10-Q 1 mar0110q.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2001. OR [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________________ to ___________________. Commission file number 0-11413 MERIDIAN INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) Indiana 35-1689161 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2955 North Meridian Street P.O. Box 1980 Indianapolis, IN 46206 (Address of principal executive offices) Registrant's telephone number, including area code: (317) 931-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 7,894,196 Common Shares at March 31, 2001 Total pages: 15 MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. In the opinion of management, the financial information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. The results for the three months ended March 31, 2001, are not necessarily indicative of the results to be expected for the entire year. These quarterly interim financial statements are unaudited. MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31 December 31 2001 2000 (Unaudited) ASSETS Investments: Fixed maturities, available for sale at fair value (cost $228,034,000 and $232,938,000) $ 233,495,711 $ 235,184,265 Equity securities, at fair value (cost $48,789,000 and $45,039,000) 47,480,713 52,680,078 Short-term investments, at cost, which approximates market 1,866,320 6,140,534 Other invested assets 2,183,038 1,899,308 Total investments 285,025,782 295,904,185 Cash 1,895,574 1,849,786 Premiums receivable 10,987,303 9,283,881 Accrued investment income 3,059,198 3,803,515 Deferred policy acquisition costs 19,799,417 19,716,433 Goodwill 13,189,870 13,365,992 Reinsurance receivables 27,687,497 33,592,907 Prepaid reinsurance premiums 3,548,847 3,589,669 Due from Meridian Mutual Insurance Company 9,409,811 6,928,351 Current and deferred federal income taxes 11,181,915 10,147,373 Other assets 876,992 708,768 Total assets $ 386,662,206 $ 398,890,860 LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $ 151,581,126 $ 161,772,444 Unearned premiums 88,196,907 87,882,951 Other post-employment benefits 2,415,679 2,273,321 Bank loan payable 6,000,000 6,500,000 Reinsurance payables 9,929,281 8,337,027 Other liabilities 3,805,463 5,673,453 Total liabilities 261,928,456 272,439,196 Shareholders' equity: Common shares, no par value, Authorized 20,000,000 shares; Issued 8,339,498 and 8,312,878; Outstanding 7,894,196 and 7,867,576 at March 31, 2001 and December 31, 2000, respectively 46,166,260 45,850,259 Treasury shares, at cost; 445,302 shares (6,549,079) (6,549,079) Contributed capital 36,481,864 36,481,864 Retained earnings 42,270,990 43,831,835 Accumulated other comprehensive income 6,363,715 6,836,785 Total shareholders' equity 124,733,750 126,451,664 Total liabilities and shareholders' equity $ 386,662,206 $ 398,890,860 The accompanying notes are an integral part of the consolidated financial statements. MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (Unaudited)

The accompanying notes are an integral part of the consolidated financial statements. MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY for the three months ended March 31, 2001 and 2000 (Unaudited)

The accompanying notes are an integral part of the consolidated financial statements. MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of the consolidated financial statements. MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The unaudited consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements of Meridian Insurance Group, Inc., for the year ended December 31, 2000. In the opinion of management, the financial information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. The results for the three months ended March 31, 2001, are not necessarily indicative of the results to be expected for the entire year. 1. Related Party Transactions Meridian Insurance Group, Inc. (the "Company") is an insurance holding company principally engaged in underwriting property and casualty insurance through its wholly-owned subsidiaries, Meridian Security Insurance Company, Meridian Citizens Security Insurance Company and Insurance Company of Ohio. Since August 1, 1996, the companies have participated in a pooling arrangement with Meridian Mutual Insurance Company ("Meridian Mutual"), the principal shareholder of the Company, and Meridian Citizens Mutual Insurance Company, in which the underwriting income and expenses of each entity are shared. The participation percentages of the Company's insurance subsidiaries for each of the periods ended March 31, 2001 and 2000 totaled 74 percent. 2. Reinsurance For the three months ended March 31, 2001 and 2000, the effects of reinsurance on the Company's premiums written, premiums earned and losses and loss adjustment expenses are as follows: Three Months Ended March 31, 2001 2000 Premiums written: Direct $ 56,242,942 $ 60,437,396 Assumed 137,557 92,952 Ceded (2,583,054) (4,240,373) Net $ 53,797,445 $ 56,289,975 Premiums earned: Direct $ 55,941,690 $ 57,274,651 Assumed 124,853 93,497 Ceded (2,623,876) (4,175,354) Net $ 53,442,667 $ 53,192,794 Losses and loss adjustment expenses: Direct $ 42,084,160 $ 38,254,821 Assumed 180,713 267,419 Ceded 325,950 61,270 Net $ 42,590,823 $ 38,583,510 3. Earnings Per Share The following table represents the reconciliation of the numerators and denominators of the Company's basic earnings per share and diluted earnings per share computation reported on the Consolidated Statement of Income for the three month periods ended March 31, 2001 and 2000:

4. Income Taxes For the three months ended March 31, 2001, the Company's income tax benefit differed from the tax benefit expected by applying the applicable statutory corporate tax rate primarily due to tax-exempt interest income, the dividends received deduction and changes in estimated tax liabilities. 5. Comprehensive Income The Company's other comprehensive income (loss) consists solely of net unrealized gains (losses) on securities. The total net unrealized gains (losses) on securities for the three month periods ended March 31, 2001 and 2000 consist of the following: Three Months Ended March 31, 2001 2000 Unrealized holding gains (losses) before deferred income taxes $ (1,549,172)$ 632,800 Deferred income tax (expense) benefit 542,000 (221,000) Subtotal (1,007,172) 411,800 Less: Reclassification adjustment for realized gains (losses) (821,102) 1,476,292 Income tax (expense) benefit related to realized gains 287,000 (517,000) Subtotal (534,102) 959,292 Other comprehensive loss $ (473,070)$ (547,492) 6. Segment Information 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 for the three months ended March 31, 2001 and 2000. 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 is allocated based upon the relative size of each segment. Asset information by reportable segment is not reported, since the Company does not internally produce such information. Three months ended March 31, 2001

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: Three months ended March 31, 2001 2000 Personal Lines: Automobile $ 23,877,036 $ 24,699,256 Homeowners 6,335,025 6,115,062 Other 660,731 641,222 Total Personal Lines 30,872,792 31,455,540 Commercial Lines: Automobile 5,233,899 5,040,544 Workers Compensation 6,752,652 6,427,711 Commercial Multi-Peril 6,437,711 6,265,706 Other 1,169,921 1,249,284 Total Commercial Lines 19,594,183 18,983,245 Farm Lines: Farmowners 2,410,062 2,217,155 Other 565,630 536,854 Total Farm Lines 2,975,692 2,754,009 Total All Lines Combined $ 53,442,667 $ 53,192,794 7. Accounting for Derivative Instruments and Hedging Activities 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. 8. Supplemental Cash Flow Disclosures Interest on the bank loan paid for the three month periods ended March 31, 2001 and 2000 was $119,838 and $137,103, respectively. No federal income taxes were paid for the three month periods ended March 31, 2001 and 2000. 9. Pending Mergers On October 25, 2000, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger (the "MIGI Merger") of the Company with a newly-formed, wholly- owned subsidiary of State Automobile Mutual Insurance Company ("State Auto"). At the same time, the Company's largest shareholder, Meridian Mutual, entered into an Agreement to Merge with and into State Auto (the "Mutual Merger" and together with the MIGI Merger, the "Mergers"). As a result of the Mergers, (a) the operations of Meridian Mutual and State Auto will be combined, with State Auto as the surviving corporation of the Mutual Merger, (b) the Company will become a wholly-owned subsidiary of State Auto, and (c) the public shareholders of the Company will receive $30.00 per share in cash. Each Merger is conditioned upon consummation of the other Merger and receipt of regulatory approvals, including the Indiana and Ohio Departments of Insurance. In addition, the MIGI Merger must be approved by the shareholders of the Company and the Mutual Merger must be approved by the policyholders of Meridian Mutual and State Auto and reapproved by the board of directors of each party. On April 23, 2001, the policyholders of Meridian Mutual and State Auto held special meetings at which they approved and adopted the Plan and Joint Agreement of Merger. On April 26, 2001, the Indiana Department of Insurance granted regulatory approval of the acquisition of control of the Company and its insurance company subsidiaries by State Auto. On May 23, 2001, a special meeting of the Company's shareholders will be held to consider and vote upon the MIGI Merger. Together, Meridian Mutual and State Auto own approximately 53% of the Company's outstanding shares and each have agreed to vote all Company shares owned by them in favor of the MIGI Merger. The Merger Agreement also provides for the payment of a break-up fee or liquidated damages to State Auto or liquidated damages to the Company if the Merger Agreement is terminated under certain circumstances. MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations: Financial Position Total assets for Meridian Insurance Group, Inc. were $386.7 million at March 31, 2001, a decrease from the December 31, 2000 total of $398.9 million. Total investments declined by $10.9 million reflecting changes in market values of investments and operating cash flows. Total liabilities at March 31, 2001 of $261.9 million decreased in comparison to $272.4 million reported at December 31, 2000. The decline of $10.2 million in losses and loss adjustment expense reserves from year end primarily reflects the timing of claim settlements. Unrealized appreciation on the Company's fixed maturity portfolio increased by approximately $3.2 million since December 31, 2000. The modified duration of the Company's fixed maturity portfolio is approximately 4.8 years. Net unrealized appreciation on equity securities decreased by $3.9 million since December 31, 2000. The Company's shareholders' equity at March 31, 2001 decreased by approximately $1.7 million to $124.7 million compared to $126.5 million reported at December 31, 2000. The primary factors leading to this decrease were a net loss of $0.9 million, net unrealized losses on securities of $0.5 million and shareholder dividends of $0.6 million. These factors were partially offset by $0.3 million related to the exercise of stock options. The Company's book value per share at March 31, 2001 was $15.80, compared to $16.07 reported at year end 2000. Results of Operations First quarter 2001 operating results improved substantially from the fourth quarter of 2000 but were below first quarter 2000 results. For the quarter, the Company recorded an operating loss of $0.3 million, or $0.03 per diluted common share. This compares to an operating loss per diluted common share of $1.19 for the fourth quarter of 2000 and operating earnings of $0.23 per diluted common share for the first quarter of 2000. Net realized investment losses for the first quarter of 2001 were $0.09 per diluted common share compared to net realized investment gains of $0.11 per diluted common share in 2000. The Company's first quarter 2001 statutory combined ratio was approximately 108.3 percent, compared to 132.7 percent for the fourth quarter of 2000 and 101.8 percent for the first quarter of 2000. Net written premiums of $53.8 million for 2001 decreased 4.4 percent from the first quarter of 2000. For the first quarter of 2001, net written premiums for personal lines decreased 5.6 percent to $30.0 million, commercial lines decreased 3.7 percent to $20.6 million, while farm lines increased 2.4 percent to $3.2 million. The decline in net premiums written for personal lines was primarily due to the termination of the GROUPadvantager program in late 2000. Net written premiums for GROUPadvantager were approximately $0.5 million and $3.2 million during the first quarters of 2001 and 2000, respectively. (GROUPadvantage is a registered service mark of Consumer Insurance Services of America "CISA" and is used under license from CISA.) This decline was partially offset by an increase in non-standard automobile net written premiums of $1.5 million from the first quarter of 2000. Commercial lines net written premiums declined from the first quarter of 2000 due to lower levels of new business. The Company implemented rate increases and stricter underwriting guidelines to improve profitability. Ceded premiums written in the first quarter of 2001 were $2.6 million compared to $4.2 million for the first quarter of 2000. The decrease is attributable to lower levels of direct written premium, a refund of workers' compensation ceded premium and the elimination of the Company's underlying aggregate excess catastrophe reinsurance contract in 2001. The Company's total revenues for the first quarter of 2001 were $56.6 million compared to $58.6 million for the same period in 2000. Premiums earned increased slightly to $53.4 million from $53.2 million for 2000. During the first quarter of 2001, total personal lines earned premium decreased 1.9 percentage points from the same period in 2000. Premiums earned for personal automobile, the Company's largest line of business, decreased by 3.3 percentage points, offset by increases in earned premiums for homeowners of 3.6 percentage points. During the first quarter of 2001, premiums earned in the non-standard automobile line of business increased to $5.6 million from $4.3 million for the same period in 2000, while earned premiums for the GROUPadvantager products decreased by $1.8 million to $1.1 million for first quarter 2001. Earned premiums for commercial and farm lines improved during the first quarter of 2001 by approximately 3.2 percent and 8.0 percent, respectively. Net investment income for the first quarter of 2001 was approximately $3.9 million, which is consistent with the same period in 2000. The Company has continued to focus on increasing book yield by selling lower yielding and tax advantaged securities and reinvesting the proceeds in higher yielding fixed maturities. The Company recorded a net realized loss from the sale and write-down of investments for approximately $1.0 million, or $0.09 per diluted common share after tax, compared to a realized gain of $1.3 million or $0.11 earnings per diluted common share after tax for the prior period. During the first quarter of 2001, net realized investment losses includes approximately $0.7 million of losses due to other than temporary declines in fair value on certain utility equity securities owned by the Company. The Company's total incurred losses and loss adjustment expenses for the first quarter of 2000 increased to $42.6 million from $38.6 million for the first quarter of 2000. The first quarter 2001 loss and loss adjustment expense ratio increased to 79.7 percent compared to 72.5 percent for the same period in 2000. Loss and loss adjustment expenses for personal lines increased by 11.5 percentage points. Commercial lines increased during the first quarter of 2001 by 7.3 percentage points. Operating results continue to be negatively impacted by the discontinued GROUPadvantage program, which added 5.3 percentage points to the overall loss and loss adjustment expense ratio in the first quarter of 2001. For the first quarter of 2000, GROUPadvantage added 2.9 percentage points to the overall loss and loss adjustment expense ratio. Weather-related property losses were not a significant factor in either 2001 or 2000 first quarter operating results. The Company's total general operating and amortization expenses for the first quarter of 2001 were $16.3 million down from $16.4 million for the first quarter of 2000. Relative to earned premium, the expense ratio improved to 30.5 percent compared to 30.9 percent for the first quarter of 2000. MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings The lawsuit filed against the Company and its individual directors, which was discussed in Item 3 of the Company's annual Form 10-K for the period ended December 31, 2000, was dismissed by the United States District Court, Southern District of Indiana, on April 10, 2001. The court dismissed the plaintiff's claims for injunctive relief with prejudice and dismissed the plaintiff's claims for monetary relief without prejudice for lack of jurisdiction. Item 6. a. Exhibits. No exhibits are filed for the period covered by this statement. b. No reports on Form 8-K were filed during the period covered by this statement. MERIDIAN INSURANCE GROUP, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERIDIAN INSURANCE GROUP, INC. DATE: May 14, 2001 By: /s/ Norma J. Oman Norma J. Oman, President and Chief Executive Officer DATE: May 14, 2001 By: /s/ Steven E. English Steven E. English, Chief Financial Officer and Treasurer

MERIDIAN INSURANCE GROUP INC 10-Q