Year Ended December 31, 1995 1994 1993 1992 1991 (In thousands, except per share data and ratios) Operating data: Premiums earned $143,866 $135,002 $125,902 $108,097 $105,685 Net investment income 14,564 13,996 13,569 12,620 11,953 Realized investment gains 1,538 286 890 540 1,408 Other income (expense) (146) 54 (115) 182 305 Total revenues 159,822 149,338 140,246 121,439 119,351
Income before taxes and change in accounting method 15,722 11,536 11,650 10,022 5,309 Income taxes 4,105 2,415 2,765 1,797 733 Income before change in accounting method 11,617 9,121 8,885 8,225 4,576 Changes in accounting method: Other post-retirement benefits -- -- -- (651) -- Accounting for income taxes -- -- 526 -- -- Net income $ 11,617 $ 9,121 $ 9,411 $ 7,574 $ 4,576
Net income per share $ 1.72 $ 1.35 $ 1.53 $ 1.53 $ 0.93
Balance sheet data at end of period: Total investments (1) $254,694 $219,461 $221,197 $169,277 $160,655 Total assets 322,588 291,406 285,936 221,534 181,459 Total liabilities 204,346 197,154 191,490 154,935 122,107 Shareholders' equity 118,243 94,252 94,447 66,599 59,352 Shareholders' equity per share $ 17.45 $ 13.98 $ 14.02 $ 13.42 $ 12.09
On February 8, 1996, the Company announced its intent to acquire Citizens Security Group Inc. ("Citizens") for approximately $29 million in cash. This pending acquisition will fit well into the Company's plan for geographic expansion into additional Midwestern and North Central states. When the acquisition of Citizens is completed, the Company's operating territory will expand into four additional states: Minnesota, Missouri, North Dakota and South Dakota; and its revenue base will increase in Iowa, Ohio and Wisconsin. The Company will gain control of Citizens Security Mutual Insurance Company as a result of the acquisition. Direct written premiums for the Citizens' affiliated companies were approximately $50 million in 1995. Underwriting results of Citizens are expected to be incorporated into a pooling arrangement with Meridian Mutual and Meridian Security.
During 1995, the Company continued implementation of processes that were re-engineered during 1994. Personal computer based client server technology is now in use to support the data gathering activities and rating of four major lines of business. A commercial lines select business unit was organized to handle certain commercial accounts by identifying those that require further underwriter scrutiny, and assigning those accounts to underwriters with the appropriate level of authority. Resulting productivity improvements were as high as forty percent for some of the affected transactions. These productivity gains allow the Company to increase policy counts with minimal staffing increases.
In 1995, the Company reported record highs in net income of $11.6 million and earnings per common share of $1.72. This compares to 1994 net income of $9.1 million and $1.35 per share. The improved results were primarily attributed to increased revenues and a reduction in all three components of the combined underwriting and expense ratio. Total revenues increased 7.0 percent to $159.8 million from $149.3 million while the 1995 statutory combined ratio improved to 100.2 percent from 101.8 percent for 1994.
The Company's incurred losses and loss adjustment expenses of $99.1 million for 1995 increased 5.5 percent over 1994's $94.0 million, primarily as a result of the increased volume of business. The statutory loss and loss adjustment expense ratio improved to 69.2 percent in comparison to 69.8 percent for the previous year. The Company reflected improved results in its commercial multiple-peril, homeowner and workers' compensation lines of business. The loss ratio for commercial multiple-peril improved significantly from 1994's ratio of 55.5 percent to a 37.6 percent ratio in 1995. Homeowners also recorded a reduction from 72.9 percent in 1994 to 71.0 percent in 1995. A reduction in liability claims for the current period was the primary reason for the improvement in these lines of business. The Company also experienced improved underwriting results in both the voluntary and involuntary workers' compensation lines. Partially offsetting these improvements was deterioration in the personal and commercial automobile and farmowners lines of business. The loss ratio for personal and commercial auto increased to 67.4 percent from 61.4 percent in 1994 primarily as a result of increased severity. The deterioration in the farmowners loss ratio to 60.7 percent for 1995 from 56.5 percent in 1994 was caused by a rise in liability claims.
Net income for 1994 was $9.1 million, or $1.35 per share of common stock. This compares to income before change in accounting method of $8.9 million, or $1.45 per share for 1993 on approximately 601,000 fewer weighted average shares outstanding. The cumulative effect of the accounting change for income taxes added $526,000, or $.08 per share, to the 1993 results.
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. (See Note 9 of the Notes to Consolidated Financial Statements.) 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. Over the next year, a relatively small portion of the Company's bond portfolio is scheduled to mature.
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 which are carried at market value. In 1995, the carrying values for these investments increased significantly. As a result, the Company at December 31, 1995 recorded unrealized gains in the bond portfolio of approximately $4.1 million, net of deferred income taxes. At year-end 1994, the Company recorded unrealized losses on the bond portfolio of approximately $6.7 million, net of deferred income taxes. Net unrealized appreciation of investments added $1.01 to the Company's $17.45 book value per share at December 31, 1995, compared to unrealized losses causing a decrease of $1.08 per share in December 31, 1994's book value of $13.98.
Financial Statements: Consolidated Statement of Income 25 Consolidated Balance Sheet 26 Consolidated Statement of Shareholders' Equity 27 Consolidated Statement of Cash Flows 28 Notes to Consolidated Financial Statements 29
Losses and loss adjustment expenses 99,123,849 93,970,529 86,621,891 General operating expenses 14,155,631 14,527,021 14,935,470 Amortization expenses 30,820,058 29,304,576 27,039,135
Per share data: Income before change in accounting method $ 1.72 $ 1.35 $ 1.45 Change in accounting method: Accounting for income taxes -- -- 0.08 Net income $ 1.72 $ 1.35 $ 1.53
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET as of December 31, 1995 and 1994
December 31, 1995 1994 ASSETS Investments: Fixed maturities--available for sale, at market value (cost $213,816,000 and $201,577,000) $220,036,772 $191,483,830 Fixed maturities--held to maturity, at amortized cost (market value $0 and $4,757,000) -- 4,389,117 Equity securities, at market (cost $26,961,000 and $19,323,000) 31,119,875 18,377,530 Short-term investments, at cost, which approximates market 2,483,338 4,124,829 Other invested assets 1,053,905 1,085,271 Total investments 254,693,890 219,460,577
December 31, 1995 1994 1993 Cash flows from operating activities: Net income $ 11,617,039 $ 9,121,063 $ 9,410,769 Reconciliation of net income to net cash provided by operating activities: Realized investment gains (1,538,281) (285,701) (890,052) Amortization 31,257,989 30,202,060 27,364,007 Deferred policy acquisition costs (32,068,780) (29,181,486) (29,270,562) Increase in unearned premiums 4,895,409 982,535 5,398,792 Increase (decrease) in loss and loss adjustment expense (177,410) 3,990,725 15,206,998 Increase in amount due from Meridian Mutual (2,548,320) (1,337,003) (1,067,309) Decrease (increase) in reinsurance receivables 234,172 (2,303,137) (6,972,539) Decrease (increase) in prepaid reinsurance premiums 2,654 205,510 (695,342) Decrease (increase) in other assets 66,763 (638,901) (732,235) Increase in other post-employment benefits 197,223 102,060 84,095 Decrease in payable under funded cover contract -- -- (536,815) Increase (decrease) in reinsurance payables 972,951 (248,655) 333,172 Increase in other liabilities 116,619 831,814 1,463,115 Other, net 755,919 (247,430) (367,222) Net cash provided by operating activities 13,783,947 11,193,454 18,728,872 Cash flows from investing activities: Purchase of fixed maturities, held to maturity -- (598,781) (15,053,397) Purchase of fixed maturities, available for sale (39,897,557) (36,558,664) (84,512,019) Proceeds from sale of fixed maturities 17,111,272 18,528,560 37,608,463 Proceeds from calls, prepayments and maturity of fixed maturities 14,404,070 16,403,055 34,508,225 Purchase of equity securities (15,735,622) (16,369,601) (14,592,666) Proceeds from sale of equity securities 9,556,180 10,267,616 2,249,118 Net (increase) decrease in short-term investments 1,641,491 (2,075,005) 4,896,901 Decrease (increase) in other invested assets 31,366 (347,414) 4,586 Increase (decrease) in securities payable 1,117,355 430,569 (927,801) Net cash used in investing activities (11,771,445) (10,319,665) (35,818,590) Cash flows from financing activities: Repurchase and retirement of common stock (77,033) -- -- Net proceeds from issuance of common stock -- -- 18,963,960 Exercise of stock options 222,996 39,819 34,500 Dividends paid (1,826,933) (1,617,696) (1,409,713) Net cash provided by (used in) financing activities (1,680,970) (1,577,877) 17,588,747 Increase (decrease) in cash 331,532 (704,088) 499,029 Cash at beginning of year 603,566 1,307,654 808,625 Cash at end of year $ 935,098 $ 603,566 $ 1,307,654
Net cash provided by operating activities reflects cash payments for income taxes as follows:
Fixed maturity investments include bonds, notes, collateralized mortgage obligations, mortgage backed pass-through securities and sinking fund and perpetual preferred stocks. The fixed maturity portfolio is invested in securities classified as available for sale and is carried at quoted market values. Equity securities, consisting entirely of unaffiliated common stocks, are reported at market. Short-term investments are recorded at cost, approximating market value. Other investments include a limited partnership recorded on the equity method and a mortgage loan stated at the aggregate unpaid balance.
Premiums are recognized as revenue on a monthly pro-rata basis over the coverage terms of the respective policies. Any premiums applicable to the future terms of the policies are included in liabilities as unearned premiums.
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.
Available-for-sale securities (securities that may be sold prior to maturity if changes occur in market interest rate risks, changes in securities prepayment risk, the Company's management of its income tax position, its general liquidity needs, etc.) are carried at fair value, with the unrealized gains and losses recorded, net of deferred tax, to shareholders' equity.
Trading securities (securities purchased for trading) are carried at fair value, with the unrealized gains and losses reflected in the consolidated statement of income.
Initially, the Company classified approximately 98 percent of its fixed maturities as "available for sale" and 2 percent as "held to maturity", with no fixed maturities being assigned to the "trading" category. The cumulative effect of adopting SFAS No. 115 resulted in a $4,417,201 increase, net of deferred income taxes, to the Company's shareholders' equity.
On November 30, 1995, the Company, as permitted in Q61 of the FASB Special Report on SFAS No. 115, transferred all holdings classified as "held to maturity" to the "available for sale" category. This transaction did not have a material effect on the Company's financial statements.
Net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year.
1995 1994 1993 Interest on fixed maturities: Tax-exempt securities $ 3,578,156 $ 3,050,947 $ 2,894,337 Taxable securities 8,727,315 8,251,261 8,052,603 Dividends on redeemable preferred stock 2,402,974 2,673,605 2,667,643 Dividends on equity securities 560,390 339,559 130,250 Interest on short-term investments 247,272 162,067 170,167 Other investment income 84,873 146,698 302,371 Total investment income 15,600,980 14,624,137 14,217,371 Investment expenses 1,037,160 628,153 648,452 Net investment income $14,563,820 $13,995,984 $13,568,919
Net change in unrealized appre- ciation (depreciation) of fixed maturities, held to maturity $ (367,533) $ (713,522) $ 5,187,662
December 31, 1994 Held to maturity: Government and agency domestic bonds $ 836,966 $ 264,034 $ -- $ 1,101,000 Municipal bonds 2,555,000 118,409 11,064 2,662,345 Mortgage-backed securities 997,151 5,393 9,239 993,305 Total held to maturity 4,389,117 387,836 20,303 4,756,650 Available for sale: Government and agency domestic bonds 10,374,013 6,820 262,473 10,118,360 Municipal bonds 60,559,578 203,144 3,242,025 57,520,697 Corporate bonds 33,777,177 167,484 1,898,193 32,046,468 Mortgage-backed securities 61,167,044 228,563 1,850,753 59,544,854 Sinking fund preferred stocks 35,698,821 148,190 3,593,560 32,253,451 Total available for sale 201,576,633 754,201 10,847,004 191,483,830 Total fixed maturity securities $ 205,965,750 $ 1,142,037 $10,867,307 $196,240,480
Proceeds from sales of investments in fixed maturity securities during 1995, 1994 and 1993, respectively, were $17,111,272, $18,528,560 and $37,608,463. During 1995, 1994 and 1993, respectively, gross gains of $445,260, $444,784 and $1,400,322 and gross losses of $357,890, $563,142 and $504,156 were realized on those sales.
Effective May 1, 1993, Meridian Security's participation in the reinsurance pooling agreement was increased to 74 percent from the 62 percent in effect since April, 1987. In exchange for Meridian Security's increased assumption of liabilities for unearned premiums and losses and loss adjustment expenses under the pooling agreement, Meridian Mutual transferred cash and marketable securities having a market value of $18,493,000 to Meridian Security, net of a ceding commission of $2,491,893. The ceding commission was amortized as the related premium revenue was recognized. The following table presents the pro-forma underwriting results of Meridian Insurance Group, Inc., for the year ended December 31, 1993 as though Meridian Security's participation in the pooling agreement had been at the 74 percent level for the entire period:
Effective January 1, 1994, Vernon transferred its book of business to Meridian Security via an assumption reinsurance agreement. Under the agreement, Meridian Security assumed all of the in-force business and liabilities of Vernon. This transfer did not have a material impact on the Company's financial statements. Prior to the assumption reinsurance agreement, the operations of Vernon were not included in the pooling arrangement between Meridian Mutual and Meridian Security; Vernon had separate agreements with Meridian Mutual for both reinsurance and for services provided by Meridian Mutual for the Vernon operation. For the year ended December 31 1993, Vernon ceded approximately $2,259,000 in premiums to Meridian Mutual. As a result of the assumption reinsurance agreement, Vernon no longer writes insurance business and is currently a dormant operation.
5.Liability for Losses and Loss Adjustment Expenses Activity in the liability for losses and loss adjustment expenses is summarized as follows:
6.Reinsurance Meridian Mutual and Meridian Security limit the maximum net loss which can arise from large risks or risks in concentrated areas of exposure by reinsuring their insurance business with other 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. The following table sets forth data relating to third party reinsurance transactions.
1995 1994 1993 Ceded: Premiums earned $11,126,543 $12,062,572 $11,587,107 Unearned premiums $ 2,617,138 $ 2,619,792 $ 2,564,379 Reserve for losses and loss adjustment expenses $31,204,462 $31,815,440 $30,133,606
Three types of reinsurance are purchased jointly by Meridian Mutual and Meridian Security. Treaty reinsurance automatically covers certain types of policies up to contracted limits. Meridian Mutual and Meridian Security are named as insured parties, so contracted coverage applies to risks written by either of the companies. Facultative reinsurance is purchased on an individual risk basis and sets specific limits of coverage. Such coverage is purchased to cover liability and property exposures in excess of $200,000, up to the limits set forth in the individual treaty. In addition, a separate catastrophe reinsurance treaty provides coverage for multiple losses caused by a single catastrophic event such as a windstorm or earthquake. The combined retention for Meridian Mutual and Meridian Security under this contract was $3,250,000 plus five percent of losses up to the $50,000,000 contract limit.
In 1993, FASB announced that the financial statements of insurance companies must accrue certain liabilities under funded cover catastrophe arrangements with reinsurers in accordance with SFAS No. 5. During 1995, the Company had an excess catastrophe agreement which was classified as "funded cover" reinsurance. This "funded cover" reinsurance agreement expired on December 31, 1995 with an excess balance of approximately $1,360,000 to be returned to the Company.
8.Income Taxes Current tax expense for the following periods differed from the tax expected solely on pre-tax income by applying the applicable statutory corporate tax rate to the various differences identified as follows:
The Revenue Reconciliation Act of 1990 required insurance companies to accrue future recoveries of salvage and subrogation on a discounted basis. A fresh start of 87 percent of the beginning 1990 discounted balance was provided for by that act. The impact of this provision has been calculated at $923,000, of which approximately $7,000 was recognized in 1995, $20,000 in 1994, and $130,000 in 1993. Prior to 1993, $746,000 was recognized.
The deferred income tax provision results from temporary differences in the recognition of certain items for tax and financial statement purposes. The sources of these temporary differences and the resulting components of the deferred tax provision are as follows:
Deferred policy acquisition costs $ 542,000 $ 2,000 $ 862,000 Loss and loss expense reserves and salvage and subrogation 366,000 45,000 (1,092,000) Unearned premium reserves (400,000) (82,000) (753,000) Payable under funded cover contract -- -- 183,000 Post-employment benefits (74,000) (35,000) (34,000) Investments 98,000 (105,000) 14,000 Other 19,000 16,000 217,000 Total deferred income taxes (benefit) $ 551,000 $ (159,000) $ (603,000)
Under SFAS No. 109, "Accounting For Income Taxes", the Company recorded a net deferred tax asset in 1995 and 1994, which is included among other assets. The net deferred tax asset at December 31, 1995 and 1994, is comprised of the following:
Deferred tax liabilities: Deferred policy acquisition costs 4,674,000 4,132,000 4,130,000 Investments 178,000 80,000 184,000 Unrealized appreciation on investment securities 3,607,000 -- 252,000 Other 34,000 25,000 24,000 Total deferred tax liabilities 8,493,000 4,237,000 4,590,000 Net deferred tax asset $ 1,277,000 $ 9,182,000 $ 5,024,000
The following is selected information for the Company's insurance subsidiaries, as determined in accordance with accounting practices prescribed or permitted by the Department of Insurance of the State of Indiana:
Statutory capital and surplus $ 90,952,000 $ 74,716,000 $ 72,260,000 Statutory net investment income $ 14,733,000 $ 13,927,000 $ 13,526,000 Statutory net income $ 11,625,000 $ 10,097,000 $ 5,165,000
10.Shareholders' Equity 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. On June 23, 1993, the Plan was amended to increase the maximum number of common shares authorized for issuance under the Plan to 750,000 shares. 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. Stock appreciation rights may be granted, which are subject to the same terms as the options and are exercisable only to the extent such options are exercisable. Restricted stock awards may be granted subject to terms and conditions as prescribed by the committee which administers the Plan.
In 1991, options with respect to 88,647 common shares were granted to 60 employees of Meridian Mutual and Vernon. These options have a term of five years, become exercisable in full beginning on the first anniversary of the date of the grant, and have an exercise price of $5.75 per share. As of December 31, 1995, 69,047 shares of these options had been exercised.
The 1994 Outside Director's Stock Option Plan ("Plan") provides for an aggregate maximum of up to 150,000 common shares to be issued upon the exercise of options granted to "outside" directors, who are defined as non-employee directors of the Company or Meridian Mutual. Each outside director was granted an option to purchase 1,000 common shares on May 4, 1994, and automatically will be granted an option to purchase an additional 1,000 common shares on the date of each subsequent annual meeting of shareholders held prior to 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 of the option. Each option will be exercisable commencing one year after the date of grant and will expire no later than 10 years after the date of grant. As of December 31, 1995, 21,000 options have been granted under the Plan and none of the options have been exercised.
11.Unaudited Selected Quarterly Financial Data (Amounts in thousands except per-share data)