with no prior insurance or with driving records that do not qualify them for standard or preferred premium rates. Non-standard policies are generally sold at higher premiums to offset increased risk of loss. The non-standard auto policies are marketed through the Company's independent agency force, select non-standard specialty agents, and directly via the internet in certain states in which the Company does not sell personal lines through independent agents.
Another source of premium growth is the Company's relationship with GROUPadvantage. This sales arrangement makes Meridian's personal lines products available through franchised independent agencies to Sam's Club members in certain states. In late 1998, the Company began writing business in Michigan and Illinois through this distribution channel. During 1999, this arrangement was expanded to include Missouri, Ohio, and Pennsylvania, with Kansas and Wisconsin added in early 2000. (GROUPadvantage is a registered serviced mark of Consumer Insurance Services of America (CISA) and is used under license from CISA.)
The Company has been steadily expanding its operations into new states. At the end of 1994, Meridian operated in seven states, entirely in the Midwest. The Company has significantly increased its geographic diversification in recent years and is currently licensed in 19 states. Additional state expansion, including Florida, Oregon, Utah, and Washington D.C., is planned for 2000.
In addition to growth initiatives, the Company is working to increase profitability through consistent exercise of underwriting discipline, proper pricing, sound investment management, enhanced customer service and cost control. During 1999 the Company continued its expense consolidation efforts. The Meridian Citizens personal and commercial lines processing was successfully integrated into the Company's Indianapolis headquarters and the Red Wing, Minnesota office was closed. These actions are expected to save approximately $1.1 million of costs annually, beginning in 2000.
Statements in this annual report that are not strictly historical may be "forward looking" statements which involve risks and uncertainties. The Company's future results could differ materially from those discussed. Risk factors include: variation in catastrophe losses due to changes in weather patterns or other natural causes; changes in property and casualty reserves; developments in insurance regulations or legislation that may affect the Company; technological difficulties and advancements; general economic conditions; fluctuations in interest rates or securities markets; or market and competitive 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.
As we approached the end of the century, there was a significant concern that many information technology products would not recognize the year 2000. Businesses were at risk for possible calculation errors or system failures which could cause a disruption in their operations. This became commonly known as the Year 2000 ("Y2K") issue.
In 1995, Meridian began the initial planning phase to ensure that all systems were Y2K compliant. As a result of this planning, it was determined that Meridian would utilize internal resources to complete the necessary remediation. This would allow Meridian to contain costs and maintain control as well as provide consistency in system applications. As a result of this decision, a team of programmers was hired under the direction of experienced internal management to address the issue. It was determined that the Meridian Citizens project team would operate independently utilizing contracted personnel to complete the project. Such personnel, our former contracted outside automation services providers, were under contract to complete and test the Y2K programming efforts as well as provide daily systems support.
Prioritizing the effort was done by reviewing those systems and programs which would require the effective date change prior to January 1, 2000, such as the policy processing systems which required renewal processing as early as November 1, 1998. Extensive reprogramming now allows the internal policy processing systems to recognize the difference between the 20th and the 21st century. Updated policy processing systems have been in production and compliant since November 1997. During the third quarter of 1998, code remediation was also completed for the Meridian management reporting systems and front-end client server applications. The Meridian Citizens companies, which operated under a different platform, largely achieved Y2K compliance as certified by the outside services provider in August 1998 and have been in production since that time. Mainframe, front-end client server, and critical network programming have also been completed. The remediated policy processing systems were tested and are processing policies with Y2K dates.
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 reviewed vendor associated software and hardware products utilized within the organization to determine the Y2K effort that would be necessary to achieve readiness. Hardware and software vendors were required to provide certification of Y2K compliance for all products or services afforded to the enterprise. All vendor products purchased within the last two years were certified and documented. Testing took place for each product in a pseudo Y2K environment prior to moving to production. Additionally, the Company established contact with agents and certain vendors to highlight the Y2K issue. This contact was established for the purpose of reasonably ascertaining the Y2K impact.
Contingency plans were developed by management of the Information Resources Division. The plans included the necessary steps to verify the functionality and to validate the compliance of each system. The contingency plans included the use of the Company's business resumption/disaster recovery "hot site" in Chicago. This hot site was prepared to run mainframe applications with very little lag time should all other contingencies have failed. While successful testing was performed at this site on two occasions during 1999, the Company did not need to utilize this source as the year 2000 began. The Company required key personnel to work during the holiday weekend beginning December 31, 1999, to insure a smooth transition into the year 2000 and found only a minor issue that was immediately resolved by replacing a personal computer.
No significant information technology projects having a material effect on the Company's financial position or results of operations were deferred as a direct result of Y2K efforts.
The Company did 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.
For the year ended December 31, 1999, the Company recorded income tax expense of $1.9 million compared to $4.7 million for the same period last year. The decrease in the effective tax rate resulted primarily from the amounts of tax exempt interest and the dividends received deduction, relative to the reduced level of pre-tax income.
Net income for 1998 grew 76 percent to $12.2 million, or $1.50 diluted earnings per share, up from $6.9 million, or $0.85 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 $0.59 per share after tax, from $4.5 million, or $0.36 per share after tax, for 1997.
The Company's total revenues for 1998 decreased 1.3 percent to $213.7 million from $216.5 million in 1997. Premiums earned decreased 2.8 percent to $189.2 million for 1998 in comparison to $194.6 million for the previous year. Net written premiums for the Company's personal lines of business decreased by approximately 1.0 percent. This was the combination of a 3.8 percent increase in personal automobile premiums and a 13.5 decrease in written premium for the homeowners line of business. The personal automobile growth was favorably affected by the introduction of the new non-standard automobile product. Net written premiums for the farmowners line of business increased approximately 1.0 percent. Commercial lines net written premium decreased approximately 7.0 percent. Underwriting actions were taken in 1997 and early 1998 to improve profitability, negatively affecting premium revenue growth in the short-term. Additionally, intense competition and a soft pricing environment continued to affect market conditions in the Company's operating territory, particularly for commercial lines of business.
Net investment income of approximately $17.2 million for 1998 increased 5.3 percent in comparison to $16.4 million for 1997. This increase was due in part to a larger invested asset base for much of the year. The Company's pre-tax net investment yield was enhanced by a reduction in the tax-advantaged portfolio allocation and a reduced allocation to investment expenses. For the years ended December 31, 1998 and 1997, the Company realized net investment gains of approximately $7.3 and $4.5 million, respectively. The 1998 realized gains resulted largely from the sale of certain equity securities, as well as from certain municipal bond sales motivated by tax planning strategies.
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 was also an improvement over the 1997 result of 68.8 percent. Worker's compensation continued 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 was 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.
For the year ended December 31, 1998, the Company recorded income tax expense of $4.7 million compared to $0.2 million for the same 1997 period. The higher level of pre-tax income and a reduction in the tax- advantaged portfolio allocation to municipal bonds and sinking fund preferred stocks were the primary factors in the increase.
The Company's primary need for liquidity is to pay shareholder dividends and service debt. 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 each of the years 1999, 1998 and 1997, Meridian Security declared and paid annual dividends to the Company of $5.0 million. 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 4.9 years. Over the next year, a relatively small portion of the Company's bond portfolio is scheduled to mature.
Approximately 76 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 18 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 defined tranches. These investments are designed to alleviate the risk of prepayment by providing predictable principal prepayment schedules within a designated range of prepayments.
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, 1999 recorded unrealized losses in the fixed maturity portfolio of approximately $3.7 million, net of deferred income taxes. At year-end 1998, the Company recorded unrealized gains on the fixed maturity portfolio of approximately $4.8 million, net of deferred income taxes. The Company's equity security portfolio, which accounted for approximately 23 percent of invested assets at year-end 1999, had unrealized gains, net of deferred income taxes, of approximately $9.6 million at December 31, 1999, compared to approximately $10.2 million at December 31, 1998. Net unrealized appreciation of investments added $0.76 to the Company's $17.26 book value per share at December 31, 1999. Net unrealized appreciation added $1.91 per share to the $17.82 book value at December 31, 1998.
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, 1999, the Company had repurchased 291,557 shares, or approximately 83 percent of the authorized total, at a cost of approximately $4.6 million. On February 23, 2000, the Company announced that its Board of Directors had authorized the additional repurchase of up to 400,000 common shares.
In July 1996, the Company completed the acquisition of Citizens Security Group Inc. of Red Wing, Minnesota. The Company purchased all of the outstanding shares of Citizens Security Group Inc. and its wholly-owned property and casualty insurance subsidiaries, Meridian Citizens Security Insurance Company and Insurance Company of Ohio, for approximately $30.3 million in cash, including capitalized acquisition costs, and became affiliated with Meridian Citizens Mutual Insurance Company. Approximately 60 percent of the purchase price was generated from the sale of a portion of the Company's investment portfolio. The remaining $12 million was financed through bank debt and is being amortized over seven years with a variable interest rate of LIBOR plus 50 basis points. The acquisition was accounted for as a purchase with the assets acquired and liabilities assumed being recorded at their estimated fair value at the date of acquisition. The excess cost over the fair value of the net assets of approximately $14.5 million was recorded as goodwill, which is being amortized on a straight-line basis over a 25 year period.
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for insurance-related assessments.
December 31, 1999 1998 ASSETS Investments: Fixed maturities, available for sale at market (cost $232,090,000 and $234,632,000) $ 226,431,532 $ 241,993,962 Equity securities, at market (cost $54,282,000 and $48,338,000) 69,002,099 64,020,661 Short-term investments, at cost, which approximates market 2,822,215 6,431,482 Other invested assets 1,322,209 1,375,463 Total investments 299,578,055 313,821,568
Cash 1,381,888 854,522 Premium receivable, net of allowance for bad debts 13,113,315 5,625,470 Accrued investment income 3,314,756 2,950,290 Deferred policy acquisition costs 19,974,450 17,671,856 Goodwill 14,070,480 14,775,426 Reinsurance receivables 34,057,786 41,803,624 Prepaid reinsurance premiums 3,592,121 3,362,441 Due from Meridian Mutual Insurance Company 4,620,574 7,528,333 Other assets 4,519,700 463,990 Total assets $ 398,223,125 $ 408,857,520
Shareholders' equity: Common shares, no par value, Authorized 20,000,000 shares; issued 8,218,167 and 8,180,883; outstanding 7,926,610 and 7,968,083 at December 31, 1999 and 1998, respectively (including 10% stock dividend issued on January 6, 1999, for 658,493 shares, and January 11, 2000, for 721,872 shares) 44,793,300 44,336,679 Treasury Shares, at cost; 291,557 and 212,800 shares at December 31, 1999 and 1998, respectively (4,566,809) (3,277,781) Contributed capital 36,481,864 25,923,462 Retained earnings 54,112,519 59,796,235 Accumulated other comprehensive income 5,988,295 15,190,238 Total shareholders' equity 136,809,169 141,968,833 Total liabilities and shareholders' equity $ 398,223,125 $ 408,857,520
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 48.1 percent of the outstanding common shares of the Company. The Company is a holding company principally engaged in the business of underwriting property and casualty insurance through its wholly-owned subsidiaries, Meridian Security Insurance Company ("Meridian Security") and Meridian Citizens Security Insurance Company ("Meridian Citizens Security").
Collectively, the insurance companies participating in this reinsurance pooling arrangement write a broad line of property and casualty insurance, including personal, non-standard and commercial automobile; homeowners, farmowners and commercial multi- peril; and workers' compensation. Business is written primarily through nearly 1,400 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, and Wisconsin.
Basis of Presentation: The consolidated financial statements have been prepared on the basis of generally accepted accounting principles which differ in some respects from those followed in reports to insurance regulatory authorities. Certain prior year amounts have been reclassified to conform to the current-year presentation.
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 support 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, 1999 no material changes have occurred.
Stock Dividend: On both December 9, 1998, and December 15, 1999, a ten percent stock dividend was declared that was effective for shareholders of record as of December 21, 1998, and December 27, 1999, respectively. The financial statements, notes, and other references to share and per share data have been retroactively restated to reflect the stock dividend for all periods presented.
In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In July 1999, the FASB released SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, An Amendment of FASB Statement No. 133." SFAS No. 137 defers the effective date of this pronouncement to fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments (including derivative instruments that are embedded in other contracts) and hedging activities. All items that are required to be recognized must be displayed according to accounting standards in the statement of financial position at fair value. The Company does not hold any derivative instruments and does not currently participate in hedging activities. The Company does not anticipate a material impact upon adoption of this statement.
2. Investments The Company's net investment income for the periods ended December 31, 1999, 1998, and 1997 are summarized as follows:
The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1999, 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, 1999 totaled $14,720,302 representing $18,850,995 of gains on certain securities and $4,130,693 of losses on other securities.
4. Segment Reporting The following tables display the Company's reportable segments, a reconciliation of segment data to total consolidated financial data, and related disclosure information concerning revenues as required by SFAS No. 131. Segments were defined based upon the Company's structure and decision making processes. Personal, commercial and farm lines are segmented within all internal reporting mechanisms to aid chief decision makers in achieving profitable results within each business segment. Amortization was allocated by segment based upon a ratio of premium. Investment income was determined consistent with statutory modeling requirements for the Insurance Expense Exhibit. These guidelines rely on historical reserve patterns by line of business. Asset information by reportable segment is not reported, since the Company does not internally produce such information.
Commercial lines: Automobile $ 18,532,450 $ 17,666,781 $ 17,826,255 Worker's compensation 22,874,065 22,442,522 25,586,297 Commercial multi-peril 24,539,325 25,983,425 28,041,002 Other 4,563,192 4,410,290 4,766,669 Total commercial lines $ 70,509,032 $ 70,503,018 $ 76,220,223
Farm lines: Farmowners 10,935,071 10,878,882 10,564,810 Total farm lines $ 10,935,071 $ 10,878,882 $ 10,564,810
6.Related Party Transactions 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, loss 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. The reinsurance pool participation percentages of the Company's insurance subsidiaries total 74 percent. 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 of the former Meridian Mutual and Meridian Citizens Mutual employees. 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.
8.Reinsurance The companies that participate in the reinsurance pooling agreement reduce the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring their insurance business with unrelated third party insurers. In accordance with industry practice, the Company in its consolidated financial statements treats risks, to the extent reinsured, as though they were risks for which the Company is not liable. Reinsurance recoverables are estimated in a manner consistent with the claim liability associated with the reinsured policy. Insurance ceded by the Company's insurance subsidiaries does not relieve the subsidiaries' primary liability as the originating insurers.
Premiums written: Direct $ 223,584,026 $ 204,046,222 $ 210,393,552 Assumed 366,751 486,305 718,004 Ceded (17,285,000) (16,461,276) (16,592,247) Net $ 206,665,777 $ 188,071,251 $ 194,519,309
Losses and loss adjustment expenses incurred: Direct $ 160,929,807 $ 151,184,461 $ 168,173,120 Assumed 57,832 624,892 1,355,214 Ceded (10,770,031) (15,189,362) (20,309,603) Net $ 150,217,608 $ 136,619,991 $ 149,218,731
The Company also maintains a non-tax qualified supplemental retirement income plan for certain key employees who participate in the defined benefit pension plan. The plan provides additional benefits in excess of the limitations imposed by Section 401(a)(17) and Section 415 of the Internal Revenue Code on plans to which those sections apply. The benefit is in the form of a straight life annuity over the lifetime of the participant and commences on the participant's normal retirement date.
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, 1999 and 1998 per FASB 132 requirements:
Reconciliation of benefit obligation: Obligation at January 1 $ 27,117,622 $ 23,432,716 Service cost 1,345,750 1,067,292 Interest cost 1,748,264 1,608,088 Plan amendments --- 1,131,954 Actuarial (gain) loss (4,679,250) 1,165,040 Benefit payments (1,273,206) (1,287,468) Obligation at December 31 $ 24,259,180 $ 27,117,622
Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $ 34,401,026 $ 31,582,957 Actual return on plan assets 6,004,071 4,105,537 Benefit payments (1,273,206) (1,287,468) Fair value of plan assets at December 31 $ 39,131,891 $ 34,401,026
Funded Status Funded status at December 31 $ 14,872,711 $ 7,283,404 Unrecognized asset (6,483,880) (7,015,956) Unrecognized prior service cost 984,688 1,058,321 Unrecognized gain (8,440,374) (603,345) Accrued asset at December 31 $ 933,145 $ 722,424
The following table presents a reconciliation of the funded status for the Company's supplemental retirement income plan and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1999 and 1998:
1999 1998 Reconciliation of benefit obligation: Obligation at January 1 $ 1,050,623 $ 760,102 Service cost 46,533 37,193 Interest cost 69,839 59,987 Actuarial (gain) loss (217,298) 193,341 Obligation at December 31 $ 949,697 $ 1,050,623
Net periodic pension costs for the supplemental retirement income plan for the years ended December 31, 1999, 1998, and 1997 were approximately $114,000, $94,000, and $72,000 respectively.
The following table presents a reconciliation of the funded status for the Company's post-retirement benefit obligation and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1999 and 1998:
Funded Status Funded status at December 31 $ (1,939,158) $ (1,909,278) Unrecognized (gain) loss (265,580) (26,338) Accrued liability at December 31 $ (2,204,739) $ (1,935,616)
A 7.75 and 6.50 percent weighted average discount rate was used for 1999 and 1998, respectively, to determine the accumulated post- retirement benefit obligation at December 31, 1999. Net periodic pension costs for the post-retirement plan for the years ended December 31, 1999, 1998, and 1997 included the following components:
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 $137,000.
The Company has paid income taxes during the past three years of $725,000 in 1999, $3,215,000 in 1998, and $1,110,000 in 1997.
13.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. 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 1999, 1998 and 1997. As of December 31, 1999, approximately $11,600,000 was available for distribution to the Company without prior approval of insurance regulatory authorities.
Meridian Security's subsidiaries, Meridian Citizens Security and ICO, also pay dividends to their parent. Each company's retained earnings available for distribution as dividends are limited by laws in their states of domicile, Minnesota and Ohio, respectively. Meridian Citizens Security declared and paid dividends to Meridian Security of $400,000 in 1999, $600,000 in 1998, and $300,000 in 1997. ICO declared and paid dividends to Meridian Security of $150,000 in 1999 and $300,000 in 1998. Dividends were not paid by ICO in 1997.
Statutory capital and surplus $ 135,534,000 $ 133,322,000 $115,280,000 Statutory net investment income $ 14,973,000 $ 16,156,000 $ 15,212,000 Statutory net income $ 6,573,000 $ 15,716,000 $ 6,140,000
In 1987, the Company's Board of Directors and Shareholders approved an Incentive Stock Plan ("Plan") for the purpose of attracting and retaining key employees. The maximum number of common shares to be authorized for issuance was limited to 750,000 shares over a 10 year term. Awards under the Plan may include non- qualified and incentive stock options, stock appreciation rights, and restricted stock. Options to purchase common shares granted under the Plan are to have an exercise price of not less than the fair market value of the Company's common shares on the date of grant. Options are to be exercisable beginning one year from the date of grant and are to expire over various periods not to exceed ten years from the date of grant. Restricted stock awards may be granted subject to terms and conditions as prescribed by the committee which administers the Plan. Under the 1987 Plan, which expired on January 21, 1997, total options with respect to 477,144 shares were granted and 272,856 options had expired. In early 1996, the Board of Directors and Shareholders approved the 1996 Employee Incentive Stock Plan, which would eventually replace the 1987 Plan. Under the 1996 Plan, which became effective on May 8, 1996, the maximum number of shares authorized for issuance is 750,000 shares over the next ten years. As of December 31, 1999, options with respect to 299,195 shares have been granted under the 1996 Plan.
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 1,210 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, 1999, total options with respect to 79,860 shares have been granted.
Revenues $ 52,633 $ 54,345 $ 53,833 $ 52,906 Net income $ 2,517 $ 2,494 $ 2,940 $ 4,199 Basic earnings per share $ 0.32 $ 0.31 $ 0.36 $ 0.53 Diluted earnings per share $ 0.31 $ 0.31 $ 0.36 $ 0.52