-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EnwC1wcozBNMUL3cUyhtNgRsufSWmkzLVIv7TpR4ZZW/DnEu3oXVE/qUF2yq/TUi DtonqpibjbdVNWn++U+Z7A== 0000809801-96-000001.txt : 19960329 0000809801-96-000001.hdr.sgml : 19960329 ACCESSION NUMBER: 0000809801-96-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERIDIAN INSURANCE GROUP INC CENTRAL INDEX KEY: 0000809801 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 351689161 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15852 FILM NUMBER: 96539465 BUSINESS ADDRESS: STREET 1: 2955 N MERIDIAN ST STREET 2: PO BOX 1980 CITY: INDIANAPOLIS STATE: IN ZIP: 46206-1980 BUSINESS PHONE: 3179278100 MAIL ADDRESS: STREET 1: P.O. BOX 1980 CITY: INDIANAPOLIS STATE: IN ZIP: 46206-1980 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) ( X ) Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1995. ( ) 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 (I.R.S. EmployerIdentification No.) incorporation or organization) 2955 North Meridian Street P.O. Box 1980 Indianapolis, IN 46206-1980 (Address of principal executive offices) Registrant's telephone number, including area code: (317) 931-7000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Shares 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of voting stock owned by non-affiliates at March 9, 1996, based on the closing sales price, was $53,306,445. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 6,779,375 Common Shares at March 9, 1996. The Index of Exhibits is located at page 44 in the sequential numbering system. Total number of pages, including cover page: 243. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document have been incorporated by reference into this Annual Report on Form 10-K: Parts of Form 10-K into Which Identity of Document Document is Incorporated Definitive Proxy Statement Part III with respect to the 1996 Annual Meeting of Shareholders of Registrant MERIDIAN INSURANCE GROUP, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1995 PART I PAGE ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 15 ITEM 3. LEGAL PROCEEDINGS 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 41 ITEM 11. EXECUTIVE COMPENSATION 41 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 41 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 42 PART I ITEM 1: BUSINESS General Meridian Insurance Group, Inc. ("the Company"), is a regional holding company principally engaged in the business of underwriting property and casualty insurance through its wholly-owned subsidiary, Meridian Security Insurance Company ("Meridian Security"). Meridian Security has 100 percent ownership in Vernon Fire & Casualty Insurance Company ("Vernon"), which is presently a dormant property and casualty insurance company. The Company also has two non-insurance subsidiaries, Meridian Service Corporation, a service support company, and MarketMasters Agency, Inc., an insurance agency. These two companies are small and have very little impact on the Company's operations. Approximately 89 percent of the 1995 business for the Company was written by Meridian Mutual Insurance Company ("Meridian Mutual"), an Indiana domiciled mutual insurance company that currently owns 46.5 percent of the outstanding common shares of the Company. The Company participates in the underwriting gain or loss on business written by Meridian Mutual pursuant to a reinsurance pooling agreement ("pooling agreement") between Meridian Mutual and Meridian Security which covers all of the property and casualty business of the two companies. Meridian Mutual writes a broad line of property and casualty insurance, including personal and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Business is written through approximately 925 independent insurance agencies in the states of Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee, and Wisconsin. During the fourth quarter of 1995, Meridian Mutual was granted licenses to write insurance in the states of Iowa, Minnesota and Pennsylvania, however, no direct premiums were written during 1995. Meridian Security is admitted in all states in which Meridian Mutual is licensed, with the exception of Pennsylvania, in which admittance is expected during the first quarter of 1996. Meridian Security writes personal and farm lines policies primarily in the rural areas of Indiana, Kentucky, Ohio, Tennessee, and Wisconsin through approximately 400 independent insurance agencies, many of which are cross-licensed with Meridian Mutual. Relationships with Meridian Mutual All of the Company's corporate officers are officers of Meridian Mutual, and six of the nine members of the Company's Board of Directors are directors of Meridian Mutual. Directors of the Company constitute a majority of the members of the Board of Directors of Meridian Mutual. The Company has no employees and is dependent upon Meridian Mutual for the sale and underwriting of insurance, the servicing of policyholder claims and all other aspects of the Company's operations. Meridian Mutual provides all of the facilities, employees, data processing, and administrative services required to conduct the business of the Company. Underwriting expenses are shared under the pooling agreement between Meridian Mutual and Meridian Security in accordance with the participation percentages of the parties. Other expenses which can be directly identified with Meridian Mutual or the Company are paid by the company to which the expense is attributable, and all other operating expenses relating to the business of Meridian Mutual and the Company (which have not been and are not expected to be significant in amount) are allocated in accordance with policies established in good faith by their Boards of Directors. Pooling Agreement The pooling agreement covers all of the property and casualty insurance written by Meridian Mutual and Meridian Security. Under the pooling agreement, all premiums, losses, loss adjustment expenses and other underwriting and administrative expenses of Meridian Mutual and Meridian Security are shared between the parties in accordance with the participation percentages established under the pooling agreement. The current participation percentages of 74 percent for Meridian Security and 26 percent for Meridian Mutual were established effective May 1, 1993. Prior to the change, the participation percentages were 62 percent for Meridian Security and 38 percent for Meridian Mutual. The participation rates were established with reference to the respective surplus accounts of Meridian Mutual and Meridian Security on the assumption that each company's capacity to underwrite premium income (and, therefore, its share of any gain or loss on insurance underwriting operations) bore a direct relationship to that company's surplus. The Boards of Directors of the Company and Meridian Mutual have delegated to their respective Audit Committees the responsibility of monitoring the relationships between Meridian Security and Meridian Mutual under the pooling agreement pursuant to such procedures as those Committees may deem necessary and appropriate to allocate the pool participation percentages to each participant of the agreement. The Audit Committees have established guidelines for reviewing the participation percentages at least annually and for referring to the Pooling Committees of the Company and Meridian Mutual any decision to change the participation percentages. Future events that could affect the relationship between the surplus accounts of the parties include the receipt by Meridian Mutual of dividends on the common shares of the Company held by it, changes in the capital structure of Meridian Security, changes in the asset values of Meridian Mutual or Meridian Security, or different effective rates of income taxation which disproportionately affect the surplus of the two companies. The Company and Meridian Mutual have conflicting interests with respect to the establishment of the respective ratios of Meridian Security and Meridian Mutual under the pooling agreement, and conflicts may arise between the Company and Meridian Mutual relating to the allocation of expenses not related to insurance underwriting, business and investment philosophies, profit objectives, cash management, dividend policy and other matters. The business and operations of the Company are integrated with and dependent upon the business and operations of Meridian Mutual. Management of Meridian Mutual determines which expenses are associated with underwriting operations (and therefore shared by Meridian Mutual and Meridian Security under the pooling agreement), and also selects and values the assets and liabilities transferred between the two companies pursuant to the pooling agreement. The pooling agreement contains no specific provisions regarding the procedures to be followed in making these decisions. In arriving at decisions involving matters in which Meridian Mutual has an interest, the directors of the Company will be governed by their fiduciary duties to the Company and its shareholders, but those directors who also are directors of Meridian Mutual also owe fiduciary duties to the policyholders of Meridian Mutual and no procedures have been established under which those decisions would be made by disinterested directors. The terms of the pooling agreement preclude conflicts which could arise in deciding which risks are to be insured by each of the participants by making the results of the operations of both participants dependent on the results of the total business covered by the pooling agreement. The pooling agreement has no fixed term and provides that it is to remain in force until canceled by the mutual consent of Meridian Security and Meridian Mutual. The pooling agreement may be amended or terminated without the necessity of a vote by the shareholders of the Company. In the event of a termination of the pooling agreement, Meridian Security would transfer back to Meridian Mutual the liabilities ceded to it by Meridian Mutual and Meridian Mutual would transfer back to Meridian Security the liabilities ceded to it by Meridian Security, and each party would receive from the other assets in an amount equal to the amount of the policy liabilities received by it. The Company would continue to own all of the outstanding common shares of Meridian Security and the Company's assets would consist of investments and other assets in an amount approximately equal to consolidated shareholders' equity. In the event of termination of the business relationships between the Company and Meridian Mutual, Meridian Security would have no underwriting, claims processing, data processing operations or other administrative services. However, Meridian Security would have limited sales operations through their independent agency force. The approval of the Indiana Insurance Commissioner is required to change the participation percentages of the parties to the pooling agreement or to terminate the pooling agreement; however, the requirement for such approvals is for the protection of the policyholders of Meridian Security and Meridian Mutual and not for the protection of shareholders of the Company. The Company intends that Meridian Security will continue its participation in the pooling agreement, absent some unforeseen change in circumstances. A. M. Best Company, Inc., Ratings Since 1993, Meridian Mutual and Meridian Security have maintained a rating of "A" (excellent) (a group rating) by A. M. Best Company, Inc. ("Best"). Best is an independent company which rates insurance companies on the basis of their opinion as to the financial position and operating performance. Best's ratings are based upon factors related to the capacity of the insurer to make payment of its obligations to policyholders and do not relate to the protection of investors or indicate expected investment results. Operations In the following discussion of operations, the term "Meridian" refers to the operations of the property and casualty insurance business of Meridian Mutual and Meridian Security covered by the pooling agreement. Effective January 1, 1994, the property and casualty insurance operations of Vernon were assumed by Meridian Security through an assumption reinsurance agreement, which in turn became part of the pooling agreement. The marketing strategies and reserving methods used by Vernon remained the same. The underwriting of the farmowners line of business was integrated with Meridian Mutual's and the remaining lines were underwritten separately by Meridian Mutual employees. The insurance products, which now bear Meridian Security's name, continued to be marketed in Indiana and were expanded into Kentucky, Ohio, Tennessee and Wisconsin during 1995. The former Vernon agents were licensed with Meridian Security and were given the opportunity to be cross-licensed with Meridian Mutual. Underwriting The underwriting division of Meridian is responsible for establishing risk-selection guidelines for Meridian's agents and underwriters and monitors policy issuance to insure adherence to the established guidelines. The underwriting division also determines the pricing of Meridian's products and is responsible for the development of new products and enhancements. The underwriting division works closely with Meridian's sales representatives and consults regularly with Meridian's agents to assess current market conditions. In establishing prices, the underwriting division analyzes studies of statistical and actuarial data concerning the impact of price changes in the markets served by Meridian and considers data compiled by industry organizations. This allows Meridian to more accurately assess the anticipated costs of risks underwritten. Over the past several years, Meridian has emphasized efforts to improve underwriting in order to reduce its loss ratio. Processes such as re-underwriting the existing book of business, monitoring unprofitable agents, improving rate adequacy and the consolidation of four district offices into the home office facility have resulted in an improvement in the Company's statutory combined ratio from 105.3 percent in 1991 to 100.2 percent in 1995. Currently, the Company is focused on reducing underwriting expenses in order to further improve the combined ratio. Beginning in 1994, Meridian began to re-engineer and re-design certain core processes. The implementation of these re- engineered processes and the continued refinement of the automated systems contributed to a 1.5 percentage point reduction in the loss adjustment and operating expense ratio's during 1995. Management believes that the continuation of these processes in 1996 will further reduce the Company's underwriting ratio. Products and Marketing Meridian Mutual writes a broad line of property and casualty insurance including personal and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Meridian Security writes private passenger automobile, homeowners, farmowners, and other personal lines coverages. Meridian markets all of its insurance through independent insurance agents, and development and maintenance of a strong agency system is essential. Meridian seeks to provide its agents and policyholders a level of service that surpasses industry standards. Meridian Mutual's agency network numbers approximately 925 independent insurance agencies spread throughout eight states. Meridian Security maintains its own agency network of approximately 400 independent insurance agencies in five states, many of which are cross-licensed with Meridian Mutual. Meridian's independent agencies are primarily small to medium-sized firms with no agency producing more than 2 percent of the total written premium during 1995. Meridian continuously monitors its agencies, giving special attention to the volume and profitability of business written by each agency. Agencies which consistently write unprofitable business may be terminated by Meridian, subject to compliance with applicable state laws. Each agency enters into a standard agency agreement, under which the agency is authorized to sell and bind insurance coverage in accordance with procedures specified in the agreement and in accordance with Meridian's underwriting guidelines, as well as to collect and remit premiums. The agency receives as a commission a percentage of the premium for each policy written. Meridian offers a direct billing service to its agents, under which premium statements are provided to the insured and the insured pays the premiums directly to Meridian. Meridian pays the same commission rates on company-billed and agency- billed policies, thereby allowing agencies to reduce administrative costs without a reduction in commission income. The amount of company- billed business in 1995 was approximately 79 percent of Meridian's net premiums written. Meridian offers an annual incentive trip to agents who meet qualifying requirements that are set each year by Meridian. In addition, Meridian offers an agency profit-sharing agreement in which agencies attaining prescribed premium volume and meeting prescribed profitability requirements receive a bonus. Meridian has established agency councils which meet regularly with members of management to discuss the concerns of the agents. These councils are encouraged to suggest ways for Meridian to improve its operations and service to the individual agents. Meridian has developed separate growth strategies with respect to the personal, commercial and farm lines of business. With respect to personal lines, Meridian believes that continued improvements in service to agents and policyholders and the development of additional product enhancements will increase penetration of existing markets. By emphasizing strict adherence to underwriting guidelines and targeting selected lines of business, Meridian believes moderate growth in personal lines business is achievable without significantly increasing risk exposure. Meridian has identified several segments of its commercial lines markets in which management believes Meridian can compete effectively. Meridian has and will continue to focus on the mid-sized accounts in the $15,000 to $100,000 range of annual premium volume in addition to its traditional business with smaller accounts. In an effort to increase Meridian's penetration in commercial markets, Meridian has increased its number of commercial field underwriters to work closely with designated larger volume agents in developing new commercial accounts. The strategy with respect to farm lines emphasizes increased penetration of existing markets by targeting small to medium sized, family-owned farms which meet Meridian's underwriting guidelines. Management believes Meridian enjoys a competitive advantage in this target market because of its regional focus and due to the fact that some national insurers have vacated this market. The following table sets forth for the periods indicated the net premiums written, the net underwriting gain (loss), loss ratios, expense ratios and combined ratios for the Company's insurance operations, prepared in accordance with statutory accounting principles. The combined ratio does not reflect investment income, federal income taxes, or other non-underwriting income or expense, all of which are included in determining net income. Year Ended December 31, 1995 1994 1993 1992 1991 (Dollars in thousands) Premium Written Personal lines: Automobile $59,444 $54,205 $55,291 $48,468 $49,164 Homeowners 19,526 16,667 17,407 14,510 14,447 Other 5,190 4,035 3,894 3,226 3,355 Total personal lines 84,160 74,907 76,592 66,204 66,966 Farmowners 8,166 7,099 7,544 6,373 6,291 Commercial lines: Automobile 13,107 11,972 11,556 8,363 7,587 Workers' compensation 22,438 21,894 19,264 12,518 10,394 Commercial multi-peril 19,548 19,414 18,842 14,417 14,863 Other 1,323 859 995 1,052 1,002 Total commercial lines 56,416 54,139 50,657 36,350 33,846 Total premium written $148,742 $136,145 $134,793 $108,927 $107,103 Net Underwriting Gain (Loss) $ (1,610)$ (2,751)$ (5,536)$ (3,900)$ (6,158) Loss Ratio Personal lines: Automobile 75.0% 69.2% 65.8% 71.4% 71.6% Homeowners 81.2 82.9 77.8 91.0 75.3 Other 43.7 53.9 64.7 61.4 59.7 Total personal lines 74.6% 71.5% 68.4% 75.1% 71.8% Farmowners 69.6% 64.4% 68.5% 78.0% 58.0% Commercial lines: Automobile 89.1% 80.0% 65.3% 65.9% 69.5% Workers' compensation 58.6 62.7 79.9 71.1 92.4 Commercial multi-peril 45.8 70.3 67.4 50.4 68.5 Other 47.4 (14.0) 35.1 64.7 119.3 Total commercial lines 61.0% 68.1% 71.0% 61.3% 77.4% Total loss ratio 69.2% 69.8% 69.4% 70.8% 72.7% Expense Ratio 31.0% 32.0% 32.4% 32.3% 32.6% Combined Ratio 100.2% 101.8% 101.8% 103.1% 105.3% Claims Meridian's claim division is responsible for developing and implementing policies and procedures for the payment and disposition of claims and for establishing claim reserves. In connection therewith, it resolves questions concerning policy coverage and manages reinsurance recoveries and salvage and subrogation matters. Claims litigation is managed in conjunction with Meridian's legal division. All claim services for Meridian are handled through claim service centers in Indianapolis, Indiana; Louisville, Kentucky; and East Lansing, Michigan. Insurance claims on policies underwritten by Meridian are normally investigated and settled by Meridian claim adjusters. Independent adjusters are employed as needed to handle the occasional overload of claims and in territories in which the volume of claims is not sufficient to justify having company claim adjusters. Meridian claim adjusters have authority to settle claims within policy limits, subject to direction and control by a claim manager or supervisor. All claims estimated to have a potential value of $50,000 or more are supervised by examiners at the home office, and all claims in excess of $100,000 must be approved by the claim division director and, if litigation is involved, the legal division director. A claim review committee provides for the periodic evaluation of larger claims to enhance the investigation and decision-making process. The committee reviews claims reserved in excess of $100,000, and any other claims involving special circumstances in order to make decisions as to investigations and/or settlement values. Reserves Loss reserves are estimates at a given time, based on facts then known, of what an insurer predicts its exposure to be in connection with incurred losses. Loss adjustment expense reserves are estimates of the ultimate liability of the expenses in settling all claims, including investigation and litigation costs resulting from such claims. The ultimate liability of the insurer for all losses and loss adjustment expenses reserved at any point in time may be greater or less than these estimates. Meridian maintains reserves for the eventual payment of losses and loss adjustment expenses with respect to both reported and unreported claims. Meridian follows two principal methods of establishing reserves. For coverages which involve a large volume of claims of relatively small amounts such as automobile property damage, comprehensive and collision insurance, reserves are maintained on an average basis by reference to the number and amount of paid claims. Adjustments to average reserves are made quarterly, based on the claims experience for the prior quarter. Reserves for other claims are established on a case-by-case basis pursuant to which a reserve amount is assigned to each claim when reported, based primarily upon an investigation of the circumstances surrounding each claim, consideration of the liability and the damages, and the insurance policy provisions relating to the claim. During the claim settlement process, it may become necessary to adjust estimates of future liability as additional facts regarding individual claims become known. Meridian also establishes reserves for claims which have been incurred but which have not been reported, utilizing a statistical model based on historical experience. Reserves established pursuant to this statistical model also are designed to correct historical deficiencies or redundancies in the reserves established on a case-by-case basis. Meridian consults with an independent actuarial firm on a quarterly basis concerning the adequacy of its reserves. Meridian believes that reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of settling reported and unreported claims, net of reinsurance, anticipated salvage and subrogation receipts, and other recoveries. Loss reserves are not discounted to present value. Inflation is implicitly provided for in calculating reserves through analysis of cost trends and review of historical reserve estimates. The following table sets forth a three-year reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the Company. Year Ended December 31, 1995 1994 1993 (In thousands) Balance at beginning of period $123,755 $119,764 $ 95,106 Less reinsurance recoverables 31,815 30,134 23,100 Net balance at beginning of period 91,940 89,630 72,006 Incurred related to: Current year 104,585 99,444 92,996 Prior years (5,461) (5,473) (6,374) Total incurred 99,124 93,971 86,622 Paid related to: Current year 61,792 55,216 48,107 Prior years 36,899 36,445 20,891 Total paid 98,691 91,661 68,998 Net balance at end of period 92,373 91,940 89,630 Plus reinsurance recoverables 31,204 31,815 30,134 Balance at end of period $123,577 $123,755 $119,764 The reconciliation for 1995 shows an approximately $5.5 million reduction in previously established loss reserves. Favorable loss developments resulting from decreases in the frequency and severity of claims in 1994 and prior accident years for all of the Company's major lines of business with the exception of the commercial automobile line were the primary factors in the most recent period reduction. The Company also experienced favorable underwriting trends from its involvement in the involuntary National Workers' Compensation Pool. The following table shows the calendar-year development of the unpaid losses and loss adjustment expenses of the Company's pooled business for each of the last ten years. The Company was formed in 1987, thus the reserve development for years prior to that date was based on the statutory combined reserves and development of Meridian Security. The top line of the table shows the estimated reserves for losses and loss adjustment expenses as recorded by the Company for each of the indicated years. These reserves represent the estimated amount of net unpaid losses and loss adjustment expenses for claims arising on or before December 31 of each year, including claims that had not yet been reported. The data in the upper portion of the table reflect the cumulative payments made as they have developed through time. The payments are expressed as a percentage of the year-end reserves shown in the top line. The data in the lower portion show the change in the reserve estimate over time. A redundancy in reserves means that reserves established in prior years exceeded actual losses and loss adjustment expenses or were re- evaluated to less than the originally reserved amount. A deficiency in reserves means that the reserves established in prior years were less than actual losses and loss adjustment expenses or were re- evaluated at more than the originally reserved amount. In evaluating the following information for the Company, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of redundancy related to losses settled in 1995 but incurred in 1990 is included in the cumulative redundancy amount for each of the years from 1990 through 1994. The table does not present accident or policy-year development data. Reserves increased significantly from 1986 to 1989 principally as a result of an increase in private passenger automobile as a percentage of the total business written by the Company, and related increases in the frequency and severity of claims. Additionally, reserves in 1988 were increased by approximately $5.0 million to adjust for the adverse loss development trends experienced in 1985 through 1987. Increases in Meridian Security's share of the pooled loss and loss adjustment expense reserves also contributed significantly to the increase in reserves. Meridian Security's participation increased from 8 percent in 1985, to 44 percent on December 1, 1986, to 62 percent on April 1, 1987, and to the current level of 74 percent on May 1, 1993. Conditions and trends that have affected development of the reserves in the past may not necessarily occur in the future. Accordingly, the data in the table may not be indicative of future redundancies or deficiencies.
Year Ended December 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 (Dollars in thousands) Net reserves for losses & loss adjustment expenses $92,373 $91,939 $89,630 $72,006 $68,102 $64,742 $62,281 $53,569 $43,899 $26,819 $ 8,360 Cumulative paid as a percent of year- end reserves: One year later 39.0% 40.7% 29.0% 42.4% 46.6% 46.1% 47.2% 57.4% 41.6% -57.5% Two years later 59.0% 51.7% 55.0% 68.5% 68.9% 68.1% 79.7% 74.0% -11.4% Three years later 62.6% 67.5% 74.7% 81.3% 81.3% 90.3% 93.6% 42.2% Four years later 74.9% 81.6% 84.1% 87.4% 97.0% 102.3% 74.3% Five years later 85.7% 88.0% 88.6% 99.9% 107.2% 86.3% Six years later 90.1% 90.7% 100.1% 109.7% 94.5% Seven years later 92.3% 101.4% 110.3% 98.5% Eight years later 102.7% 111.4% 99.4% Nine years later 113.2% 102.0% Ten years later 107.4% Reserves re-estimated as a percent of year-end reserves: One year later 92.9% 92.3% 93.6% 97.5% 103.2% 99.7% 102.3% 112.8% 109.6% 87.9% Two years later 89.0% 84.6% 93.0% 99.0% 100.7% 100.6% 112.7% 120.1% 106.7% Three years later 83.3% 89.0% 97.9% 99.2% 100.4% 109.5% 122.9% 123.2% Four years later 89.3% 95.3% 99.3% 99.7% 110.0% 120.0% 126.9% Five years later 96.3% 97.9% 100.3% 109.2% 119.3% 122.0% Six years later 98.4% 99.5% 110.6% 119.6% 122.9% Seven years later 100.0% 109.9% 122.6% 124.6% Eight years later 110.6% 123.0% 134.7% Nine years later 124.4% 136.0% Ten years later 141.0% Redundancy (deficiency) 7.1% 11.0% 16.7% 10.7% 3.7% 1.6% 0.0% -10.6% -24.4% -41.0%
Reinsurance Meridian follows the customary industry practice of limiting its exposure by ceding to reinsurers a portion of the premiums received and risks assumed under the policies reinsured. Reinsurance is purchased to reduce a net liability on individual risks to predetermined limits and to protect against multiple losses from a single catastrophe or a series of catastrophes. Although reinsurance does not discharge an insurer from its primary liability for claims up to the full limits of the policies, it makes the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. Employers Reinsurance Corporation, rated "A++" by Best, is the Company's main reinsurer providing property and liability excess of loss coverage. Meridian uses a large number of reinsurers for property catastrophe and facultative coverages to reduce the effect of a default by any one reinsurer. Most of these companies are rated "A- " or better by Best, or an equivalent rating by other recognized independent rating agencies. Reinsurers not rated by Best or another independent agency are analyzed and approved by Meridian's reinsurance broker, E. W. Blanch, and by Meridian personnel. The reinsurance purchased by Meridian includes contracts under which certain types of policies are automatically reinsured up to the contract limits ("treaty reinsurance") and contracts which provide reinsurance on an individual risk basis and require specific agreement of the reinsurer as to limits of coverage provided ("facultative reinsurance"). The amount of coverage under Meridian's treaty reinsurance depends upon the amount, nature, and size of the risks insured. For liability insurance, an excess of loss treaty provided for recovery of losses over $200,000 per occurrence up to limits of between $1.0 million and $5.0 million depending on the line of business. For property insurance, an excess of loss treaty provided for the recovery of losses over $200,000 up to $4.0 million per occurrence. Separate catastrophe coverage provided for recovery of 95 percent of catastrophic losses in excess of an aggregate retention of $3.25 million per catastrophic event, up to a limit of $50.0 million. The catastrophe coverage is intended to protect the Company from a loss occurrence directly occasioned by any one disaster, accident or loss or a series of disasters, accidents or losses arising out of a single "event," as that term is defined in the relevant reinsurance agreements. Meridian Mutual and Meridian Security are each named as insured parties under these treaty reinsurance contracts, and the coverage described herein applies to all risks written by these companies. Meridian Security retains risk according to its percentage participation under the pooling agreement. On both property and liability coverages, facultative reinsurance is purchased by Meridian to cover exposure from loss over the limits provided under treaty reinsurance. The risks shared by Meridian Mutual and Meridian Security under the pooling agreement consist of only the net risks remaining after the ceding of reinsurance to third party reinsurers. Meridian also maintains a multiple-event catastrophe loss treaty to provide protection for multiple catastrophe events that fall below the $3.25 million single event retention level noted above but are large enough in aggregate to cause significant loss exposure. Under this contract, catastrophe property losses (defined as those in excess of $150,000) are accumulated for the calendar year to a retention of $4.9 million. Once the accumulated losses exceed this retention, recovery is available from the reinsurers at a rate of 95 percent of the covered losses in excess of the retention to a limit of $9.9 million. In 1995, the Company had an excess catastrophe coverage agreement which was classified as a "funded cover" reinsurance contract that expired on December 31, 1995. Over the four years this contract was in-force, the Company paid premiums that exceeded the losses and expenses paid by the reinsurers, therefore, a "profit sharing" return premium of approximately $1,360,000 was due the Company at December 31, 1995. This amount was received in January, 1996. In lieu of this contract, Meridian increased its catastrophe retention to $6.0 million in 1996 from the $3.25 million retention that had been in effect for 1995. Coverage limits under the continuing catastrophe contracts have been raised from $50 million in 1995 to $65 million for 1996. As of December 31, 1995, the Company had approximately $31.2 million of reinsurance recoverable on unpaid losses. Of this amount, approximately $14.7 million was recoverable from Employers Reinsurance Corporation and approximately $16.1 million was recoverable from the Michigan Catastrophic Claims Association, a mandatory state- administered personal injury protection reinsurance pool in which all insurers writing automobile business in that state must participate. The cost of Meridian's reinsurance contracts is renegotiated annually. If the relationships between Meridian and its current reinsurers were to be terminated, Meridian believes that, under current circumstances, relationships with other reinsurers could be established without a material adverse effect on its business. On December 29, 1995, Meridian Mutual entered into an indemnity reinsurance agreement with Celina Mutual Insurance Company ("Celina") to purchase the right to renew a select book of commercial lines business. Under this agreement, Celina transferred approximately $6 million of its Pennsylvania commercial lines annualized premiums to Meridian Mutual along with access to approximately 80 independent insurance agents located in the state of Pennsylvania. This transaction was recorded as assumed written premium, which will become earned over the next twelve months. Renewals of the assumed policies will be recorded as direct business of Meridian Mutual. Meridian Mutual's underwriting results related to this business will be pooled with Meridian Security. At December 31, 1995, the Company reflected unearned premiums of approximately $2.1 million and ceding commissions of approximately $409,000, which are deferred on the Company's books until the premiums become earned. Aside from the indemnity reinsurance agreement described above, Meridian assumes a limited amount of reinsurance from third parties. This business accounted for approximately 3.5 percent of net premiums written in 1995. Investments Investments of the Company are principally held by Meridian Security and Vernon, which are subject to regulation by the Indiana Department of Insurance. The investment decisions are made pursuant to guidelines established by the Company's Finance and Investment Committee. This committee is made up of five directors of the Company, three of whom are also directors of Meridian Mutual. All investment transactions are reviewed by this committee. The investment guidelines established by the Finance and Investment Committee are intended to reflect a prudent approach to managing invested assets. Investments are required to be diversified by type of issuer, type of security and type of industry. Specific restrictions prohibit investments in real estate mortgages unless the related credit instruments are collateralized by federal or government agencies, and also limit the amount which may be invested in common stocks, based upon the premium-to-surplus ratio of the Company. The Company's fixed maturity portfolio, which is made up of bonds and sinking fund preferred stocks, consists almost entirely of investment grade securities, the average quality of which is rated Aa/AA. The fixed maturity securities at December 31, 1995 were made up entirely of securities classified as available for sale, which are carried on the Company's balance sheet at fair market value. In 1994, the Company's portfolio included both securities expected to be held to maturity and those available for sale. The Company invests in both taxable and tax-exempt securities as part of its strategy to maximize after-tax income. This strategy considers, among other factors, the impact of the alternative minimum tax. Tax-exempt bonds, on a carrying value basis, made up approximately 33.9 percent and 30.7 percent of the total fixed maturity portfolio at December 31, 1995 and 1994, respectively. On a carrying value basis, sinking fund preferred stocks made up approximately 16.5 percent of the total fixed maturity portfolio of the Company for each of the periods ended December 31, 1995 and 1994. The weighted average maturity of the Company's bonds and sinking fund preferred stocks is approximately eleven years. However, as a result of the number of early calls and prepayments, management believes the anticipated weighted average effective maturity of the bonds and sinking fund preferred stocks is approximately six years. The Company also holds investments in mortgage-backed pass-through securities and collateralized mortgage obligations ("CMO") which had a carrying value of $58.3 million at December 31, 1995. The Company has attempted to reduce the prepayment risks associated with mortgage- backed securities by investing a majority of the Company's CMO holdings 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. If principal is prepaid earlier than originally anticipated, investment yields may decrease due to reinvestment of these funds at lower current interest rates and capital gains or losses may be realized since the book value of securities purchased at premiums or discounts may be different than the prepayment amount. As a result of the Company's improved profitability, the Company, as approved by the investment committee, has increased its equity security holdings over the past two years. Equity securities consist solely of common stocks and had a fair market value of $31.1 million and $18.4 million at December 31, 1995 and 1994, respectively. Equity securities accounted for 12.2 percent and 8.4 percent of the total investment portfolio at December 31, 1995 and 1994, respectively. Regulation Numerous aspects of the business and operations of Meridian Mutual and Meridian Security are subject to supervision and regulation in each state in which they transact business. The primary purpose of state supervision and regulation is the protection of policyholders. The extent of such regulation varies among states but generally derives from state statutes which delegate regulatory, supervisory, and administrative authority to state insurance departments. The authority of state insurance departments generally extends to the establishment of solvency standards which must be met and maintained by insurers, the licensing of insurers and agents, the nature of and limitations on investments and premium rates, the provisions which insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders, the approval of policy forms, the payment of dividends, the establishment of premium rates and the settlement of claims. State insurance departments also conduct periodic examinations of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies. The regulatory agencies of each state have statutory authority to enforce their laws and regulations through various administrative orders, civil and criminal enforcement proceedings, and the suspension or revocation of certificates of authority. In extreme cases, including insolvency, impending insolvency and other matters, a regulatory authority may take over the management and operation of an insurer's business and assets. Meridian Mutual and Meridian Security are admitted as insurers in the states of Illinois, Indiana, Iowa, Michigan, Minnesota, Kentucky, Ohio, Tennessee, and Wisconsin. Meridian Mutual is also licensed to transact insurance business in the state of Pennsylvania. Under insolvency or guaranty laws in the states in which Meridian Mutual and Meridian Security operate, insurers doing business in those states can be assessed up to prescribed limits for losses incurred by policyholders of insolvent insurance companies. Additionally, Meridian Mutual and Meridian Security are required to participate in various mandatory pools or underwriting associations. The maximum amounts that can be assessed against an insurer in any one year under the insolvency or guaranty laws of the states named above are limited to a percentage (2 percent in Iowa, Minnesota, Pennsylvania, and Wisconsin, 1.5 percent in Ohio and 1 percent in Illinois, Indiana, Michigan, Kentucky, and Tennessee) of the annual direct premiums written by the company in the state in question with respect to the affected line of business. The Company is subject to statutes governing insurance holding companies. Typically, such statutes require the Company to file information periodically concerning its capital structure, ownership, financial condition, and material transactions between the Company and its insurance subsidiaries not in the ordinary course of business. The Company's insurance subsidiaries are subject to periodic examination by the insurance departments of the states in which they do business, and the payment of dividends by the insurance subsidiaries to the Company is subject to certain limitations. See Note 9 of Notes to Consolidated Financial Statements. Certain transactions between the Company and its insurance subsidiaries including changes in the terms of the pooling agreement and certain loan transactions, if any, may be effected only upon prior approval thereof by the Indiana Insurance Commissioner. Certain transactions deemed to constitute a "change in control" of the Company, including a party's purchase of 10 percent or more of the outstanding common shares, are all subject to approval by the Indiana Insurance Commissioner. Changes in the laws or regulations to which the Company is subject could adversely affect the operations of the Company. Specific regulatory developments which could materially adversely affect the operations of the Company include, but are not limited to, the potential repeal of the McCarran-Ferguson Act (which exempts insurance companies from a variety of federal regulatory requirements) and rate rollback legislation. The Company will continue to monitor current developments closely. Competition The property and casualty insurance industry is highly competitive. Meridian Mutual and Meridian Security competes with other property and casualty insurers both in the recruitment and retention of qualified agents and in the sale of insurance products to consumers. The Company believes the principal competitive factors in its markets to be service to agents and policyholders and price. Success in recruiting and retaining agents is dependent upon the administrative support provided to agents, commission rates, and the ability of the insurer to provide products that meet the needs of the agent and the agent's customers. In selling its insurance products, Meridian Mutual and Meridian Security compete with other insurers writing through independent agents (including insurers represented by the independent agents who represent Meridian), with insurers having their own agency organizations and with direct sellers of insurance products. There are numerous companies competing for business in the geographic areas in which Meridian Mutual and Meridian Security operate. No single company dominates the marketplace, but many of Meridian's competitors have more established national reputations and substantially greater financial resources and market share than Meridian. Employees The Company has no employees and relies upon Meridian Mutual to provide all management and administrative services required by the Company. Meridian Mutual employs approximately 500 people. The Company believes that Meridian Mutual's relationship with its employees is satisfactory. Audit Practices The Board of Directors has an Audit Committee composed of three directors who are not employees of the Company or its affiliates. Usually meeting in conjunction with the Meridian Mutual Audit Committee, the committee monitors the Company's financial reporting and internal control systems and reviews the work of internal audit. The Company retains the firm of Coopers & Lybrand L.L.P. as independent accountants to perform an independent audit of the financial statements of the Company and its affiliates. The audit is conducted in accordance with generally accepted auditing standards. The independent accountants have unlimited access to, and meet regularly with, the Audit Committees. Pending Acquisition 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. On March 22, 1996, the Company and Citizens executed a definitive acquisition agreement. This acquisition is conditioned upon the approval of Citizens' shareholders, Citizens Mutual's policyholders and the insurance departments of Indiana, Minnesota and Ohio. It is expected that the acquisition will be completed by June 30, 1996. ITEM 2: PROPERTIES The headquarters building of the Company and Meridian Mutual is owned by Meridian Mutual and is located near downtown Indianapolis, Indiana. The building is a multi-level structure containing approximately 205,000 square feet of office space. During 1995, construction was completed on a 75,000-square-foot addition to the home office facility. This expansion allowed the Company and Meridian Mutual to enhance and enlarge its operational work areas and create a brighter, more open environment. The expansion also allowed Meridian to consolidate the two Indianapolis satellite offices, which were being leased, into the home office facility. In 1995, Meridian Mutual sold its 27,000-square-foot district service office facility in Louisville, Kentucky. Due to consolidations which led to staff reductions in the Louisville office, the Company and Meridian Mutual now jointly lease office space of approximately 6,500 square feet in Louisville. Meridian also leases a claim service center in Lansing, Michigan and a district service office in Columbus, Ohio. ITEM 3: LEGAL PROCEEDINGS The Company's insurance subsidiaries are parties to litigation arising in the ordinary course of their business. The Company believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information The Company's common stock has traded on the Nasdaq Stock Market under the symbol "MIGI" since completing an initial public offering of 1,700,000 shares in March 1987 at a price of $12 per share. On May 5, 1993, the Company completed a second public offering of 1,725,000 common shares at $12 per share. As of February 22, 1996, approximately 46.5 percent of the common stock was owned by Meridian Mutual and the balance was spread among approximately 264 common shareholders of record, including many brokers holding shares for their individual clients. The number of individual shareholders on the same date was approximately 1,300. The number of Common Shares outstanding on February 22, 1996, totaled 6,779,375. Information relating to the common stock is available through the Nasdaq Stock Market System and the following table sets forth the high and low closing sale prices of the common stock for each quarter of 1995 and 1994. 1995 1994 Quarter Ended High Low High Low March 31 $12.00 $10.00 $12.13 $10.13 June 30 13.50 11.25 11.25 9.50 September 30 14.13 11.25 11.00 10.00 December 31 15.50 13.00 11.00 9.75 Dividend Policy Beginning with the first quarter of 1995, the Company increased its quarterly cash dividend to $0.07 per common share. In 1993 and 1994, the Company paid out quarterly dividends of $0.06 per share. The continued payment of dividends is reviewed quarterly by the Board of Directors in relation to changes in the financial condition and results of operations of the Company. The ability of the Company to pay dividends is dependent upon the receipt of dividends from its insurance company subsidiaries, which are subject to state laws and regulations which restrict their ability to pay dividends. See Note 9 of the Notes to Consolidated Financial Statements. ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA 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. 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 Losses and loss adjustment expenses 99,124 93,971 86,622 75,980 79,308 General operating expenses 14,156 14,527 14,935 12,742 12,451 Amortization expenses 30,820 29,304 27,039 22,695 22,283 Total expenses 144,100 137,802 128,596 111,417 114,042 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 Weighted average shares outstanding 6,770 6,740 6,139 4,945 4,911 Net income per share $ 1.72 $ 1.35 $ 1.53 $ 1.53 $ 0.93 Dividends declared per share $ 0.28 $ 0.24 $ 0.24 $ 0.18 $ 0.00 Underwriting ratios (statutory basis): Loss and loss adjustment expense ratio 69.2% 69.8% 69.4% 70.8% 72.7% Expense ratio 31.0 32.0 32.4 32.3 32.6 Combined ratio 100.2% 101.8% 101.8% 103.1% 105.3% 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 (1) The 1995 and 1994 investments reflect the Company's adoption of SFAS No. 115 (See Note 1 of the Notes to the Consolidated Financial Statements). ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company continues to strive for profitable growth and has made several advances in that area during the past year. Through a reinsurance pooling agreement between Meridian Mutual and Meridian Security, the Company currently receives 74 percent of all the property and casualty business of the combined insurance operations. During the fourth quarter of 1995, Meridian Mutual and Meridian Security gained admittance to the states of Iowa and Minnesota. Meridian Mutual was also granted a license to write property and casualty business in the state of Pennsylvania, with Meridian Security expecting to receive regulatory approval for admission during the first quarter of 1996. Meridian Security charted new territory in 1995 by beginning to write personal and farm lines policies in the states of Kentucky, Ohio, Tennessee, and Wisconsin. On December 29, 1995, Meridian Mutual entered into an indemnity reinsurance agreement with Celina Mutual Insurance Company ("Celina"), covering a book of commercial lines business. Under this agreement, Celina will transfer approximately $6 million of its Pennsylvania commercial lines annual premiums to Meridian Mutual along with access to approximately 80 independent insurance agents located in the state of Pennsylvania. Since this transaction occurred at the end of the year, it had no impact on the Company's 1995 statement of income. Meridian Mutual's underwriting results related to this business will be pooled with Meridian Security's. 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. During 1996, the Company expects to install an automated personal lines underwriting system that will enable policies meeting certain criteria to be issued without manual review, thus reducing costs without increasing risk. If an application for certain types of policies receives a passing grade electronically, the policy will be automatically issued. If the application is "kicked out" electronically for any number of reasons, it is then passed on to an underwriter for further review. We believe this is how automation can be used to assure consistent underwriting compliance and cost- effectively leverage the experience of senior underwriters. The Company has made substantial progress in automated agency interface. Meridian began uploading private passenger automobile and homeowners policy information from 121 agencies during 1995. Information is entered on the agencies' computer systems and then transmitted directly to Meridian's computer system. Uploading and downloading reduce the duplication of efforts by both agency and company personnel for processing policies. By the end of 1995, over 300 agencies were receiving policy information downloaded directly from Meridian's mainframe computer. Plans for 1996 include adding approximately 200 more upload agencies and 75 more download agencies. Results of Operations 1995 Compared to 1994 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. Net premiums earned for 1995 reflected 6.6 percent growth to $143.9 million from 1994's $135.0 million. This growth was attributed to nearly all major lines of business. Meridian's personal lines production for 1995 experienced growth of 8.7 percent. This was primarily attributed to the homeowners and private passenger automobile lines of business, which reflected earned premium growth of 9.7 percent and 7.6 percent, respectively. Farmowners achieved earnings growth of 10.2 percent, while Meridian's commercial lines of business grew 3.1 percent over the 1994 level. The increase in commercial lines was attributed primarily to 8.9 percent growth in the commercial automobile line and 6.7 percent increase in voluntary workers' compensation business. Depressing the commercial lines growth was a reduction of nearly $600,000 in assumed earned premiums from the National Workers' Compensation Pool ("NWCP"). This partially resulted from actions taken by Meridian to control the type of workers' compensation business it would accept in states where the NWCP was unprofitable. The commercial lines growth was also hampered by soft market conditions, primarily in the state of Michigan where premium volume declined from the 1994 level. Meridian has addressed its products, rates and personnel in the state of Michigan and will continue to monitor these actions for improved results. Total policy count, on a pooled basis, for 1995 increased by approximately 7,000 policies, or 3.0 percent, over the 1994 total. Net investment income for 1995 increased 4.1 percent to $14.6 million from $14.0 million in 1994 resulting primarily from a larger invested asset base. A reduction in the Company's pre-tax net investment yield to 6.1 percent in 1995 from 6.4 percent in 1994 primarily was a result of a greater proportion of common stocks and tax-exempt bonds in the investment portfolio and increased investment expenses. During 1995 the Company realized gains on the disposition of invested assets of $1.5 million compared to $0.3 million of realized gains for the prior year. Such gains were realized primarily on the sale of common stocks and have an insignificant effect on future investment yields. 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. General operating expenses incurred during 1995 of $14.2 million decreased 2.6 percent from $14.5 million reported for 1994. Lower state income taxes, reduced assessments from the NWCP and certain economies of scale were the primary contributors to the expense reduction. The reduced expenses, combined with a slight reduction in the Company's average commission rate, produced a statutory expense ratio of 31.0 percent for the current period compared to 32.0 percent for the prior year. Amortization expenses of $30.8 million for the 1995 period increased 5.2 percent from $29.3 million, corresponding with the Company's growth in premium volume. The Company's effective tax rate in 1995 increased to 26.1 percent compared to the prior year's 20.9 percent. This increase was attributed to an overall growth in taxable income causing the Company to be subject to less relative impact of tax-exempt income and the dividends received deduction. 1994 Compared to 1993 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 net premiums earned in 1994 increased 7.2 percent to $135.0 million from the $125.9 million reported in 1993. Commercial lines growth of $5.1 million came primarily from the workers' compensation and commercial package products. Personal lines premiums grew $3.5 million in 1994, with the majority of growth seen in the personal automobile and homeowners lines of business. Farmowners products reported growth of $0.5 million. Total 1994 year-end policy count for all Meridian lines increased 3.1 percent over 1993. Net investment income of $14.0 million represents an improvement of 3.1 percent over the 1993 total of $13.6 million. The Company's effective investment yield for 1994 declined to 6.4 percent from 7.0 percent in 1993. A greater emphasis on the purchase of tax-exempt municipal bonds and equity securities produced a lower average portfolio yield. Realized gains of $0.3 million declined from the $0.9 million reported at year-end 1993. The Company's statutory loss and loss adjustment expense ratio deteriorated slightly from the 69.3 percent reported in 1993 to 69.8 percent for 1994. The year-end loss ratio for commercial auto was 80.0 percent compared to 65.4 percent reported in 1993. Increase in liability claim frequency accounts for the higher ratio in this line. However, improvement was seen in the voluntary workers' compensation results from the 69.6 percent reported in 1993 to 50.7 percent reported at year-end 1994, due to both an increase in earned premiums and a decline in the average loss payment. Meridian continues to monitor the legislative environment for workers' compensation in our operating states to optimize underwriting results. General operating expenses totaled $14.5 million, a slight decrease from the $14.9 million reported in 1993. Reduced commission expenses were partially offset by an increase in state income taxes. Higher deferred acquisition costs relating to increased premium volume caused the Company's amortization expense to grow by 8.4 percent to $29.3 million from the $27.0 million reported in 1993. The Company's effective tax rate for 1994 was 20.9 percent compared to 23.7 percent for 1993. A larger proportion of tax exempt interest and the dividends received deduction contributed to the effective rate reduction. Liquidity and Capital Resources 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. Approximately 86 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 26 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 has no exposure to high risk derivatives in its portfolio. 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. On February 8, 1996, the Company announced that it has entered into a letter of intent to acquire Citizens Security Group, Inc. of Red Wing, Minnesota for approximately $29 million in cash. The transaction is subject to the execution of a definitive acquisition agreement and approvals by state regulatory authorities, the companies' boards of directors and Citizens' common and preferred shareholders. It is anticipated that the acquisition will be completed by mid-1996. Approximately 60 percent of the cash will be generated from the sale of a portion of Meridian Security's investment portfolio with the balance likely to be financed with bank debt. Such acquisition financing has not yet been finalized. This acquisition is expected to generate approximately $35 to $40 million of net premium writings in seven states, four of which the Company does not currently operate in. Beginning in 1994, state insurance regulators required companies to calculate Risk Based Capital ("RBC"). RBC is the capital required to cover the varying degrees of risk inherent in a company's assets, loss reserves, underwriting, and reinsurance. The "company action level" RBC is the minimum amount of capital required in order to avoid regulatory action. Meridian Security's adjusted capital of $89.4 million in 1995 is over four times the required minimum. Impact of Inflation Inflation can have a significant impact on property and casualty insurers because premium rates are established before the amount of losses and loss adjustment expenses is known. The Company attempts to anticipate increases from inflation in establishing rates, subject to limitations imposed for competitive pricing. 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 may partially offset potentially higher claims and expenses. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Report of Independent Accountants 24 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 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Meridian Insurance Group, Inc. We have audited the accompanying consolidated balance sheet of Meridian Insurance Group, Inc., and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Meridian Insurance Group, Inc., and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1, the Company changed its method of accounting for certain investments in debt and equity securities in 1994, and its method of accounting for income taxes in 1993. Coopers & Lybrand L.L.P. Indianapolis, Indiana February 16, 1996 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME for the Years Ended December 31, 1995, 1994 and 1993 December 31, 1995 1994 1993 Premiums earned $143,865,821 $135,001,881 $125,902,355 Net investment income 14,563,820 13,995,984 13,568,919 Net realized investment gains 1,538,281 285,701 890,052 Other income (expense) (146,345) 54,623 (114,865) Total revenues 159,821,577 149,338,189 140,246,461 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 Total expenses 144,099,538 137,802,126 128,596,496 Income before taxes and change in accounting method 15,722,039 11,536,063 11,649,965 Income taxes (benefit) Current 3,554,000 2,574,000 3,368,000 Deferred 551,000 (159,000) (603,000) Total income taxes 4,105,000 2,415,000 2,765,000 Income before change in accounting method 11,617,039 9,121,063 8,884,965 Cumulative effect of change in accounting method: Accounting for income taxes -- -- 525,804 Net income $ 11,617,039 $ 9,121,063 $ 9,410,769 Weighted average shares outstanding 6,770,081 6,739,712 6,138,706 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 The accompanying notes are an integral part of the consolidated financial statements. 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 Cash 935,098 603,566 Premium receivable, net of allowance for bad debts 2,642,425 2,491,976 Accrued investment income 2,942,194 3,063,515 Deferred policy acquisition costs 13,354,600 11,977,429 Goodwill 2,152,339 2,280,788 Reinsurance receivables 32,469,285 32,703,457 Prepaid reinsurance premiums 2,617,138 2,619,792 Due from Meridian Mutual Insurance Company 9,358,803 6,810,483 Other assets 1,422,444 9,394,448 Total assets $322,588,216 $291,406,031 LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $123,577,240 $123,754,650 Unearned premiums 64,558,695 59,663,286 Other post-employment benefits 1,298,378 1,101,155 Reinsurance payables 6,863,626 5,890,675 Other liabilities 8,047,610 6,743,826 Total liabilities 204,345,549 197,153,592 Shareholders' equity: Common shares, no par value, Authorized-20,000,000 Issued-6,803,185 and 6,769,343, Outstanding- 6,776,805 and 6,742,763 at December 31, 1995 and 1994, respectively 44,076,685 43,930,722 Contributed capital 15,058,327 15,058,327 Unrealized appreciation (depreciation) of investments, net of deferred income taxes 6,842,245 (7,281,724) Retained earnings 52,265,410 42,545,114 Total shareholders' equity 118,242,667 94,252,439 Total liabilities and shareholders' equity $322,588,216 $291,406,031 The accompanying notes are an integral part of the consolidated financial statements.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY for the Years Ended December 31, 1995, 1994 and 1993 Unrealized Unearned Appreciation Restricted Common Contributed (Depreciation) Retained Common Shares Capital of Investments Earnings Shares Balance at January 1, 1993 $24,391,097 $15,058,327 $ 2,722 $27,147,210 $ -- Net income -- -- -- 9,410,769 -- Sale of 1,725,000 shares of common stock 19,458,000 -- -- -- -- Stock issue costs (494,040) -- -- -- -- Unrealized appreciation of equity securities, net of deferred income taxes -- -- 488,305 -- -- Dividends ($0.24 per share) -- -- -- (1,516,117) -- Issuance of 49,667 restricted common shares 526,504 -- -- -- (526,504) Vested restricted common shares 33,758 -- -- -- 432,004 Exercise of stock options for 6,000 common shares 34,500 -- -- -- -- Forfeiture of 9,000 restricted common shares (94,500) -- -- -- 94,500 Balance at December 31, 1993 43,855,319 15,058,327 491,027 35,041,862 0 Cumulative effect of accounting change for certain investments, net of deferred income taxes -- -- 4,417,201 -- -- Net income -- -- -- 9,121,063 -- Unrealized depreciation of investment securities, net of deferred income taxes -- -- (12,189,952) -- -- Dividends ($0.24 per share) -- -- -- (1,617,811) -- Vested restricted common shares 35,584 -- -- -- -- Exercise of stock options for 6,925 common shares 39,819 -- -- -- -- Balance at December 31, 1994 43,930,722 15,058,327 (7,281,724) 42,545,114 0 Net income -- -- -- 11,617,039 -- Unrealized appreciation of investment securities, net of deferred income taxes -- -- 14,123,969 -- -- Dividends ($0.28 per share) -- -- -- (1,896,743) -- Exercise of stock options for 40,521 common shares 222,996 -- -- -- -- Repurchase and retirement of 6,479 common shares (77,033) -- -- -- -- Balance at December 31, 1995 $44,076,685 $15,058,327 $ 6,842,245 $52,265,410 $ 0 The accompanying notes are an integral part of the consolidated financial statements.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the Years Ended December 31, 1995, 1994 and 1993 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: Federal income tax paid $ 3,247,630 $ 2,950,000 $ 3,323,445 The accompanying notes are an integral part of the consolidated financial statements. MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.Summary of Significant Accounting Policies 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 46.5 percent of the outstanding common shares of the Company. The Company is a regional holding company principally engaged in the business of underwriting property and casualty insurance through its wholly-owned subsidiary, Meridian Security Insurance Company ("Meridian Security"), which owns 100 percent of Vernon Fire & Casualty Insurance Company ("Vernon"). The Company also has two non-insurance subsidiaries, Meridian Service Corporation, a service support company, and MarketMasters Agency, Inc., an insurance agency. During the periods presented, the results of operations of the Company's non-insurance subsidiaries were not significant. The Company participates in the underwriting gain or loss on business written by Meridian Mutual pursuant to a reinsurance pooling agreement between Meridian Mutual and Meridian Security which covers all of the property and casualty business of the two companies. (See Note 4.) Meridian Mutual writes a broad line of property and casualty insurance, including personal and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Business is written through approximately 925 independent insurance agencies in the states of Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee, and Wisconsin. During the fourth quarter of 1995, Meridian Mutual was granted licenses to write insurance in the states of Iowa, Minnesota and Pennsylvania; however, no direct premiums were written in these three states during 1995. Meridian Security is licensed in all states in which Meridian Mutual is licensed with the exception of Pennsylvania, for which an application is currently pending. During 1995, Meridian Security wrote personal and farm lines policies in Indiana, Kentucky, Ohio, Tennessee, and Wisconsin through approximately 400 independent insurance agencies, many of which are cross-licensed with Meridian Mutual. 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of Meridian Insurance Group, Inc., and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. Investments 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. Realized gains or losses on disposition of investments are determined on a specific identification basis. Unrealized gains and losses resulting from changes in the valuation of both equity securities and fixed maturities available for sale are recorded directly in shareholders' equity, net of applicable deferred income taxes. The Company regularly evaluates its investments based on current economic conditions, past credit loss experience and other circumstances of the Company. A decline in a security's net market value that is not a temporary fluctuation is recognized as a realized loss, and the cost basis of that security is reduced. Premium Revenue 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. Deferred Policy Acquisition Costs Policy acquisition costs, principally commissions, premium taxes, and variable underwriting and policy issue expenses, have been deferred. Such costs are amortized as premium revenue is earned. The method used in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, and also considers the effects of anticipated investment income, losses and loss adjustment expenses, and certain other costs anticipated to be incurred as the premium is earned. 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. Losses and Loss Adjustment Expenses Reserves for unpaid losses and loss adjustment expenses are based on both estimates of the ultimate costs of individual claims and on other non-discounted estimates, such as claims incurred but not reported and salvage and subrogation. The methods of making such estimates are continually reviewed and updated, and any reserve adjustments are reflected in current operating results. Accounting For Stock-Based Compensation In November 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" to become effective for financial statements for fiscal years beginning after December 15, 1995. 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 intends to continue to value its stock option plans under the existing accounting rules contained in Accounting Principles Board Opinion No. 25. The Company intends to disclose the pro- forma impact of SFAS No. 123 on net income and earnings per share, the effect of which has not yet been determined. See Note 10 for a detailed description of the Company's incentive stock plans. Accounting For Certain Investments in Debt and Equity Securities Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under this statement the Company classified all investment securities into three categories: Held-to-maturity securities (those securities which the Company has the ability and positive intent to hold to maturity) are carried at amortized cost. The Company may only dispose of such securities under certain unforeseen circumstances, such as issuer credit deterioration or regulatory requirements. 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. Accounting for Income Taxes In 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes", which requires that deferred income taxes be calculated using the liability method. Companies establish deferred tax liabilities or assets estimating the future tax effects of temporary differences between the tax basis of an asset or liability and the basis recorded in financial statements. Changes in future tax rates thus cause immediate adjustments to deferred taxes. The cumulative effect of adopting this statement resulted in a tax benefit for the Company of $525,804, representing an increase in the net deferred tax asset as of January 1, 1993. The cumulative effect of this reporting change increased the Company's income per share by $0.08 for the year ended December 31, 1993. Net Income per Share Net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. 2.Investments Investment income is summarized as follows: 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 Realized and unrealized gains on investments are summarized as follows: 1995 1994 1993 Realized gains (losses): Fixed maturities $ 87,370 $ (118,358) $ 896,166 Equity securities 1,458,589 404,059 (6,114) Other invested assets (7,678) -- -- Total realized investment gains $ 1,538,281 $ 285,701 $ 890,052 Net change in unrealized appreciation (depreciation): Fixed maturities, available for sale $16,373,654 $(16,819,514) $ -- Equity securities 5,104,315 (1,696,054) 740,305 Cumulative effect of accounting change for certain investments -- 6,743,818 -- Deferred income tax from cumulative effect of accounting change for certain investments -- (2,326,617) -- Deferred income tax benefit (expense) (7,354,000) 6,325,616 (252,000) Net change in unrealized appreciation (depreciation) $14,123,969 $ (7,772,751) $ 488,305 Net change in unrealized appre- ciation (depreciation) of fixed maturities, held to maturity $ (367,533) $ (713,522) $ 5,187,662 The fixed maturity portfolio at December 31, 1995 consisted entirely of securities classified as available for sale. At December 31, 1994, the portfolio was made up of both securities that were expected to be held to maturity and those classified as available for sale. The amortized cost and estimated market values of investments in fixed maturity securities at December 31, 1995 and 1994, are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value December 31, 1995 Available for sale: Government and agency domestic bonds $ 8,127,012 $ 600,241 $ 3,790 $ 8,723,463 Municipal bonds 72,356,941 2,649,867 371,703 74,635,105 Corporate bonds 40,484,745 1,633,386 5,580 42,112,551 Mortgage-backed securities 57,037,770 1,425,970 158,915 58,304,825 Sinking fund preferred stocks 35,809,142 803,950 352,264 36,260,828 Total fixed maturity securities $213,815,610 $ 7,113,414 $ 892,252 $220,036,772 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 The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrower's may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value Available for sale: Due in one year or less $ 818,008 $ 692,263 Due after one year through five years 31,104,759 31,960,828 Due after five years through ten years 46,709,065 49,029,337 Due after ten years through fifteen years 53,417,983 55,177,084 Due after fifteen years 24,728,025 24,872,435 Subtotal 156,777,840 161,731,947 Mortgage-backed securities 57,037,770 58,304,825 Total fixed maturity securities $213,815,610 $220,036,772 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. Unrealized appreciation resulting from changes in the valuation of equity securities at December 31, 1995 totaled $4,158,392, representing $4,907,598 of gains on certain securities and $749,206 of losses on other securities. 3.Distribution of Proceeds From Public Offering On May 5, 1993, Meridian Insurance Group, Inc., completed a second stock offering of 1,725,000 common shares at $12 per share. Total proceeds received from this offering, net of commissions, were $19,458,000; related underwriting expenses totaled $494,040. This stock offering allowed the Company to contribute $18,000,000 to its principal subsidiary, Meridian Security Insurance Company, thus increasing Meridian Security's surplus and enabling it to assume a greater volume of business under the reinsurance pooling agreement. (See Note 4.) 4.Related Party Transactions Meridian Security and Meridian Mutual are parties to a reinsurance pooling agreement ("pooling agreement") structured such that Meridian Security cedes all of its insurance business to Meridian Mutual and in turn receives back a percentage participation in all of the business written by both companies. All losses and loss adjustment expenses as well as other underwriting expenses are shared by Meridian Mutual and Meridian Security based on their percentage participation defined in the pooling agreement. Other expenses are allocated on the basis of specific identification or estimated costs. Amounts either due to or due from Meridian 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 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: 1993 Premiums earned $130,405,000 Losses and loss adjustment expenses 90,428,000 General operating expenses 15,420,000 Amortization of deferred acquisition costs 27,385,000 Underwriting gain (loss) $ (2,828,000) For the year ended December 31, 1995, approximately 90 percent of the Company's total premium volume was derived from its participation in the pooling agreement. In 1994 and 1993, approximately 84 percent and 87 percent, respectively, was derived from the pooling arrangement. Meridian Security has no employees and is dependent on the business and operations of Meridian Mutual. Meridian Mutual has 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 in 1995 were approximately $100,000. The Company also participates in the multi-employer plan for other post-retirement benefits offered by Meridian Mutual to employees, including medical benefits for early retirees (eligible upon attainment of age 55 and five years of service up to age 65) and group term life insurance that phases out over a five year period from the retirement date. Related costs allocated to the Company were approximately $102,000, $84,000 and $100,000 for 1995, 1994 and 1993, respectively. 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. The Company's non-insurance subsidiaries are provided office space and various services by Meridian Mutual and Meridian Security. Expenses are allocated to such subsidiaries on the basis of specifically identified or estimated costs. 5.Liability for Losses and Loss Adjustment Expenses Activity in the liability for losses and loss adjustment expenses is summarized as follows: 1995 1994 1993 Balance at beginning of period $123,754,650 $119,763,925 $ 95,105,928 Less reinsurance recoverables 31,815,440 30,133,606 23,099,968 Net balance at beginning of period 91,939,210 89,630,319 72,005,960 Incurred related to: Current year 104,584,909 99,444,243 92,995,660 Prior years (5,461,060) (5,473,714) (6,373,769) Total incurred 99,123,849 93,970,529 86,621,891 Paid related to: Current year 61,791,602 55,216,000 48,107,000 Prior years 36,898,679 36,445,638 20,890,532 Total paid 98,690,281 91,661,638 68,997,532 Net balance at end of period 92,372,778 91,939,210 89,630,319 Plus reinsurance recoverables 31,204,462 31,815,440 30,133,606 Balance at end of period $123,577,240 $123,754,650 $119,763,925 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. Approximately 99 percent of the Company's ceded reserves for losses and loss adjustment expenses are with Michigan Catastrophic Claims Association, Employers Reinsurance Corporation and General Reinsurance Corporation. Reinsurance recoveries recognized for the years ended December 31, 1995, 1994 and 1993 were $1,547,000, $2,758,000 and $4,685,544, respectively. The effect of reinsurance on premiums written and earned for the years ended December 31, 1995, 1994 and 1993 are as follows: 1995 1994 1993 Premiums written: Direct $152,596,128 $144,084,372 $144,272,466 Assumed 7,269,782 6,132,096 6,005,502 Ceded (11,102,025) (14,026,543) (14,121,576) Net $148,763,885 $136,189,925 $136,156,392 Premiums earned: Direct $149,748,331 $141,275,894 $134,021,523 Assumed 5,222,170 5,744,277 5,690,972 Ceded (11,104,680) (12,018,290) (13,810,140) Net $143,865,821 $135,001,881 $125,902,355 On December 29, 1995, Meridian Mutual entered into an indemnity reinsurance agreement with Celina Mutual Insurance Company regarding commercial line business in the state of Pennsylvania. This transaction was recorded as assumed written premium, which will be earned over the next twelve months. Renewals of these policies will be recorded as direct business of Meridian Mutual. Through the pooling agreement, Meridian Security assumed premiums written of approximately $2,100,000 and ceding commissions of approximately $409,000, all of which have been deferred until the premiums are earned. 7.Deferred Policy Acquisition Costs Changes in deferred policy acquisition costs are summarized as follows: 1995 1994 1993 Deferred, beginning of period $11,977,429 $11,972,069 $9,612,192 Additions: Commissions 25,797,651 23,444,057 23,403,068 Ceding commission 409,350 621,494 2,491,893 Premium taxes 1,625,370 2,108,746 1,586,490 Other 4,236,409 3,007,189 1,789,111 32,068,780 29,181,486 29,270,562 Amortization expense 30,691,609 29,176,126 26,910,685 Deferred, end of period $13,354,600 $11,977,429 $11,972,069 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: 1995 1994 1993 Tax at statutory rate $ 5,403,000 $ 3,813,000 $ 3,849,000 Tax-exempt interest (1,005,000) (897,000) (827,000) Dividends received deduction (598,000) (593,000) (581,000) Salvage and subrogation fresh start (7,000) (20,000) (130,000) Nondeductible expenses 109,000 74,000 75,000 Other 203,000 38,000 379,000 Total income taxes $ 4,105,000 $ 2,415,000 $ 2,765,000 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: 1995 1994 1993 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: 1995 1994 1993 Deferred tax assets: Unearned premium reserves $ 4,336,000 $ 3,936,000 $ 3,854,000 Loss and loss expense reserves and salvage and subrogation 4,980,000 5,346,000 5,391,000 Unrealized depreciation on investment securities -- 3,747,000 -- Other post-employment benefits 454,000 380,000 345,000 Other -- 10,000 24,000 Total deferred tax assets 9,770,000 13,419,000 9,614,000 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 Company has paid income taxes during the last three preceding years that exceed the recorded deferred income tax asset generated by operations. 9.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 (statutory basis). 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 $2,400,000 in 1995, $2,200,00 in 1994 and $500,000 in 1993. As of December 31, 1995, approximately $11,0000,000 was available for distribution to the Company without prior approval of the insurance regulatory authorities. 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: 1995 1994 1993 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. In 1994 and early 1995, options with respect to 268,280 common shares were granted to 13 key employees of Meridian Mutual. These options have a term of ten years with one-third of the shares granted to each employee becoming exercisable annually beginning on the first anniversary of the date of grant, at $11.875 per share. As of December 31, 1995, none of these options had been exercised and 19,099 of these options had been forfeited. 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. In 1995, options with respect to 26,000 common shares were granted to 26 key management/professional personnel of Meridian Mutual. These options have a term of 10 years. One-half of the options granted to each employee will become exercisable on November 30, 1996, and one-half on November 30, 1997, at $15.28 per share subject to the individual's employment on the vesting date. As of December 31, 1995, none of the options had been exercised and 2,000 of the options had been forfeited. 11.Unaudited Selected Quarterly Financial Data (Amounts in thousands except per-share data) 1995 First Second Third Fourth Revenues $ 38,667 $ 39,633 $ 41,400 $ 40,122 Net income $ 2,751 $ 1,261 $ 3,404 $ 4,201 Net income per share $ 0.41 $ 0.19 $ 0.50 $ 0.62 1994 First Second Third Fourth Revenues $ 35,734 $ 37,089 $ 38,542 $ 37,973 Net income $ 360 $ 1,718 $ 2,632 $ 4,411 Net income per share $ 0.05 $ 0.26 $ 0.39 $ 0.65 12.Subsequent Events On February 8, 1996, the Company and Citizens Security Group, Inc. ("Citizens") jointly announced that they have entered into a letter of intent providing for Meridian Security's acquisition of Citizens for approximately $29 million in cash. The transaction is subject to the execution of a definitive acquisition agreement which is expected by mid-March 1996. The acquisition is conditioned upon approval by the companies' Boards of Directors, Citizens' common and preferred shareholders and insurance regulators in Indiana, Minnesota and Ohio, where the insurance companies are domiciled. It is anticipated that the acquisition will be completed by mid- year 1996. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the information contained under the captions "Election of Directors" and "Executive Compensation" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held May 1, 1996. ITEM 11: EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the information contained under the caption "Executive Compensation" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held on May 1, 1996. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the information contained under the caption "Beneficial Ownership of Common Shares" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held on May 1, 1996. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the information contained under the caption "Certain Relationships and Transactions" in the Company's definitive proxy statement to be sent to shareholders in connection with the annual meeting of shareholders to be held on May 1, 1996. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report. (1) Financial Statements: Report of Independent Accountants Financial Statements: Consolidated Statement of Income for the years ended December 31, 1995, 1994 and 1993 Consolidated Balance Sheet as of December 31, 1995 and 1994 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Report of Independent Accountants on Financial Statement Schedules Financial Statement Schedules: Schedule I -- Summary of Investments Other Than Investments in Related Parties Schedule II -- Condensed Financial Information of Registrant Schedule IV -- Reinsurance Schedule VI -- Supplemental Information Concerning Property-Casualty Insurance Operations Schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto or because such schedules are not required or applicable. (3) Exhibits: See Index to Exhibits (b) Reports on Form 8-K No reports on Form 8-K were filed during the year ended December 31, 1995. 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. By: /s/ Steven R. Hazelbaker Steven R. Hazelbaker Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 20, 1996, on behalf of the registrant in the capacities indicated: /s/ Ramon L. Humke /s/ John T. Hackett Ramon L. Humke John T. Hackett Chairman of the Board Director /s/ Norma J. Oman /s/ David M. Kirr Norma J. Oman David M. Kirr President, Chief Executive Officer Director and Director /s/ Brent Hartman /s/ Sarah W. Rowland Brent Hartman Sarah W. Rowland Senior Vice President Director /s/ Harold C. McCarthy /s/ Van P. Smith Harold C. McCarthy Van P. Smith Director Director /s/ Joseph D. Barnette, Jr. /s/ Thomas H. Sams Joseph D. Barnette, Jr. Thomas H. Sams Director Director MERIDIAN INSURANCE GROUP, INC. FORM 10-K for the fiscal year ended December 31, 1995 Index to Exhibits Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit (3) 3.01 Restated Articles of Incorporation of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 3.01 to the registrant's Form S-1 Registration Statement No. 33-11413.) 3.02 Bylaws of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 3.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1987; Commission File No. 0-11413.) (4) 4.01 Text of Certificate for Common Shares of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 4.01 to the registrant's Form S-1 Registration Statement No. 33-11413.) (9) No exhibit. (10) 10.01 Form of Meridian Mutual Insurance Company Agency Agreement. (Incorporated by reference to Exhibit 10.04 to the registrant's Form S-1 Registration Statement No. 33-11413.) 10.02 Form of Meridian Security Insurance Company Agency Agreement. (Incorporated by reference to Exhibit 10.05 to the registrant's Form S-1 Registration Statement No. 33-11413.) 10.03 Form of Supplemental Pension Agreement between Meridian Mutual Insurance Company and Harold C. McCarthy. (Incorporated by reference to Exhibit 10.06 to the registrant's Form S-1 Registration Statement No. 33-11413.) ** 10.04 Meridian Insurance Group, Inc., Incentive Stock Plan. (Incorporated by reference to Exhibit 10.07 to Amendment No. 1 to the registrant's Form S-1 Registration Statement No. 33-11413.) ** 10.05 The Meridian Mutual Insurance Company Non-employee Director's Pension Plan. (Incorporated by reference to Exhibit 10.11 to the registrant's Form 10-K for the fiscal year ended December 31, 1988; Commission File No. 0-11413.) ** 10.06 Form of 1991 Non-qualified Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 19.03 to the registrant's Form 10-K for the fiscal year ended December 31, 1990; Commission File No. 0-11413.) ** 10.07 Stock Option Agreement between Meridian Insurance Group, Inc., and Norma J. (Hicks) Oman date December 17, 1990. (Incorporated by reference to Exhibit 19.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1991; Commission File No. 0-11413.) ** 10.08 Meridian Mutual Insurance Company Sharing Success Plan effective January 1, 1992. (Incorporated by reference to Exhibit 19.03 to the registrant's Form 10-K for the fiscal year ended December 31, 1991; Commission File No. 0-11413.) ** 10.09 Form of Addendum to Supplemental Pension Agreement between Meridian Mutual Insurance Company and Harold C. McCarthy. (Incorporated by reference to Exhibit 19.07 to the registrant's Form 10-K for the fiscal year ended December 31, 1991; Commission File No. 0-11413.) ** 10.10 Form of Change in Control Agreement between Meridian Mutual Insurance Company and Norma J. Oman, William E. Denny, J. Mark McKinzie, Brent Hartman, and Steven R. Hazelbaker. (Incorporated by reference to Exhibit 19.08 to the registrant's Form 10-K for the fiscal year ended December 31, 1991; Commission File No. 0-11413.) ** 10.11 Funded Excess Catastrophe Reinsurance Contract issued to Meridian Mutual Insurance Group effective January 1, 1992. (Incorporated by reference to Exhibit 10.25 to the registrant's Form S-2 Registration Statement, File No. 33-58406.) 10.12 Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire & Casualty Insurance Company effective January 1, 1992. (Incorporated by reference to Exhibit 10.26 to the registrant's Form S-2 Registration Statement, File No. 33-58406.) 10.13 Multiple Layer Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire & Casualty Insurance Company effective January 1, 1991. (Incorporated by reference to Exhibit 10.28 to the registrant's Form S-2 Registration Statement, File No. 33-58406.) Amendments No. 1 and No. 2 to Multiple Layer Reinsurance Agreement. (Incorporated by reference to Exhibit 19.12 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) 10.14 Form of 1991 Non-qualified Stock Option Agreement Amendment effective February 13, 1992. (Incorporated by reference to Exhibit 19.01 to the registrant's Form 10-K for the fiscal year ended December 31, 1992; Commission File No. 0-11413.) ** 10.15 Form of Vernon Fire & Casualty Insurance Company Agency Contract. (Incorporated by reference to Exhibit 19.04 to the registrant's Form 10-K for the fiscal year ended December 31, 1992; Commission File No. 0-11413.) 10.16 Form of Vernon Fire & Casualty Insurance Company Agency Profit Sharing Agreement. (Incorporated by reference to Exhibit 19.05 to the registrant's Form 10-K for the fiscal year ended December 31, 1992; Commission File No. 0-11413.) 10.17 Meridian Insurance Statement of Policy on Inter-Company Expense Allocation. (Incorporated by reference to Exhibit 19.06 to the registrant's Form 10-K for the fiscal year ended December 31, 1992; Commission File No. 0-11413.) 10.18 Reinsurance Pooling Agreement between Meridian Mutual Insurance Company and Meridian Security Insurance Company amended and restated as of June 23, 1993. (Incorporated by reference to Exhibit 19.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1992; Commission File No. 0-11413.) 10.19 Form of Meridian Security Insurance Company Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 19.03 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) 10.20 Form of Meridian Insurance Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 19.04 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) 10.21 Meridian Insurance Group, Inc., 1994 Outside Director Stock Option Plan. (Incorporated by reference to Exhibit 19.05 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) ** 10.22 Written Description of 1994 Meridian Mutual Insurance Company Employee Incentive Plan. (Incorporated by reference to Exhibit 19.08 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) ** 10.23 Commercial and Personal Umbrella Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company and Amendments No. 1 through 6 thereto. (Incorporated by reference to Exhibit 19.09 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) 10.24 Personal Excess Liability Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company and Amendments No. 1 through 6 thereto. (Incorporated by reference to Exhibit 19.10 to the registrant's Form 10-K for the fiscal year ended December 31, 1993; Commission File No. 0-11413.) 10.25 Written Description of 1995 Meridian Mutual Insurance Company Employee Incentive Plan. (Incorporated by reference to Exhibit 19.01 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) ** 10.26 Form of Supplemental Retirement Income Plan for Employees of Meridian Mutual Insurance Company. (Incorporated by reference to Exhibit 19.02 of the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) ** 10.27 Form of 1994 Incentive Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Incentive Stock Plan. (Incorporated by reference to Exhibit 19.03 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) ** 10.28 Form of 1994 Non-qualified Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Incentive Stock Plan. (Incorporated by reference to Exhibit 19.04 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) ** 10.29 Amendment No. 3 to the Multiple Layer Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire & Casualty Insurance Company effective January 1, 1991. (Incorporated by reference to Exhibit 19.05 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.30 Amendment No. 7 to Commercial and Personal Umbrella Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company. (Incorporated by reference to Exhibit 19.06 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.31 Excess Catastrophe Reinsurance Contract effective January 1, 1995, issued to Meridian Mutual Group by the Subscribing Reinsurers identified therein. (Incorporated by reference to Exhibit 19.07 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.32 Underlying Aggregate Excess Catastrophe Reinsurance Contract effective January 1, 1995, issued to Meridian Mutual Group by the Subscribing Reinsurers identified therein. (Incorporated by reference to Exhibit 19.08 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.33 Amendment No. 1 to Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire & Casualty Insurance Company effective January 1, 1992. (Incorporated by reference to Exhibit 19.09 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.34 Form of Meridian Insurance Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 19.11 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.35 Form of Meridian Insurance Agency Agreement. (Incorporated by reference to Exhibit 19.12 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.36 Agreement between Meridian Mutual Insurance Company and William E. Denny. (Incorporated by reference to Exhibit 19.13 to the registrant's Form 10-K for the fiscal year ended December 31, 1994; Commission File No. 0-11413.) 10.37 Written Description of 1996 Meridian Mutual Insurance Company Employee Incentive Plan ** *Page 57 10.38 Form of 1995 Non-qualified Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Employee Incentive Stock Plan ** *Page 58 10.39 Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan ** *Page 62 10.40 Schedule of reinsurers and their participation percentages under the Excess Catastrophe Reinsurance Contract issued to Meridian Mutual Group effective January 1, 1996 *Page 79 10.41 Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Meridian Mutual Group by the Subscribing Reinsurers identified therein*Page 83 10.42 Underlying Aggregate Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Meridian Mutual Group by the Subscribing Reinsurers identified therein *Page 141 10.43 Reinsurance Confirmation Letter dated January 2, 1996, regarding catastrophe reinsurance contracts *Page 163 10.44 Property Excess of Loss Reinsurance Binding Agreement between Meridian Mutual Group and NAC Reinsurance Corporation effective June 15, 1995 *Page 164 (11) No exhibit. (12) No exhibit. (13) No exhibit. (16) No exhibit. (18) No exhibit. (21) 21.01 Revised list of Subsidiaries of Meridian Insurance Group, Inc. (Incorporated by reference to Exhibit 22.01 to the registrant's Form 10-K for the fiscal year ended December 31, 1992; Commission File No. 0-11413.) (22) No exhibit. (23) 23.01 Consent of Independent Accountants dated March 26, 1996 *Page 182 (24) No exhibit. (27) 27.01 Financial data schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1995. *Page 183 (28) 28.01 Combined Statutory Schedule P Loss and Loss Adjustment Expense Reserves for the Consolidated Insurance Subsidiaries of Meridian Insurance Group, Inc., as of December 31, 1995 *Page 185 * Exhibits filed as a part of this document. ** These exhibits represent management contracts, compensatory plans or arrangements that are required to be filed by Item 601 of Regulation S-K. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Shareholders and Board of Directors Meridian Insurance Group, Inc. Our report on the consolidated financial statements of Meridian Insurance Group, Inc., and Subsidiaries is included on page 24 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 51 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Indianapolis, Indiana February 16, 1996 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES FORM 10-K INDEX TO FINANCIAL STATEMENT SCHEDULES PAGE Schedule I Summary of Investments Other than Investments in Related Parties 52 Schedule II Condensed Financial Information of Registrant 53 Schedule IV Reinsurance 55 Schedule VI Supplemental Information Concerning Property- Casualty Insurance Operations 56 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 Amount at Which Shown Market in the Cost Value Balance Sheet Fixed maturities Available-for-sale: Bonds United States Government and government agencies and authorities $ 56,584,045 $ 58,288,599 $ 58,288,599 States, municipalities, and political subdivisions 78,499,234 80,849,601 80,849,601 Public utilities 6,878,027 7,045,609 7,045,609 All other corporate bonds 36,045,162 37,592,135 37,592,135 Redeemable preferred stocks 35,809,142 36,260,828 36,260,828 Total fixed maturities 213,815,610 220,036,772 220,036,772 Equity securities Common stocks Public utilities 1,610,719 2,056,850 887,275 Banks, trust, and insurance companies 1,480,975 1,611,100 1,345,325 Industrial, miscellaneous, and all other 23,869,789 27,451,925 16,144,930 Total equity securities 26,961,483 31,119,875 31,119,875 Mortgage loan 727,111 727,111 727,111 Other long-term investments 250,000 326,794 326,794 Short-term investments 2,483,338 2,483,338 2,483,338 Total investments $244,237,542 $254,693,890 $254,693,890 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEET as of December 31, 1995 and 1994 ASSETS 1995 1994 Cash and short-term investments $ 1,041,331 $ 533,836 Investment in subsidiaries (eliminated in consolidation) 118,957,091 95,266,894 Other assets 24,411 18,946 Total assets $120,022,833 $ 95,819,676 LIABILITIES AND SHAREHOLDERS' EQUITY Due to Meridian Mutual Insurance Company $ 6,551 $ 61,517 Post-employment benefits 1,298,378 1,101,155 Dividends payable 474,376 404,566 Other liabilities 861 -- Total liabilities 1,780,166 1,567,237 Shareholders' equity: Common shares 44,076,685 43,930,722 Contributed capital 15,058,327 15,058,327 Unrealized appreciation (depreciation) of investments, net of deferred income tax 6,842,245 (7,281,724) Retained earnings 52,265,410 42,545,114 Total shareholders' equity 118,242,667 94,252,439 Total liabilities and shareholders' equity $120,022,833 $ 95,819,676 STATEMENT OF INCOME For the Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 Dividend income from subsidiaries $ 2,400,000 $ 2,200,000 $ 500,000 Other income 1,928 780 -- Less: General operating expenses 730,704 734,605 1,032,719 Current federal income tax benefit (379,345) (314,016) (172,644) Income (loss) before equity in net income of subsidiaries 2,050,569 1,780,191 (360,075) Equity in undistributed net income of subsidiaries 9,566,470 7,340,872 9,245,040 Income before change in accounting method 11,617,039 9,121,063 8,884,965 Change in accounting method: Accounting for income taxes -- -- 525,804 Net income $11,617,039 $ 9,121,063 $ 9,410,769 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT, Continued STATEMENT OF CASH FLOWS For the Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 Cash flows from operation: Net income $11,617,039 $ 9,121,063 $ 9,410,769 Reconciliation of net income to net cash provided (used) by operations: Equity in undistributed net income of subsidiaries (9,566,470) (7,340,872) (9,245,040) Compensation expense related to restricted stock -- 35,584 465,762 (Increase) decrease in other assets (5,465) 47,371 247,303 Increase (decrease) in due to Meridian Mutual Insurance Company (54,966) 40,107 (10,308) Increase in post-employment benefits 197,223 102,060 84,095 Increase (decrease) in other liabilities 861 -- (66) Change in accounting method for income taxes -- -- (525,804) Other, net 243 431 -- Net cash provided by operations 2,188,465 2,005,744 426,711 Cash flows from investing activities: Capital contribution to subsidiary -- -- (18,000,000) Net cash used by investing activities -- -- (18,000,000) Cash flows from financing activities: Proceeds from issuance of common stock -- -- 18,963,960 Proceeds from stock options 39,819 39,819 34,500 Repurchase and retirement of common stock (77,033) -- -- Dividends paid (1,826,933) (1,617,696) (1,409,713) Net cash provided (used) by financing activities (1,680,970) (1,577,877) 17,588,747 Net increase in cash 507,495 427,867 15,458 Cash at beginning of year 533,836 105,969 90,511 Cash at end of year $ 1,041,331 $ 533,836 $ 105,969
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE IV--REINSURANCE For the Years Ended December 31, 1995, 1994 and 1993 Percentage Ceded Assumed of Amount Gross to Other from Other Net Assumed Amount Companies(1) Companies(1) Amount to Net Property and liability insurance premiums: Year ended December 31, 1995 $149,748,331 $11,104,680 $ 5,222,170 $143,865,821 3.6% Year ended December 31, 1994 $141,275,894 $12,018,290 $ 5,744,277 $135,001,881 4.3% Year ended December 31, 1993 $134,021,523 $13,810,140 $ 5,690,972 $125,902,355 4.5% 1) The amounts for the years ended December 31, 1995 and 1994 represents Meridian Security's share of third party reinsurance transactions pursuant to the pooling agreement. Prior to 1994, the amount ceded also includes Vernon Fire & Casualty's third party reinsurance transactions which were not subject to the pooling arrangement.
MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS For the Years Ended December 31, 1995, 1994 and 1993 Year Ended December 31, 1995 1994 1993 Deferred policy acquisition costs $ 13,354,600 $ 11,977,429 $ 11,972,069 Reserves for losses and loss adjustment expenses $123,577,240 $123,754,650 $119,763,925 Unearned premiums $ 64,558,695 $ 59,663,286 $ 58,680,751 Earned premiums $143,865,821 $135,001,881 $125,902,355 Investment income $ 14,563,820 $ 13,995,984 $ 13,568,919 Losses and loss adjustment expenses incurred related to: Current years $104,584,909 $ 99,444,243 $ 92,995,660 Prior years $ (5,461,060) $ (5,473,714)$ (6,373,769) Amortization of deferred policy acquisition costs $ 30,691,609 $ 29,176,126 $ 26,910,685 Paid losses and loss adjustment expenses $ 98,690,281 $ 91,661,638 $ 68,997,532 Premiums written $148,763,885 $136,189,925 $136,156,392 EX-10.37 2 1996 EMPLOYEE INCENTIVE ANNOUNCED by Norma Oman The key corporate objective in 1996 is "to strengthen the financial position of the corporation through sound, aggressive insurance operations and investment strategies." To achieve this objective, each of us needs to focus on the right issues and effect positive change to produce profitable premium growth, to gain processing efficiencies and to deliver A++ service to our customers. The 1996 employee incentive is designed to reward your efforts in the achievement of these results. Eligible participants in the 1996 plan include Meridian employees as of January 2, 1996, who remain active employees at the time of bonus payment in early 1997. Each eligible participant will receive a cash award based on the pre-tax income level attained. The size of your cash award may vary from 1.5 percent to 4.5 percent of your annual salary as of December 31, 1996, and is based on meeting at least the threshold combined pre-tax income goal. In addition, bonus payments will be pro-rated for pre-tax income results between the threshold and maximum levels. For example, if pre-tax income is $18,150,000 (halfway between target and maximum), then your bonus would be 3.8 percent (or halfway between the target and maximum award). The applicable company goals and your accompanying awards are as follows: CORPORATE FINANCIAL PERFORMANCE Award Payout Schedule as a % of Annual Base Salary Pre-Tax Income Your Award Potential Maximum (120% of $19,800,000 4.5% of annual base goal) salary Target (100% of $16,500,000 3% of annual base goal) salary Threshold (80% of $13,200,000 1.5% of annual base goal) salary Barring unforeseen circumstances, bonus payments will be finalized after the close of the fiscal year and results have been approved by the Joint Audit Committee of the Board of Directors. Normally, the bonuses will be paid in March. No bonuses are payable in the event of a participant's termination before the bonus payment date, other than by death, permanent disability, or normal retirement, in which event a discretionary payment may be made. An employee for whom a formal leave of absence has been granted by the Company may be construed to be an active employee of the Company at the time of bonus payment, with approval of the President. The Company reserves the right to modify or terminate this incentive plan as necessary. Meridian is pleased to offer this incentive opportunity. I am confident in our abilities to meet and exceed our objectives. EX-10.38 3 NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made this 30th day of November, 1995, between Meridian Insurance Group, Inc., with its principal office at Indianapolis, Indiana, (hereinafter called the "Corporation") and __________ residing at _____________, Indianaplis, Indiana, _______, (hereinafter called the "Employee"). WITNESSETH THAT: WHEREAS, the directors of the Corporation adopted the 1987 Employee Incentive Stock Plan (the "Plan") on January 21, 1987, and the shareholders of the Corporation approved the Plan at their meeting held on January 21, 1987; and WHEREAS, the Employee has been designated, in accordance with the terms of the Plan, as a key employee to whom an Option to purchase shares of the Corporation is to be granted; NOW, THEREFORE, it is mutually agreed as follows: 1. The Corporation hereby grants to the Employee, on the terms and conditions hereinafter set forth, an Option to purchase all or any part of 1,000 shares of the Corporation's common shares at a price of $15.28 per share. This Option is for all purposes pursuant and subject to the provisions of the Plan, and the Employee agrees to be bound by the rules and regulations for the administration of the Plan as presently prescribed or hereafter amended, and by any amendment, construction or interpretation of the Plan adopted by the Board of Directors of the Corporation. 2. The right to purchase the shares subject to this Option shall accrue on the following dates provided the Employee is employed by the Corporation, its parent, subsidiaries or affiliates on such dates: 50 percent on November 30, 1996, and 50 percent on November 30, 1997. No part of the Option shall lapse by reason of any omission to exercise the Option or any part thereof prior to November 30, 2005. 3. This Option may be exercised only by written notice to the Corporation specifying the number of shares in respect of which the Option is being exercised and by payment to the Corporation in cash of the full purchase price for the shares so specified, or, at the option of the Employee, the purchase price may be paid in whole or in part through the transfer to the Corporation of shares of Meridian Stock previously acquired by the Employee. 4. The Corporation shall take any action required by law and applicable regulations, including the Indiana Securities Act and the rules and regulations of the Indiana Securities Division, to authorize the issuance and delivery of any shares covered by this Option. Upon completion of such action and the receipt of payment for the shares in respect of which this Option is exercised, the Corporation shall deliver to the Employee or his duly authorized representatives, certificates for such shares, which shares shall be fully paid and non-assessable. 5. (a) If prior to the delivery by the Corporation of all of the shares covered by this Option, there shall be any increase or decrease in the number of issued shares of the Corporation resulting from a subdivision or consolidation of shares or any other capital adjustment, the payment of a share dividend, or other increase or decrease in the shares of the Corporation effected without receipt of consideration, there shall be a proportionate and equitable adjustment of the terms of this Option with respect to the amount and class of shares remaining subject to the Option and the purchase price to be paid therefor, as determined by the Board of Directors or their designated Committee. (b) In the event that, prior to the delivery by the Corporation of all of the shares covered by this Option, there shall be a capital reorganization or reclassification of the Corporation resulting in a substitution of other shares for common shares, there shall be substituted for the shares of the Corporation the number of substitute shares which would have been issued in exchange for the common shares then remaining under the Option if such common shares had been then issued and outstanding. (c) If the Corporation shall enter into any agreement providing for the merger or consolidation of the Corporation with or into any other person, regardless of whether or not the Corporation shall be the surviving or resulting Corporation as a consequence of such merger or consolidation, the Corporation shall have the right to terminate this Agreement and to thereby terminate all rights thereunder on thirty (30) days' written notice to the Employee; provided, however, that if such merger or consolidation is not consummated within 180 days from the date of the notice, the Agreement so terminated shall be deemed to have been continuously in effect since the date of execution thereof. In the event of a dissolution or liquidation of the Corporation, the Corporation shall give thirty (30) days' written notice thereof to the Employee, and all rights of the Employee under this Agreement shall be deemed to be terminated upon such dissolution or liquidation. 6. The Employee shall have no rights or privileges as a shareholder of the Corporation with respect to the common shares issuable under this Option until certificates representing such shares have been delivered to him. 7. The Employee agrees, for himself and his personal representatives, that any and all shares purchased by him or them, upon the exercise of any portion of this Option, may be "restricted securities" within the meaning of Rule 144 promulgated by the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (the "1933 Act"), or may otherwise be subject to the provisions of Rule 144. The Employee may be required to agree in writing, at any time deemed appropriate by the Corporation, that there will be no sale or other disposition of the shares (i) unless a registration statement is in effect with respect to the resale of such shares, (ii) unless the Employee has received an opinion from counsel for the Corporation to the effect that the shares may be sold without compliance with the registration provisions of the 1933 Act, or (iii) unless a "no-action" letter to that effect has been obtained from the staff of the SEC. In this connection, all certificates representing the shares purchased upon exercise of this Option may have set forth thereon a legend evidencing the foregoing restrictions in such form as the Corporation may determine, and appropriate stop transfer instructions may be issued to the Corporation's transfer agent in connection therewith. In addition, the Employee may be required to agree to any other limitation upon resale deemed appropriate by the Corporation for the purpose of complying with the then current rules and regulations of the SEC. 8. This Option shall not be assignable or transferable by the Employee otherwise than by will or the laws of descent and distribution and shall be exercisable during his lifetime only by him. 9. (a) If the Employee shall cease to be employed by a Company in the Meridian Group (as defined in the 1987 Employee Incentive Stock Plan) for reasons other than (i) death, (ii) discharge for cause, or (iii) voluntary action of the Participant without the written consent of the President of the Company (or the President's delegate), the Employee may exercise this Option at any time within three years after such termination, to the extent of the number of shares covered by this Option which were purchasable at the date of such termination; provided, however, that this Option shall be so exercisable only until the earlier of the expiration of such three-year period or the expiration date of such Option. (b) If the Employee shall cease to be employed by a Company in the Meridian Group either (i) for cause or (ii) by voluntary action of the Employee without the written consent of the President of the Company (or the President's delegate), this Option shall expire and any rights hereunder shall terminate immediately. (c) Should the Employee die either while in the employ of a Company in the Meridian Group or after termination of such employment (other than discharge for cause, by voluntary action of the Employee without the written consent of the President of the Company, or the President's delegate), the Option rights of the deceased Employee may be exercised by his or her Personal Representative until the earlier of one year after the Employee's death or three years after his or her termination of employment to the extent of the number of shares covered by this Option which were purchasable at the date of such death except that this Option shall not be exercisable on any date beyond the expiration date of this Option. If the Employee granted an Option should die within thirty days prior to the expiration date of such Option, if on the date of death the Employee was then entitled to exercise such Option, and if the Option expires without being exercised, the Personal Representative of the Employee shall receive in settlement a cash payment from the Company of a sum equal to the amount, if any, by which the Fair Market Value (determined on the expiration date of the Option) of Meridian Stock subject to the Option exceeds the Option Price. 10. A leave of absence for the Employee during the term of this Option which is authorized by the Corporation shall not be deemed a termination of employment; however, the Employee may not exercise any Options hereunder during such leave of absence. 11. Nothing in this Agreement shall be deemed to create any limitation or restriction upon such rights as the Corporation would otherwise have to terminate the employment of the Employee at any time for any reason. 12. Any notice to be given or served under the terms of this Agreement shall be delivered to the Secretary of the Corporation and to the Employee at the address shown above, or such other address or addresses as either party may designate in writing to the other. Any such notice shall be deemed to have been duly given or delivered if it is sent by registered or certified mail, return receipt requested. 13. This Agreement shall be construed in accordance with the laws of Indiana and shall be binding on and inure to the benefit of any successor or successors of the Corporation and the personal representatives of the Employee. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written. MERIDIAN INSURANCE GROUP, INC. By:______________________________ Norma J. Oman, President EMPLOYEE: _________________________________ EX-10.39 4 MERIDIAN INSURANCE GROUP INC. 1996 EMPLOYEE INCENTIVE STOCK PLAN ARTICLE I Purpose and Effective Date 1.1. Purpose. The purpose of the Plan is to provide financial incentives for selected Key Employees of the Meridian Group, thereby promoting the long-term growth and financial success of the Meridian Group by (i) attracting and retaining employees of outstanding ability, (ii) strengthening the Meridian Group's capability to develop, maintain, and direct a competent management team, (iii) providing an effective means for selected Key Employees to acquire and maintain ownership of Meridian Stock, (iv) motivating Key Employees to achieve long-range performance goals and objectives, and (v) providing incentive compensation opportunities competitive with those of other major corporations. 1.2. Effective Date and Expiration of Plan. The Plan shall be effective May 8, 1996. Unless earlier terminated by the Board pursuant to Section 7.3 the Plan shall terminate on the tenth anniversary of its Effective Date. No Award shall be made pursuant to the Plan after its termination date, but Awards made prior to the termination date may extend beyond that date. ARTICLE II Definitions The following words and phrases, as used in the Plan, shall have these meanings: 2.1 "Award" means individually or collectively, any Option, Tandem SAR, SAR, or Stock or Restricted Stock Award. 2.2 "Board" means the Board of Directors of the Company. 2.3 "Code" means the Internal Revenue Code of 1986, as amended. 2.4 "Committee" means a committee of not less than three persons appointed by the Board from the Compensation Committee of the Board or from the Executive Committee of the Board, each of whom shall be a Disinterested Person. 2.5 "Company" means Meridian Insurance Group, Inc. and its successors and assigns. 2.6 "Disinterested Person" means any person who, at the time discretion under the Plan is exercised, meets the definition of a "disinterested person" in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and then applicable to the Company. 2.7 "Effective Date" means May 8, 1996. 2.8 "Fair Market Value" means, as of any specified date, an amount equal to the mean between the reported high and low bid prices of Meridian Stock on the specified date on the National Association of Securities Dealers, Inc. Automated Quotation System or any system then in use, or, if no such quotation is available, the fair market value on the specified date of the share of such stock as determined by the Board in good faith, and at such time as the shares are traded on the National Market System the price for purposes of this paragraph shall be the last reported sales price on the specified date. 2.9 "Incentive Stock Option" means an option within the meaning of Section 422(b) of the Code. 2.10 "Key Employee" means an employee of one of the Companies in the Meridian Group who occupies a responsible executive, managerial, insurance professional, or administrative position and who has the capacity to contribute to the success of the Meridian Group. 2.11 "Meridian Group" means the Company and each of its' subsidiaries and Meridian Mutual Insurance Company, on and after the Effective Date. 2.12 "Meridian Stock" means common shares of the Company. 2.13 "Nonqualified Stock Option" means an Option granted under the Plan other than an Incentive Stock Option. 2.14 "Option" means both a Nonqualified Stock Option and an Incentive Stock Option to purchase Meridian Stock. 2.15 "Option Price" means the price at which Meridian Stock may be purchased under an Option as provided in Section 5.4. 2.16 "Participant" means a Key Employee to whom an Award has been made under the Plan. 2.17 "Personal Representative" means the person or persons who, upon the death, disability, or incompetency of a Participant, shall have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to exercise an Option or the right to any Restricted Stock Award theretofore granted or made to such Participant. 2.18 "Plan" means Meridian Insurance Group, Inc. 1996 Employee Incentive Stock Plan. 2.19 "Reload Option" means an Option described in Section 5.7 of the Plan. 2.20 "Restricted Stock" means Meridian Stock subject to the terms and conditions of Sections 6.1 through Section 6.6 of the Plan. 2.21 "Restricted Stock Award" means an Award granted under Sections 6.1 through 6.6 of the Plan. 2.22 "Restriction Period" means a period of time determined under Section 6.2 during which Restricted Stock is subject to the terms and conditions provided in Section 6.3. 2.23 "SAR" means a stock appreciation right granted under Section 5.10. 2.24 "Stock Award" means an Award in the form of Meridian Stock as described under Section 6.7 of the Plan. 2.25 "Stock Option Agreement" means an agreement entered into between a Participant and the Company under Section 5.3. 2.26 "Subsidiary" means a corporation, domestic or foreign, the majority of the voting stock of which is owned directly or indirectly by the Company or Meridian Mutual Insurance Company. 2.27 "Tandem SAR" means a stock appreciation right described in Section 5.9 of the Plan. ARTICLE III Administration 3.1 Committee to Administer. The Plan shall be administered by the Committee. The Committee shall have full power and authority to interpret and administer the Plan and to establish and amend rules and regulations for its administration. The Committee's decisions shall be final and conclusive with respect to the interpretation of the Plan and any Award made under it. A majority of the members of the Committee shall constitute a quorum for the conduct of business at any meeting. The Committee shall act by majority vote of the members present at a duly convened meeting, which may include a meeting by conference telephone call held in accordance with applicable law. Action may be taken without a meeting if written consent thereto is given in accordance with applicable law. 3.2 Powers of Committee. (a) Subject to the provisions of the Plan, the Committee shall have authority, in its discretion, to determine those Key Employees who shall receive an Award, the time or times when such Award shall be made, and the type of Award to be granted. (b) The Committee shall determine the terms, restrictions, and provisions of the agreement relating to each Award, including such terms, restrictions, and provisions as shall be necessary to cause certain options to qualify as Incentive Stock Options. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any agreement relating to an Award, in such manner and to the extent the Committee shall determine in order to carry out the purpose of the plan. The Committee may, in its discretion, accelerate (i) the date on which any Option or SAR may be exercised, or (ii) the date of termination of the restrictions applicable to a Restricted Stock Award, if the Committee determines that to do so will be in the best interests of the Company and the Participants in the Plan. ARTICLE IV Awards 4.1 Awards. Awards shall be subject to the terms and conditions of the Plan and to such other terms and conditions consistent with the Plan as the Committee deems appropriate. Awards under a particular section of the Plan need not be uniform and Awards under two or more sections may be combined in one agreement. Any combination of Awards may be granted at one time and on more than one occasion to the same Key Employee. 4.2 Eligibility For Awards. An Award may be made to any Key Employee selected by the Committee. In making this selection and in determining the form and amount of the Award, the Committee may give consideration to the functions and responsibilities of the respective Key Employee, his or her present and potential contributions to the success of the Meridian Group, the value of his or her services to the Meridian Group, and such other factors deemed relevant by the Committee. 4.3 Shares Available Under the Plan. The Meridian Stock to be offered under the Plan pursuant to Options, Tandem SARs, Restricted Stock Awards, and Stock Awards may be authorized but unissued Meridian Stock or Meridian Stock previously issued and outstanding and reacquired by the Company. Subject to adjustment under Section 7.2, no more than an aggregate of 750,000 shares of Meridian Stock shall be issuable upon exercise of Options (including Reload Options) and Tandem SARs and pursuant to Restricted Stock Awards and Stock Awards granted under the Plan. SARs with respect to no more than 250,000 shares of Meridian Stock may be granted under Section 5.10 of the Plan. Any shares of Meridian Stock subject to an Option which for any reason is canceled or terminated without having been exercised, or any shares of Restricted Stock which are forfeited, shall again be available for Awards under the Plan. Shares subject to an Option canceled upon the exercise of an SAR shall not again be available for Awards under the Plan. ARTICLE V Stock Options and Stock Appreciation Rights 5.1 Award of Stock Options. The Committee may, from time to time, subject to the provisions of the Plan and such terms and conditions as the Committee may prescribe, award Incentive Stock Options and Nonqualified Stock Options to any Key Employee. Awards of Incentive Stock Options and Nonqualified Stock Options shall be separate and not in tandem. 5.2 Period of Option. (a) Unless otherwise provided in the related Stock Option Agreement, an Option granted under the Plan shall be exercisable only after twelve months have elapsed from the date of grant. After the twelve-month waiting period, the Option may be exercised at any time during the term of the Option, in whole or in installments, as specified in the related Stock Option Agreement. Subject to Section 5.6, the duration of each Option shall not be more than ten years from the date of grant. (b) Except as provided in Section 5.6, an Option may not be exercised by a Participant unless such Participant is then, and continually (except for sick leave, military service, or other approved leave of absence) after the grant of the Option has been, an employee of one of the Companies in the Meridian Group. 5.3 Stock Option Agreement. Each Option shall be evidenced by a Stock Option Agreement, in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve. 5.4 Option Price, Exercise, and Payment. The Option Price of Meridian Stock under each Option shall be determined by the Committee, but the Option price of Meridian Stock under an Incentive Stock Option shall be a price not less than 100 percent of the Fair Market Value of Meridian Stock at the date such Incentive Stock Option is granted, as determined by the Committee. Options may be exercised from time to time by giving written notice of exercise to the Treasurer of the Company, specifying the number of shares to be purchased. No Option may be exercised for less than ten shares unless the issue of a lesser number is enough to exhaust the Option. The notice of exercise shall be accompanied by payment in full of the Option Price in cash or its equivalent, provided, however, that if the Committee, in its discretion, so provides in the related Stock Option Agreement, the Option Price may be paid in whole or in part through the transfer to the Company of shares of Meridian Stock previously acquired by the Participant, provided the shares so transferred have been held by the Participant for a period of more than one year and, further provided, that no Restricted Stock may be transferred as payment of the Option Price. In the event such Option Price is paid, in whole or in part, with shares of Meridian Stock, the portion of the Option Price so paid shall be equal to the value, as of the date of exercise of the Option, of such shares. The value of such shares shall be equal to the number of such shares multiplied by the average of the high and low sales prices of Meridian Stock quoted on the National Association of Securities Dealers, Inc. Automated Quotation System on the trading day coincident with the date of exercise of such Option (or the immediately preceding trading day if the date of exercise is not a trading day). Such shares must be delivered (along with the portion to be paid in cash) within three days after the date of exercise. If the Participant fails to pay the Option Price within such three-day period, the Committee shall have the right to take whatever action it deems appropriate, including voiding the exercise of the Option. The Company shall not issue or transfer Meridian Stock upon exercise of an Option until the Option Price is fully paid. 5.5 Limitations on Exercise of Incentive Stock Options. (a) The aggregate Fair Market value (determined as of the time such Option is granted) of Meridian Stock with respect to which Incentive Stock Options are exercisable for the first time by a Key Employee during any calendar year (under all plans of the Company, and its Subsidiaries) shall not exceed $100,000. (b) An Incentive Stock Option shall not be awarded to any Key Employee who, at the time of award, owns Meridian Stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company. 5.6 Termination of Employment. (a) If a Participant shall cease to be employed by a Company in the Meridian Group for reasons other than (i) death, (ii) discharge for cause, or (iii) voluntary action of the Participant without the written consent of the President of the Company (or the President's delegate), the Participant may exercise an Option at any time within three years after such termination, to the extent of the number of shares covered by such Option which were purchasable at the date of such termination; provided, however, that an Option shall be so exercisable only until the earlier of the expiration of such three-year period or the expiration date of such Option. (b) If a Participant shall cease to be employed by a Company in the Meridian Group either (i) for cause or (ii) by voluntary action of the Participant without the written consent of the President of the Company (or the President's delegate), any Options of such Participant shall expire and any rights thereunder shall terminate immediately. (c) Should a Participant die either while in the employ of a Company in the Meridian group or after termination of such employment (other than discharge for cause or by voluntary action of the Participant without the written consent of the President of the Company or the President's delegate), the Option rights of such deceased Participant may be exercised by his or her Personal Representative until the earlier of one year after the Participant's death or three years after his or her termination of employment to the extent of the number of shares covered by such Option which were purchasable at the date of such death except that an Option shall not be so exercisable on any date beyond the expiration date of such Option. If a Participant who was granted an Incentive Stock Option should die within thirty days prior to the expiration date of such Option, if on the date of death the Participant was then entitled to exercise such Option, and if the Option expires without being exercised, the Personal Representative of the Participant shall receive in settlement a cash payment from the Company of a sum equal to the amount, if any, by which the Fair Market Value (determined on the expiration date of the Option) of Meridian Stock subject to the Option exceeds the Option Price. 5.7 Reload Option (a) Concurrently with the award of Options to a Participant under the Plan the Committee may authorize Reload Options to purchase for cash or shares a number of shares of Meridian Stock. The number of Reload Options shall equal: (i) the number of shares of Meridian Stock used to exercise the underlying Options and (ii) to the extent authorized by the Committee, the number of shares of Meridian Stock used to satisfy any tax withholding requirement incident to the exercise of the underlying Options. The grant of a Reload Option will become effective upon the exercise of underlying Options or Reload Options through the use of shares of Meridian Stock held by the optionee for at least 12 months or such longer period as determined by the Committee. Notwithstanding the fact that the underlying option may be an Incentive Stock Option, a Reload Option may qualify as an "incentive stock option" subject to Section 422 of the Internal Revenue Code of 1986. (b) Each Stock Option Agreement shall state whether the Committee has authorized Reload Options with respect to the underlying Options. Upon the exercise of an underlying Option or other Reload Option, the Reload Option will be evidenced by an amendment to the underlying Stock Option Agreement. (c) The option price per share of Meridian Stock deliverable upon the exercise of a Reload Option shall be the Fair Market Value of a share of Meridian Stock on the date the grant of the Reload Option becomes effective. (d) Each Reload Option is fully exercisable six months from the effective date of grant. The term of each Reload Option shall be equal to the remaining option term of the underlying Option. (e) The Committee may in its discretion limit the number of Reload exercises available to a Participant, or restrict the availability of a Reload Option until a specified level of stock price appreciation occurs in the underlying Options. 5.8 Shareholder Rights and Privileges. A Participant shall have no rights as a shareholder with respect to any shares of Meridian Stock covered by an Option until the issuance of a stock certificate to the Participant representing such shares. 5.9 Award of Tandem SARs. (a) At any time prior to six months before an Option's expiration date, the Committee may award to the Participant a Tandem SAR related to the Option. (b) The Tandem SAR shall represent the right to receive payment of an amount equal to the amount, if any, by which the average of the high and low sales prices of Meridian Stock quoted on the National Association of Securities Dealers, Inc. Automated Quotation System on the trading day immediately preceding the date of exercise of the Tandem SAR exceeds the Option Price. (c) Tandem SARs shall be evidenced by either the Stock Option Agreement or a separate agreement between the Company and the Participant. (d) A Tandem SAR shall be exercisable only at the same time and to the same extent and subject to the same conditions as the Option related thereto is exercisable, except that the Committee may prescribe additional conditions and limitations on the exercise of any Tandem SAR. A Tandem SAR shall be transferable only when the related Option is transferable, and under the same conditions. The exercise of a Tandem SAR shall cancel the related Option. Tandem SARs may be exercised only when the value of a share of Meridian Stock subject to the related Option exceeds the Option Price. Such value shall be determined in the manner specified in Section 5.9(b). (e) A Tandem SAR shall be exercisable only by written notice to the Treasurer of the Company and only to the extent that the related Option is exercisable. However, a Tandem SAR shall in no event be exercisable during the first six months of its term, except in the event of death or disability of the Participant prior to the expiration of such six-month period. (f) All Tandem SARs shall automatically be exercised on the last trading day prior to the expiration of the related Option, so long as the value of a share of Meridian Stock exceeds the Option Price, unless prior to such day the holder instructs the Treasurer otherwise in writing. Such value shall be determined in the manner specified in Section 5.9(b). (g) Payment of the amount to which a Participant is entitled upon the exercise of a Tandem SAR shall be made in cash, Meridian Stock, or partly in cash and partly in Meridian Stock, as the Committee shall determine at the time of the Award. To the extent that payment is made in Meridian Stock, the shares shall be valued in the manner specified in Section 5.9(b). (h) Each Tandem SAR shall expire on a date determined by the Committee at the time of Award, or, if later, upon the termination of the related Option. 5.10 Stock Appreciation Rights (a) Participants may be awarded SARs for a period of five years or such shorter period greater than six months as may be determined by the Committee (the "Designated Period"). That Designated Period may vary as among Participants and as among Awards to a Participant. At the end of the Designated Period with respect to a Participant, that Participant shall receive an amount equal to the appreciation in market value of his or her SARs as determined in Section 5.10(b) of the Plan. That amount shall be payable in cash, Meridian Stock, or partly in cash and partly in Meridian Stock (as determined in its sole discretion by the Committee). The value of any shares of Meridian Stock so payable shall be measured by the Fair Market Value of Meridian Stock on the day on which the Designated Period ends. No fractional shares shall be issued but a Participant shall be entitled to a cash adjustment for a fractional share that would otherwise be issued. (b) The market value of one SAR on a valuation date for purposes of the Plan shall be considered to be the Fair Market Value of one share of Meridian Stock on that valuation date. The market value of SARs held by a Participant on a valuation date shall be determined by multiplying the number of SARs held by that Participant by the market value of one SAR on that valuation date. The appreciation in market value of SARs for purposes of determining payments to be made to a Participant shall be measured by determining the market value of SARs held by that Participant on the day on which the Designated Period of those SARs ends and subtracting from that the market value of the same SARs on the date awarded to that Participant. The measurement of appreciation shall be made separately with respect to each separate award of SARs. (c) The SARs shall be used solely as a device for the measurement and determination of the amount to be paid to Participants. The SARs shall not constitute or be treated as property or as a trust fund of any kind. All amounts at any time attributable to the SARs shall be and remain the sole property of the Company and all Participants' rights hereunder are limited to the rights to receive cash and shares of Meridian Stock as provided in this Plan. (d) In the event of an adjustment of shares of Meridian Stock pursuant to Section 7.2, the number of SARs of a Participant and the maximum number of SARs and shares of Meridian Stock provided in Section 4.3 shall be adjusted in the same manner as shares of Meridian Stock reflected by those SARs would be adjusted. 5.11 Rules Relating to Exercise. In the case of a Participant subject to the restrictions of Section 16(b) of the Securities Exchange Act of 1934, as amended, no Tandem SAR, SAR or other stock appreciation right (referred to in Rule 16b-3(e) or any successor rule under the Securities Exchange Act of 1934, as amended (collectively, a "Stock Appreciation Right") shall be exercised except in compliance with any applicable requirements of Rule 16b-3 or any successor rule. If a full or partial settlement in cash would result, (i) such a Participant may not exercise a Stock Appreciation Right or any related Option during the first six months of the term of the Stock Appreciation Right or Option to be exercised; and (ii) such a Participant may exercise a Stock Appreciation Right only either: (A) during the period beginning on the third business day following the date of release of quarterly or annual summary statements of sales and earnings of the Company and ending on the twelfth business day following such date, unless a different period is specified by Rule 16b-3(e) or any successor rule; (B) pursuant to an irrevocable election to exercise made at least six months in advance of the effective date of the election, which election shall be subject to the consent or disapproval of the Committee; or (C) pursuant to an election to exercise incident to death, retirement, disability or termination of employment. ARTICLE VI Stock and Restricted Stock Awards 6.1 Award of Restricted Stock. (a) The Committee may make a Stock Award or Restricted Stock Award or both to any Participant, subject to this Article VI and to such other terms and conditions as the Committee may prescribe. (b) Each certificate for Restricted Stock shall be registered in the name of the Participant and deposited by him or her, together with a stock power endorsed in blank, with the Company. 6.2 Restriction Period. At the time of making a Restricted Stock Award, the Committee shall establish the Restriction Period applicable to such Award. The Committee may establish different Restriction Periods from time to time and each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee. Restriction Periods, when established for each Restricted Stock Award, shall not be changed except as permitted by Section 6.3. 6.3 Other Terms and Conditions. Meridian Stock, when awarded pursuant to a Restricted Stock Award, will be represented by a stock certificate registered in the name of the Participant who receives the Restricted Stock Award. Such certificate shall be deposited with the Company as provided in Section 6.1(b). The Participant shall be entitled to receive dividends during the Restriction Period and shall have the right to vote such Meridian Stock and all other shareholder's rights, with the exception that (i) the Participant will not be entitled to delivery of the stock certificate during the Restriction Period, (ii) the Company will retain custody of the Meridian Stock during the Restriction Period, and (iii) a breach of a restriction or a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Award will cause a forfeiture of the Restricted Stock Award. The Committee may, in addition, prescribe additional restrictions, terms, or conditions upon or to the Restricted Stock Award. 6.4 Restricted Stock Award Agreement. Each Restricted Stock Award shall be evidenced by a Restricted Stock Award Agreement in such form and containing such terms and conditions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve. 6.5 Termination of Employment. The Committee may, in its sole discretion, establish rules pertaining to the Restricted Stock Award in the event of termination of employment (by retirement, disability, death, or otherwise) of a Participant prior to the expiration of the Restriction Period. 6.6 Payment for Restricted Stock. Restricted Stock Awards may be made by the Committee under which the Participant shall not be required to make any payment for the Meridian Stock or, in the alternative, under which the Participant, as a condition to the Restricted Stock Award, shall pay all (or any lesser amount than all) of the Fair Market Value of the Meridian Stock, determined as of the date the Restricted Stock Award is made. If the latter, such purchase price shall be paid in cash as provided in the Restricted Stock Award Agreement. 6.7 Unrestricted Stock Award. (a) Grant or Right to Receive. The Committee, in its sole discretion, (a) may offer a Participant who has earned a cash bonus or other cash incentive award the right to receive payment of such bonus or incentive award in the form of Meridian Stock, or (b) may require a Participant who has earned a cash bonus or other cash incentive award to take payment of such bonus or incentive award in the form of Meridian Stock. Such Stock Award of shares of Meridian Stock shall be valued at the Fair Market Value of such shares on the date or dates the cash compensation would otherwise be paid and shall not be subject to the restrictions set forth in Sections 6.1 - 6.6 of the Plan. (b) Participant Election. With respect to paragraph (a) of this Section 6.7, the Participant shall communicate his choice of cash or a Stock Award by an irrevocable written election delivered to the Company no later than the date or dates specified by the Committee. With respect to any Participant who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, such irrevocable election shall become effective no earlier than six months and one day following the date of the election; to change an election such Participant must make a new irrevocable election which shall be effective six months and one day following the date of the new irrevocable election. ARTICLE VII Miscellaneous Provisions 7.1 Nontransferability. No Award under the Plan shall be transferable by the Participant otherwise than by will or laws of descent and distribution or pursuant to a qualified domestic relations order. All Awards shall be exercisable or received during the Participant's lifetime only by such Participant or his Personal Representative. Any transfer contrary to this Section 7.1 will nullify the Award. 7.2 (a) Recapitalization. The aggregate number of shares of Meridian Stock which may be the subject of an Award, the number of shares covered by each outstanding Award, and the terms thereof relating to the value of Meridian Stock, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Meridian Stock resulting from a subdivision or consolidation of shares or any other capital adjustment, the payment of a share dividend, or other increase or decrease in the shares of Meridian Stock effected without receipt of consideration by the Company. In the event that, prior to the delivery by the Company of the Meridian Stock remaining under any Award, there shall be a capital reorganization or reclassification of the Company resulting in a substitution of other shares for common shares, there shall be substituted for Meridian Stock the number of substitute shares which would have been issued in exchange for the common shares then remaining under the Award if such common shares had been then issued and outstanding. (b) Merger, Dissolution. If the Company shall enter into any agreement providing for the merger or consolidation of the Company with or into any other person, regardless of whether or not the Company shall be the surviving or resulting corporation as a consequence of such merger or consolidation, the Company shall have the right to terminate all outstanding Agreements entered into pursuant to Awards and to thereby terminate all rights of the Participants thereunder on thirty (30) days written notice to each Participant; provided, however, that if such merger or consolidation is not consummated within 180 days from the date of the notice, all Agreements so terminated shall be deemed to have been continuously in effect since the date of execution thereof. In the event of a dissolution or liquidation of the Company, the Company shall give thirty (30) days written notice thereof to each Participant, and all rights of the Participants under all outstanding Agreements entered into pursuant to an Award shall be deemed to be terminated upon such dissolution or liquidation. 7.3 Amendment, Suspension, and Termination of Plan. (a) The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem to be in the best interests of the Company; provided, however, that no such amendment shall, without stockholder approval, (i) except as provided in Section 7.2, materially increase the number of shares of Meridian Stock which may be issued under the Plan (ii) materially modify the requirements as to eligibility for participation in the Plan, (iii) materially increase the benefits accruing to Participants under the Plan. (iv) make any other change that would disqualify the Plan for purposes of the exemption provided by Rule 16b- 3(d)(3) of the Securities and Exchange Commission, (v) reduce the Option Price of an Incentive Stock Option below the Fair Market Value of Meridian Stock on the day an Incentive Stock Option is awarded, (vi) permit the award of Tandem SARs other than in tandem with an Option, (vii) permit the exercise of an SAR during the first six months of its term except as otherwise provided herein, (viii) permit the exercise of an Option or Tandem SAR without surrender of the related Tandem SAR or Option, respectively, or (ix) extend the termination date of the Plan. No such amendment, suspension, or termination shall alter or impair any outstanding Award without the consent of the Participant affected thereby. (b) With the consent of the Participant affected thereby, the Committee may amend or modify any outstanding Award in any manner to the extent that the Committee would have had the authority under the Plan initially to grant such Award as so modified or amended, including without limitation, to change the date or dates as of which such Options, Tandem SARs or SARs may be exercised or to remove the restrictions on shares of Restricted Stock. 7.4 Nonuniform Determinations. The Committee's determinations under the Plan, including without limitation, (i) the determination of the Key Employees to receive Awards, (ii) the form, amount, and timing of such Awards, (iii) the terms and provisions of such Awards and (iv) the agreements evidencing the same, need not be uniform and may be made by it selectively among Key Employees who receive, or who are eligible to receive, Awards under the Plan, whether or not such Key Employees are similarly situated. 7.5 General Restriction. Each Award under the Plan shall be subject to the condition that, if at any time the Committee shall determine that (i) the listing, registration, or qualification of the shares of Meridian Stock subject or related thereto upon any securities exchange or under any state or federal law, (ii) the consent or approval of any government or regulatory body, or (iii) an agreement by the Participant with respect thereto, is necessary or desirable, then such Award shall not become exercisable in whole or in part unless such listing, registration, qualification, consent, approval, or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 7.6 Securities Act of 1933. Upon issuance of Meridian Stock to the Participant, or his heirs, the recipient of that stock shall represent that the shares of stock are taken for investment and not resale and make those other representations as may be necessary to qualify the issuance of the shares as exempt from the Securities Act of 1933 or any applicable state securities laws or to permit registration of the shares and shall represent that he or she shall not dispose of those shares in violation of the Securities Act of 1933. The Company reserves the right to place a legend on any stock certificate issued under the Plan to assure compliance with this paragraph. No shares of Meridian Stock of the Company shall be required to be distributed until the Company shall have taken such action, if any, as is then required to comply with the provisions of the Securities Act of 1933 or any other then applicable securities law. 7.7 Withholding of Tax. (a) Payment by Participant. Each Participant shall, no later than the date as of which the value of an Award or of any Meridian Stock or other amounts received thereunder first becomes includable in the gross income of the Participant for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company shall have the right to deduct any such taxes from the salary of the Participant. (b) Payment in Meridian Stock. A Participant my elect to have such tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Meridian Stock to be issued pursuant to any Award a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) sufficient to cover the amount required to be withheld, or (ii) transferring to the Company shares of Meridian Stock owned by the Participant with an aggregate Fair Market Value (as of the date the withholding is effected) sufficient to cover the amount required to be withheld. With respect to any Participant who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, the following additional restrictions shall apply: (A) The election to satisfy tax withholding obligations relating to an Award in the manner permitted by this Section 7.7 shall be made either (1) during the period beginning on the third business day following the date of release of quarterly or annual summary statements of sales and earnings of the Company and ending on the twelfth business day following such date, or (2) at least six months prior to the date as of which the receipt of such an Award first becomes a taxable event for federal income tax purposes; (B) Such election shall be irrevocable; (C) Such election shall be subject to the consent or disapproval of the Committee; and (D) The Meridian Stock withheld to satisfy tax withholding must pertain to an Award which has been held by the Participant for at least six months from the date of grant of the Award. 7.8 No Right to Employment. Neither the action of the Company in establishing the Plan, nor any action taken by it or by the Board or the Committee under the Plan, nor any provision of the Plan, shall be construed as giving to any person the right to be retained in the employ of the Company, Meridian Mutual Insurance Company, or any Subsidiary of either. 7.9 Insofar as Key Employees who are directors or officers subject to Section 16 of the Securities Exchange Act of 1934, as amended, are concerned (i) the Plan is intended to comply with all applicable conditions of Rule 16b-3 and its successors; (ii) all transactions involving Key Employees who are directors or officers are subject to such conditions, regardless of whether such conditions are expressly set forth in the Plan; and (iii) any provision of the Plan that is contrary to a condition of Rule 16b-3 shall not apply to Key Employees who are directors or officers. EX-10.40 5 Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to Meridian Mutual Group Indianapolis, Indiana Second Excess Catastrophe Reinsurance Reinsurers Participations The Aetna Casualty and Surety Company 7.00% Country Mutual Insurance Company 6.58 Dorinco Reinsurance Company 10.00 Erie Insurance Exchange 1.50 Insurance Corporation of Hannover 3.50 International Property Catastrophe Reinsurance Company, Ltd. 3.67 Nationwide Mutual Insurance Company 3.50 Shelter Reinsurance Company 1.00 Sumitomo Marine Re Management, Ltd. (for The Sumitomo Marine & Fire Insurance Co., Ltd., U.S. Branch) 1.75 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 7.50 Reinsurance Australia Corporation Limited 3.00 Through Swire Blanch Europe Bayerische Ruckversicherung A.G. 5.00 Cie Transcontinentale de Reassurance 4.00 Mapfre Re Compania de Reaseguros, S.A. 2.00 Unione Italiana Di Riassicurazione S.P.A. 1.50 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 7.00 Through Swire Fraser Ltd. Lloyd's Underwriters Per Signing Schedule(s) 31.50 Total 100.00% Third Excess Catastrophe Reinsurance Reinsurers Participations AXA Reinsurance Company 5.00% Employers Mutual Casualty Company 2.00 Erie Insurance Exchange 2.00 Farmers Mutual Hail Insurance Company of Iowa 1.50 First Excess and Reinsurance Corporation 6.00 Global Capital Re 5.00 Great Lakes Re Management Corporation 5.25 Insurance Corporation of Hannover 2.50 International Property Catastrophe Reinsurance Company, Ltd. 2.00 LaSalle Re Limited 15.75 Nationwide Mutual Insurance Company 3.50 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 2.00 Shelter Reinsurance Company 0.75 United States Fidelity and Guaranty Company 5.25 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 7.50 Reinsurance Australia Corporation Limited 7.50 Through Swire Blanch Europe Cie Transcontinentale de Reassurance 2.50 Helvetia Swiss Insurance Company, Ltd. 1.00 La Mutuelle Du Mans Assurances I.A.R.D. 2.00 Mapfre Re Compania de Reaseguros, S.A. 2.00 Unione Italiana Di Riassicurazione S.P.A. 1.00 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 6.00 Through Swire Fraser Ltd. Lloyd's Underwriters Per Signing Schedule(s) 12.00 Total 100.00% Fourth Excess Catastrophe Reinsurance Reinsurers Participations Constitution Reinsurance Corporation 5.00% Dorinco Reinsurance Company 6.00 Employers Mutual Casualty Company 0.60 Erie Insurance Exchange 1.25 First Excess and Reinsurance Corporation 2.00 Global Capital Re 7.50 Grinnell Mutual Reinsurance Company 1.50 LaSalle Re Limited 10.52 Nationwide Mutual Insurance Company 3.00 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 2.50 Shelter Reinsurance Company 1.00 SOREMA North America Reinsurance Company 15.00 Sumitomo Marine Re Management, Ltd. (for The Sumitomo Marine & Fire Insurance Co., Ltd., U.S. Branch) 1.00 United Fire & Casualty Company 0.75 Vesta Fire Insurance Corporation 5.50 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 4.25 Through Swire Blanch Europe AXA RE 6.00 Cie Transcontinentale de Reassurance 2.50 La Mutuelle Du Mans Assurances I.A.R.D. 1.50 Mapfre Re Compania de Reaseguros, S.A. 1.50 Unione Italiana Di Riassicurazione S.P.A. 1.00 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 4.50 Through Swire Fraser Ltd. Lloyd's Underwriters Per Signing Schedule(s) 15.63 Total 100.00% Fifth Excess Catastrophe Reinsurance Reinsurers Participations AXA Reinsurance Company 1.25% Employers Mutual Casualty Company 1.00 Erie Insurance Exchange 1.25 Farmers Mutual Hail Insurance Company of Iowa 0.35 Grinnell Mutual Reinsurance Company 0.35 International Property Catastrophe Reinsurance Company, Ltd. 2.50 LaSalle Re Limited 2.50 Nationwide Mutual Insurance Company 2.50 Renaissance Reinsurance Ltd. 10.00 St. Paul Reinsurance Management Corporation (for St. Paul Fire and Marine Insurance Company) 1.10 Shelter Reinsurance Company 0.50 SOREMA North America Reinsurance Company 7.50 United Fire & Casualty Company 0.50 United States Fidelity and Guaranty Company 5.00 Vesta Fire Insurance Corporation 5.00 Through Park International Limited Mid Ocean Reinsurance Company Ltd. 7.50 Through Swire Blanch Europe Albingia Versicherungs AG 2.50 AXA RE 5.00 Bayerische Ruckversicherung A.G. 5.00 Cie Transcontinentale de Reassurance 1.25 La Mutuelle Du Mans Assurances I.A.R.D. 1.50 Mapfre Re Compania de Reaseguros, S.A. 2.50 Sirius International Insurance Corporation 1.00 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 3.50 Through Swire Fraser Ltd. Lloyd's Underwriters Per Signing Schedule(s) 28.95 Total 100.00% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 EX-10.41 6 E. W. BLANCH CO. Reinsurance Services Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Preamble The "Meridian Mutual Group" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire and Casualty Insurance Company, all of Indianapolis, Indiana. It is understood that Meridian Mutual Insurance Company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article I - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Fire, Allied Lines, Homeowners (property perils only), Mobile Homeowners (property perils only), Farmowners (property perils only), Commercial Multiple Peril (property perils only), Businessowners (property perils only), Earthquake, Inland Marine and Automobile Physical Damage (comprehensive coverage only) business, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract. Article II - Term A. This Contract shall become effective on January 1, 1996, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 1996, both days inclusive. B. If this Contract expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. Article III - Territory The liability of the Reinsurer shall be limited to losses under policies covering property located within the territorial limits of the United States of America, its territories or possessions, Puerto Rico, the District of Columbia and Canada; but this limitation shall not apply to moveable property if the Company's policies provide coverage when said moveable property is outside the aforesaid territorial limits. Article IV - Exclusions This Contract shall not apply to: 1. Reinsurance accepted by the Company other than: a. Facultative reinsurance on a share basis of risks accepted individually and not forming part of any agreement, or b. Local agency reinsurance on a share basis accepted in the normal course of business. 2. Nuclear incident per the following clauses attached hereto: a. "Nuclear Incident Exclusion Clause - Physical Damage Reinsurance - U.S.A." (NMA 1119); b. "Nuclear Incident Exclusion Clause - Physical Damage Reinsurance - Canada" (NMA 1980); c. "Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994) (Worldwide Excluding U.S.A. & Canada)" (NMA 1975(a)). 3. Pool, association, or syndicate business as excluded by the provisions of the "Pools, Associations and Syndicates Exclusion Clause" attached to and forming part of this Contract. 4. Any liability of the Company arising from its participation or membership in any insolvency fund. 5. Credit, financial guarantee and insolvency business. 6. War risks as excluded in any standard policy. 7. Policies written to apply in excess of underlying insurance or policies written with a deductible or franchise of more than $10,000; however, this exclusion shall not apply to policies which provide a percentage deductible or franchise in connection with earthquake or windstorm. 8. Insurance on growing crops. 9. Insurance against flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, when written as such; however, this exclusion shall not apply as respects the foregoing perils included in Commercial Multiple Peril, Homeowners Multiple Peril, Farmowners Multiple Peril, Inland Marine, Businessowners, Mobile Homeowners, and Automobile Physical Damage policies, and in endorsements to Fire and Extended Coverage policies. 10. Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property. 11. Difference in conditions insurance and similar kinds of insurance, howsoever styled. 12. Risks which have a total insurable value of more than $250,000,000. 13. Any collection of fine arts with an insurable value of $5,000,000 or more. 14. Inland Marine business with respect to the following: a. All bridges and tunnels; b. Cargo insurance when written as such with respect to ocean, lake, or inland waterways vessels; c. Commercial negative film insurance and cast insurance; d. Drilling rigs, except water well drilling rigs; e. Furriers' customers policies; f. Garment contractors policies; g. Insurance on livestock under so-called "mortality policies," when written as such; h. Jewelers' block policies and furriers' block policies; i. Mining equipment while underground; j. Radio and television broadcasting towers; k. Registered mail insurance when the limit of any one addressee on any one day is more than $50,000; l. Watercraft other than watercraft insured under personal property floaters, yacht and/or outboard policies, homeowners, farmowners, or recreational vehicle policies. 15. Automobile physical damage business with respect to the following: a. Insurance against collision; b. Insurance against theft or larceny; c. Manufacturers' stocks at factories or warehouses. 16. Seepage and/or pollution and/or contamination. 17. Losses in respect of overhead transmission and distribution lines and their supporting structures other than those on or within 150 meters (or 500 feet) of the insured premises. It is understood and agreed that public utilities extension and/or suppliers extension and/or contingent business interruption coverages are not subject to this exclusion provided that these are not part of a transmitters' or distributors' policy. 18. Extra Contractual Obligations and Loss In Excess of Policy Limits. Article V - Retention and Limit A. As respects each excess layer of reinsurance coverage provided by this Contract, the Company shall retain and be liable for the first amount of ultimate net loss, shown as "Company's Retention" for that excess layer in Schedule A attached hereto, arising out of each loss occurrence. The Reinsurer shall then be liable, as respects each excess layer, for 95.0% of the amount by which such ultimate net loss exceeds the Company's applicable retention, but the liability of the Reinsurer under each excess layer shall not exceed 95.0% of the amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects any one loss occurrence. B. As respects each excess layer of reinsurance coverage provided by this Contract, the Company shall retain, (net and unreinsured elsewhere, as respects the Fourth and Fifth excess layers), in addition to its initial retention for each loss occurrence, 5.0% of the excess ultimate net loss to which the excess layer applies. As respects the Second and Third excess layers of reinsurance coverage, the Company's initial retention and such additional retention shall be subject to the reinsurance set forth in paragraph C below. C. The Company shall be permitted to carry underlying aggregate excess catastrophe reinsurance recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article VI - Reinstatement A. In the event all or any portion of the reinsurance under any excess layer of reinsurance coverage provided by this Contract is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time the loss occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium calculated as follows: 1. The percentage of the occurrence limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times 2. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any loss under any excess layer hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer for that excess layer. If the earned reinsurance premium for any excess layer for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due for that excess layer shall be based on the annual deposit premium for that excess layer and shall be readjusted when the earned reinsurance premium for that excess layer for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer for any excess layer as reflected by any such statement (less prior payments, if any, for that excess layer) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss for that excess layer. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer under any excess layer of reinsurance coverage provided by this Contract shall not exceed either of the following: 1. 95.0% of an amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or 2. 95.0% of an amount, shown as "Reinsurer's Annual Limit" for that excess layer in Schedule A attached hereto, in all during the term of this Contract. Article VII - Definition of Ultimate Net Loss "Ultimate net loss" as used herein is defined as the sum or sums (including interest on judgments, litigation expenses and all other loss adjustment expenses, except office expenses and salaries of the Company's regular employees) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Article VIII - Other Reinsurance A. The Company shall maintain in force excess per risk reinsurance, recoveries under which shall inure to the benefit of this Contract. B. The Company shall be permitted to carry underlying excess catastrophe reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article IX - Loss Occurrence (NMA 2244/BRMA 27A) A. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in paragraph A of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." B. Except for those "loss occurrences" referred to in subparagraphs 1 and 2 of paragraph A above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. C. However, as respects those "loss occurrences" referred to in subparagraphs 1 and 2 of paragraph A above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. D. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. Article X - Loss Notices and Settlements A. Whenever losses sustained by the Company appear likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of the original policies (or within the terms of extra contractual obligations coverage, if any, provided under this Contract) and within the terms of this Contract, shall be binding upon the Reinsurer. The Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. The Company shall be the sole judge of what is covered by an original policy. Article XI - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XII - Premium A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the greater of the following: 1. The amount, shown as "Annual Minimum Premium" for that excess layer in Schedule A attached hereto; or 2. The percentage, shown as "Premium Rate" for that excess layer in Schedule A attached hereto, of the Company's net earned premium for the term of this Contract. B. The Company shall pay the Reinsurer an annual deposit premium for each excess layer of an amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto, in four equal installments of an amount, shown as "Quarterly Deposit Premium" for that excess layer in Schedule A attached hereto, on January 1, April 1, July 1 and October 1 of 1996. C. Within 60 days after the expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each excess layer, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company for each such excess layer shall be remitted promptly. D. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. For purposes of calculating net earned premium, 90% of the total basic policy premium as respects Homeowners, Mobilehomeowners and Farmowners business, 70% of the total basic policy premium as respects Businessowners and Commercial Multiple Peril, and 100% of the Comprehensive portion of the premium for Automobile Physical Damage business shall be considered subject premium. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVI - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XVII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XVIII - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XIX - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XX - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded United States outstanding loss and loss adjustment expense reserves by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. If the Reinsurer is unauthorized in any province or jurisdiction of Canada, the Reinsurer agrees to fund 115% of its share of the Company's ceded Canadian outstanding loss and loss adjustment expense reserves by: 1. A clean, irrevocable and unconditional letter of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a Canadian bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities, for no more than 15/115ths of the total funding required; and/or 2. Cash advances for the remaining balance of the funding required; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. C. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expenses paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for C(1) or C(3), or in the case of C(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXI - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXII - Arbitration (BRMA 6J) A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article XXIII - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXIV - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Indianapolis, Indiana,this _______ day of ____________________________________ 199___. __________________________________________________ ___ Meridian Mutual Group Schedule A Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to Meridian Mutual Group Indianapolis, Indiana Second Third Fourth Fifth Excess Excess Excess Excess Company's Retention $6,000,000 $10,000,000 $18,000,000 $30,000,000 Reinsurer's Per $4,000,000 $ 8,000,000 $12,000,000 $35,000,000 Occurrence Limit (95.0% of) Reinsurer's Annual $8,000,000 $16,000,000 $24,000,000 $70,000,000 Limit (95.0% of) Annual Minimum Premium $403,120 $456,000 $456,000 $824,800 Premium Rate .711% .804% .804% 1.455% Annual Deposit Premium $504,000 $570,000 $570,000 $1,030,000 Quarterly Deposit $126,000 $142,500 $142,500 $257,500 Premium The figures listed above for each excess layer shall apply to each Subscribing Reinsurer in the percentage share for that excess layer as expressed in its Interests and Liabilities Agreement attached hereto. Table of Contents Article Page Preamble 1 I Classes of Business Reinsured 1 II Term 2 III Territory 2 IV Exclusions 2 V Retention and Limit 4 VI Reinstatement 5 VII Definition of Ultimate Net Loss 6 VIII Other Reinsurance 6 IX Loss Occurrence (NMA 2244/BRMA 27A) 6 X Loss Notices and Settlements 7 XI Salvage and Subrogation 8 XII Premium 8 XIII Offset (BRMA 36C) 9 XIV Access to Records (BRMA 1D) 9 XV Net Retained Lines (BRMA 32E) 9 XVI Errors and Omissions (BRMA 14F) 9 XVII Currency (BRMA 12A) 10 XVIII Taxes (BRMA 50C) 10 XIX Federal Excise Tax (BRMA 17A) 10 XX Unauthorized Reinsurers 10 XXI Insolvency 12 XXII Arbitration (BRMA 6J) 12 XXIII Service of Suit (BRMA 49C) 13 XXIV Intermediary (BRMA 23A) 14 Schedule A Interests and Liabilities Agreement of The Aetna Casualty and Surety Company Hartford, Connecticut (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 7.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hartford, Connecticut,this ________ day of _______________________199___. __________________________________________________ ___ The Aetna Casualty and Surety Company Interests and Liabilities Agreement of Albingia Versicherungs AG Hamburg, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 2.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamburg, Germany,this _______ day of ___________________________199___. __________________________________________________ ___ Albingia Versicherungs AG Interests and Liabilities Agreement of AXA RE Paris, France (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 6.00% of the Fourth Excess Catastrophe Reinsurance 5.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Paris, France,this _______ day of ______________________________199___. __________________________________________________ ___ AXA RE Interests and Liabilities Agreement of AXA Reinsurance Company Wilmington, Delaware (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 5.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 1.25% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of _________________________ 199___. __________________________________________________ ___ AXA Reinsurance Company Interests and Liabilities Agreement of Bayerische Ruckversicherung A.G. Munich, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 5.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 5.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Munich, Germany,this _______ day of ____________________________199___. __________________________________________________ ___ Bayerische Ruckversicherung A.G. Interests and Liabilities Agreement of Cie Transcontinentale de Reassurance Paris, France (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 4.00% of the Second Excess Catastrophe Reinsurance 2.50% of the Third Excess Catastrophe Reinsurance 2.50% of the Fourth Excess Catastrophe Reinsurance 1.25% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Paris, France,this _______ day of ______________________________199___. __________________________________________________ ___ Cie Transcontinentale de Reassurance Interests and Liabilities Agreement of Constitution Reinsurance Corporation New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 5.00% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of _________________________199___. __________________________________________________ ___ Constitution Reinsurance Corporation Interests and Liabilities Agreement of Country Mutual Insurance Company Bloomington, Illinois (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 6.58% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Bloomington, Illinois,this _______ day of _______________________ 199___. __________________________________________________ ___ Country Mutual Insurance Company Interests and Liabilities Agreement of Dorinco Reinsurance Company Midland, Michigan (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 10.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 6.00% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Midland, Michigan,this _______ day of __________________________199___. __________________________________________________ ___ Dorinco Reinsurance Company Interests and Liabilities Agreement of Employers Mutual Casualty Company Des Moines, Iowa (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 0.60% of the Fourth Excess Catastrophe Reinsurance 1.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Des Moines, Iowa,this _______ day of ___________________________199___. __________________________________________________ ___ Employers Mutual Casualty Company Interests and Liabilities Agreement of Erie Insurance Exchange Erie, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.50% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 1.25% of the Fourth Excess Catastrophe Reinsurance 1.25% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Erie, Pennsylvania,this _______ day of __________________________ 199___. __________________________________________________ ___ Erie Insurance Exchange Interests and Liabilities Agreement of Farmers Mutual Hail Insurance Company of Iowa Des Moines, Iowa (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 1.50% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0.35% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Des Moines, Iowa,this _______ day of ___________________________ 199___. __________________________________________________ ___ Farmers Mutual Hail Insurance Company of Iowa Interests and Liabilities Agreement of First Excess and Reinsurance Corporation Overland Park, Kansas (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 6.00% of the Third Excess Catastrophe Reinsurance 2.00% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Overland Park, Kansas,this _______ day of _______________________199___. __________________________________________________ ___ First Excess and Reinsurance Corporation Interests and Liabilities Agreement of GIO Insurance Ltd. trading as GIO Reinsurance Sydney, Australia (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 7.50% of the Second Excess Catastrophe Reinsurance 7.50% of the Third Excess Catastrophe Reinsurance 4.25% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Sydney, Australia,this _______ day of __________________________199___. __________________________________________________ ___ GIO Insurance Ltd. trading as GIO Reinsurance Interests and Liabilities Agreement of Global Capital Re Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 5.00% of the Third Excess Catastrophe Reinsurance 7.50% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of __________________________199___. __________________________________________________ ___ Global Capital Re Interests and Liabilities Agreement of Great Lakes American Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 5.25% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of _________________________199___. __________________________________________________ ___ Great Lakes American Reinsurance Company Interests and Liabilities Agreement of Grinnell Mutual Reinsurance Company Grinnell, Iowa (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance 0.35% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Grinnell, Iowa,this _______ day of _____________________________199___. __________________________________________________ ___ Grinnell Mutual Reinsurance Company Interests and Liabilities Agreement of Helvetia Swiss Insurance Company, Ltd. St. Gallen, Switzerland (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 1.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: St. Gallen, Switzerland,this _______ day of _____________________ ______________199___. __________________________________________________ ___ Helvetia Swiss Insurance Company, Ltd. Interests and Liabilities Agreement of Insurance Corporation of Hannover Chicago, Illinois (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 3.50% of the Second Excess Catastrophe Reinsurance 2.50% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Los Angeles, California,this _______ day of _____________________199___. __________________________________________________ ___ Insurance Corporation of Hannover Interests and Liabilities Agreement of International Property Catastrophe Reinsurance Company, Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 3.67% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 2.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of __________________________199___. __________________________________________________ ___ International Property Catastrophe Reinsurance Company, Ltd. Interests and Liabilities Agreement of La Mutuelle Du Mans Assurances I.A.R.D. LeMans, France (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance 1.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: LeMans, France,this _______ day of _____________________________199___. __________________________________________________ ___ La Mutuelle Du Mans Assurances I.A.R.D. Interests and Liabilities Agreement of LaSalle Re Limited Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 15.75% of the Third Excess Catastrophe Reinsurance 10.52% of the Fourth Excess Catastrophe Reinsurance 2.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of ___________________________199___. __________________________________________________ ___ LaSalle Re Limited Interests and Liabilities Agreement of Mapfre Re Compania de Reaseguros, S.A. Madrid, Spain (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 2.00% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance 2.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Madrid, Spain,this _______ day of _______________________________ 199___. __________________________________________________ ___ Mapfre Re Compania de Reaseguros, S.A. Interests and Liabilities Agreement of Nationwide Mutual Insurance Company Columbus, Ohio (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 3.50% of the Second Excess Catastrophe Reinsurance 3.50% of the Third Excess Catastrophe Reinsurance 3.00% of the Fourth Excess Catastrophe Reinsurance 2.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Columbus, Ohio,this _______ day of _____________________________199___. __________________________________________________ ___ Nationwide Mutual Insurance Company Interests and Liabilities Agreement of Reinsurance Australia Corporation Limited Sydney, Australia (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 3.00% of the Second Excess Catastrophe Reinsurance 7.50% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Sydney, Australia,this _______ day of __________________________199___. __________________________________________________ ___ Reinsurance Australia Corporation Limited Interests and Liabilities Agreement of Renaissance Reinsurance Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 10.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of __________________________199___. __________________________________________________ ___ Renaissance Reinsurance Ltd. Interests and Liabilities Agreement of St. Paul Fire and Marine Insurance Company St. Paul, Minnesota (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 2.50% of the Fourth Excess Catastrophe Reinsurance 1.10% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of _________________________199___. __________________________________________________ ___ St. Paul Fire and Marine Insurance Company St. Paul Reinsurance Management Corporation, Reinsurance Managers Interests and Liabilities Agreement of Shelter Reinsurance Company Columbia, Missouri (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.00% of the Second Excess Catastrophe Reinsurance 0.75% of the Third Excess Catastrophe Reinsurance 1.00% of the Fourth Excess Catastrophe Reinsurance 0.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Columbia, Missouri,this _______ day of _________________________199___. __________________________________________________ ___ Shelter Reinsurance Company Interests and Liabilities Agreement of Sirius International Insurance Corporation Stockholm, Sweden (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 1.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Stockholm, Sweden,this _______ day of __________________________199___. __________________________________________________ ___ Sirius International Insurance Corporation Interests and Liabilities Agreement of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 15.00% of the Fourth Excess Catastrophe Reinsurance 7.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of _________________________199___. __________________________________________________ ___ SOREMA North America Reinsurance Company Interests and Liabilities Agreement of The Sumitomo Marine & Fire Insurance Co., Ltd. (U.S. Branch) New York, New York through Sumitomo Marine Re Management, Inc. New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.75% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 1.00% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of _________________________199___. __________________________________________________ ___ The Sumitomo Marine & Fire Insurance Co., Ltd. (U.S. Branch) By: Sumitomo Marine Re Management, Inc. Interests and Liabilities Agreement of United Fire & Casualty Company Cedar Rapids, Iowa (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0.75% of the Fourth Excess Catastrophe Reinsurance 0.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Cedar Rapids, Iowa,this _______ day of _________________________199___. __________________________________________________ ___ United Fire & Casualty Company Interests and Liabilities Agreement of United States Fidelity and Guaranty Company Baltimore, Maryland (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 5.25% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 5.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Morristown, New Jersey,this _______ day of _____________________ 199___. United States Fidelity and Guaranty Company By: _________________________________________________ Attorney-In-Fact Interests and Liabilities Agreement of Unione Italiana di Riassicurazione S.P.A. Rome, Italy (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.50% of the Second Excess Catastrophe Reinsurance 1.00% of the Third Excess Catastrophe Reinsurance 1.00% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Rome, Italy,this _______ day of ________________________________199___. __________________________________________________ ___ Unione Italiana di Riassicurazione S.P.A. Interests and Liabilities Agreement of Vesta Fire Insurance Corporation Birmingham, Alabama (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 5.50% of the Fourth Excess Catastrophe Reinsurance 5.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Birmingham, Alabama,this _______ day of _________________________199___. __________________________________________________ ___ Vesta Fire Insurance Corporation Interests and Liabilities Agreement of Certain Underwriting Members of Lloyd's shown in the Signing Schedule(s) attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 31.50% of the Second Excess Catastrophe Reinsurance 12.00% of the Third Excess Catastrophe Reinsurance 15.63% of the Fourth Excess Catastrophe Reinsurance 28.95% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes and Mount, 750 Seventh Avenue, New York, New York 10019. Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s) attached hereto. Interests and Liabilities Agreement of SOREMA North America Reinsurance Company New York, New York as the fronting company for P.R.A.M. subscriptions (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 7.00% of the Second Excess Catastrophe Reinsurance 6.00% of the Third Excess Catastrophe Reinsurance 4.50% of the Fourth Excess Catastrophe Reinsurance 3.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of __________________________ 199___. __________________________________________________ ___ SOREMA North America Reinsurance Company for and on behalf of P.R.A.M. ____________________________________ Interests and Liabilities Agreement of Mid Ocean Reinsurance Company Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 7.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. The following Article shall apply to the Subscribing Reinsurer's share in the attached Contract, in lieu of the provisions of Article XXIV - Intermediary - of the Contract: "Article XXIV - Intermediaries E. W. Blanch Co. and Park International Limited are hereby recognized as the Intermediaries negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431, and Park International Limited, Insurance Brokers and Managers, 44 Church Street, Hamilton HM12, Bermuda. Payments by the Company to either of the Intermediaries shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to either of the Intermediaries shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company." In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of _______________________________199___. __________________________________________________ ___ Mid Ocean Reinsurance Company Ltd. Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to Meridian Mutual Group Indianapolis, Indiana E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 EX-10.42 7 E. W. BLANCH CO. Reinsurance Services Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Preamble The "Meridian Mutual Group" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire and Casualty Insurance Company, all of Indianapolis, Indiana. It is understood that Meridian Mutual Insurance Company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article I - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Fire, Allied Lines, Homeowners (property perils only), Mobile Homeowners (property perils only), Farmowners (property perils only), Commercial Multiple Peril (property perils only), Businessowners (property perils only), Earthquake, Inland Marine and Automobile Physical Damage (comprehensive coverage only) business, subject to the terms, conditions and limitations hereinafter set forth. Article II - Term A. This Contract shall become effective on January 1, 1996, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 1996, both days inclusive. B. If this Contract expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. Article III - Territory The liability of the Reinsurer shall be limited to losses under policies covering property located within the territorial limits of the United States of America, its territories or possessions, Puerto Rico, the District of Columbia and Canada; but this limitation shall not apply to moveable property if the Company's policies provide coverage when said moveable property is outside the aforesaid territorial limits. Article IV - Exclusions This Contract shall not apply to: 1. Reinsurance accepted by the Company other than: a. Facultative reinsurance on a share basis of risks accepted individually and not forming part of any agreement, or b. Local agency reinsurance on a share basis accepted in the normal course of business. 2. Nuclear incident per the following clauses attached hereto: a. "Nuclear Incident Exclusion Clause - Physical Damage Reinsurance - U.S.A." (NMA 1119); b. "Nuclear Incident Exclusion Clause - Physical Damage Reinsurance - Canada" (NMA 1980); c. "Nuclear Energy Risks Exclusion Clause (Reinsurance) (1994) (Worldwide Excluding U.S.A. & Canada)" (NMA 1975(a)). 3. Pool, association, or syndicate business as excluded by the provisions of the "Pools, Associations and Syndicates Exclusion Clause" attached to and forming part of this Contract. 4. Any liability of the Company arising from its participation or membership in any insolvency fund. 5. Credit, financial guarantee and insolvency business. 6. War risks as excluded in any standard policy. 7. Policies written to apply in excess of underlying insurance or policies written with a deductible or franchise of more than $10,000; however, this exclusion shall not apply to policies which provide a percentage deductible or franchise in connection with earthquake or windstorm. 8. Insurance on growing crops. 9. Insurance against flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, when written as such; however, this exclusion shall not apply as respects the foregoing perils included in Commercial Multiple Peril, Homeowners Multiple Peril, Farmowners Multiple Peril, Inland Marine, Businessowners, Mobile Homeowners, and Automobile Physical Damage policies, and in endorsements to Fire and Extended Coverage policies. 10. Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property. 11. Difference in conditions insurance and similar kinds of insurance, howsoever styled. 12. Risks which have a total insurable value of more than $250,000,000. 13. Any collection of fine arts with an insurable value of $5,000,000 or more. 14. Inland Marine business with respect to the following: a. All bridges and tunnels; b. Cargo insurance when written as such with respect to ocean, lake, or inland waterways vessels; c. Commercial negative film insurance and cast insurance; d. Drilling rigs, except water well drilling rigs; e. Furriers' customers policies; f. Garment contractors policies; g. Insurance on livestock under so-called "mortality policies," when written as such; h. Jewelers' block policies and furriers' block policies; i. Mining equipment while underground; j. Radio and television broadcasting towers; k. Registered mail insurance when the limit of any one addressee on any one day is more than $50,000; l. Watercraft other than watercraft insured under personal property floaters, yacht and/or outboard policies, homeowners, farmowners, or recreational vehicle policies. 15. Automobile physical damage business with respect to the following: a. Insurance against collision; b. Insurance against theft or larceny; c. Manufacturers' stocks at factories or warehouses. 16. Seepage and/or pollution and/or contamination. 17. Losses in respect of overhead transmission and distribution lines and their supporting structures other than those on or within 150 meters (or 500 feet) of the insured premises. It is understood and agreed that public utilities extension and/or suppliers extension and/or contingent business interruption coverages are not subject to this exclusion provided that these are not part of a transmitters' or distributors' policy. 18. Extra Contractual Obligations and Loss in Excess of Policy Limits. Article V - Retention and Limit A. No claim shall be made hereunder until the Company's subject ultimate net loss arising out of loss occurrences commencing during the term of this Contract exceeds 2.5% of net earned premium for the term of this Contract, subject to a minimum retention of $4,975,000. The Reinsurer shall then be liable for 95.0% of the amount by which the Company's subject ultimate net loss for the contract year exceeds the Company's retention, but the liability of the Reinsurer shall not exceed 95.0% of $8,000,000 in all during the term of this Contract. B. "Subject ultimate net loss" as used herein shall mean: 1. The Company's ultimate net loss in excess of $175,000 arising out of any one loss occurrence, not to exceed $6,000,000 in any one loss occurrence; plus, 2. The Company's 5.0% co-participation under their per occurrence catastrophe coverage of $12,000,000 excess of $6,000,000 per loss occurrence. No loss occurrence shall be included in subject ultimate net loss unless said loss occurrence involves at least two risks. C. The Company shall maintain in force excess per risk reinsurance, recoveries under which shall inure to the benefit of this Contract. Article VI - Definition of Ultimate Net Loss "Ultimate net loss" as used herein is defined as the sum or sums (including interest on judgments, litigation expenses and all other loss adjustment expenses, except office expenses and salaries of the Company's regular employees) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. Article VII - Loss Occurrence (NMA 2244/BRMA 27A) A. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in paragraph A of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence." B. Except for those "loss occurrences" referred to in subparagraphs 1 and 2 of paragraph A above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event. C. However, as respects those "loss occurrences" referred to in subparagraphs 1 and 2 of paragraph A above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss. D. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. Article VIII - Loss Notices and Settlements A. Whenever losses sustained by the Company appear likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of the original policies (or within the terms of extra contractual obligations coverage, if any, provided under this Contract) and within the terms of this Contract, shall be binding upon the Reinsurer. The Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. The Company shall be the sole judge of what is covered by an original policy. C. If the aggregate subject excess ultimate net paid losses occurring during the term of this Contract exceed the provisional retention, the reinsurer shall make preliminary payment of the Reinsurer's portion of such subject ultimate net losses. The provisional retention shall be calculated based upon 2.5% of the estimated net earned premium for the term of this Contract, as estimated at the inception hereof. Any such preliminary payment shall be adjusted to actual as soon as the Company's net earned premium is known. Article IX - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article X - Premium A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer .86% of its net earned premium for the term of this Contract, subject to a minimum premium of $1,480,000. B. The Company shall pay the Reinsurer a deposit premium of $1,850,000 in four equal installments of $462,500 on January 1, April 1, July 1 and October 1, 1996. C. Within 60 days after the expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. D. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. For purposes of calculating net earned premium, 90% of the total basic policy premium as respects Homeowners, Mobilehomeowners and Farmowners business, 70% of the total basic policy premium as respects Businessowners and Commercial Multiple Peril, and 100% of the Comprehensive portion of the premium for Automobile Physical Damage business shall be considered subject premium. Article XI - Profit Sharing A. If this reinsurance Contract is renewed for calendar years 1997 and 1998, and the premiums paid for this Contract, and such 1997 and 1998 Contracts exceed the losses incurred under said contracts, then the Company will be entitled to a "Return Premium." The "Return Premium" shall be equal to the greater of zero or 25% of the "Profit Balance" under said contracts in the aggregate. The "Profit Balance" shall be equal to 80% of the total premiums, including reinstatement premiums paid (if any) during the terms of said contracts, less losses incurred under said contracts B. At the date that such a "Return Premium" is mutually determined by the Company and the Reinsurer and the payment is made by the Reinsurer to the Company, such contracts shall be considered commuted, and such payment, once effected, shall be regarded as a full and final release of the Reinsurer from all liability under such contracts. C. Should the Reinsurer decline to offer a renewal of this reinsurance for 1997 and/or 1998 at similar terms to this Contract, in relation to the exposure presented, then the "Return Premium" shall be calculated based on the period during which this Contract and whichever (if any) other contracts as are described in paragraph A were in effect, subject to the above mentioned conditions. Article XII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIII - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XIV - Net Retained Lines (BRMA 32B) A. This Contract applies only to that portion of any policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XV - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XVI - Currency (BRMA 12A) Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XVII - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XVIII - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XIX - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded United States outstanding loss and loss adjustment expense reserves by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. If the Reinsurer is unauthorized in any province or jurisdiction of Canada, the Reinsurer agrees to fund 115% of its share of the Company's ceded Canadian outstanding loss and loss adjustment expense reserves by: 1. A clean, irrevocable and unconditional letter of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a Canadian bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities, for no more than 15/115ths of the total funding required; and/or 2. Cash advances for the remaining balance of the funding required; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. C. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expenses paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves, if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for C(1) or C(3), or in the case of C(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XX - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (a) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXI - Arbitration (BRMA 6J) A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article XXII - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXIII - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Indianapolis, Indiana,this _______ day of ___________________________199___. __________________________________________________ ___ Meridian Mutual Group Table of Contents Article Page Preamble 1 I Classes of Business Reinsured 1 II Term 2 III Territory 2 IV Exclusions 2 V Retention and Limit 5 VI Definition of Ultimate Net Loss 5 VII Loss Occurrence (NMA 2244/BRMA 27A) 5 VIII Loss Notices and Settlements 7 IX Salvage and Subrogation 7 X Premium 7 XI Profit Sharing 8 XII Offset (BRMA 36C) 8 XIII Access to Records (BRMA 1D) 9 XIV Net Retained Lines (BRMA 32B) 9 XV Errors and Omissions (BRMA 14F) 9 XVI Currency (BRMA 12A) 9 XVII Taxes (BRMA 50C) 9 XVIII Federal Excise Tax (BRMA 17A) 10 XIX Unauthorized Reinsurers 10 XX Insolvency 11 XXI Arbitration (BRMA 6J) 12 XXII Service of Suit (BRMA 49C) 13 XXIII Intermediary (BRMA 23A) 14 Interests and Liabilities Agreement of Dorinco Reinsurance Company Midland, Michigan (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 23.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Midland, Michigan,this _______ day of _____________________________199___. __________________________________________________ ___ Dorinco Reinsurance Company Interests and Liabilities Agreement of The Nissan Fire & Marine Insurance Co., Ltd. Tokyo, Japan (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 2.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Tokyo, Japan,this _______ day of __________________________________ 199___. __________________________________________________ ___ The Nissan Fire & Marine Insurance Co., Ltd. Interests and Liabilities Agreement of Renaissance Reinsurance Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 67.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of _____________________________199___. __________________________________________________ ___ Renaissance Reinsurance Ltd. Interests and Liabilities Agreement of Albingia Versicherung AG Hamburg, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 3.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamburg, Germany,this _______ day of ______________________________199___. __________________________________________________ ____ Albingia Versicherung AG Interests and Liabilities Agreement of Cie Transcontinentale de Reassurance Paris, France (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to and duly executed by Meridian Mutual Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 4.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1996, and shall continue in force until December 31, 1996, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Paris, France,this _______ day of _________________________________ 199___. __________________________________________________ ___ Cie Transcontinentale de Reassurance Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to Meridian Mutual Group Indianapolis, Indiana E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to Meridian Mutual Group Indianapolis, Indiana Reinsurers Participations Dorinco Reinsurance Company 23.0% The Nissan Fire & Marine Insurance Co., Ltd. 2.5 Renaissance Reinsurance, Ltd. 67.5 Through Swire Blanch (Copenhagen Office) Albingia Versicherung AG 3.0 Cie Transcontinentale de Reassurance 4.0 Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 EX-10.43 8 March 7, 1996 E. W. BLANCH CO. 3500 West 80th Street Minneapolis, Minnesota 55431 Reinsurance Confirmation RE: Excess Catastrophe Reinsurance Contract Underlying Aggregate Excess Reinsurance Contract Effective: January 1, 1996 Reinsurance Confirmations This confirms that Meridian Mutual Group accepts the terms and conditions outlined in E. W. Blanch Co.'s Reinsurance Confirmation package of December 27, 1995. In addition, this confirms that Meridian Mutual Group, has authorized and directed E. W. Blanch Co. to place the subject business with those reinsurers listed in E. W. Blanch Co.'s Reinsurance Confirmation package of December 27, 1995. Sincerely, Meridian Mutual Group By: Title: Vice President Corporate Underwriting Director Date: January 2, 1996 EX-10.44 9 ENDORSEMENT #1 Property Excess of Loss Reinsurance Binding Agreement between Meridian Insurance Company of Indianapolis, Indiana and NAC Reinsurance Corporation New York, NY Article 5, entitled "TERRITORY" is amended to include the state of Iowa and Pennsylvania effective January 1, 1996. Accepted by: CARL W. BUEDEL Meridian Insurance Date: DEBBIE BOUSSO NAC Resinsurance Corporation Date: Property Excess of Loss Reinsurance Binding Agreement between Meridian Insurance of Indianapolis, Indiana (both hereinafter referred to as the "COMPANY") and NAC Reinsurance Corporation New York, NY (hereinafter referred to as the "REINSURER") ARTICLE 1 PARTIES TO THE AGREEMENT This Agreement is solely between the Company and the Reinsurer. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this Agreement. Performance of the obligations of each party under this Agreement shall be rendered solely to the other party. In no instance shall any insured of the Company, and claimant against an insured of the Company, or any other third party have any rights under this Agreement. The rights and obligations of the parties to this Agreement shall not be affected by the termination of this Agreement and all necessary transactions relating to this Agreement will continue in accordance with the terms and conditions stipulated herein until all obligations of either party to the other are fully concluded. ARTICLE 2 TERMS AND CANCELLATION Anything contained herein to the contrary notwithstanding, coverage is continuous for all new and renewal policies attaching from 12:01 a.m. Central Daylight Time, June 15, 1995, until canceled by either party at any time with 90 days prior written notice by certified mail. In the event this agreement is terminated by either party, the Reinsurer shall be liable for all original policies or portions thereof in force as of the date of termination up to the natural expiration or prior termination date of said policies, plus odd time, but not to exceed eighteen months in total. ARTICLE 3 BUSINESS COVERED By this Agreement and subject to the terms and conditions herein contained, the Reinsurer agrees to indemnify the Company in respect to the net excess liability stipulated in this Agreement which may accrue to the Company as a result of each loss occurrence during the term of this Agreement under any and all written binders, policies, or contracts of insurance issued by the Company and classified by the Company as Commercial Property business, including Garage Keepers Legal Liability, in accordance with the Meridian Commercial Lines Underwriting Guide (CLUG). Binding authority for risks ceded hereunder is granted to the Company subject to all terms and conditions herein. Any changes to the terms and conditions of this Agreement must be made by endorsement to the Agreement and countersigned by a duly authorized representative of the Reinsurer. ARTICLE 4 PERILS COVERED The policies ceded to this Agreement are reinsured for All Risks of physical loss including Earthquake, excluding Flood, covering Property Damage and Time Element in accordance with the terms of the Company's policy and this Agreement for single amount subject risks individually ceded to the Agreement. All Risks, including Flood and Earthquake coverage, are provided for those risks classified as Inland Marine. Risks located in ISO Earthquake Zones 1 and 2 are excluded for the peril of Earthquake. ARTICLE 5 TERRITORY This agreement shall apply to policies covering risks located in Illinois, Indiana, Kentucky, Michigan, Ohio, Wisconsin, and Tennessee in accordance with the Company's regulatory filing. The Company shall notify the Reinsurer in advance of any regulatory filing to insure risks in additional states, and subject to the Reinsurer's approval, the territory clause of this Agreement will be amended. ARTICLE 6 LIMIT OF LIABILITY OF THE REINSURER Reinsurance Accepted for Protected Risks defined as Meridian CLUG Classifications 1, 2, 3, and 4, in ISO Protection Classes 1 through 8 shall be limits up to two times the Company's maximum net and treaty retention as outlined in the Commercial Lines Divisional Authority Level section of the CLUG. Reinsurance limits shall be subject to a maximum limit of $6,000,000 any one risk. Reinsurance Accepted for Unprotected Risks defined as Meridian CLUG Classifications 1, 2, 3, and 4 located in ISO Protection Classes 9 and 10 shall be limits up to three times the Company's maximum net and treaty retention as outlined in the Commercial Lines Divisional Authority Level section of the CLUG. Reinsurance limits shall be subject to a maximum limit of $3,750,000 for any one risk. These reinsurance limits are subject to a $10,000,000 limitation in any one occurrence. Garage Keepers Legal Liability is included with a maximum sublimit of $500,00 to be written by Meridian. ARTICLE 7 BINDING AUTHORITY Authority to bind the Reinsurer is granted to all Meridian underwriters above the Level Two underwriting designation. ARTICLE 8 TOTAL INSURED VALUE LIMITATION Total Insured Values for any one risk ceded to the agreement shall not exceed $10,000,000 for Protected Risks and $5,000,000 for Unprotected Risks. Reinsurance rates for this agreement are designed to reinsurer excess of the company's net and treaty retention up to 100% of the total risk values. Risks which require additional limits should be submitted to the Reinsurer for Special Acceptance or for individual risk certificate coverage. The Agreement includes only those accounts insured 100% by Meridian Insurance. Any policy which otherwise satisfies the terms and conditions of this agreement must be cleared with the Reinsurer prior to binding if the Company participates jointly with any other insurer. ARTICLE 9 RATES Reinsurance Premium for individual risks ceded to this agreement shall be calculated in accordance with the schedule of Reinsurance rates below which shall be applied to the Company's 100% gross location premium for each risk. Reinsurance rates for Protected and Unprotected Risks are as follows: PROTECTED RISKS PC 1 - 8 NET AND TREATY RETENTION AS NET REINSURANCE RATE PERCENTAGE OF TOTAL LOCATION VALUES 33% - 39% 23.5% 40% - 49% 20.2% 50% - 59% 16.1% 60% - 69% 12.0% 70% - 79% 8.2% 80% - 89% 4.8% 90% - 99% 2.5% UNPROTECTED RISKS PC9 and 10 NET AND TREATY RETENTION AS NET REINSURANCE RATE PERCENTAGE OF TOTAL LOCATION VALUES 25% - 34% 42.5% 35% - 44% 30.5% 45% - 54% 26.1% 55% - 64% 23.7% 65% - 74% 16.8% 75% - 84% 12.5% 85% - 94% 7.0% 95% - 99% 2.9% ARTICLE 10 RIGHT OF REJECTION The Reinsurer may reject any individual cession and shall so notify the Company in writing of its declination within 15 working days of receipt of Bordereau. The Company shall replace the reinsurance promptly, but within a period not to exceed one hundred twenty (120) days after receipt by the Company of the notice of declination from the Reinsurer. ARTICLE 11 REPORTING AND PAYMENT PROCEDURES Risk Summary Sheets for each risk and a monthly Bordereaux of all risks ceded shall be submitted to the Reinsurer within 20 working days after the last day of each month. Any premium amounts due the Reinsurer shall be paid with the Bordereaux. Risk Summary Sheets for each insured shall include the following information: 1. Total Insured Values 2. Construction 3. CLUG Classification 4. Protection Class 5. 100% of Meridian's Gross Premium for the Risk 6. Net Resinsurance Rate 7. Net Reinsurance Premium Bordereaux for all risks ceded during the preceding month shall list the following information: 1. Named Insured 2. Reinsurance Premium 3. Reinsurance Period 4. Policy Number ARTICLE 12 PROFIT COMMISSION The Reinsurer shall pay the Company a profit commission equal to 25% of the net profit, if any, accruing to the Reinsurer during the adjustment period, subject to a minimum reinsurance premium of $350,000 during the 24-month adjustment period. The Reinsurer's net profit during the adjustment period shall be calculated in accordance with the following formula, it being understood that a positive balance equals net profit and a negative balance equals net loss: 1. Earned reinsurance premium for the adjustment period; less 2. Expenses incurred by the Reinsurer at 15% of earned reinsurance premium for the adjustment period; less 3. Losses incurred for the adjustment period. With respect to the calculation and payment of profit commission, the following interpretations and reporting terms and conditions shall apply: 1. Adjustment Period "Adjustment period" as used herein shall be defined as the 24 months following inception, and as each 24-month period thereafter, while this agreement remains in effect. 2. Statement of Profit Commission Within 45 days following 6 months after the adjustment period, the Company shall calculate and render an initial statement of the Reinsurer's net profit for the entire adjustment period. Within 45 days after the end of the 12-month period thereafter, a revised statement shall be rendered by the Company to the Reinsurer to reflect any changes in the original statement. Any return profit commission shown to be due the Reinsurer shall be paid by the Company with the revised statement. Any profit commission shown to be due the Company upon receipt of either the initial statement or the revised statement shall be paid by the Reinsurer as promptly as possible after the receipt and verification of the Company's statement. 3. Short-term Cancellation If this Agreement is canceled at any time prior to the expiration of the adjustment period, no profit commission will be due the Company. 4. Losses Incurred "Losses incurred" as used herein shall mean ceded losses and loss adjustment expenses paid as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expenses outstanding as of the same date. ARTICLE 13 LOSS NOTIFICATION, NET LOSS, LOSS ADJUSTMENT EXPENSES AND RECOVERIES Loss Notification The Company shall give prompt written notice to the Reinsurer of any claim or loss which in the sound judgment of the Company may result in a net loss to the Reinsurer. While the Reinsurer does not have the duty to investigate or defend claims or suits, it shall nevertheless have the right and the opportunity, with the full cooperation of the Company, to associate with the Company at its own expense in the defense of any claim, suit, or proceeding which involves or is like to involve this Agreement. All loss settlements, provided they are within the terms and conditions of the Company's policy and this Agreement, shall be binding upon the Reinsurer. Upon receipt of satisfactory proof of loss payment, the Reinsurer shall promptly pay the Company for amounts due under this Agreement. Net Loss The term "net loss" as used herein shall be understood to mean the sum actually paid or to be paid by the COMPANY in settlement of losses reinsured hereunder for which it is liable after making deductions for all other insuring reinsurance, whether collectible or not, and all salvages and other recoveries, including subrogation recoveries; provided however, that in the event of insolvency of the COMPANY, "net loss" shall be determined in accordance with the provisions of the Clause entitled INSOLVENCY of this agreement. Net Loss shall not include loss adjustment expenses. It is agreed that the existence of underlying reinsurance, if any, shall be entirely disregarded in determining the Company's net loss. Nothing in this Clause shall imply that losses are not recoverable under this Agreement until the Company's net loss has been finally ascertained. Loss Adjustment Expenses The term "loss adjustment expenses" shall mean expenses of the Company, including court costs, prejudgment interest and post judgment interest, incurred in the investigation, adjustment, and defense of claims under the terms of policies subject to this Agreement, which expenses are allocable to a specific net loss, but shall not include administrative and office expenses and salaries and expenses of employees and officials of the Company. The Reinsurer shall indemnify the Company for the Reinsurer's proportionate share of loss adjustment expenses which shall be in addition to its Limit of Liability. In the event a verdict or judgment is reduced by an appeal or a settlement, subsequent to the entry of a judgment, resulting in an ultimate savings to the REINSURER, or a judgment is reversed outright, the expenses incurred in securing such reduction or reversal shall be prorated between the COMPANY and the REINSURER in the proportion that each benefits from such reduction or reversal, and the expenses incurred up to the time of the original verdict or judgment shall be prorated in proportion to each party's interest in such original verdict or judgment. Recoveries The Reinsurer shall be subrogated, as respects to any loss for which the Reinsurer shall actually pay or become liability to pay, to all the rights of the Company against any person or other entity who may be legally responsible in damages for said loss. The Company hereby agrees to enforce such rights, but in case the Company shall refuse or neglect to do so, the Reinsurer is hereby authorized and empowered to enforce such rights. Any recoveries, salvages, or reimbursements applying to risks covered under this Agreement shall always be used to reimburse the excess reinsurer, according to their participation, before being used in any way to reimburse the Company for its primary loss. All salvages, recoveries, or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments shall be made by the parties hereto. ARTICLE 14 AUDITS The Company shall place at the disposal of the Reinsurer and the Reinsurer shall have the right to inspect, through its authorized representatives, at all reasonable times during the currency of this Agreement and thereafter, the books, records, and papers of the Company pertaining to the reinsurance provided hereunder and all claims made in connection therewith. ARTICLE 15 OFFSET The Company and The Reinsurer may offset any balance or amount due from one party to the other under this Agreement or any other reinsurance agreement of any kind heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company. If the Company (including all affiliates and/or subsidiaries, whether or not covered by this Agreement) is comprised of more than one entity, all such entities will be considered the Company for purposes of offset. In the event of insolvency of either the Company or the Reinsurer, offset shall be permitted in accordance with the terms of this Clause and as otherwise permitted by law. ARTICLE 16 INSOLVENCY In the event of the insolvency of the Company and the appointment of a liquidator or receiver, reinsurance due under this Agreement shall be payable, with reasonable provision for verification, on the basis of the liability of the Company resulting from claims allowed against the Company in the liquidation proceeding without diminution because such liquidator or receiver has failed to pay all or a portion of any claims. Payment by the Reinsurer as set forth above shall be made directly and exclusively to the Company or its liquidator or receiver, except as provided by subsection (a) of Section 4118 of New York Insurance Law or except (a) where this Agreement specifies another payee in the event of the insolvency, and (b) the Reinsurer, with the consent of the direct insureds, has assumed such policy obligations of the Company as direct obligations to the payees under such policies in substitution for the obligations of the Company to such payees. In the event of the insolvency of the Company, the liquidator or receiver shall give written notice of the pendency of claim against the Company under policies reinsured within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Reinsurer has the right but not the duty to investigate said claim and interpose in the proceeding where the claim is to be adjudicated, at its own expense, any defense that it may deem available to the Company, or its liquidator or receiver. The expense thus incurred by the Reinsurer will be chargeable against the Company, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. ARTICLE 17 TAXES The Company shall be liable for paying all taxes, other than income or profit taxes, levied on the Reinsurer for business reinsured under this Agreement. If the Reinsurer is obligated to pay taxes other than income or profit taxes for business reinsured under this Agreement, the Company shall reimburse the Reinsurer, provided that the Company shall not be required to pay the same tax twice. EXCLUSIONS 1. Grain Risks - including feed mixing, grain elevators, and train terminals; 2. Petro Chemical Risks and High Hazard Chemical - including manufacturing and storage. High Hazard chemical business is defined as a chemical exposure consisting of acids, coal chemicals, industrial gases, petrochemical (including, but not limited to, polypropylene, polyethylene phenols, and polymers) petroleum and synthetic fuel refining, chlorine, methane, caustic soda, electrolytic, and electro thermal chemical manufacturing, ammonia, urea, and nitrogen compounds (including nitric acid). In general, any chemical with over 250 psig would be classified as high hazard. 3. Damage to Growing Crops or Standing Timber; 4. Satellites, Aerospace, and Aviation; 5. Boiler and Machinery when written as such; 6. Transmission and Distribution Liens except coverage provided within 1,000 feet of insured's building; 7. Underground Mines, Tunnels, and Storage Facilities; 8. Wind and/or Solar Powered Electrical Generation Facilities; 9. Railroad Rolling Stock; 10. Builders Risks Contracts written for a term in excess of 36 months; 11. Jewelers' and Furriers' Block; 12. Auto Physical Damage and Dealer's Open Lot, except for Garage Keepers Legal Liability; 13. Ocean Marine; 14. Covered Stadiums and Domes 15. Flood and Earthquake when written as such; 16. Animal Mortality; 17. Strike Insurance; 18. Offshore Drilling Rigs, Pipeline Risks and Property belonging thereto; 19. Fidelity and Surety; 20.Losses arising out of seepage and/or pollution as per the Company's standard pollution and seepage exclusion. However, this exclusion will not apply when the Company includes its standard pollution exclusion on a policy and the judicial entity having legal jurisdiction invalidates the Company's exclusion thereby obligating the Company for liability arising out of seepage and/or pollution when such liability was intended to be excluded from coverage; 21. Insolvency Funds and Financial Guaranty Funds; 22. Retroactive Liability including IBNR an known losses; 23. Extra Contractual Obligation and Loss in Excess of Policy Limits; 24. United States Longshoremen and Harbor Workers and Jones Act business; 25.War Risks as per the North American War Exclusion Clause (Reinsurance), BRMA Clause Number 56A; 26.Business included in the Nuclear Incident Exclusion Clause attached hereto (BRMA Clause No. 35B); 27. Assumed Resinsurance except for reinsurance assumed from subsidiaries; 28. Business Produced By Managing General agents; 29.The Company's liability as a member, subscriber, or reinsurer of any pool, syndicate, or association including, but not limited to, Fair Plans and Coastal Pools; EXCLUSIONS CONTINUED 30.Losses arising out of asbestos as per the Company's standard asbestos exclusion. However, this exclusion will not apply when the Company includes its standard asbestos exclusion on a policy, or when the Company includes its standard asbestos exclusion on a policy and the judicial entity having legal jurisdiction invalidates the Company's exclusion policy and the judicial entity having legal jurisdiction invalidates the Company's exclusion thereby obligating the Company for liability arising out of asbestos such liability was intended to be excluded from coverage. 31. Meridian Insurance CLUG Risk Classification 5. The exclusions enumerated above, with the exception of 21, 22, 23, 24, 25, 26, 27, 28, and 29, will not apply when they are merely incidental to the main operations of the insured, provided such main operations are covered by the Company and are not themselves excluded from the scope of this Agreement. The Company shall be sole judge of what is "incidental". Errors and omissions on the part of the Company, shall not invalidate the reinsurance under this Agreement, provided such errors or omissions are corrected promptly after discovery thereof, but the liability of the Reinsurer under this Agreement or any exhibits or endorsements attached thereto shall in no event exceed the limits specified herein. Risks which are specifically excluded by the Agreement may be individually submitted hereunder, and, if accepted by the Reinsurer, such business shall then be covered under the terms of this Agreement, except as such terms shall be modified by such acceptance. 35 B NUCLEAR INCIDENT EXCLUSION CLAUSE--PHYSICAL DAMAGE--REINSURANCE U.S.A. 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of Paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in Paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of Paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this Paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant of nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property cused by or resulting from radioactive contamination, however caused. However, on and after 1st January 1960, this subparagraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4.Without in any way restricting the operations of Paragraph (1), (2), and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5.It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 35B 6.The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant, or site. Note: Without in any restricting the operation of Paragraph (1) hereof, it is understood and agreed that: (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whever first occurs whereupon all the provisions of this Clause shall apply. 56 A NORTH AMERICAN WAR EXCLUSION CLAUSE (REINSURANCE) As regards interests which at time of loss or damage are on shore, no liability shall attach hereto in respect of any loss or damage which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority. This War Exclusion Clause shall not, however, apply to interests which at time of loss or damage are within the territorial limits of the United States of America (comprising the fifty States of the Union and the District of Columbia and including Bridges between the U.S.A. and Mexico provided they are under United States ownership), Canada, St. Pierre and Miquelon, provided such interests are insured under policies, endorsements, or binders containing a standard war or hostilities or warlike operations exclusion clause. DEFINITION OF LOCATION The Company shall be the sole judge of what constitutes a single location provided that: 1. One location shall always be determined from the standpoint of the peril of fire, whether or not the fire insurance is written by the Company; 2. A non-fire resistive building and its contents shall never be considered as constituting more than one location, nor shall time element coverages be considered a separate location apart from the building and its contents. 3. When two or more buildings and personal property are situated at the same general location, with no single building located farther than 100 yards from the nearest other building, the Company shall identify on its records at the time of acceptance by the Company those two or more original buildings which are deemed to constitute a single location. If such identification is not made, each building and its contents shall be considered to be a separate location. 4. The term building shall mean each structure which is within the local fire insurance rating organization's definition of a separate building or fire division for rate making purposes. With respect to those structures not within such definition(s), the term "building" shall mean each separately roofed structure enclosed within exterior walls. LOSS OCCURRENCE DEFINITION The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident, or loss or series of disaster, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contingous thereto and to one another. However, the duration and extent of any one "Loss Occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows: (i) As regard windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto. (ii) As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. (iii) As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "Loss Occurrence". (iv) As regards to "Freeze", only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company's "Loss Occurrence". For all "Loss Occurrences" the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident, or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event, except for those "Loss Occurrences" referred to in Subparagraphs (i) and (ii) above where only one such period of 72 consecutive hours shall apply with respect to one event, regardless of the duration of the event. No individual losses occasioned by an event that would be covered by 72 hours Clauses may be included in any "Loss Occurrence" claimed under the 168 hours provision. Accepted By: CARL W. BUEDEL MERIDIAN INSURANCE Date: EUGENE M. MANDERINO NAC REINSURANCE CORPORATION Date: EX-23 10 Consent of Independent Public Accountants We consent to the incorporation by reference in Registration Statement No. 33-11413 on Form S-1 as amended by Post- Effective Amendment No. 1 effective March 19, 1987; and in Registration Statement No. 33-58406 on Form S-2 effective April 27, 1993 of Meridian Insurance Group, Inc. of our report, dated February 16, 1996, on our audits of the consolidated financial statements and financial statement schedules of Meridian Insurance Group, Inc. as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Indianapolis, Indiana March 26, 1996 EX-27 11 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1995 DEC-31-1995 220,037 0 2,483 31,120 727 0 254,694 935 1,265 13,355 322,588 123,577 64,559 0 0 0 44,077 0 0 74,166 322,588 143,866 14,564 1,538 (146) 99,124 30,820 14,156 15,722 4,105 11,617 0 0 0 11,617 1.72 1.70 123,755 104,585 (5,461) 61,792 36,899 123,577 (3,938)
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