The following selected financial data is derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this document.
Diluted earnings per share*$ 1.65 $ 0.93 $ 0.77 $ 1.56 $ 1.23
Dividends declared per share* $ 0.30 $ 0.29 $ 0.29 $ 0.26 $ 0.22
Underwriting ratios (statutory basis): Loss and loss adjustment expense ratio 71.8% 76.8% 78.0% 69.2% 69.8% Expense ratio 31.1 30.3 30.0 31.0 32.0 Combined ratio 102.9% 107.1% 108.0% 100.2% 101.8%
Balance sheet data at end of period: Total investments $313,822 $308,427 $281,689 $254,694 $219,461 Total assets 408,858 413,586 397,798 322,588 291,406 Total liabilities 266,889 281,692 275,624 204,346 197,154 Shareholders' equity 141,969 131,894 122,174 118,243 94,252 Shareholders' equity per share* $ 19.60 $ 18.09 $ 16.38 $ 15.88 $ 12.71
During recent years, the Company has aggressively expanded 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 and presently operates in 15 states. Additional state expansion, including Arizona, Georgia, Kansas and Maryland, is planned for 1999.
During 1998, Meridian introduced its new non-standard automobile coverage. Non-standard automobile insurance covers drivers with no prior insurance or with driving records that do not qualify them for standard premium rates. Non-standard policies are generally sold at higher premiums to offset increased risk of loss. The non-standard auto policies are currently marketed through the Company's independent agency force, key non-standard specialty agents and direct sales.
Participation in a marketing and sales partnership with GROUPadvantage offers promising opportunities. This sales arrangement makes Meridian's personal lines products available through franchised independent agencies to Sam's Club members in certain states. Specifically, in October we began marketing our products to Sam' Club members in Michigan. Shortly thereafter, Illinois was added and we expect to make our products available to Sam's Club members in several additional states during 1999. (GROUPadvantage is a registered service mark of Consumer Insurance Services of America (CISA) and is used under license from CISA.)
Operational consolidation is also expected to result in cost savings. During the 1998 fourth quarter, the Company consolidated its two regional claim centers into its Indianapolis claims operation. Additionally, the information systems of the Meridian Citizens companies (formerly Citizens Security Group companies) were centralized into the Company's Indianapolis location. It is expected that the consolidation of the regional claims offices and the Meridian Citizens information systems into the Company's headquarters will lower operating expenses, while maintaining a high level of service to agents and policyholders. The Company estimates annualized cost savings of at least $1,000,000, or $0.09 per share after tax, to result from these consolidation efforts.
Three years into the project, Meridian has made significant progress. Prioritizing the effort was done by reviewing those systems and programs which would require the effective date change prior to January 1, 2000 such as policy processing systems which required renewal processing as early as November of 1998. Extensive reprogramming now allows these internal policy processing systems to recognize the difference between the 20th and the 21st century. Meridians' remediated policy processing systems have been in production and compliant since November 1997. In July 1998, Meridian also completed code remediation for the management reporting systems and front- end client server systems. The Meridian Citizens companies which again operate on a different platform, achieved Y2K compliance in August 1998 and have been in production since that time. 1998 mainframe impact, front-end client server, and critical network programming have also been completed. Critical operating systems for the Company have been tested by our Quality of Assurance Unit and were found to be compliant. There are a few internal non-critical programming efforts which are still in the process of remediation. The majority of these are expected to be completed and tested by the end of 1998. A few are targeted for completion during the first and second quarters of 1999. It is anticipated that these systems will be remediated, tested, and moved into production by July 1999. As the Company has already processed policies encompassing Y2K dates, the Company does not feel at risk for Y2K difficulties and as such no contingency plans are currently in place for the operating systems.
Meridian anticipates that the costs associated with Y2K remediation will approximate $1.3 million upon completion. Such incremental costs have been estimated at approximately $200,000 in 1996 and approximately $400,000 per year for 1997-1998. It is also anticipated that approximately $300,000 will be spent in 1999. Approximately 50 percent of the total costs relate to personnel such as custom programmers. The remainder relates to costs for replacing certain software applications and equipment. Such costs have been funded through operating revenues and represent less than 10 percent of the information systems annual budgets. Costs associated with the Meridian Citizens remediation were included under the automation programming charges incurred by the Company on a monthly basis and were therefore not distinguishable from normal programming fees. Due to the complexity and impact of the Y2K project, the Company engaged independent consultants to review the planning and remediation methods utilized within the project for all subsidiaries. The written report received from the independent consultants contained comments and suggestions which were implemented and incorporated into the final Y2K action plans. At this time the Company's policy processing and management reporting systems have been corrected, thoroughly tested by our Quality Assurance team and moved into full production. Actual policies have been processed which are affected by the Y2K issue. Throughout 1999, the Company will double check the systems to verify that the infrastructure will respond correctly to the actual century date change. The Company has also addressed the facilities Y2K issues by evaluating HVAC, security systems, elevators, the automobile fleet, etc., to ascertain compliance.
No significant information technology projects having a material effect on the Company's financial position or results of operations have been deferred as a direct result of Year 2000 efforts.
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 expense. 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 current year's realized gains resulted largely from the sale of certain equity securities, as well as from certain municipal bond sales motivated by tax planning strategies.
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.
For the year ended December 31, 1997, the Company recorded net income of $6.9 million, or $.94 basic earnings per common share ($.93 diluted earnings per share). This compares to 1996 net income of $5.8 million, or $0.78 basic earnings per share ($0.77 diluted earnings per share). Included in the 1997 results was an entire year of operations from the 1996 acquisition of the Citizens Security companies, compared to five months of Citizens Security operations for the prior period. Earnings for both periods were negatively impacted by a large volume of property damage claims associated with severe weather that occurred throughout the Company's operating territory. Weather-related catastrophe losses were estimated to be approximately $7.2 million, or $0.65 per share, in 1997 and $10.6 million, or $.94 per share, in 1996. The Company's 1997 statutory combined ratio was 107.1 percent versus 108.0 percent for 1996.
Net investment income for 1997 increased 9.8 percent to $16.4 million in comparison to $14.9 million for 1996. This was attributed to a larger asset base resulting primarily from the acquisition of Citizens Security Group. The Company's pre-tax net investment yield for 1997 improved slightly to 6.0 percent from 5.9 percent one year ago. The average yield of the Company's fixed maturity portfolio at December 31, 1997 was 6.7 percent compared to 6.8 percent at year end 1996. During 1997, the Company realized net gains on the sale of investments of $4.5 million, or approximately $0.44 per common share, versus $3.8 million, or $0.37 per share in 1996. Nearly all of the realized gains recognized over these two years were generated from the sale of equity securities and have an insignificant effect on future investment yields.
For the year ended December 31, 1997, the Company recorded income tax expense of $207,000 compared to $150,000 for 1996. The low effective tax rate resulted primarily from the amount of tax-exempt investment income in relation to pre-tax income.
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 1998, Meridian Security declared and paid dividends to the Company of $5.0 million. In 1997 and 1996, dividends paid to the Company were $5.0 million and $3.9 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 4.4 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 77 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 19 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 does have exposure to market rates and prices. The Company's primary market risk exposures are changes in price for equity securities and changes in interest rates and credit ratings for fixed maturity securities. The Company, with the Board of Directors, administers and oversees investment risk through the Investment Committee, which provides executive oversight of investment activities. The Company has specific investment guidelines and policies that define the overall framework used daily by investment portfolio managers to limit the Company's exposure to market risk.
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, 1998, the Company had repurchased 212,800 shares, or approximately 61 percent of the authorized total, at a cost of $3.3 million.
The Company considers inflation when estimating liabilities for losses and loss adjustment expenses, particularly for claims having a long period between occurrence and settlement. The liabilities for losses and loss adjustment expenses are management's estimates of the ultimate net cost of underlying claims and expenses and are not discounted for the time value of money. In times of inflation, the normally higher investment yields available may partially offset potentially higher claims and expenses.
Financial Statements: Consolidated Statement of Income 27 Consolidated Balance Sheet 28 Consolidated Statement of Shareholders' Equity 29 Consolidated Statement of Cash Flows 30 Notes to Consolidated Financial Statements 31
Income before taxes 16,820,513 7,128,123 5,950,093 Income taxes (benefit) Current 2,514,968 1,067,000 702,141 Deferred 2,155,000 (860,000) (552,000)
Cash 854,522 1,188,423 Premium receivable, net of allowance for bad debts 5,625,470 4,343,157 Accrued investment income 2,950,290 3,130,712 Deferred policy acquisition costs 17,671,856 17,651,544 Goodwill 14,775,426 15,479,456 Reinsurance receivables 41,803,624 48,850,066 Prepaid reinsurance premiums 3,362,441 3,861,507 Due from Meridian Mutual Insurance Company 7,528,333 7,723,277 Other assets 463,990 2,931,077 Total assets $408,857,520 $413,585,804
LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $154,252,671 $169,801,326 Unearned premiums 81,223,095 82,839,333 Other post-employment benefits 1,935,616 1,933,181 Bank loan payable 10,125,000 11,375,000 Payable for securities 3,061,898 --- Reinsurance payables 9,811,976 9,078,076 Other liabilities 6,478,431 6,664,653 Total liabilities 266,888,687 281,691,569
Shareholders' equity: Common shares, no par value, Authorized- 20,000,000 Issued-7,456,512 and 7,444,050, Outstanding-7,243,712 and 7,289,550 at December 31, 1998 and 1997, respectively (including 10% stock dividend issued on January 6, 1999, 658,493 shares) 44,336,679 44,110,416
December 31, 1998 1997 1996 Cash flows from operating activities: Net income $12,150,545 $ 6,921,123 $ 5,799,952 Reconciliation of net income to net cash provided by operating activities: Realized investment gains (7,342,074) (4,477,580) (3,793,778) Amortization 42,917,642 42,893,857 36,442,635 Deferred policy acquisition costs (42,686,105) (43,475,066) (39,321,446) Deferred income taxes 2,155,000 (860,000) (552,000) Increase (decrease) in unearned premiums (1,616,238) (1,226,418) 2,034,199 Increase (decrease) in loss and loss adjustment expenses (15,548,655) 8,492,087 11,054,147 Decrease in amount due from Meridian Mutual 194,944 1,250,395 385,131 Decrease (increase) in reinsurance receivables 7,046,442 (2,999,236) (7,352,448) Decrease (increase) in prepaid reinsurance premiums 499,066 1,159,098 (349,547) Decrease in other assets 1,143,489 5,549,960 2,064,651 Increase in other post-employment benefits 2,435 515,367 119,436 Increase in reinsurance payables 733,900 413,718 1,800,732 Decrease in other liabilities (1,794,478) (1,839,705) (1,866,664) Other, net (1,905,950) 1,629,010 490,268 Net cash provided by (used in) operating activities (4,050,037) 13,946,610 6,955,268
Cash flows from financing activities: Repurchase of common stock (969,593) (2,308,188) (22,080) Exercise of stock options 161,055 --- 23,241 Proceeds from bank loan --- --- 12,000,000 Repayment of bank loan (1,250,000) (500,000) (125,000) Dividends paid (2,124,274) (2,144,839) (2,101,426) Net cash provided by (used in) financing activities (4,182,812) (4,953,027) 9,774,735
Increase (decrease) in cash (333,901) (1,939,731) 2,193,056 Cash at beginning of year 1,188,423 3,128,154 935,098 Cash at end of year $ 854,522 $ 1,188,423 $ 3,128,154
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 47.8 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"), Meridian Citizens Security Insurance Company ("Meridian Citizens Security", formerly Citizens Fund Insurance Company) and Insurance Company of Ohio ("ICO"). Both Meridian Citizens Security 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, Meridian Citizens Security, ICO and Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual", formerly Citizens Security Mutual Insurance Company), 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 7-Related Party Transactions.)
Collectively, the insurance companies participating in this reinsurance pooling arrangement write 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 1,370 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, Washington and Wisconsin.
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.
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.
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.
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, 1998, no material changes have occurred.
On December 9, 1998 a ten percent stock dividend was declared that was effective for shareholders of record as of December 21, 1998. 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 issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement is effective for fiscal years beginning after June 15, 1999. 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 participate in hedging activities. The Company does not anticipate a material impact upon adoption of this statement.
1998 1997 1996 Interest on fixed maturities: Tax-exempt securities $ 2,531,304 $ 3,909,985 $ 3,875,822 Taxable securities 11,883,195 9,905,146 8,686,144 Dividends on redeemable preferred stock 1,769,286 2,078,536 2,489,104 Dividends on equity securities 1,011,335 879,579 773,238 Interest on short-term investments 229,347 156,128 243,837 Other investment income 149,589 187,159 93,861 Total investment income 17,574,056 17,116,533 16,162,006 Investment expenses 328,372 744,822 1,253,721 Net investment income $17,245,684 $16,371,711 $14,908,285
Net change in unrealized appreciation (depreciation): Fixed maturities, available for sale $(1,379,804) $ 4,755,339 $(2,234,493) Equity securities 2,734,114 6,098,280 2,692,197 Limited partnerships (61,304) 235,767 83,897 Deferred income tax expense (452,000) (3,882,000) (242,000) Net change in unrealized appreciation $ 841,006 $7,207,386 $ 299,601
Estimated Amortized Market Cost Value Available for sale: Due in one year or less $ 3,956,944 $ 3,986,769 Due after one year through five years 43,008,654 44,235,400 Due after five years through ten years 44,173,456 46,753,160 Due after ten years through fifteen years 40,673,916 41,386,618 Due after fifteen years through twenty years 8,996,874 9,167,923 Due after twenty years 50,024,177 51,995,112 Subtotal 190,834,021 197,524,982 Mortgage-backed securities 43,797,738 44,468,980 Total fixed maturity securities $234,631,759 $241,993,962
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and displaying of comprehensive income and its components. SFAS No. 130. 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.
Unrealized holding gains before deferred income taxes $10,797,051 $16,155,789 $ 4,254,590 Deferred income tax expense (3,778,000) (5,655,000) (1,489,000) Less: Reclassification adjustment for realized gains 9,504,045 5,066,403 3,793,988 Income tax expense related to realized gains (3,326,000) (1,773,000) (1,328,000)
As required by SFAS No. 131, the following table delineates the Company's products and revenues in a manner which is consistent with segment reporting:
On July 31, 1996, the Company acquired Citizens Security Group Inc. and its property and casualty insurance subsidiaries, Meridian Citizens Security Insurance Company and Insurance Company of Ohio, for a cash purchase price of $30,262,442, including capitalized acquisition costs. Approximately 60 percent of the purchase price was generated from the sale of a portion of the Company's investment portfolio and the remainder was financed through bank debt. 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 resulted in goodwill of approximately $14,501,000, which is being amortized over a 25 year period on the straight-line basis.
The principal balance of the bank loan as of December 31, 1998 approximates its market value. Interest paid on the loan during 1998 and 1997 amounted to $672,000 and $732,000, 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).
Since the acquisition of Citizens Security Group on August 1, 1996, the reinsurance pool participation percentages of the Company's insurance subsidiaries totaled 74 percent. Prior to August 1, Meridian Security and Meridian Mutual were the only participants in the aforementioned pooling arrangement, of which Meridian Security assumed 74 percent of the combined underwriting income and expenses of the two companies.
Net balance at end of period 112,451,217 120,928,862 119,489,931 Plus reinsurance recoverables 41,801,454 48,872,464 41,819,308 Balance at end of period $ 154,252,671 $169,801,326 $161,309,239
The reconciliations for 1998 and 1997 show approximately $8.7 million and $16.4 million reductions, respectively, in previously established loss reserves. Favorable loss developments resulting from decreases in the frequency and severity of claims in prior accident years for the Company's personal automobile liability, workers' compensation and commercial multi-peril lines of business were the primary factors in the reductions.
Approximately 90 percent of the Company's ceded reserves for losses and loss adjustment expenses were with Employers Reinsurance Corporation, Michigan Catastrophic Claims Association and Dorinco Reinsurance America Corporation. The effect of reinsurance on premiums written, premiums earned and losses and loss adjustment expenses for the years ended December 31, 1998, 1997 and 1996 were as follows:
Premiums earned: Direct $205,534,750 $211,105,812 $176,718,644 Assumed 614,042 1,232,165 6,425,316 Ceded (16,960,370) (17,751,345) (15,839,546) Net $189,188,422 $194,586,632 $167,304,414
Deferred, beginning of period $17,651,544 $16,690,275 $13,354,600 Additions: Commissions 31,845,030 32,391,959 30,593,227 Equity in acquired unearned premium reserve --- --- 2,312,841 Premium taxes 2,416,582 2,375,996 2,458,670 Other 7,972,312 8,357,111 4,222,123 Total additions 42,233,924 43,125,066 39,586,861 Amortization expense 42,213,612 42,163,797 36,251,186 Deferred, end of period $17,671,856 $17,651,544 $16,690,275
Effective January 1, 1997, the Company became the employer of all employees who were formerly employed by Meridian Mutual and Meridian Citizens Mutual. As a result of this transfer, all employee benefit plans that were previously under Meridian Mutual and Meridian Citizens Mutual were merged into the Company plans.
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, 1998 and 1997: 1998 1997 Reconciliation of benefit obligation: Obligation at January 1 $ 760,102 $ 612,911 Service cost 37,193 28,919 Interest cost 59,987 45,968 Actuarial loss 193,341 72,304 Obligation at December 31 $ 1,050,623 $ 760,102
Funded Status Funded status at December 31 $(1,050,623) $(760,102) Unrecognized prior service cost 216,599 239,676 Unrecognized loss 260,908 74,012 Accrued liability at December 31 $ (573,116) $(446,414)
A 6.5 and 7.0 percent weighted average discount rate was assumed for 1998 and 1997, respectively, in determining the accumulated benefit obligation and a 5.0 percent average salary increase was used to project the additional pay increase on all plans. The expected return on assets for the defined pension plan was assumed to be 8.25 percent. Net periodic pension costs for the defined benefit pension plan for the year ended December 31, 1998 and 1997 included the following components: 1998 1997
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, 1998 and 1997: 1998 1997 Reconciliation of benefit obligation: Obligation at January 1 $ 1,952,474 $ 1,451,197 Service cost 211,586 145,017 Interest cost 133,691 102,484 Actuarial (gain) loss (324,893) 346,098 Benefit payments (63,580) (92,322) Obligation at December 31 $ 1,909,278 $ 1,952,474
Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $ --- $ --- Employer contributions 63,580 92,322 Benefit payments (63,580) (92,322) Fair value of plan assets at December 31 $ --- $ ---
Service costs $ 156,574 $ 107,313 Interest costs 98,931 75,838 Amortization of net loss (11,864) (29,704) Net periodic benefit cost $ 243,641 $ 153,447
Prior to January 1, 1997, Meridian Citizens Security and ICO had no employees and were dependent on the business and operations of Meridian Mutual and Meridian Citizens Mutual. Meridian Mutual had 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 were immaterial to the results of operations for the year ended December 31,1996. The Company also participated in the multi-employer plan of other post- retirement benefits offered by Meridian Mutual to employees, including medical benefits for early retirees and group term life insurance. Related costs allocated to the Company were approximately $ 53,000 for 1996.
Tax at statutory rate $ 5,719,000 $ 2,381,000 $ 2,023,000 Tax-exempt interest (757,000) (1,131,000) (1,134,000) Dividends received deduction (370,000) (613,000) (619,000) Loss, LAE and salvage and subrogation fresh start --- (137,000) (17,000) Nondeductible expenses 277,000 277,000 168,000 Other (199,032) (570,000) (270,859) Total income taxes $ 4,669,968 $ 207,000 $ 150,141
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. In 1996, the tax effect on the recognized amortization amounted to approximately $17,000.
Under SFAS No. 109, "Accounting For Income Taxes", the Company recorded net deferred tax liabilities in 1997 and a deferred tax asset in 1996. The net deferred tax asset/liability at December 31, 1998, 1997 and 1996, is comprised of the following:
The Company has paid income taxes during the last three preceding years of $3,215,000 in 1998, $1,110,000 in 1997, and $1,678,000 in 1996.
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 1998, $5,000,000 in 1997 and $3,900,000 in 1996. As of December 31, 1998, approximately $13,300,000 was available for distribution to the Company without prior approval of insurance regulatory authorities.
Statutory capital and surplus $ 133,322,000 $ 115,280,000 $ 105,506,000 Statutory net investment income $ 16,156,000 $ 15,212,000 $ 15,809,000 Statutory net income $ 15,716,000 $ 6,140,000 $ 3,307,000
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, 1998, 1997 and 1996 would have been reduced by the following pro-forma amounts: $186,000, $640,000 and $143,000 and $0.03, $0.09 and $0.02, respectively. The weighted average grant date fair value of options granted during the year was estimated to be $18.78, $18.99 and $16.58 using the Black-Scholes model with the following assumptions for 1998, 1997 and 1996, respectively: risk free interest rates of 5.31 percent, 6.29 percent and 6.55 percent; dividend yield of 1.80 percent, 2.29 percent and 2.15 percent; and volatility of 38.10 percent, 26.38 percent and 31.38 percent. As of December 31, 1998, options outstanding under these plans had an exercise price that ranged from $9.09 to $17.05 and a remaining weighted average contractual life of 6 years.
Stock options granted by the Company for the periods ended December 31, 1998, 1997 and 1996 are summarized in the following table:
16. Unaudited Selected Quarterly Financial Data: (Amounts in thousands except per-share data)
Quarter Ended March 31 June 30 September 30 December 31 Revenues $ 52,633 $ 54,345 $ 53,833 $ 52,906 Net income $ 2,517 $ 2,494 $ 2,940 $ 4,199 Basic earnings per share $ 0.35 $ 0.34 $ 0.40 $ 0.58 Diluted earnings per share $ 0.34 $ 0.34 $ 0.40 $ 0.57
Revenues $ 52,908 $ 54,527 $ 54,592 $ 54,451 Net income $ 310 $ 1,802 $ 3,019 $ 1,790 Basic earnings per share $ 0.04 $ 0.24 $ 0.41 $ 0.25 Diluted earnings per share $ 0.04 $ 0.24 $ 0.41 $ 0.24