-----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, EtgVsKbJM9UaLmO/buSHrEvNq7VnbVk1IVBRZsIf45AEDhZ0G8Yr7SYodmdE0mtD GGRVSs7Kc0qIqxt53nCydw== 0000809801-97-000003.txt : 19970401 0000809801-97-000003.hdr.sgml : 19970401 ACCESSION NUMBER: 0000809801-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 97568764 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, 1996. ( )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. Employer Identification 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 3, 1997, based on the closing sales price, was $56,255,313. 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 3, 1997. The Index of Exhibits is located at page 44 in the sequential numbering system. Total number of pages, including cover page: 410. 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 1997 Annual Meeting of Shareholders of Registrant MERIDIAN INSURANCE GROUP, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1996 PART I PAGE ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 17 ITEM 3. LEGAL PROCEEDINGS 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24 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 subsidiaries, Meridian Security Insurance Company ("Meridian Security"), Citizens Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("ICO"). Citizens Fund and ICO, along with their holding company, Citizens Security Group, Inc. ("CSGI"), were purchased by Meridian Security on July 31, 1996. The Company also owns a small service support company, Meridian Service Corporation, whose results of operations are insignificant to the total operations of the Company. During the fourth quarter of 1996, the Company dissolved MarketMasters Agency, Inc., a small insurance agency, and Vernon Fire and Casualty Insurance Company, a dormant property and casualty insurance company. The assets and liabilities of these two subsidiaries were merged into their parent companies at the historical book values. Approximately 46.5 percent of the Company's outstanding common shares are owned by Meridian Mutual Insurance Company ("Meridian Mutual"), a mutual property and casualty insurance company headquartered in Indianapolis, Indiana. Effective August 1, 1996, Meridian Security, Citizens Fund, ICO, Meridian Mutual and Citizens Security Mutual Insurance Company ("Citizens Security Mutual"), the former majority shareholder of CSGI, became parties to a reinsurance pooling agreement ("pooling agreement") under which all business written by each entity are shared by the companies on the basis of their percentage participation defined in the pooling agreement. Prior to August 1, 1996, Meridian Security and Meridian Mutual were the only participants in this pooling arrangement. 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 1,075 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Ohio, Pennsylvania, Tennessee, and Wisconsin. Meridian Mutual is also licensed to write business in the state of Minnesota, but no direct premiums were written during 1996. Meridian Security is admitted in all states in which Meridian Mutual is licensed and writes personal and farm lines primarily in the rural areas of Indiana, Iowa, Kentucky, Ohio, Tennessee, and Wisconsin through approximately 400 independent insurance agencies, many of which are cross-licensed with Meridian Mutual. Citizens Fund and Citizens Security Mutual offer a variety of personal and commercial insurance products in the states of Iowa, Minnesota, Missouri, North Dakota, Ohio, South Dakota, and Wisconsin through a network of approximately 425 independent insurance agencies. ICO writes personal and commercial products in the state of Ohio through approximately 90 independent insurance agencies. During the fourth quarter of 1996, Citizens Security Mutual was granted a license to write insurance in the state of Indiana, however, no premiums were written during 1996. Relationships with Meridian Mutual and Citizens Security Mutual All of the Company's corporate officers are officers of Meridian Mutual and six of the ten members that constitute the Company's Board of Directors are also directors of Meridian Mutual. Of the directors and officers of Citizens Security Mutual, six of the eight members, of which all hold dual roles, are corporate officers of the Company. Prior to January 1, 1997, the Company had no employees and was dependent upon Meridian Mutual and Citizens Security Mutual for the sale and underwriting of insurance, the servicing of policyholder claims and all other aspects of the Company's operations. Effective January 1, 1997, the Company became the employer for all of the employees of Meridian Mutual and Citizens Security Mutual and the related employee benefit plans were merged into the Company's plans. Underwriting expenses are shared under the pooling agreement between each entity in accordance with the participation percentages of the parties. Other expenses which can be directly identified with Meridian Mutual, Citizens Security 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 each 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, Citizens Security Mutual, Meridian Security, Citizens Fund, and ICO. Under the pooling agreement, all premiums, losses, loss adjustment expenses and other underwriting and administrative expenses of each company are shared in accordance with the participation percentages established under the pooling agreement. Effective August 1, 1996, the participation percentages of the Company's insurance subsidiaries totaled 74 percent. The participation rates were fixed with reference to the relative historical net written premiums of the companies. Therefore, each company's relative share of underwriting revenues, losses, and expenses was not significantly altered as an immediate result of the acquisition. Prior to August 1, Meridian Mutual and Meridian Security were the only participants in the pooling agreement, of which Meridian Security had assumed 74 percent of the combined underwriting income and expenses since May 1, 1993. The Boards of Directors of the Company, Meridian Mutual and Citizens Security Mutual have delegated to their respective Audit Committees the responsibility of monitoring the relationships between each of the participants 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 each company any decision to change the participation percentages. Future events that could affect the participation percentages among 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 or asset values of Meridian Mutual, Meridian Security, Citizens Security Mutual, Citizens Fund, or ICO, different effective rates of income taxation, or other factors which disproportionately affect the surplus of any of the participants. The Company, Meridian Mutual and Citizens Security Mutual have conflicting interests with respect to the establishment of the respective ratios of each company under the pooling agreement, and conflicts may arise between the Company, Meridian Mutual and Citizens Security 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 largely dependent upon the business and operations of Meridian Mutual and Citizens Security Mutual. Management of Meridian Mutual determines which expenses are associated with underwriting operations (and therefore shared by each of the entities under the pooling agreement), and also selects and values the assets and liabilities transferred between the 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 and/or Citizens Security 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 and Citizens Security Mutual also owe fiduciary duties to the policyholders of Meridian Mutual and Citizens Security 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 all 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, Citizens Fund, ICO or Citizens Security Mutual and Meridian Mutual. The pooling agreement may be amended or terminated without the necessity of a vote by the shareholders of the Company or the policyholders of any of the parties. In the event of a termination of the pooling agreement, the terminating party or parties would transfer back to Meridian Mutual the liabilities ceded to it by Meridian Mutual and Meridian Mutual would transfer back to the terminating party the liabilities ceded to it by terminating party, and each party would receive from the other assets in an amount equal to the amount of the policy liabilities received. If the pooling agreement had been terminated at the end of February 1997, approximately 12 percent of the assets and liabilities subject to the pooling agreement would have been transferred to the Company's insurance subsidiaries. The Company would continue to own all of the outstanding common shares of Meridian Security, Citizens Fund and ICO. The Company would maintain the employee force but would have limited sales operations through a much smaller independent agency force. Regulatory approvals of the states of domicile are 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 the participating companies and not for the protection of the Company's shareholders. The Company intends that its insurance subsidiaries will continue their 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 group rating of "A" (excellent) by A. M. Best Company, Inc. ("Best"). Subsequent to the July 31, 1996 acquisition of CSGI, the Meridian group rating of "A" was also given to Citizens Fund, ICO and Citizens Security Mutual. 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 and the term "Citizens Security Group" refers to the operations of Citizens Security Mutual, Citizens Fund and ICO covered by the pooling agreement. Although the business of Citizens Security Group is pooled with Meridian's business, the operations of Citizens Security Group are separate from Meridian's operations. The operations of Citizens Fund and ICO were included in the Company's results of operations beginning on August 1, 1996. The 1996 acquisition of Citizens Security Group expanded the Company's operating territory into four additional states (Minnesota, Missouri, South Dakota, and North Dakota) and expanded the premium base in Iowa, Ohio and Wisconsin. This geographic expansion has enabled the Company to spread its risk across a larger region. It is also anticipated that certain economies of scale and expense efficiencies will result from the acquisition. Underwriting-Meridian The underwriting of Meridian is separated into personal, commercial and farm lines of business. The underwriting personnel are responsible for establishing risk-selection guidelines for Meridian's agents and underwrite and monitor policy issuance to insure adherence to the established guidelines. The underwriting departments also determine the pricing of Meridian's products and are responsible for the development of new products and enhancements. The underwriting personnel work closely with Meridian's sales representatives and consult regularly with Meridian's agents to assess current market conditions. In establishing prices, Meridian's underwriting personnel analyze studies of statistical and actuarial data concerning the impact of price changes in the markets served by Meridian and consider 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 consolidating four district offices into the home office facility have all contributed to reducing the Company's statutory combined ratio. The Company's 1996 combined ratio of 108.0 percent was unusually high as a result of a record number of catastrophe and other weather-related non- catastrophic claims. The Company has also focused considerable resources on reducing per-unit costs and other expenses in order to improve its loss adjustment and underwriting expense ratios. Beginning in 1994, Meridian began to re-engineer and re-design certain core processes. In 1996, Meridian began test piloting an automated personal lines underwriting system that will enable policies meeting certain criteria to be issued without manual review. This will allow the Company to increase the processing of business without proportionally expanding the size of the underwriting staff, thereby reducing per-unit costs. By mid-1997, the Company anticipates that most new private passenger automobile and homeowners business will be processed through automated underwriting. Underwriting-Citizens Security Group Citizens Security Group has its own underwriting personnel who operate independently of Meridian's underwriting operation. The underwriters for Citizens Security Group underwrite only standard lines of property and casualty insurance for persons and businesses in the "preferred risk" category rather than those lines which are considered higher risk, such as aviation, pollution and liquor liability. The underwriting personnel of Citizens Security Group perform basically the same functions as that of Meridian, but operate within their own set of established guidelines and procedures. Products and Marketing-Meridian 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 primarily in rural areas of its operating territory. 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 1,075 independent insurance agencies spread throughout nine states. Meridian Security maintains its own agency network of approximately 400 independent insurance agencies in six 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 1996. 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. Approximately 80 percent of Meridian's net written premium is derived from company- billed business. 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. Products and Marketing-Citizens Security Group The Citizens Security Group offers a variety of personal and commercial products including homeowners, personal and commercial automobile, commercial multi-peril, workers' compensation, tenant, inland marine, general liability and umbrella lines of business. The commercial products are oriented toward retail stores, restaurants, trade contractors and members of various trade associations, including funeral directors, newspaper publishers and veterinarians. Citizens Security Mutual and Citizens Fund market their products through a network of approximately 425 independent insurance agencies throughout seven states and ICO solicits business through a network of approximately 90 independent agencies in the state of Ohio. Citizens Security Group's independent agencies are primarily small to medium- sized firms with no one agency or group of related agencies accounting for more than 3.5 percent of premiums written. The process in which the Citizens Security Group selects and retains its insurance agencies is basically the same as that of Meridian. The insurance agencies retained by Citizens Security Group receive a commission on the direct business written by each agency and participate in an agency profit sharing program that is based on profitability, retention and growth of business with additional compensation being provided to agencies that exceed certain productivity levels. Citizens Security Group strives to offer excellent service to its agents and policyholders by providing 24-hour claims service and rapid turnaround of rate quotations, policy issuances and policy endorsements. As an incentive to agents to sell its products, the Citizens Security Group emphasizes policyholder service, multi-line insurance coverage packages and a policyholder-oriented premium payment plan. The premium payment plan is a direct billing service known as the "Citizens Account Plan", or "CAP", and is designed to offer policyholders a convenient and flexible method in paying premiums. Under the plan, policyholders are billed directly for premiums on a monthly basis and have the option of making a minimum monthly payment or prepaying all or a portion of the premium. A single, easy-to-read bill covering the aggregate amount of premiums for all policies written by the Citizens Security Group is sent to the policyholders. Approximately 93 percent of all premiums received in 1996 were billed directly to the policyholders. The Citizens Security Group markets their insurance products so that the products of one company are distinguishable from those of the other companies. The personal insurance products are designed to be marketed in a comprehensive package that includes personal automobile, homeowners, inland marine and umbrella insurance. Citizens Security Group's commercial products are marketed through various state trade associations, such as funeral directors, newspaper publishers and veterinarians, in which the company is the endorsed property and casualty insurance provider. The broad line of retail store, restaurant and trade contractor coverages are designed to be tailored to the customers' needs into one convenient package. 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 1996 column reflects the operations of Citizens Fund and ICO beginning August 1, 1996. 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, 1996 1995 1994 1993 1992 (Dollars in thousands) Premium Written Personal lines: Automobile $ 68,219 $ 59,444 $ 54,205 $ 55,291 $ 48,468 Homeowners 21,964 19,526 16,667 17,407 14,510 Other 5,678 5,190 4,035 3,894 3,226 Total personal lines 95,861 84,160 74,907 76,592 66,204 Farmowners 8,441 8,166 7,099 7,544 6,373 Commercial lines: Automobile 16,227 13,107 11,972 11,556 8,363 Workers' compensation 23,380 22,438 21,894 19,264 12,518 Commercial multi-peril 23,453 19,548 19,414 18,842 14,417 Other 1,833 1,323 859 995 1,052 Total commercial lines 64,893 56,416 54,139 50,657 36,350 Total premium written $169,195 $148,742 $136,145 $134,793 $108,927 Net Underwriting Gain (Loss) $(13,868) $ (1,610) $ (2,751) $ (5,536) $(3,900) Loss Ratio Personal lines: Automobile 75.0% 75.0% 69.2% 65.8% 71.4% Homeowners 110.7 81.2 82.9 77.8 91.0 Other 55.1 43.7 53.9 64.7 61.4 Total personal lines 81.8% 74.6% 71.5% 68.4% 75.1% Farmowners 98.4% 69.6% 64.4% 68.5% 78.0% Commercial lines: Automobile 79.6% 89.1% 80.0% 65.3% 65.9% Workers' compensation 54.2 58.6 62.7 79.9 71.1 Commercial multi-peril 85.5 45.8 70.3 67.4 50.4 Other 14.3 47.4 (14.0) 35.1 64.7 Total commercial lines 70.0% 61.0% 68.1% 71.0% 61.3% Total loss ratio 78.0% 69.2% 69.8% 69.4% 70.8% Expense Ratio 30.0% 31.0% 32.0% 32.4% 32.3% Combined Ratio 108.0% 100.2% 101.8% 101.8% 103.1% Claims-Meridian 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. Claims-Citizens Security Group Meridian's claim division is also responsible for developing and implementing policies and procedures for the payment and disposition of claims on insurance policies written by Citizens Security Group. The Citizens Security Group has a contract with an outside claim adjustment firm, VIS'N, Inc., which provides initial claim investigation and settlement services. All claims involving litigation are referred to Meridian's legal staff for disposition. In addition, certain of Citizens Security Group's independent insurance agents are given authority to settle small property claims on behalf of the companies. Reserves-Meridian and Citizens Security Group 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 and Citizens Security Group maintain reserves for the eventual payment of losses and loss adjustment expenses with respect to both reported and unreported claims. Two principal methods are followed in 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 and Citizens Security Group also establish reserves for claims which have been incurred but which have not been reported, utilizing statistical models based on historical experience. Reserves established pursuant to the statistical models also are designed to correct historical deficiencies or redundancies in the reserves established on a case-by-case basis. Meridian and Citizens Security Group consult with an independent actuarial firm on a quarterly basis concerning the adequacy of their reserves. Management 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. The net reserves acquired through acquisition represent the loss and loss adjustment expense reserves, net of reinsurance, for Citizens Fund and ICO at the date of acquisition. Year Ended December 31, 1996 1995 1994 (In thousands) Balance at beginning of period $123,577 $123,755 $119,764 Less reinsurance recoverables 31,204 31,815 30,134 Net balance at beginning of period 92,373 91,940 89,630 Net reserves acquired through acquisition 20,685 --- --- Incurred related to: Current year 137,817 104,585 99,444 Prior years (7,716) (5,461) (5,473) Total incurred 130,101 99,124 93,971 Paid related to: Current year 93,199 61,792 55,216 Prior years 30,470 36,899 36,445 Total paid 123,669 98,691 91,661 Net balance at end of period 119,490 92,373 91,940 Plus reinsurance recoverables 41,819 31,204 31,815 Balance at end of period $161,309 $123,577 $123,755 The reconciliation for 1996 shows an approximately $7.7 million reduction in previously established loss reserves. Favorable loss developments resulting from decreases in the frequency and severity of claims in 1995 and prior accident years for the Company's personal and commercial automobile liability and workers' compensation lines of business 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, net of reinsurance recoveries, 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 1996 but incurred in 1990 is included in the cumulative redundancy amount for each of the years from 1990 through 1995. 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 the Company's share of the pooled loss and loss adjustment expense reserves also contributed significantly to the increase in reserves. The Company's participation increased from 44 percent in 1986, to 62 percent on April 1, 1987, and to the current level of 74 percent on May 1, 1993. In 1996, the Company acquired approximately $20.7 million in loss and loss adjustment expense reserves from the acquisition of the Citizens Fund and ICO insurance operations which is included in the current year amount. Additionally, payments received on the acquired reserves since the acquisition were spread out over the ten years based on the accident year in which the original acquired reserve was set up. The participation percentage from the pooling agreement for the combined insurance operations of the Company totaled 74 percent. 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, 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 (Dollars in thousands) Net reserves for losses & loss adjustment expenses $119,490 $ 92,373 $ 91,940 $ 89,630 $ 72,006 $ 68,102 $ 64,742 $ 62,281 $ 53,569 $ 43,899 $ 26,819 Cumulative paid as a percent of year- end reserves: One year later 40.7% 39.0% 40.7% 29.0% 42.4% 46.6% 46.1% 47.2% 57.4% 41.6% Two years later 59.0% 59.0% 51.7% 55.0% 68.5% 68.9% 68.1% 79.7% 74.0% Three years later 68.9% 62.6% 67.5% 74.7% 81.3% 81.3% 90.3% 93.6% Four years later 67.8% 74.9% 84.6% 84.1% 87.4% 97.0% 102.3% Five years later 77.4% 85.7% 88.0% 88.6% 99.9% 107.2% Six years later 87.5% 90.1% 90.7% 100.1% 109.7% Seven years later 91.8% 92.3% 101.4% 110.3% Eight years later 93.5% 102.7% 111.4% Nine years later 103.7% 113.2% Ten years later 114.8% Reserves re-estimated as a percent of year-end reserves: One year later 96.6% 92.9% 92.3% 93.6% 97.5% 103.2% 99.7% 102.3% 112.8% 109.6% Two years later 94.9% 89.0% 84.6% 93.0% 99.0% 100.7% 100.6% 112.7% 120.1% Three years later 89.2% 83.3% 89.0% 97.9% 99.2% 100.4% 109.5% 122.9% Four years later 83.6% 89.3% 95.3% 99.3% 99.7% 110.0% 120.0% Five years later 89.2% 96.3% 97.9% 100.3% 109.2% 119.3% Six years later 95.4% 98.4% 99.5% 110.6% 119.6% Seven years later 97.9% 100.0% 109.9% 122.6% Eight years later 100.2% 110.6% 123.0% Nine years later 110.9% 124.4% Ten years later 125.1% Redundancy (deficiency) 3.4% 5.1% 10.8% 16.4% 10.8% 4.6% 2.1% -0.2% -10.9% -25.1%
Reinsurance Meridian 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 the treaty reinsurance contracts depends upon the amount, nature, and size of the risks insured. For liability insurance, an excess of loss treaty provides for recovery of losses over $250,000 ($200,000 in 1996) 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 provides 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 $6.0 million per catastrophic event, up to a limit of $65.0 million. For 1997, an additional catastrophe contract was added to provide an additional $50 million on top of the $65 million layer for protection against earthquake exposures. 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 also maintains two multiple-event catastrophe loss treaties to provide protection for multiple catastrophe events that fall below the $6.0 million single event retention level noted above but are large enough in aggregate to cause significant loss exposure. The combined retention under the first of these aggregate excess contracts is based on 2.5 percent of subject earned premiums, plus five percent of losses up to the $10.0 million contract limits ($8.0 million in 1996), with a $250,000 deductible per catastrophic event ($175,000 in 1996). Retention under the second aggregate excess contract, which became effective in May, 1996, is $1,500,000 per quarter ($500,000 in 1996), plus five percent of losses up to $4.5 million per quarter, with a total contract limit of $12.0 million and a $250,000 per event deductible. Effective January 1, 1997, Meridian Mutual, Meridian Security, Citizens Security Mutual, Citizens Fund, and ICO were all named as insured parties under these treaty reinsurance contracts, and the coverage described herein applies to all risks written by these companies. Prior to January 1, 1997, Meridian Mutual and Meridian Security were the only companies participating in these contracts. On both property and liability coverages, facultative reinsurance is purchased to cover exposure from loss over the limits provided under treaty reinsurance. The risks shared by the companies under the pooling agreement consist of only the net risks remaining after the ceding of reinsurance to third party reinsurers. As of December 31, 1996, the Company had approximately $41.8 million of reinsurance recoverable on unpaid losses. Of this amount, approximately $18.7 million was recoverable from Employers Reinsurance Corporation and approximately $14.7 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 was earned over the succeeding twelve months. Renewals of the assumed policies were recorded as direct business of Meridian Mutual. Through the pooling agreement, the Company reflected unearned premiums of approximately $2.1 million and ceding commissions of approximately $409,000, which were deferred on the Company's books until the premiums were earned. Aside from the indemnity reinsurance agreement described above, Meridian assumes a limited amount of reinsurance from third parties. This business accounted for approximately 2.0 percent of net premiums written in 1996. Reinsurance-Citizens Security Group The reinsurance contracts maintained by the Citizens Security Group in 1996 were of two general types, consisting of excess of loss reinsurance, which covered losses in excess of a specified retained amount, and pro rata reinsurance, under which premiums and losses were shared on a proportionate basis up to a specified amount. Effective January 1, 1996, Citizens Security Group entered into a pro rata reinsurance contract covering 40 percent of each homeowner policy. Under other reinsurance contracts, Citizens Security Group retained the first $0.3 million of losses on any one risk on property coverage. The Citizens Security Group also had pro rata reinsurance contracts for property risks covering losses between $0.3 million and $4.6 million per risk. For property risks in excess of $4.6 million the companies within the group negotiated reinsurance arrangements for each risk on an individual basis. The casualty reinsurance written by Citizens Security Group was reinsured for losses in excess of $0.25 million up to a maximum of $5.0 million per occurrence. Effective January 1, 1996, the Citizens Security Group also entered into an aggregate excess of loss contract which reinsured losses and allocated loss adjustment expenses in excess of 62 percent in any accident year. The reinsurer's obligation was limited to five percent of accident year subject net earned premiums. Losses and loss adjustment expenses in excess of 67 percent were retained. The Citizens Security Group also maintained a catastrophe reinsurance contract to protect against property loss occurrences that involved more than one risk. Under this contract, Citizens Security Group would recover 95 percent of the accumulated catastrophic losses in excess of $0.6 million, up to $1.25 million and 97.5 percent of the next $18.75 million of catastrophic losses. Investments Investments of the Company are principally held by Meridian Security, Citizens Fund and ICO, which are subject to regulation by their respective departments 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, 1996 and 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. 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 31.6 percent and 33.9 percent of the total fixed maturity portfolio at December 31, 1996 and 1995, respectively. On a carrying value basis, sinking fund preferred stocks made up approximately 14.2 percent and 16.5 percent of the total fixed maturity portfolio of the Company at December 31, 1996 and 1995, respectively. The Company also holds investments in mortgage-backed pass-through securities and collateralized mortgage obligations ("CMO") which had a carrying value of $54.7 million and $58.3 million at December 31, 1996 and 1995, respectively. 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 number of early calls and prepayments, the estimated weighted average duration of the fixed maturity portfolio is approximately 4.6 years. The Company, as approved by the investment committee, has increased its equity security holdings over the past three years. Equity securities consist of common stocks and perpetual preferred stocks and had a fair market value of $40.6 million and $31.1 million at December 31, 1996 and 1995, respectively. Equity securities accounted for 14.4 percent and 12.2 percent of the total investment portfolio at December 31, 1996 and 1995, respectively. Regulation Numerous aspects of the business and operations of the Company's insurance subsidiaries and affiliates 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. Citizens Fund and Citizens Security Mutual hold licenses to write in Iowa, Minnesota, Wisconsin, North and South Dakota. Citizens Fund and ICO each are admitted as insurers in the state of Ohio. Citizens Security Mutual is also licensed to write insurance in Missouri and has a reinsurance license for property and casualty insurance in Ohio. Under insolvency or guaranty laws in the states in which the above companies operate, insurers doing business in those states can be assessed up to prescribed limits for losses incurred by policyholders of insolvent insurance companies. Additionally, the companies 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 specified percentage of the annual direct premiums written by the company in the state in question with respect to the affected lines 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 10 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 state regulatory authorities in the insurance company's state of domicile. 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 state regulatory authorities. 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. Price competition has been particularly intense during recent years and is expected to continue for the foreseeable future. Meridian Mutual, Meridian Security, Citizens Security Mutual, Citizens Fund, and ICO all compete 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, Meridian Security, Citizens Security Mutual, Citizens Fund, and ICO compete with other insurers writing through independent agents (including insurers represented by the independent agents who represent Meridian and Citizens Security Group), 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 the Company, Meridian Mutual and Citizens Security Mutual operate. No single company dominates the marketplace, but many of Meridian's and Citizens Security Group's competitors have more established national reputations and substantially greater financial resources and market share. Employees Effective January 1, 1997, the Company became the employer of all employees that were formerly employed by Meridian Mutual and Citizens Security Mutual. This transfer will allow for more freedom in compensation planning, such as more flexibility in the use of the Company's common stock as compensation, and will improve internal efficiencies by combining employee benefit plans. Prior to the change, the Company had no employees and relied upon Meridian Mutual and Citizens Security Mutual to provide all management and administrative services required by the Company. Meridian Mutual employed approximately 500 people and Citizens Security Mutual had approximately 70 employees on its payroll. The Company believes that its 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. 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. The principal office space for the operations of Citizens Security Group is located in Red Wing, Minnesota and is being leased by Citizens Security Mutual. The space consists of approximately 30,000 square feet with the lease expiring on December 31, 2002. In August, 1996, Citizens Security Mutual subleased approximately 8,200 square feet of this office space to VIS'N, Inc. Citizens Security Mutual also leases an additional office in Red Wing, Minnesota, consisting of approximately 3,300 square feet under a lease that expires on June 30, 1998. In September, 1996, approximately 2,900 square feet of this office space was subleased to Design Ink Plus, Ltd. 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 March 3, 1997, approximately 46.5 percent of the common stock was owned by Meridian Mutual and the balance was spread among approximately 250 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 26, 1997, 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, low and closing sale prices of the common stock for each quarter of 1996 and 1995. 1996 1995 Quarter Ended High Low Close High Low Close March 31 $15.25 $13.50 $14.75 $12.00 $10.00 $11.50 June 30 $15.25 $13.25 $13.69 $13.50 $11.25 $13.00 September 30 $14.50 $13.25 $14.25 $14.13 $11.25 $13.25 December 31 $15.13 $13.13 $14.75 $15.63 $13.00 $14.88 Dividend Policy Beginning with the first quarter of 1996, the Company increased its quarterly cash dividend to $0.08 per common share. In 1995 and 1994, the Company paid quarterly dividends of $0.07 and $0.06 per share, respectively. 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 10 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, 1996 1995 1994 1993 1992 (In thousands, except per share data and ratios) Operating data: Premiums earned $167,304 $143,866 $135,002 $125,902 $108,097 Net investment income 14,908 14,564 13,996 13,569 12,620 Realized investment gains 3,794 1,538 286 890 540 Other income (expense) 563 (146) 54 (115) 182 Total revenues 186,569 159,822 149,338 140,246 121,439 Losses and loss adjustment expenses 130,101 99,124 93,971 86,622 75,980 General operating expenses 13,767 14,156 14,527 14,935 12,742 Interest expense 308 --- --- --- --- Amortization expenses 36,443 30,820 29,304 27,039 22,695 Total expenses 180,619 144,100 137,802 128,596 111,417 Income before taxes and change in accounting method 5,950 15,722 11,536 11,650 10,022 Income taxes 150 4,105 2,415 2,765 1,797 Income before change in accounting method 5,800 11,617 9,121 8,885 8,225 Changes in accounting method: Other post-retirement benefits --- --- --- --- (651) Accounting for income taxes --- --- --- 526 --- Net income $ 5,800 $ 11,617 $ 9,121 $ 9,411 $ 7,574 Weighted average shares outstanding 6,779 6,770 6,740 6,139 4,945 Net income per share $ 0.86 $ 1.72 $ 1.35 $ 1.53 $ 1.53 Dividends declared per share $ 0.32 $ 0.28 $ 0.24 $ 0.24 $ 0.18 Underwriting ratios (statutory basis): Loss and loss adjustment expense ratio 78.0% 69.2% 69.8% 69.4% 70.8% Expense ratio 30.0 31.0 32.0 32.4 32.3 Combined ratio 108.0% 100.2% 101.8% 101.8% 103.1% Balance sheet data at end of period: Total investments (1) $281,689 $254,694 $219,461 $221,197 $169,277 Total assets 397,798 322,588 291,406 285,936 221,534 Total liabilities 275,624 204,346 197,154 191,490 154,935 Shareholders' equity 122,174 118,243 94,252 94,447 66,599 Shareholders' equity per share $ 18.02 $ 17.45 $ 13.98 $ 14.02 $ 13.42 (1) The 1996, 1995 and 1994 investments reflect the Company's adoption of SFAS No. 115 (See Note 2 of the Notes to the Consolidated Financial Statements). ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview: The high level of catastrophe and other weather-related losses in 1996 is principally to blame for breaking the Company's several year trend of improved operating results. Extensive property damage claims arising primarily from hailstorms, tornadoes and high winds resulted in the worst year for catastrophic claims in our Company's history. Gross catastrophe losses were approximately six times those of an average year. In spite of the significant increase in the magnitude of such claims, our claims service quality remained high. The catastrophe activity of 1996 should not overshadow certain positive strides made during the year. A major development was the acquisition of Citizens Security Group Inc. and its subsidiaries, Citizens Fund Insurance Company and Insurance Company of Ohio on July 31, 1996. This acquisition fit well into the Company's plan for geographic expansion into additional Midwestern and North Central states. The acquisition expanded the Company's operating territory into four additional states: Minnesota, Missouri, North Dakota, and South Dakota; and increased its revenue base in Iowa, Ohio and Wisconsin. The Company also gained control of Citizens Security Mutual Insurance Company as a result of the acquisition. Direct written premiums for the Citizens Security Group were nearly $55 million for the full year. Underwriting results for Citizens Security were incorporated into the Company's pooling arrangement effective August 1, 1996. The Company continues to look for other acquisitions that meet its criteria. The acquisition of Citizens Security Group, combined with growth in the existing book of Meridian business, caused an increase in 1996 annualized direct written premiums of approximately 34 percent. Future synergies are expected as the Company begins to take further advantage of Citizens Security's strength in working with certain business associations and as Meridian provides a farm product and certain commercial lines products to Citizens Security. The Company strives for a balanced book of property and casualty business including personal, commercial and farm lines. During 1996, the Company continued the favorable trend of decreasing its operating expenses relative to premiums. Achieving continued reductions in per-unit costs and improvement in productivity remain key strategic goals. Meridian has developed 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. Meridian began testing this system in late 1996. By mid-1997, we expect to have most new Meridian homeowners and automobile business processed by automated underwriting. Additional efficiencies are expected to result from progress with commercial lines client-server processing and agency interface. Results of Operations: 1996 Compared to 1995 In 1996, the Company reported net income of $5.8 million, or $0.86 per common share . This compares to 1995 net income of $11.6 million, or $1.72 per share. The 1996 results were negatively impacted by a series of severe storms that produced an unusually large volume of property damage claims throughout the Company's operating territory. The after-tax impact of catastrophe and other weather-related non- catastrophic claims is estimated to be approximately $1.17 per share in 1996, compared to approximately $0.42 per share in 1995. The 1996 catastrophe losses represent the largest catastrophe loss total in the Company's history. The Company's statutory combined ratio for 1996 was 108.0 percent versus 100.2 percent for the comparable 1995 period. The Company's total revenues in 1996 were a record high of $186.6 million, a 16.7 percent increase over 1995's $159.8 million. The 1996 total includes five months of premiums and investment income from the Citizens Security Group companies which were acquired on July 31, 1996. The effect of the Citizens Security Group acquisition on total revenues was approximately $15.8 million, including approximately $14.7 million of net earned premiums and $1.1 million of net investment income. Incremental net income from the Citizens Security Group operation for the five month period ended December 31, 1996 was approximately $0.25 million, or $0.04 per share, net of goodwill amortization and interest expense. The Company's largest source of revenue, net earned premiums, increased 16.3 percent in 1996 to $167.3 million compared to $143.9 million for the 1995 period. Aside from the 10.2 percent increase in premium volume that resulted from the Citizens Security Group acquisition, premiums earned by the Meridian operation increased approximately 6.1 percent, or $8.8 million, over the 1995 total. The Meridian growth was attributed to nearly all lines of business, with personal lines production increasing 6.8 percent, commercial lines 5.6 percent and farmowners achieving growth of 2.8 percent in earned premium volume. Commercial and personal automobile and homeowners were the primary lines of business contributing to the increased premium volume. Depressing the commercial lines growth was a reduction of approximately $1.2 million in assumed earned premiums from the National Workers' Compensation Pool. Total policy count for the Meridian products, on a pooled basis, increased by approximately 12,650 policies, or 5.3 percent over the 1995 in-force total. Net investment income of $14.9 million in 1996 increased 2.4 percent over 1995's total of $14.6 million. The pre-tax net investment yield declined slightly to 5.9 percent from 6.1 percent in 1995. The reduced portfolio yield resulted primarily from a greater proportion of assets being invested in equity securities and tax-exempt bonds. The average yield of the fixed maturity portfolio is 6.8 percent. The investment income generated from the acquired Citizens Security Group investment portfolio was partially offset by a reduction in the Meridian portfolio to help fund the purchase. In 1996, the Company realized net gains on the disposition of invested assets of $3.8 million, or $0.37 per share net of tax, compared to $1.5 million, or $0.15 per share after tax, for the 1995 period. Nearly all of the realized gains recognized in 1996 were generated from the sale of equity securities which are expected to have little impact on future investment yields. Heavily impacted by catastrophe losses in 1996, the Company's incurred losses and loss adjustment expenses of $130.1 million were 31.3 percent higher than the $99.1 million reported for the comparable 1995 period. Approximately $12.2 million of the current year losses resulted from catastrophe and other weather-related non-catastrophic claims. This compares to approximately $4.4 million for the 1995 period. The acquisition of the Citizens Security Group business contributed approximately $9.1 million to the current year loss and loss adjustment expense total, accounting for over 9 percent of the increase. Also contributing to the high volume of losses was an increase in claim severity for Meridian's private passenger automobile and commercial multiple-peril lines of business. Partially offsetting these losses were improved results in the Company's workers' compensation and personal and commercial automobile liability lines of business. The Company's statutory loss ratio for 1996 deteriorated to 68.9 percent from 1995's 60.2 percent. The statutory loss adjustment expense ratio of 9.1 percent remained virtually unchanged from 1995 ratio. The Company's general operating and amortization expenses of $50.2 million for the year ended December 31, 1996 were 11.6 percent higher than the $45.0 million reported for the same 1995 period. Relative to earned premium volume, the Company's expense ratio for 1996 improved to 30.0 percent from 31.3 percent for the prior year. Factors leading to the reduced expense ratio include certain economies of scale and decreases in employee incentive compensation, agent profit-sharing and assessments from certain boards and bureaus. As a result of the Citizens Security Group acquisition, the Company incurred approximately $252,000 of additional expense in 1996 for goodwill amortization and incurred interest expense of approximately $308,000 on the related bank loan. For the most recent year, the Company recorded income tax expense of $150,000. The low effective tax rate results primarily from the amount of tax-exempt investment income in relation to pre-tax income. 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 compared 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. 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 10 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. The average duration of the fixed maturity portfolio is 4.6 years. Over the next year, a relatively small portion of the Company's bond portfolio is scheduled to mature. Approximately 85 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 23 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. The Company at December 31, 1996 recorded unrealized gains in the bond portfolio of approximately $2.7 million, net of deferred income taxes. At year-end 1995, the Company recorded unrealized gains on the bond portfolio of approximately $4.1 million, net of deferred income taxes. Net unrealized appreciation of investments added $1.05 to the Company's $18.02 book value per share at December 31, 1996, similar to unrealized appreciation adding $1.01 per share to the $17.45 book value at December 31, 1995. On July 31, 1996, the Company completed the acquisition of Citizens Security Group Inc. of Red Wing, Minnesota. The Company purchased all of the outstanding shares of Citizens Security Group and its wholly- owned property and casualty insurance subsidiaries, Citizens Fund Insurance Company and Insurance Company of Ohio, for approximately $30.3 million in cash, including capitalized acquisition costs, and became affiliated with Citizens Security Mutual Insurance Company. Approximately 60 percent of the purchase price was generated from the sale of a portion of the Company's investment portfolio. The remaining $12 million was financed through bank debt and is being amortized over seven years with a variable interest rate of LIBOR plus 50 basis points. The acquisition was accounted for as a purchase with the assets acquired and liabilities assumed being recorded at their estimated fair value at the date of acquisition. The excess cost over the fair value of the net assets of approximately $15.1 million was recorded as goodwill, which is being amortized on a straight-line basis over a 25 year period. 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. In 1996, the adjusted capital of the Company's insurance subsidiaries is well above 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 25 Financial Statements: Consolidated Statement of Income 26 Consolidated Balance Sheet 27 Consolidated Statement of Shareholders' Equity 28 Consolidated Statement of Cash Flows 29 Notes to Consolidated Financial Statements 30 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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 2, the Company changed its method of accounting for certain investments in debt and equity securities in 1994. Coopers & Lybrand L.L.P. Indianapolis, Indiana February 26, 1997 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME for the Years Ended December 31, 1996, 1995 and 1994 December 31, 1996 1995 1994 Premiums earned $167,304,414 $143,865,821 $135,001,881 Net investment income 14,908,285 14,563,820 13,995,984 Net realized investment gains 3,793,778 1,538,281 285,701 Other income (expense) 562,198 (146,345) 54,623 Total revenues 186,568,675 159,821,577 149,338,189 Losses and loss adjustment expenses 130,101,192 99,123,849 93,970,529 General operating expenses 13,766,868 14,155,631 14,527,021 Interest expense 307,887 --- --- Amortization expenses 36,442,635 30,820,058 29,304,576 Total expenses 180,618,582 144,099,538 137,802,126 Income before taxes 5,950,093 15,722,039 11,536,063 Income taxes (benefit) Current 702,141 3,554,000 2,574,000 Deferred (552,000) 551,000 (159,000) Total income taxes 150,141 4,105,000 2,415,000 Net income $ 5,799,952 $ 11,617,039 $ 9,121,063 Weighted average shares outstanding 6,779,284 6,770,081 6,739,712 Per share data: Net income $ 0.86 $ 1.72 $ 1.35 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, 1996 and 1995 December 31, 1996 1995 ASSETS Investments: Fixed maturities--available for sale, at market value (cost $234,356,000 and $213,816,000) $238,343,040 $220,036,772 Equity securities, at market (cost $33,779,000 and $26,961,000) 40,629,633 31,119,875 Short-term investments, at cost, which approximates market 1,326,634 2,483,338 Other invested assets 1,390,176 1,053,905 Total investments 281,689,483 254,693,890 Cash 3,128,154 935,098 Premium receivable, net of allowance for bad debts 4,674,984 2,642,425 Accrued investment income 3,241,125 2,942,194 Deferred policy acquisition costs 16,690,275 13,354,600 Goodwill 16,848,829 2,152,339 Reinsurance receivables 45,850,830 32,469,285 Prepaid reinsurance premiums 5,020,605 2,617,138 Due from Meridian Mutual Insurance Company 8,973,672 9,358,803 Other assets 11,679,744 1,422,444 Total assets $397,797,701 $322,588,216 LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $161,309,239 $123,577,240 Unearned premiums 84,065,751 64,558,695 Other post-employment benefits 1,417,814 1,298,378 Bank loan payable 11,875,000 --- Reinsurance payables 8,664,358 6,863,626 Other liabilities 8,291,558 8,047,610 Total liabilities 275,623,720 204,345,549 Shareholders' equity: Common shares, no par value, Authorized- 20,000,000, Issued-6,805,955 and 6,803,185, Outstanding-6,779,375 and 6,776,805 at December 31, 1996 and 1995, respectively 44,077,846 44,076,685 Contributed capital 15,058,327 15,058,327 Unrealized appreciation of investments, net of deferred income taxes 7,141,846 6,842,245 Retained earnings 55,895,962 52,265,410 Total shareholders' equity 122,173,981 118,242,667 Total liabilities and shareholders' equity $397,797,701 $322,588,216 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, 1996, 1995 and 1994 Unrealized Appreciation Common Contributed (Depreciation) Retained Shares Capital of Investments Earnings Balance at January 1, 1994 $ 43,855,319 $ 15,058,327 $ 491,027 $ 35,041,862 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 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) Repurchase and retirement of 6,479 common shares (77,033) --- --- --- Exercise of stock options for 40,521 common shares 222,996 --- --- --- Balance at December 31, 1995 44,076,685 15,058,327 6,842,245 52,265,410 Net income --- --- --- 5,799,952 Unrealized appreciation of investment securities, net of deferred income taxes --- --- 299,601 --- Dividends ($0.32 per share) --- --- --- (2,169,400) Exercise of stock options for 4,042 common shares 23,241 --- --- --- Repurchase and retirement of 1,472 common shares (22,080) --- --- --- Balance at December 31, 1996 $ 44,077,846 $ 15,058,327 $ 7,141,846 $ 55,895,962 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, 1996, 1995 and 1994 December 31, 1996 1995 1994 Cash flows from operating activities: Net income $ 5,799,952 $ 11,617,039 $ 9,121,063 Reconciliation of net income to net cash provided by operating activities: Realized investment gains (3,793,778) (1,538,281) (285,701) Amortization 36,442,635 31,257,989 30,202,060 Deferred policy acquisition costs (39,321,446) (32,068,780) (29,181,486) Increase in unearned premiums 2,034,199 4,895,409 982,535 Increase (decrease) in loss and loss adjustment expense 11,054,147 (177,410) 3,990,725 Decrease (increase) in amount due from Meridian Mutual 385,131 (2,548,320) (1,337,003) Decrease (increase) in reinsurance receivables (7,352,448) 234,172 (2,303,137) Decrease (increase) in prepaid reinsurance premiums (349,547) 2,654 205,510 Decrease (increase) in other assets 2,064,651 66,763 (638,901) Increase in other post-employment benefits 119,436 197,223 102,060 Increase (decrease) in reinsurance payables 1,800,732 972,951 (248,655) Increase (decrease) in other liabilities (1,866,664) 116,619 831,814 Other, net (61,732) 755,919 (247,430) Net cash provided by operating activities 6,955,268 13,783,947 11,193,454 Cash flows from investing activities: Purchase of fixed maturities (47,518,736) (39,897,557) (37,157,445) Proceeds from sale of fixed maturities 38,131,207 17,111,272 18,528,560 Proceeds from calls, prepayments and maturity of fixed maturities 24,843,739 14,404,070 16,403,055 Purchase of equity securities (19,794,358) (15,735,622) (16,369,601) Proceeds from sale of equity securities 18,633,656 9,556,180 10,267,616 Net (increase) decrease in short-term investments 3,300,088 1,641,491 (2,075,005) Decrease (increase) in other invested assets (336,271) 31,366 (347,414) Acquisition of subsidiary (30,262,442) --- --- Increase (decrease) in securities payable (1,533,830) 1,117,355 430,569 Net cash used in investing activities (14,536,947) (11,771,445) (10,319,665) Cash flows from financing activities: Repurchase and retirement of common stock (22,080) (77,033) --- Exercise of stock options 23,241 222,996 39,819 Proceeds from bank loan 12,000,000 --- --- Repayment of bank loan (125,000) --- --- Dividends paid (2,101,426) (1,826,933) (1,617,696) Net cash provided by (used in) financing activities 9,774,735 (1,680,970) (1,577,877) Increase (decrease) in cash 2,193,056 331,532 (704,088) Cash at beginning of year 935,098 603,566 1,307,654 Cash at end of year $ 3,128,154 $ 935,098 $ 603,566 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 subsidiaries, Meridian Security Insurance Company ("Meridian Security"), Citizens Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("ICO"). Both Citizens Fund and ICO, along with their holding company, Citizens Security Group Inc. ("CSGI"), were acquired by the Company on July 31, 1996. (See Note 3.) Effective August 1, 1996, Citizens Fund , ICO and Citizens Security Mutual Insurance Company ("Citizens Security Mutual"), the former majority shareholder of CSGI, became participants in a reinsurance pooling arrangement with Meridian Mutual and Meridian Security, in which the underwriting income and expenses of each entity are shared. The participation percentages of the Company's insurance subsidiaries total 74 percent. Prior to August 1, Meridian Security and Meridian Mutual were the only participants in the reinsurance pooling arrangement, of which Meridian Security assumed 74 percent of the combined underwriting income and expenses of the two companies. (See Note 5.) 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 1,075 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Ohio, Pennsylvania, Tennessee, and Wisconsin. Meridian Security is licensed in all states in which Meridian Mutual is licensed and writes personal and farm lines in Indiana, Iowa, Kentucky, Ohio, Tennessee, and Wisconsin through approximately 400 independent insurance agencies, many of which are cross-licensed with Meridian Mutual. Citizens Fund and Citizens Security Mutual offer a variety of personal and commercial insurance products in the states of Iowa, Minnesota, Missouri, North Dakota, Ohio, South Dakota, and Wisconsin through a network of 425 independent insurance agencies. ICO writes personal and commercial products in the state of Ohio through approximately 92 independent agencies. 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, mortgage backed pass-through securities, collateralized mortgage obligations, other asset backed securities and sinking fund preferred stocks. The fixed maturity portfolio is invested entirely in securities classified as available for sale and is carried at quoted market values. Equity securities, consisting of unaffiliated common and perpetual preferred stocks, are reported at quoted market values. Short-term investments are recorded at cost, approximating market value. Other investments include 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. In connection with the acquisition of Citizens Fund and ICO, the Company allocated a portion of its cost to an asset representing the estimated equity in the unearned premium reserve of the acquired book of business. The asset is being amortized as the related premium revenue 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. Income Taxes: Deferred income taxes are provided to reflect the estimated future tax effects of temporary differences between the tax basis of an asset or liability and the basis recorded in financial statements. The deferred tax asset or liability is measured by using enacted tax rates expected to apply to future taxable income in the periods in which the temporary differences are expected to be recovered or settled. Accordingly, changes in future tax rates cause immediate adjustments to deferred taxes. 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: 1996 1995 1994 Interest on fixed maturities: Tax-exempt securities $ 3,875,822 $ 3,578,156 $ 3,050,947 Taxable securities 8,686,144 8,727,315 8,251,261 Dividends on redeemable preferred stock 2,489,104 2,402,974 2,673,605 Dividends on equity securities 773,238 560,390 339,559 Interest on short-term investments 243,837 247,272 162,067 Other investment income 93,861 84,873 146,698 Total investment income 16,162,006 15,600,980 14,624,137 Investment expenses 1,253,721 1,037,160 628,153 Net investment income $ 14,908,285 $ 14,563,820 $ 13,995,984 Realized and unrealized gains on investments are summarized as follows: 1996 1995 1994 Realized gains (losses): Fixed maturities $ (456,602) $ 87,370 $ (118,358) Equity securities 4,559,380 1,458,589 404,059 Other invested assets --- (7,678) --- Total realized investment gains 4,102,778 1,538,281 285,701 Investment expenses 309,000 --- --- Net realized investment gains $ 3,793,778 $ 1,538,281 $ 285,701 Net change in unrealized appreciation (depreciation): Fixed maturities, available for sale $ (2,150,596) $ 16,373,654 $(16,819,514) Equity securities 2,692,197 5,104,315 (1,696,054) 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) (242,000) (7,354,000) 6,325,616 Net change in unrealized appreciation (depreciation) $ 299,601 $ 14,123,969 $ (7,772,751) Net change in unrealized depreciation of fixed maturities, held to maturity $ --- $ (367,533) $ (713,522) Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("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 carried at amortized cost; available-for-sale securities carried at fair value, with the unrealized gains and losses recorded, net of deferred tax, to shareholders' equity; and trading securities 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 taxes, to the Company's shareholders' equity. On November 30, 1995, the Company, as permitted in Q61 of the Financial Accounting Standards Board ("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. The amortized cost and estimated market values of investments in fixed maturity securities at December 31, 1996 and 1995, are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value December 31, 1996 Available for sale: Government and agency domestic bonds $ 11,441,004 $ 317,830 $ 50,708 $ 11,708,126 Municipal bonds 73,550,278 1,954,019 302,450 75,201,847 Corporate bonds 61,810,087 1,141,551 152,224 62,799,414 Mortgage-backed securities 54,090,640 714,993 155,481 54,650,152 Sinking fund preferred stocks 33,464,362 1,080,656 561,517 33,983,501 Total fixed maturity securities $234,356,371 $5,209,049 $1,222,380 $238,343,040 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 The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value Available for sale: Due in one year or less $ 2,220,935 $ 2,231,573 Due after one year through five years 42,239,968 42,740,774 Due after five years through ten years 48,664,611 49,914,445 Due after ten years through fifteen years 32,881,299 33,865,382 Due after fifteen years through twenty years 5,693,977 5,655,926 Due after twenty years 48,564,941 49,284,788 Subtotal 180,265,731 183,692,888 Mortgage-backed securities 54,090,640 54,650,152 Total fixed maturity securities $234,356,371 $238,343,040 Proceeds from sales of investments in fixed maturity securities during 1996, 1995 and 1994, respectively, were $38,131,207, $17,111,272 and $18,528,560. During 1996, 1995 and 1994, respectively, gross gains of $197,320, $445,260 and $444,784 and gross losses of $653,922, $357,890 and $563,142 were realized on those sales. Unrealized appreciation resulting from changes in the valuation of equity securities at December 31, 1996 totaled approximately $6,851,000 representing $7,614,000 of gains on certain securities and $763,000 of losses on other securities. 3. Acquisition: On July 31, 1996, the Company acquired Citizens Security Group Inc. and its property and casualty insurance subsidiaries, Citizens Fund Insurance Company and Insurance Company of Ohio, for a cash purchase price of approximately $30,262,000, including capitalized acquisition costs. Approximately 60 percent of the purchase price was generated from the sale of a portion of the Company's investment portfolio and the remainder was financed through bank debt. (See Note 4). The acquisition was accounted for as a purchase with the assets acquired and liabilities assumed being recorded at their estimated fair value at the date of acquisition. The excess cost over the fair value of the net assets resulted in goodwill of approximately $15,140,000, which is being amortized over 25 years on the straight-line basis. The consolidated financial statements include the results of operations of the acquired entities from the date of acquisition. Unaudited pro-forma condensed consolidated results of operations presented below assume the acquisition and financing of the transaction had occurred at the beginning of each period presented: 1996 1995 Premiums earned $185,808,000 $174,501,000 Total revenues $206,201,000 $192,416,000 Net income $ 4,138,000 $ 11,310,000 Net income per share $ 0.61 $ 1.67 These unaudited pro-forma results are not necessarily indicative of the results of operations that would have occurred had the acquisition taken place at the beginning of each period, or of future operations of the combined companies. Supplemental cash flow information for the acquisition is as follows: 1996 Fair value of assets acquired $ 77,440,427 Cash paid 30,262,442 Liabilities assumed $ 47,177,985 4.Bank Loan Payable: The Citizens Security Group acquisition was funded in part through a $12,000,000 bank loan. The debt has a variable interest rate of LIBOR plus 50 basis points and will mature on August 1, 2003. The Company is required to make principal payments in accordance with the following schedule: 1997 $ 625,000 1998 1,125,000 1999 1,625,000 2000 2,000,000 2001 2,125,000 Thereafter 4,375,000 Total payments outstanding $ 11,875,000 The principal balance of the bank loan as of December 31, 1996 approximates its market value. Interest paid on the loan during 1996 amounted to $187,887. The bank debt includes certain financial covenants, the most significant of which concern the amounts of risk based capital, statutory policyholders' surplus, total debt, debt to capitalization and debt service coverage (the relationship of dividends available from the Company's insurance subsidiaries to required principal and interest payments). 5.Related Party Transactions: Meridian Security, Citizens Fund, ICO, Meridian Mutual and Citizens Security Mutual are parties to a reinsurance pooling agreement ("pooling agreement") under which all premiums, losses and loss adjustment expenses as well as other underwriting expenses are shared by the companies on the basis of their percentage participation defined in the pooling agreement. Other expenses are allocated on the basis of specific identification or estimated costs. Amounts either due to or due from Meridian Mutual and Citizens Security 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. Beginning August 1, 1996, the reinsurance pool participation percentages of the Company's insurance subsidiaries total 74 percent. Prior to August 1, Meridian Security and Meridian Mutual were the only participants in the aforementioned pooling arrangement, of which Meridian Security assumed 74 percent of the combined underwriting income and expenses of the two companies. For the year ended December 31, 1996, approximately 88 percent of the Company's total premium volume was derived from its participation in the pooling agreement. In 1995 and 1994, approximately 90 percent and 84 percent, respectively, was derived from the pooling arrangement. Prior to January 1, 1997, Meridian Security, Citizens Fund and ICO had no employees and were dependent on the business and operations of Meridian Mutual and Citizens Security Mutual. Meridian Mutual had a defined pension plan covering substantially all employees and a non-tax qualified retirement plan for certain key employees. Related pension costs allocated to the Company were immaterial to the results of operations for the periods ended December 31, 1996, 1995 and 1994. The Company also participated 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 $53,000, $98,000 and $102,000 for 1996, 1995 and 1994, respectively. Effective January 1, 1997, the Company became the employer of all employees that were formerly employed by Meridian Mutual and Citizens Security Mutual. This transfer allows for more freedom in compensation planning, such as more flexibility in the use of the Company's common stock as compensation, and to improve internal efficiencies by combining employee benefit plans. As a result of this transfer, all employee benefit plans that were previously under Meridian Mutual and Citizens Security Mutual were merged into Company plans. 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. 6. Liability for Losses and Loss Adjustment Expenses: Activity in the liability for losses and loss adjustment expenses is summarized as follows: 1996 1995 1994 Balance at beginning of period $123,577,240 $123,754,650 $119,763,925 Less reinsurance recoverables 31,204,462 31,815,440 30,133,606 Net balance at beginning of period 92,372,778 91,939,210 89,630,319 Net reserves acquired (See Note 3) 20,685,369 --- --- Incurred related to: Current year 137,817,367 104,584,909 99,444,243 Prior years (7,716,175) (5,461,060) (5,473,714) Total incurred 130,101,192 99,123,849 93,970,529 Paid related to: Current year 93,199,000 61,791,602 55,216,000 Prior years 30,470,408 36,898,679 36,445,638 Total paid 123,669,408 98,690,281 91,661,638 Net balance at end of period 119,489,931 92,372,778 91,939,210 Plus reinsurance recoverables 41,819,308 31,204,462 31,815,440 Balance at end of period $161,309,239 $123,577,240 $123,754,650 7.Reinsurance: The companies participating in the reinsurance pooling agreement (see Note 5) limit the maximum net loss which can arise from large risks or risks in concentrated areas of exposure by reinsuring their insurance business with unrelated third party insurers. In accordance with industry practice, the Company in its consolidated financial statements treats risks, to the extent reinsured, as though they were risks for which the Company is not liable. Reinsurance recoverables are estimated in a manner consistent with the claim liability associated with the reinsured policy. Insurance ceded by the Company's insurance subsidiaries does not relieve the subsidiaries' primary liability as the originating insurers. For the years ended December 31, 1996, 1995 and 1994, the amounts of unearned premiums that related to third party reinsurers were approximately $5,021,000, $2,617,000 and $2,620,000, respectively. Three types of reinsurance were purchased jointly by Meridian Mutual and Meridian Security. Treaty reinsurance automatically covers certain types of policies up to contracted limits. Facultative reinsurance is purchased on an individual risk basis and sets specific limits of coverage. Such coverage was purchased to cover liability and property exposures in excess of $200,000, up to the limits set forth in the individual treaty. Catastrophe reinsurance provides coverage for multiple losses caused by a single catastrophic event such as a windstorm or earthquake. The combined retention under this contract was $6,000,000 plus five percent of losses up to the $65,000,000 contract limit ($3,250,000 and $50,000,000, respectively, for years prior to 1996). Two other catastrophe reinsurance treaties provide coverage for aggregate losses caused by multiple catastrophic events. The combined retention under the first of these aggregate excess contracts was based on 2.5 percent of subject earned premiums, plus five percent of losses up to the $8,000,000 contract limits, with a $175,000 deductible per catastrophic event. Retention under the second aggregate excess contact, effective May 10, 1996, was $500,000 per quarter, plus five percent of losses up to $4,500,000 per quarter, with a total contract limit of $12,000,000 and a $250,000 per event deductible. The reinsurance agreements maintained by Citizens Security Mutual, Citizens Fund and ICO in 1996 were of two general types, consisting of excess of loss reinsurance and pro rata reinsurance. Effective January 1, 1996, the companies entered into a pro rata reinsurance contract covering 40 percent of each homeowner policy. Under other reinsurance contracts, the companies retained the first $300,000 of loss on any one risk on property coverage. The companies have pro rata reinsurance contracts for property risks covering losses between $300,000 and $4,600,000 per risk. For property risks in excess of $4,600,000, the companies negotiate reinsurance arrangements for each risk on an individual basis. The casualty reinsurance written by the companies is reinsured for losses in excess of $250,000 up to a maximum of $5,000,000 per occurrence. Effective January 1, 1996, the companies entered into an aggregate excess of loss contract which reinsures losses and allocated loss adjustment expenses in excess of 62 percent in any accident year. The reinsurer's obligation is limited to 5 percent of accident year subject net earned premium. Losses and allocated adjustment expenses in excess of 67 percent are retained. Approximately 89 percent of the Company's ceded reserves for losses and loss adjustment expenses are with Michigan Catastrophic Claims Association, Employers Reinsurance Corporation and Swiss Reinsurance America Corporation. Reinsurance recoveries recognized for the years ended December 31, 1996, 1995 and 1994 were $24,136,000, $1,547,000 and $2,758,000, respectively. The effect of reinsurance on premiums written and earned for the years ended December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 Premiums written: Direct $181,680,624 $152,596,128 $144,084,372 Assumed 3,730,504 7,269,782 6,132,096 Ceded (16,216,479) (11,102,025) (14,026,543) Net $169,194,649 $148,763,885 $136,189,925 Premiums earned: Direct $176,718,644 $149,748,331 $141,275,894 Assumed 6,425,316 5,222,170 5,744,277 Ceded (15,839,546) (11,104,680) (12,018,290) Net $167,304,414 $143,865,821 $135,001,881 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 was earned over the succeeding 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. 8. Deferred Policy Acquisition Costs: Changes in deferred policy acquisition costs are summarized as follows: 1996 1995 1994 Deferred, beginning of period $ 13,354,600 $ 11,977,429 $ 11,972,069 Additions: Commissions 30,593,227 25,797,651 23,444,057 Equity in acquired unearned premium reserve 2,312,841 --- --- Ceding commission --- 409,350 621,494 Premium taxes 2,458,670 1,625,370 2,108,746 Other 3,956,708 4,236,409 3,007,189 Total Additions 39,321,446 32,068,780 29,181,486 Amortization expense 35,985,771 30,691,609 29,176,126 Deferred, end of period $ 16,690,275 $ 13,354,600 $ 11,977,429 9.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: 1996 1995 1994 Tax at statutory rate $ 2,023,000 $ 5,403,000 $ 3,813,000 Tax-exempt interest (1,134,000) (1,005,000) (897,000) Dividends received deduction (619,000) (598,000) (593,000) Loss, LAE and Salvage and subrogation fresh start (17,000) (7,000) (20,000) Nondeductible expenses 168,000 109,000 74,000 Other (270,859) 203,000 38,000 Total income taxes $ 150,141 $ 4,105,000 $ 2,415,000 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 no amortization was recognized in 1996. Approximately $7,000 was recognized in 1995, and $20,000 in 1994. Prior to 1994, $876,000 was recognized. The Tax Reform Act of 1986 allowed for a fresh start deduction for reserve discounting requirements. This produced an aggregate tax benefit of approximately $900,000 of which the Company recognized approximately $17,000 in 1996. Prior to 1996, the Company had recognized approximately $855,000 of this benefit. Under SFAS No. 109, "Accounting For Income Taxes", the Company recorded a net deferred tax asset in 1996 and 1995, which is included among other assets. The net deferred tax asset at December 31, 1996, 1995 and 1994, is comprised of the following: 1996 1995 1994 Deferred tax assets: Unearned premium reserves $ 5,533,000 $ 4,336,000 $ 3,936,000 Loss and loss adjustment expense reserves and salvage and subrogation 6,336,000 4,980,000 5,346,000 Unrealized depreciation on investment securities --- --- 3,747,000 Other post-employment benefits 496,000 454,000 380,000 Other 875,000 --- 10,000 Total deferred tax assets 13,240,000 9,770,000 13,419,000 Deferred tax liabilities: Deferred policy acquisition costs 5,842,000 4,674,000 4,132,000 Investments 327,000 178,000 80,000 Unrealized appreciation on investment securities 3,849,000 3,607,000 --- Other 425,000 34,000 25,000 Total deferred tax liabilities 10,443,000 8,493,000 4,237,000 Net deferred tax asset $ 2,797,000 $ 1,277,000 $ 9,182,000 The Company has paid income taxes during the last three preceding years that exceed the recorded deferred income tax asset generated by operations ($1,678,000 in 1996, $3,248,000 in 1995 and $2,950,000 in 1994). 10. Statutory Information: Subsidiary retained earnings available for distribution as dividends to the Company are limited by law to the statutory unassigned surplus of the subsidiaries on the previous December 31, as determined in accordance with the accounting practices prescribed or permitted by insurance regulatory authorities of the state of Indiana. Subject to this limitation, the maximum dividend that may be paid during a 12-month period, without prior approval of the insurance regulatory authorities is the greater of ten percent of statutory capital and surplus as of the preceding December 31 or net income for the preceding calendar year determined on a statutory basis. Meridian Security declared and paid dividends to the Company of $3,900,000 in 1996, $2,400,000 in 1995 and $2,200,000 in 1994. As of December 31, 1996, approximately $9,300,000 was available for distribution to the Company without prior approval of 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 their state of domicile: 1996 1995 1994 Statutory capital and surplus $105,506,000 $ 90,952,000 $ 74,716,000 Statutory net investment income $ 15,809,000 $ 14,733,000 $ 13,927,000 Statutory net income $ 3,307,000 $ 11,625,000 $ 10,097,000 11. Shareholders' Equity: The Company has an Incentive Stock Plan ("Plan") for the purpose of attracting and retaining key employees. The maximum number of common shares authorized for issuance under the Plan is 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. Restricted stock awards may be granted subject to terms and conditions as prescribed by the committee which administers the Plan. In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on the fair value method of accounting. The Company continues to account for stock options in accordance with Accounting Principles Board Opinion No. 25. Had compensation cost been determined using the fair value of the options at the grant dates in accordance with SFAS No. 123, the Company's net income and earnings per share for the periods ended December 31, 1996 and 1995 would have been reduced to the following pro-forma amounts: $143,000 and $53,000 and $0.02 and $0.01, respectively. The fair value of each option was estimated to be $13.63 and $13.43 on the date of the grant using the Black-Scholes model with the following assumptions for 1996 and 1995, respectively: risk free interest rates of 6.55 percent and 6.70 percent; dividend yield of 2.15 percent and 2.35 percent; and volatility of .314 and .358. As of December 31, 1996, options outstanding under these plans had an exercise price that ranged from $11.88 to $15.28 and a remaining weighted average contractual life of 6 years. Stock options granted by the Company for the periods ended December 31, 1996, 1995 and 1994 are summarized in the following table: 1996 1995 1994 Weighted Weighted Weighted Price Shares Price Shares Price Shares Outstanding at January 1 $11.69 313,781 $10.88 328,401 $ 8.30 97,713 Granted 14.04 31,000 14.27 37,000 11.81 278,280 Exercised during the year 5.75 (4,042) 5.75 (30,521) 10.98 (47,592) Canceled during the year 9.51 (37,415) 12.20 (21,099) --- --- Outstanding at December 31 12.28 303,324 11.69 313,781 10.88 328,401 Portion thereof exercisable at December 31 $12.30 272,324 $11.52 278,781 $ 5.75 50,121 Available for future grants 220,856 251,856 288,856 12. Unaudited Selected Quarterly Financial Data: (Amounts in thousands except per-share data) Quarter Ended March 31 June 30 September 30 December 31 1996 Revenues $ 41,400 $ 43,262 $ 48,990 $ 52,917 Net income $ 595 $ 702 $ 1,806 $ 2,697 Net income per share $ 0.09 $ 0.10 $ 0.27 $ 0.40 1995 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 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 14, 1997. 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 14, 1997. 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 14, 1997. 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 14, 1997. 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, 1996, 1995 and 1994 Consolidated Balance Sheet as of December 31, 1996 and 1995 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 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 A report on Form 8-K was filed August 14, 1996, with respect to Item 2, Item 5, and Item 7 thereof. 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 19, 1997, 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 /s/ Scott S. Broughton Scott S. Broughton Director MERIDIAN INSURANCE GROUP, INC. FORM 10-K for the fiscal year ended December 31, 1996 Index to Exhibits Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit (2) 2.01 Acquisition and Affiliation Agreement by and among Citizens Security Group, Inc., Citizens Security Mutual Insurance Company and Meridian Insurance Group, Inc. *Page 58 (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. as amended through December 4, 1996. *Page 117 (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 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.) ** 10.02 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.) ** 10.03 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.) ** 10.04 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.) ** 10.05 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.) ** 10.06 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.) ** Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit 10.07 Form of Change in Control Agreement between Meridian Mutual Insurance Company and Norma J. Oman, 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.) ** 10.08 Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company and Meridian Security 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.) 10.09 Multiple Layer Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company and Meridian Security 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.) 10.10 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.) ** 10.11 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.) 10.12 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.) 10.13 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.) ** 10.14 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.) 10.15 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.) Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit 10.16 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.) ** 10.17 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.) ** 10.18 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.) ** 10.19 Amendment No. 3 to the Multiple Layer Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company and Meridian Security 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.) 10.20 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.) 10.21 Amendment No. 1 to Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company and Meridian Security 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.) 10.22 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.) 10.23 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.) 10.24 Form of 1995 Non-qualified Stock Option Agreement under 1987 Meridian Insurance Group, Inc., Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.38 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.) ** 10.25 Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.39 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.) ** Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit 10.26 Schedule of reinsurers and their participation percentages under the Excess Catastrophe Reinsurance Contract issued to Meridian Mutual Group effective January 1, 1996. (Incorporated by reference to Exhibit 10.40 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.) 10.27 Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Meridian Mutual Group by the Subscribing Reinsurers identified therein. (Incorporated by reference to Exhibit 10.41 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.) 10.28 Underlying Aggregate Excess Catastrophe Reinsurance Contract effective January 1, 1996, issued to Meridian Mutual Group by the Subscribing Reinsurers identified therein. (Incorporated by reference to Exhibit 10.42 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.) 10.29 Property Excess of Loss Reinsurance Binding Agreement between Meridian Mutual Group and NAC Reinsurance Corporation effective June 15, 1995. (Incorporated by reference to Exhibit 10.44 to the registrant's Form 10-K for the fiscal year ended December 31, 1995; Commission File No. 0-11413.) 10.30 Reinsurance Pooling Agreement Amended and Restated as of August 1, 1996, by and among Meridian Mutual Insurance Company, Meridian Security Insurance Company, Citizens Security Mutual Insurance Company, Citizens Fund Insurance Company, and Insurance Company of Ohio *Page 126 10.31 Management Services Agreement between Meridian Mutual Insurance Company and its Affiliates effective August 1, 1996 *Page 131 10.32 Management Services Agreement among Meridian Insurance Group, Inc., Meridian Mutual Insurance Company and their Affiliates effective January 1, 1997 *Page 135 10.33 Consulting Services Agreement between Meridian Insurance Group, Inc., and Scott S. Broughton ** *Page 139 10.34 Stock Option Agreement between Meridian Insurance Group, Inc., and Scott S. Broughton ** *Page 144 10.35 Claims Administration Agreement by and among Citizens Security Mutual Insurance Company, Citizens Fund Insurance Company, Insurance Company of Ohio, and VIS'N, Inc. *Page 151 10.36 Software and Hardware Support Agreement by and among Citizens Security Mutual Insurance Company, Citizens Fund Insurance Company, Insurance Company of Ohio, and VIS'N, Inc. *Page 165 10.37 Form of Meridian Insurance Agency Profit-Sharing Agreement *Page 182 10.38 Form of Meridian Insurance New Agent's Incentive Compensation Agreement *Page 186 Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit 10.39 Amendment No. 7 to the Personal Excess Liability Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company Meridian Security Insurance Company, and the Citizens Security Group *Page 190 10.40 Amendment No. 5 to the Multiple Layer Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company, and the Citizens Security Group *Page 192 10.41 Amendment No. 9 to Commercial and Personal Umbrella Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company *Page 198 10.42 Basket Reinsurance Agreement effective January 1, 1997, among Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company and Citizens Security Group *Page 200 10.43 Addendum No. 1 to the January 1, 1996, Underlying Aggregate Excess Catastrophe Reinsurance Contract issued to Meridian Mutual Group *Page 204 10.44 Excess Catastrophe Reinsurance Contract effective January 1, 1997, issued to Meridian Mutual Group *Page 210 10.45 Underlying Aggregate Excess Catastrophe Reinsurance Contract issued to Meridian Mutual Group effective January 1, 1997 *Page 226 10.46 Second Underlying Aggregate Excess Catastrophe Reinsurance Contract issued to Meridian Mutual Group effective May, 1996, and Addendum No. 1 effective January 1,1997 *Page 240 10.47 Sixth Excess Catastrophe Reinsurance Program issued to Meridian Mutual Group effective January 1, 1997 *Page 248 10.48 Seventh Excess Catastrophe Reinsurance Program issued to Meridian Mutual Group effective January 1, 1997 *Page 262 10.49 Term Loan Agreement and Business Credit Note between NBD Bank, N.A., and Meridian Insurance Group, Inc., dated July 29, 1996 *Page 275 10.50 Form of 1997 Non-qualified Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan ** *Page 291 10.51 Form of 1997 Incentive Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan ** *Page 294 Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit 10.52 Written Descriptions of 1996 and 1997 Meridian Insurance Group, Inc., Executive Incentive Plans *Page 297 10.53 Form of Directors' Non-qualified Stock Option Agreement ** *Page 301 10.54 Deferred Compensation Plan Agreement dated August 1, 1995, between Citizens Security Mutual Insurance Company and Scott S. Broughton ** *Page 304 10.55 Form of Citizens Security Group Agency Agreement *Page 315 10.56 Form of Citizens Security Mutual Insurance Company Agency Agreement *Page 320 10.57 Form of Insurance Company of Ohio Agency Agreement*Page 326 10.58 Form of Citizens Security Group Limited Agency Agreement *Page 331 10.59 Form of Citizens Security Mutual Insurance Company Personal Partner Agency Agreement *Page 335 10.60 Form of Citizens Security Group Personal Partner Contingency Plan *Page 339 10.61 Form of Citizens Security Group Network Agencies Profit Sharing Plan *Page 342 10.62 Form of Citizens Security Group Individual Agency Profit Sharing Plan *Page 346 (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. *Page 350 (22) No exhibit. (23) 23.01 Consent of Independent Accountants dated March 27, 1997 *Page 351 (24) No exhibit. (27) 27.01 Financial data schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1996. Exhibit Number Assigned in Regulation S-K Item 601 Description of Exhibit (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, 1996 *Page 352 * 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 25 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 52 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 26, 1997 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 53 Schedule II Condensed Financial Information of Registrant 54 Schedule IV Reinsurance 56 Schedule VI Supplemental Information Concerning Property- Casualty Insurance Operations 57 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996 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 $ 40,635,377 $ 41,294,992 $ 41,294,992 States, municipalities, and political subdivisions 93,551,518 95,364,477 95,364,477 Public utilities 1,537,241 1,602,531 1,602,531 All other corporate bonds 65,167,873 66,097,539 66,097,539 Redeemable preferred stocks 33,464,362 33,983,501 33,983,501 Total fixed maturities 234,356,371 238,343,040 238,343,040 Equity securities Common stocks Public utilities 1,235,361 1,472,446 1,472,446 Banks, trust, and insurance companies 2,109,155 2,853,082 2,853,082 Industrial, miscellaneous, and all other 30,434,530 36,304,105 36,304,105 Total equity securities 33,779,046 40,629,633 40,629,633 Mortgage loan 704,485 704,485 704,485 Other long-term investments 525,000 685,691 685,691 Short-term investments 1,326,634 1,326,634 1,326,634 Total investments $270,691,536 $281,689,483 $281,689,483 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEET as of December 31, 1996 and 1995 ASSETS 1996 1995 Cash and short-term investments $ 2,227,195 $ 1,041,331 Investment in subsidiaries (eliminated in consolidation) 133,923,863 118,957,091 Other assets 18,890 24,411 Total assets $136,169,948 $120,022,833 LIABILITIES AND SHAREHOLDERS' EQUITY Due to Meridian Mutual Insurance Company $ 27,517 $ 6,551 Post-employment benefits 1,417,814 1,298,378 Bank loan payable 11,875,000 --- Dividends payable 542,350 474,376 Other liabilities 133,286 861 Total liabilities 13,995,967 1,780,166 Shareholders' equity: Common shares 44,077,846 44,076,685 Contributed capital 15,058,327 15,058,327 Unrealized appreciation of investments, net of deferred income tax 7,141,846 6,842,245 Retained earnings 55,895,962 52,265,410 Total shareholders' equity 122,173,981 118,242,667 Total liabilities and shareholders' equity $136,169,948 $120,022,833 STATEMENT OF INCOME For the Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 Dividend income from subsidiaries $ 3,900,000 $ 2,400,000 $ 2,200,000 Other income 24,656 1,928 780 Less: General operating expenses 727,648 730,704 734,605 Interest expense 307,887 --- --- Current federal income tax benefit (265,508) (379,345) (314,016) Income before equity in net income of subsidiaries 3,154,629 2,050,569 1,780,191 Equity in undistributed net income of subsidiaries 2,645,323 9,566,470 7,340,872 Net income $ 5,799,952 $ 11,617,039 $ 9,121,063 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT, Continued STATEMENT OF CASH FLOWS For the Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 Cash flows from operation: Net income $ 5,799,952 $ 11,617,039 $ 9,121,063 Reconciliation of net income to net cash provided (used) by operations: Equity in undistributed net income of subsidiaries (2,645,323) (9,566,470) (7,340,872) Compensation expense related to restricted stock --- --- 35,584 (Increase) decrease in other assets 5,521 (5,465) 47,371 Increase (decrease) in due to Meridian Mutual Insurance Company 20,966 (54,966) 40,107 Increase in post-employment benefits 119,436 197,223 102,060 Increase in other liabilities 132,425 861 --- Other, net (21,848) 243 431 Net cash provided by operations 3,411,129 2,188,465 2,005,744 Cash flows from investing activities: Capital contribution to subsidiary (12,000,000) --- --- Net cash used by investing activities (12,000,000) --- --- Cash flows from financing activities: Proceeds from stock options 23,241 222,996 39,819 Repurchase and retirement of common stock (22,080) (77,033) --- Proceeds from bank loan 12,000,000 --- --- Repayment of bank loan (125,000) --- --- Dividends paid (2,101,426) (1,826,933) (1,617,696) Net cash provided (used) by financing activities 9,774,735 (1,680,970) (1,577,877) Net increase in cash 1,185,864 507,495 427,867 Cash at beginning of year 1,041,331 533,836 105,969 Cash at end of year $ 2,227,195 $ 1,041,331 $ 533,836 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE IV--REINSURANCE For the Years Ended December 31, 1996, 1995 and 1994 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, 1996 $176,718,644 $15,839,546 $ 6,425,316 $167,304,414 3.8% 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% (1) The amounts for the years ended December 31, 1996, 1995 and 1994 represents the Company's insurance subsidiaries share of third party reinsurance transactions pursuant to the pooling agreement MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS For the Years Ended December 31, 1996, 1995 and 1994 Year Ended December 31, 1996 1995 1994 Deferred policy acquisition costs $ 16,690,275 $ 13,354,600 $ 11,977,429 Reserves for losses and loss adjustment expenses $161,309,239 $123,577,240 $123,754,650 Unearned premiums $ 84,065,751 $ 64,558,695 $ 59,663,286 Earned premiums $167,304,414 $143,865,821 $135,001,881 Investment income $ 14,908,285 $ 14,563,820 $ 13,995,984 Losses and loss adjustment expenses incurred related to: Current years $137,817,367 $104,584,909 $ 99,444,243 Prior years $ (7,716,175) $ (5,461,060) $ (5,473,714) Amortization of deferred policy acquisition costs $ 35,985,771 $ 30,691,609 $ 29,176,126 Paid losses and loss adjustment expenses $123,669,408 $ 98,690,281 $ 91,661,638 Premiums written $169,194,649 $148,763,885 $136,189,925 EX-10 2 REINSURANCE POOLING AGREEMENT AMENDED AND RESTATED AS OF AUGUST 1, 1996 THIS REINSURANCE POOLING AGREEMENT (the "Agreement") made by and among Meridian Mutual Insurance Company ("Mutual"), Meridian Security Insurance Company ("Security"), Citizens Security Mutual Insurance Company ("Citizens"), Citizens Fund Insurance Company ("Fund"), and Insurance Company of Ohio ("ICO")is entered into effective 12:01 a.m. on the first day of August, 1996, (the "Effective Time") and shall remain in force continuously thereafter until cancelled at any time by mutual consent. WHEREAS Mutual and Security have been parties to this Agreement since January 1, 1981; and WHEREAS Meridian Insurance Group, Inc. has become affiliated with Citizens and has acquired Fund and ICO as of the Effective Time and believes it is in the best interests of Citizens, Fund, and ICO for them to be parties to this Agreement; and WHEREAS Citizens, Fund, ICO, and Citizens Security Group Inc. entered into an amended reinsurance pooling agreement effective October 20, 1989, which agreement the parties, including Meridian Merger Corporation as successor to Citizens Security Group Inc., desire to terminate as of the Effective Time of this Agreement, thereby agreeing to waive the one-hundred-eighty-day written termination notice requirement contained in the amended reinsurance pooling agreement; NOW, THEREFORE, do Citizens, Fund, ICO, and Meridian Merger Corporation hereby terminate, as of the Effective Time of this Agreement, that amended reinsurance pooling agreement executed October 20, 1989, by and among Citizens, Fund, ICO, and Citizens Security Group Inc., and simultaneously herewith Citizens, Fund, and ICO agree to become parties to this Agreement as witnessed by their signatures affixed to this Agreement. ARTICLE I The Companies are engaged in the insurance business and maintain a mutual relationship having certain incidents of common management, and desire to bring about for each other added economies of operation, uniform underwriting results, diversification as respects the classes of insurance business written, and maximization of capacity. To accomplish the aforesaid, the Companies do by means of this Agreement, pool all of their insurance business in force as of the Effective Time of this Agreement or thereafter and agree to share in the fortunes of their pooled insurance business. ARTICLE II Mutual hereby reinsures and Security, Citizens, Fund, and ICO hereby cede and transfer to Mutual all liabilities incurred under or in connection with all contracts and policies of insurance issued by Security, Citizens, Fund, and ICO outstanding and in force as of the Effective Time of this Agreement, or thereafter issued by them. Such liabilities shall include Security's, Citizens', Fund's, and ICO's reserves for unearned premiums, outstanding losses and loss expenses (including unreported losses), all other underwriting and administrative expenses which shall include service fee income and premium balances charged off as uncollected receivables, and policyholder dividends as evidenced by their books and records, but shall not include inter-company balances, service fee income, liabilities for Federal Income Taxes, or liabilities incurred in connection with Security's, Citizens', Fund's, and ICO's investment transactions. ARTICLE III Security, Citizens, Fund, and ICO hereby assign and transfer to Mutual all right, title and interest in and to reinsurance ceded to reinsurers, other than the parties hereto, outstanding and in force with respect to the liabilities reinsured by Mutual under Article II hereof. ARTICLE IV Each of Security, Citizens, Fund, and ICO agrees to pay to Mutual amounts equal to the aggregate of all of its liabilities reinsured by Mutual under Article II hereof. ARTICLE V Security, Citizens, Fund, and ICO hereby reinsure, and Mutual hereby cedes and transfers to each of them the following percentage of Mutual's net liabilities under all contracts and policies of insurance (including those reinsured by Mutual under Article II hereof) on which Mutual is subject to liability and which are outstanding and in force as of the Effective Time of this Agreement, or which are issued thereafter: 61 percent ceded to Security; 4 percent ceded to Citizens; 9 percent ceded to Fund; 4 percent ceded to ICO. Such liabilities shall include Mutual's reserves for unearned premiums, outstanding losses and loss expense (including unreported losses), all other underwriting and administrative expenses which shall include service fee income and premium balances charged off as uncollected receivables, and policyholder dividends but shall not include inter-company balances, service fee income, liabilities for Federal Income Taxes or liabilities incurred in connection with Mutual's investment transactions. ARTICLE VI Mutual hereby assigns and transfers to each of Security, Citizens, Fund, and ICO assets in the amount equal to the aggregate of all liabilities of Mutual reinsured by that specific company under Article V hereof. ARTICLE VII Mutual agrees to pay to Security, Citizens, Fund, and ICO their specified participation, as listed in Article V, of all premiums written by the companies after first deducting premiums on all reinsurance ceded to reinsurers (other than the parties hereto). Similarly, it is further agreed that all losses, loss expenses and other underwriting and administrative expenses which shall include service fee income and premium balances charged off as uncollected receivables, (with the exceptions noted in Article II and V hereof) of the companies, less all losses and expenses recovered and recoverable under reinsurance ceded to reinsurers (other than the parties hereto), shall be pro- rated among all five parties on the basis of their respective participations. ARTICLE VIII The obligation of the companies under this Agreement to exchange reinsurance between themselves may be offset by the reciprocal obligations so that the net amount only shall be required to be transferred. An accounting on all transactions shall be rendered quarterly, or more often as may be mutually agreed, and shall be settled within a reasonable time thereafter. Except as otherwise required by the context of this Agreement, the amount of all payments between the companies under this Agreement shall be determined on the basis of the convention form of annual statements of the companies. Notwithstanding anything herein contained, this Agreement shall not apply to the investment operations of the companies, but this provision shall not prohibit other agreements pertaining to the intercompany allocation or sharing of investment expense. ARTICLE IX The conditions of reinsurance hereunder shall in all cases be identical with the conditions of the original insurance or as changed during the term of such insurance. ARTICLE X Each of the companies hereto, as the assuming insurer, hereby agrees that all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall be payable by the assuming insurer on the basis of the liability of the ceding insurer under the policy or contract reinsured without diminution because of the insolvency of the ceding insurer; provided that such reinsurance shall be payable directly to the ceding insurer or to its liquidator, receiver or other statutory successor, except (a) where the contract specifically provided another payee for such reinsurance in the event of the insolvency of the ceding insurer and (b) where the assuming insurer, with the consent of the direct insured or insureds and with the approval of the appropriate insurance department if such approval is required by state law, has assumed such policy obligations of the ceding insurer as direct obligations of the assuming insurer to the payees under such policies and in substitution for the obligations of the ceding insurer to such payee; and further provided that the liquidator, receiver or statutory successor of the ceding insurer shall give written notice of the pendency of any claim against the insolvent ceding insurer on the policy or contract reinsured within a reasonable time after such claim; and the assuming insurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the ceding insurer or its liquidator, receiver or statutory successor, the expense thus incurred by the assuming insurer to be chargeable, subject to court approval, against the insolvent ceding insurer as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the ceding insurer solely as a result of the defense undertaken by the assuming insurer. ARTICLE XI This Agreement has no fixed term and is terminable with respect to any one of Security, Citizens, Fund, or ICO (herein the "terminating party") by the mutual consent of Mutual and the terminating party or parties. This Agreement may be amended or terminated without the necessity of a vote by the shareholders or the policyholders of any of the parties. In the event of termination of this Agreement, the terminating party shall transfer back to Mutual the liabilities ceded to it by Mutual, and Mutual shall transfer back to the terminating party the liabilities ceded to it by the terminating party, and each party shall receive from the other assets in an amount equal to the amount of the policy liabilities received by it. IN WITNESS WHEREOF, this Agreement is entered into as of the date written above. MERIDIAN MUTUAL INSURANCE COMPANY By Norma J. Oman, President Attest: J. Mark McKinzie, Secretary MERIDIAN SECURITY INSURANCE COMPANY By Norma J. Oman, President Attest: J. Mark McKinzie, Secretary CITIZENS SECURITY MUTUAL INSURANCE COMPANY By__________________________________ Norma J. Oman, President Attest:___________________________ J. Mark McKinzie, Secretary CITIZENS FUND INSURANCE COMPANY By______________________________________ Norma J. Oman, President Attest:____________________________ J. Mark McKinzie, Secretary INSURANCE COMPANY OF OHIO By_____________________________________ Norma J. Oman, President Attest:____________________________ J. Mark McKinzie, Secretary MANAGEMENT SERVICES AGREEMENT BETWEEN MERIDIAN MUTUAL INSURANCE COMPANY AND ITS AFFILIATES THIS AGREEMENT, made as of this 31 day of July, 1996, by and among Meridian Mutual Insurance Company ("Meridian"), Meridian Insurance Group, Inc. ("MIGI"), Meridian Security Insurance Company ("Security"), Vernon Fire and Casualty Insurance Company ("Vernon"), MarketMasters Agency, Inc. ("MarketMasters"), Meridian Service Corporation ("Service"), Citizens Security Mutual Insurance Company ("Citizens"), Citizens Fund Insurance Company ("Fund"), Insurance Company of Ohio ("ICO"), and Mississippi Valley Corporation ("Valley"). Security, Vernon, MIGI, MarketMasters, Service, Citizens, Fund, ICO, and Valley are sometimes referred to herein as the "affiliates." WHEREAS Mutual desires to make available to its affiliates and the affiliates desire to obtain from Mutual some or all of the following: the services of Mutual's executive, managerial, administrative and other employees, its data processing services, and the use of its equipment, supplies, communication and other facilities, together with the use of office space, all of which may be used jointly by the affiliates and Mutual; NOW, THEREFORE, in consideration of the premises and the mutual promises contained herein, the parties hereto agree as follows: 1. Mutual shall provide to the affiliates as is reasonably required by the affiliates in connection with the affiliates' business operations, the services of Mutual's executive, managerial, administrative and other employees, together with Mutual's data processing services and all of Mutual's equipment, supplies, telephone, communication, office and support facilities, and any other personnel or facilities employed, owned or leased by Mutual from time to time in the course of its business operations. Any of Mutual's employees may also serve as directors or officers of the affiliates, notwithstanding that such persons may also be officers or directors of Mutual. Mutual shall have the right to continue using for its business operations all of its employees, services and facilities provided to the other parties hereunder. To the extent reasonably possible, the parties shall jointly utilize Mutual's employees, services and facilities in a cooperative manner and consistent with the best business interests and needs of the affiliates and Mutual. 2. The employees, services and facilities provided by Mutual to the affiliates hereunder shall be made available to assist the affiliates in the following areas as needed: (a) insurance and reinsurance operations; (b) corporate analysis and planning; (c) investments (d) information and advertising; (e) communication; (f) personnel; (g) offices and facilities; (h) legal, regulatory and governmental affairs; (i) data processing; and (j) any and all other areas necessary or appropriate to the business operations of the affiliates. Mutual shall direct its employees, in performing such services for the affiliates, to use their best efforts to promote the general interests and economic welfare of the affiliates in the same manner as such employees provide services to their direct employer. 3. Each affiliate shall pay to Mutual for the employees, services and facilities provided hereunder, in arrears the fifteenth day of each calendar month during the term of this Agreement, an amount equal to all Mutual's costs relating to the following: (a) salaries; (b) employee benefit and pension plans; (c) employee relations and welfare; (d) payroll taxes and donations; (e) insurance; (f) travel; (g) rental and rent items; (h) equipment; (i) data processing; (j) printing and stationery; (k) advertising; (l) postage; (m) telephone and telegraph; (n) duplicating; (o) supplies; and (p) any similar or additional expenses arising in connection with the employees, services and facilities provided hereunder or as the parties may agree upon from time to time; provided, however, that no affiliate shall be responsible for any expenses of Mutual which do not relate to the employees, services or facilities provided by Mutual to that affiliate hereunder. The amounts due from each affiliate hereunder shall be recomputed by Mutual on a quarterly, semi-annual or annual basis as appropriate to accurately determine such amounts, using generally accepted cost accounting principles and appropriate bases of allocation supported by work papers. Any resulting adjustments shall be settled between the parties or credited to future payment periods as may be determined by Mutual. Mutual shall make its books and records available to the affiliates during regular business hours for the affiliates to verify the accuracy of the calculations by Mutual of the payments due from the affiliates hereunder. 4. Any notices to be given hereunder shall be in writing and shall be deemed effective when delivered in person or, if mailed, two days after mailing first class prepaid, to the address of the principal office of the party to which the notice is being given. 5. This Agreement may not be assigned by any party without the prior written consent of the other party. The provisions of this Agreement shall bind and inure to the benefit of the parties and their respective successors and permitted assigns. 6. This Agreement sets forth the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements with respect thereto. Any modifications or amendments to this Agreement must be in writing and signed by the parties to be bound. 7. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana both as to execution and performance. 8. Nothing contained in this Agreement shall impair the authority and responsibility of the Board of Directors of any of the affiliates to exercise managerial control as provided in said companies' Articles of Incorporation. 9. This Agreement shall remain in force until terminated as provided herein. Any party to this Agreement may terminate this Agreement by giving written notice to the other party, stating a date certain not less than 30 days hence on which such termination will become effective. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MERIDIAN MUTUAL INSURANCE COMPANY By:__________________________________ Title: President and Chief Executive Officer MERIDIAN SECURITY INSURANCE COMPANY By:__________________________________ Title: President and Chief Executive Officer MERIDIAN INSURANCE GROUP, INC. By:__________________________________ Title: President and Chief Executive Officer VERNON FIRE & CASUALTY INSURANCE COMPANY By:_______________________________________ Title: President and Chief Executive Officer MARKETMASTERS AGENCY, INC. By:________________________________________ Title:President and Chief Executive Officer MERIDIAN SERVICE CORPORATION By:________________________________________ Title: President and Chief Executive Officer CITIZENS SECURITY MUTUAL INSURANCE COMPANY By:_____________________________________ Title: President and Chief Executive Officer CITIZENS FUND INSURANCE COMPANY By:____________________________________ Title: President and Chief Executive Officer INSURANCE COMPANY OF OHIO By:____________________________________ Title: President and Chief Executive Officer MISSISSIPPI VALLEY CORPORATION By:____________________________________ Title: President and Chief Executive Officer MANAGEMENT SERVICES AGREEMENT AMONG MERIDIAN INSURANCE GROUP, INC., MERIDIAN MUTUAL INSURANCE COMPANY AND THEIR AFFILIATES THIS AGREEMENT, made as of this 1st day of January, 1997, by and among Meridian Insurance Group, Inc. ("Meridian"), Meridian Mutual Insurance Company ("Mutual"), Meridian Security Insurance Company ("Security"), Meridian Service Corporation ("Service"), Citizens Security Mutual Insurance Company ("Citizens"), Citizens Fund Insurance Company ("Fund"), Insurance Company of Ohio ("ICO"), and Mississippi Valley Corporation ("Valley"). With reference to Meridian, the word "affiliates" in this Agreement means Mutual, Security, Service, Citizens, Fund, ICO, and Valley. With reference to Mutual, the word "affiliates" in this Agreement means Meridian, Security, Service, Citizens, Fund, ICO, and Valley. WHEREAS the Boards of Directors of Meridian, Mutual, and Citizens have resolved to change the employer and paymaster of all company employees from Mutual or Citizens to Meridian Insurance Group, Inc. effective January 1, 1997; and WHEREAS Meridian desires to make available to its affiliates and its affiliates desire to obtain from Meridian certain services of Meridian's executive, managerial, administrative and other employees and human resources; and WHEREAS Mutual desires to make available to its affiliates its data processing services and the use of its equipment, supplies, communication and other facilities, together with the use of office space, all of which may be used jointly by the affiliates and Mutual; NOW, THEREFORE, in consideration of the premises and the mutual promises contained herein, the parties hereto agree as follows: 1. Meridian shall provide to the affiliates, as is reasonably required by the affiliates in connection with the affiliates' business operations, the services of Meridian's executive, managerial, administrative and other employees and human resources. Any of Meridian's employees may also serve as directors or officers of the affiliates, notwithstanding that such persons may also be officers or directors of Meridian. Meridian shall have the right to continue using for its business operations all of its employees provided to the other parties hereunder. To the extent reasonably possible, the parties shall jointly utilize Meridian's employees in a cooperative manner and consistent with the best business interests and needs of the affiliates and Meridian. Meridian shall direct its employees, in performing such services for the affiliates, to use their best efforts to promote the general interests and economic welfare of the affiliates in the same manner as such employees provide services to their direct employer. 2. Mutual shall provide to the affiliates, as is reasonably required by the affiliates in connection with the affiliates' business operations, Mutual's data processing services and all of Mutual's equipment, supplies, telephone, communication, office and support facilities, and any other facilities owned or leased by Mutual from time to time in the course of its business operations. Mutual shall have the right to continue using for its business operations all of its services and facilities provided to the other parties hereunder. To the extent reasonably possible, the parties shall jointly utilize Mutual's services and facilities in a cooperative manner and consistent with the best business interests and needs of the affiliates and Mutual. 3. The employees, services and facilities provided by Meridian and Mutual to their affiliates hereunder shall be made available to assist the affiliates in the following areas as needed: (a) insurance and reinsurance operations; (b) corporate analysis and planning; (c) investments; (d) information and advertising; (e) communication; (f) personnel; (g) offices and facilities; (h) legal, regulatory and governmental affairs; (i) data processing; and (j) any and all other areas necessary or appropriate to the business operations of the affiliates. 4. Each affiliate shall pay to Meridian for the employees and to Mutual for the services and facilities provided hereunder an amount equal to all Meridian's and Mutual's costs relating to the following: (a) salaries; (b) employee benefit and pension plans; (c) employee relations and welfare; (d) payroll taxes and donations; (e) insurance; (f) travel; (g) rental and rent items; (h) equipment; (i) data processing; (j) printing and stationery; (k) advertising; (l) postage; (m) telephone and telegraph; (n) duplicating; (o) supplies; and (p) any similar or additional expenses arising in connection with the employees, services and facilities provided hereunder or as the parties may agree upon from time to time; provided, however, that no affiliate shall be responsible for any expenses of Meridian which do not relate to the employees provided by Meridian to that affiliate hereunder or any expenses of Mutual which do not relate to the services or facilities provided by Mutual to that affiliate hereunder. Such payments shall be made in arrears on the fifteenth day of each calendar month (or more often as agreed upon by the parties) during the term of this Agreement. The amounts due from each affiliate hereunder shall be recomputed by Meridian and Mutual on a quarterly, semi- annual or annual basis as appropriate to accurately determine such amounts, using generally accepted cost accounting principles and appropriate bases of allocation supported by work papers. Any resulting adjustments shall be settled between the parties or credited to future payment periods as may be determined by Meridian and Mutual. Meridian and Mutual shall make their books and records available to the affiliates during regular business hours for the affiliates to verify the accuracy of the calculations by Meridian and Mutual of the payments due from the affiliates hereunder. 5. Any notices to be given hereunder shall be in writing and shall be deemed effective when delivered in person or by facsimile or, if mailed, two days after mailing first class prepaid, to the address of the principal office of the party to which the notice is being given. 6. This Agreement may not be assigned by any party without the prior written consent of the other party. The provisions of this Agreement shall bind and inure to the benefit of the parties and their respective successors and permitted assigns. 7. This Agreement sets forth the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements with respect thereto. Any modifications or amendments to this Agreement must be in writing and signed by the parties to be bound. 8. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana both as to execution and performance. 9. Nothing contained in this Agreement shall impair the authority and responsibility of the Board of Directors of any of the affiliates to exercise managerial control as provided in said companies' Articles of Incorporation. 10. This Agreement shall remain in force until terminated as provided herein. Any party to this Agreement may terminate this Agreement by giving written notice to the other party, stating a date certain not less than 30 days hence on which such termination will become effective. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MERIDIAN INSURANCE GROUP, INC. By:________________________________ Title: President and Chief Executive Officer MERIDIAN MUTUAL INSURANCE COMPANY By:________________________________ Title: President and Chief Executive Officer MERIDIAN SECURITY INSURANCE COMPANY By:________________________________ Title: President and Chief Executive Officer MERIDIAN SERVICE CORPORATION By:________________________________ Title: President and Chief Executive Officer CITIZENS SECURITY MUTUAL INSURANCE COMPANY By:________________________________ Title: President and Chief Executive Officer CITIZENS FUND INSURANCE COMPANY By:________________________________ Title: President and Chief Executive Officer INSURANCE COMPANY OF OHIO By:________________________________ Title: President and Chief Executive Officer MISSISSIPPI VALLEY CORPORATION By:________________________________ Title: President and Chief Executive Officer CONSULTING SERVICES AGREEMENT This CONSULTING SERVICES AGREEMENT (this "Agreement") is made and entered into as of July 31, 1996 by and between MERIDIAN INSURANCE GROUP, INC., an Indiana corporation (the "Company"), and SCOTT S. BROUGHTON ("Broughton"). Recitals A. Effective as of the date of this Agreement, a direct or indirect wholly-owned subsidiary of the Company has been merged with and into Citizens Security Group Inc. ("Citizens"), with the result that Citizens and its wholly- owned subsidiaries, Citizens Fund Insurance Company ("Citizens Fund") and Insurance Company of Ohio ("Citizens Ohio"), have become indirect wholly-owned subsidiaries of the Company. In addition, effective as of the date of this Agreement, Citizens Security Mutual Insurance Company ("Citizens Mutual") has become affiliated with the Company. These transactions have occurred pursuant to an Acquisition and Affiliation Agreement dated as of March 20, 1996, by and among the Company, Citizens and Citizens Mutual (the "Acquisition and Affiliation Agreement"). B. Prior to the date of this Agreement, Citizens Mutual, Citizens Fund and Citizens Ohio (collectively, the "Citizens Insurance Companies") had been jointly operated and managed under a management services agreement, a reinsurance pooling agreement and other arrangements, and Broughton had served for several years as an employee and officer of Citizens and the Citizens Insurance Companies, most recently as President and Chief Operating Officer. C. The Company wishes to maintain continuity of profitable, growing operations and management expertise for the Citizens Insurance Companies and, in view of the importance of Broughton's continued support for the combined enterprise and his unique institutional background and contributions toward building Citizens and the Citizens Insurance Companies, the Company desires to retain the services of Broughton, and Broughton is willing to perform services as an independent consultant, all on the terms and conditions set forth in this Agreement. Agreement In consideration of the foregoing and of the mutual covenants set forth herein, the Company and Broughton hereby agree as follows: Section 1. Services of Broughton. From the date of this Agreement through July 31, 2001, Broughton shall, as and when requested by the Company, provide consulting services, advice and assistance to the Company in connection with (a) the management and operations of Citizens and the Citizens Insurance Companies, (b) the integration of the operations and employees of Citizens and the Citizens Insurance Companies with the other insurance company subsidiaries and affiliates of the Company, (c) Citizens and the Citizens Insurance Companies' relationships with its employees, agents, lenders, regulators and others, (d) the historical relationships and background relating to Citizens and the Citizens Insurance Companies, and (e) other matters relating to the operations and business of Citizens and the Citizens Insurance Companies; and Broughton shall assist the Company in such other capacities and provide such other services as the Company may from time to time reasonably request. Broughton shall use good faith efforts to respond to requests for his services under this Agreement in a timely, responsive and efficient manner; provided however, that the Company acknowledges that Broughton shall not be expected to provide full time services. Broughton is not an agent of the Company, Citizens or any of the Citizens Insurance Companies, and except as may be expressly directed by the Company, Broughton is not authorized to take any actions binding upon or in the name of the Company, Citizens or any of the Citizens Insurance Companies. Section 2. Compensation of Broughton. As sole compensation for the services to be performed by Broughton and for the non-compete and confidentiality provisions under this Agreement: (a) The Company shall pay to Broughton a consulting fee at the rate of $175,000 per year. Such fee shall be payable at the rate of $14,583.33 per month and shall be paid to Broughton on the last day of each month beginning August 31, 1996 and ending July 31, 2001. (b) Broughton and the Company shall enter into the Stock Option Agreement in the form attached to this Agreement as Exhibit A, providing for the Company's grant to Broughton of an option to purchase 20,000 shares of the Company's common stock. (c) As additional compensation, in the event of Broughton's death or disability during the term of this Agreement, the Company shall continue to make the payments provided for in Section 2(a) to Broughton or to his estate. The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as may be required to be withheld pursuant to applicable law or regulation. Broughton acknowledges that the compensation set forth in this section shall be his sole compensation under this Agreement and that he is not entitled to additional payments or benefits of any kind pursuant to this Agreement. Section 3. Expenses. The Company shall reimburse Broughton for all ordinary and necessary expenses incurred by him in carrying out consulting services and assistance requested by the Company under this Agreement. The Company, however, retains the right to establish limits on types or amount of expenses that Broughton may incur. Section 4. Non-Compete and Non-Disclosure. During the term of this Agreement, Broughton shall not: (a) engage directly or indirectly in the insurance business in competition with any of the Citizens Insurance Companies, the Company or any of the Company's direct or indirect subsidiaries or affiliates, in any geographic area in which any of the Citizens Insurance Companies are or have been engaged in the insurance business; (b) engage in any business with or directly or indirectly solicit business from or seek to engage in any business with any agents or policyholders of any of the Citizens Insurance Companies, on his own behalf or on behalf of any other person, if such business involves products or services the same as or competitive with products or services provided to such agents or policyholders by any of the Citizens Insurance Companies or by the Company or any of the Companies' direct or indirect subsidiaries or affiliates; (c) solicit, take away, hire, employ or endeavor to employ any person who is then an employee of any of the Citizens Insurance Companies, the Company or any of the Company's direct or indirect subsidiaries or affiliates; (d) acquire or assist in any manner whatsoever any person in acquiring any insurance company or insurance business or the assets of any insurance company or insurance business if such company or business is located within any geographical territory within which any of the Citizens Insurance Companies, the Company or any of the Company's insurance company subsidiaries or affiliates is regularly engaged in business; or (e) disclose confidential information of any of the Citizens Insurance Companies, the Company or any of the Company's direct or indirect subsidiaries or affiliates; provided, however, that the restrictions contained in Sections 4(a), 4(b), 4(c) and 4(d) shall not be construed to prohibit or limit Broughton's participation as an owner, officer and/or employee of Vis'n, Inc., or the business operations or plans of Vis'n, Inc., as that company's business and business plans have been disclosed to the Company prior to the date of this Agreement. Broughton acknowledges that the limitations contained in this Section 4 are an essential term and consideration for the execution of this Agreement by the Company and that the time and geographic limitations are reasonable and necessary to protect the Company and its business interests. The Company shall be entitled to injunctive relief, damages, reasonable attorneys' fees and expenses in connection with any violation by Broughton of Sections 4 or 5. Section 5. Return of Records and Property. Broughton acknowledges that all records and copies of records pertaining to the operations, agents, customers, and business of the Citizens Insurance Companies that are or were made or received by Broughton in the performance of his duties for Citizens, the Company or any of the Citizens Insurance Companies, whether pursuant to his employment by the Citizens Insurance Companies or the Company or his retention by the Company under this Agreement, shall be the property of the Company or its subsidiaries, and Broughton shall keep such documents subject to the Company's custody and control and shall surrender to the Company such of those documents as are in his possession upon request of the Chief Executive Officer of the Company. Broughton shall not disclose or give possession of any such documents or records to anyone except authorized representatives of the Company. Section 6. Miscellaneous. (a) Except to the extent expressly contemplated by Section 2(b), this Agreement, being personal to Broughton, may not be assigned by him. The terms and conditions of this Agreement shall inure to the benefit and be binding upon the successors and assigns of the Company, and the heirs, executors and personal representatives of Broughton. (b) Should any clause, portion or section of this Agreement be unenforceable or invalid for any reason, such unenforceability or invalidity shall not affect the enforceability or validity of the remainder of this Agreement. Should any particular covenant in this Agreement be held unreasonable or unenforceable for any reason, including without limitation the time period, geographical area or scope of activity covered by such covenant, then such covenant shall be given effect and enforced to whatever extent would be reasonable and enforceable. (c) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. Any amendments to this Agreement must be made in writing and duly executed by each of the parties hereto. (d) This Agreement shall be governed as to validity, construction and in all other respects by the laws of the State of Indiana applicable to contracts made in that state. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MERIDIAN INSURANCE GROUP, INC. By:_______________________________ Norma J. Oman, President and Chief Executive Officer "Broughton" _________________________________ Scott S. Broughton STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as of July 31, 1996, by and between MERIDIAN INSURANCE GROUP, INC., an Indiana corporation (the "Company"), and SCOTT S. BROUGHTON ("Broughton"). Recitals A. Broughton is and has been a key management employee of Citizens Security Group Inc., a Minnesota corporation ("Citizens") and its affiliates. B. The Company has entered into an Acquisition and Affiliation Agreement dated as of March 20, 1996 (the "Acquisition and Affiliation Agreement"), pursuant to which (1) Meridian Acquisition Corporation, an indirect wholly- owned subsidiary of the Company has been merged with and into Citizens (the "Merger"), with the result that Citizens and its wholly-owned subsidiaries, Citizens Fund Insurance Company and Insurance Company of Ohio, have become indirect wholly-owned subsidiaries of the Company, and (2) Citizens Security Mutual Insurance Company has become affiliated with the Company. C. In connection with the Merger and the Acquisition Agreement, Broughton has entered into a Consulting Services Agreement with the Company which, among other matters, provides for the grant to Broughton of an option to purchase shares of common stock of the Company, as provided herein. Agreement In consideration of the premises and the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and Broughton agree as follows: Section 1. Grant of Option. Upon and subject to the terms and conditions set forth herein, the Company hereby grants to Broughton an option (the "Option") to purchase up to Twenty Thousand (20,000) shares (the "Shares") of the common stock of the Company (the "Common Stock"), at a per share exercise price (the "Exercise Price") equal to $14.125. Section 2. Time of Exercise of Option. The Option shall become exercisable (i) 25% on the first anniversary of the Effective Time, as such term is defined in the Acquisition and Affiliation Agreement, and (ii) an additional 25% on each of the second, third and fourth anniversary of the Effective Time. In addition, in the event of Broughton's death prior to the fourth anniversary of the Effective Time, the Option shall immediately become exercisable in full. The Option shall expire on and shall not be exercisable after the earlier of: (a)the date ninety days following Broughton's death, or (b) the tenth anniversary of the Effective Time. Section 3. Method of Exercise; Restrictions. (a) To the extent provided by Section 2 above, the Option may be exercised in whole or in part (subject to Section 3(c) below), from time to time, by presentation and surrender of this Agreement to the Company at its principal office, together with an Option Exercise Form substantially in the form attached hereto as Exhibit A, duly completed and executed for purchase of the designated number of shares of Common Stock accompanied by payment of the Exercise Price due in connection with such exercise. (b) The Exercise Price shall be paid in cash (including certified or cashier's check). (c) If the Option shall have been exercised in part, the Company shall, at the time of delivery of the certificates representing the Shares issuable pursuant to such partial exercise, make appropriate notation of the partial exercise of the Option on the face of this Agreement and return this Agreement to Broughton. (d) The Company shall make prompt delivery of the certificate(s) representing the Shares purchased pursuant to the Option; provided, however, that if any law or regulation requires the Company to take any action with respect to such Shares before the issuance thereof, then the date of delivery of such certificate shall be extended for the period necessary to take such action. Section 4. Restrictions on Transfer. The Option is not transferable by Broughton, except to his estate upon his death. During Broughton's lifetime the Option is exercisable only by him, and following Broughton's death the Option is exercisable only by his personal representative, to the extent provided in Section 2. Broughton or his estate shall have no rights in any of the Shares or otherwise as a shareholder of the Company by virtue hereof until payment of the Exercise Price and delivery of such Shares as herein provided. The Option and the rights granted hereunder shall not be pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment, or similar process. Upon any attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of the Option or any right granted hereunder or such rights contrary to the provisions hereof, or upon the levy of any attachment or similar process upon the Option or any such rights, this Agreement, the Option and such rights shall immediately and automatically become null and void and of no further force or effect. Section 5. Adjustments. In order to prevent dilution of the rights granted under the Option, the Exercise Price will be subject to adjustment from time to time as provided in this Section 5 (such price or such price as last adjusted pursuant to the terms hereof, as the case may be, thereafter constituting the "Exercise Price" for all purposes), and the number of shares of Common Stock obtainable upon exercise of the Option (or part thereof), will be subject to adjustment from time to time as provided in this Section 5: (a) Subdivision or Combination of Common Stock. If the Company, at any time prior to last date on which the Option may be exercised, declares any stock dividend or subdivides (by any stock split, recapitalization or otherwise) its outstanding shares of Common Stock into a greater number of shares, the number of shares of Common Stock obtainable upon exercise of the Option will be proportionately increased and the per share Exercise Price shall be proportionately decreased. If the Company at any time prior to the exercise of the Option combines (by reverse stock split or otherwise) its outstanding shares of Common Stock into a smaller number of shares, the number of shares of Common Stock obtainable upon exercise of the Option will be proportionately decreased and the per share Exercise Price shall be proportionately increased. (b) Reorganization, Reclassification, Consolidation, Merger or Sale. Any capital reorganization, reclassification, consolidation, merger, share exchange, sale of all or substantially all of the Company's assets to another person or similar transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets, including cash, with respect to or in exchange for Common Stock is referred to herein as an "Organic Change." Prior to the consummation of any Organic Change, the Company will, at the Company's sole election, either: (i) make appropriate provisions to allow this Option to be exercised in full immediately prior to the Organic Change; (ii) make appropriate provisions to ensure that Broughton will, upon consummation of the Organic Change, receive the economic benefit of the Option, as though the Option were exercisable in full at that time; or (iii) make appropriate provisions to ensure that Broughton will, after consummation of the Organic Change, have the right to acquire and receive in lieu of the shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of the Option, such shares of stock, securities or assets, including cash, as may be issued or payable pursuant to the terms of the transaction constituting the Organic Change with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of the Option had such Organic Change not taken place. In any such case, upon consummation of the Organic Change, the Option shall cease to be exercisable for shares of Common Stock. Section 6. Notice of Adjustment. On the happening of an event requiring an adjustment of the Exercise Price or the number or kind of securities or other property purchasable hereunder, the Company shall forthwith give written notice to Broughton stating the adjusted Exercise Price and the adjusted number and kind of securities or other property purchasable hereunder resulting from the event and setting forth in reasonable detail the method of calculation and the facts upon which the calculation is based. The Board of Directors of the Company, acting in good faith, shall determine the calculation and all other matters relating to any adjustment provided for under Section 5, which determination shall be binding upon Broughton. Section 7. Registration Statement on Form S-8. Prior to the first date on which the Option becomes exercisable and until the last date of the term of the Option (or such earlier date on which all Option Shares have been acquired), the Company shall use good faith efforts to file with the Securities and Exchange Commission and maintain the effectiveness of a Registration Statement on Form S-8 (or such other substantially similar form as may then be available to the Company for the registration of the Option Shares) for the purpose of registering the Option Shares under the Securities Act of 1933, as amended; provided, however, that the Company's obligations pursuant to this Section 7 are expressly conditioned upon its ability or eligibility to use a Registration Statement on Form S-8 (or a substantially similar form) to register the Option Shares. The expenses of registering the Option Shares pursuant hereto shall be borne by the Company. Section 8. Endorsement on Share Certificates. In the event Broughton exercises the Option at a time when the shares are not registered under the Securities Act of 1933 as contemplated by Section 7 above, the certificate representing such Shares shall be required to bear a legend in substantially the following form: "The shares represented by this certificate have not been registered under the federal Securities Act of 1933 or the securities laws of any state and have been issued and sold in reliance upon certain exemptive provisions of such laws. Such shares may not be sold or transferred except if, in the opinion of counsel reasonably acceptable to the Company, any such sale or transfer would be pursuant to an effective registration statement under the applicable state and federal securities laws or pursuant to an exemption from such registration." Section 9. Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the Company and Broughton and their respective heirs, personal representatives, successors and assigns; provided that the assignment of this Agreement by Broughton is expressly prohibited pursuant to Section 4 above. Section 10. Governing Law. This Agreement shall be governed and construed in accordance with the internal laws of the State of Indiana. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective as of the day and year first above written. "COMPANY" MERIDIAN INSURANCE GROUP, INC. By:______________________________ Norma J. Oman, President and Chief Executive Officer BROUGHTON AFFIRMS THAT HE HAS READ AND UNDERSTANDS THE CONTENTS OF THIS AGREEMENT AND THAT HE ACCEPTS THE OPTION ON THE TERMS AND CONDITIONS SET FORTH HEREIN. "BROUGHTON" __________________________________ Scott S. Broughton __________________________________ Social Security Number Address: ___________________ ___________________ EXHIBIT A TO STOCK OPTION AGREEMENT OPTION EXERCISE FORM Meridian Insurance Group, Inc. 2955 North Meridian Street Indianapolis, Indiana 46208 Reference is hereby made to that certain Stock Option Agreement dated July 31, 1996, between Meridian Insurance Group, Inc. and Scott S. Broughton (the "Agreement"). Capitalized terms used herein shall have the meanings ascribed in the Agreement. The undersigned hereby: 1. Irrevocably subscribes for _______ Shares of Common Stock of the Company at the Exercise Price (as defined in the Agreement) and encloses payment herewith in the amount of $__________. 2. Acknowledges that such Shares shall be issued by the Company pursuant to, and subject to the terms of the Agreement. 3. [IF NEEDED] Acknowledges that he is acquiring the Shares for investment solely for his own account and not with a view to distribution or resale thereof, and that he is familiar with the business and affairs of the Company and has reviewed all such financial information and other materials and information as he has deemed desirable in connection with his purchase of the Shares. 4. [IF NEEDED] Acknowledges and agrees that such Shares shall bear a legend substantially similar to that described in the Agreement. 5. Represents and warrants that he is the sole holder of the Option, that the Option is outstanding, unexpired and unexercised to the extent necessary for this exercise, and that the exercise of the Option hereby is in full compliance with the terms of the Agreement. 6. [IF A PARTIAL EXERCISE] Herewith surrenders to the Company the Agreement for notation of the partial exercise of the Option, subject to return to the undersigned upon such notation. 7. Requests that a certificate for such Shares of Common Stock be issued in the name of the undersigned and delivered to the undersigned at the address set forth below. Date: ____________________ _____________________________ Scott S. Broughton _____________________________ Social Security Number Address: _____________________________ _____________________________ CLAIMS ADMINISTRATION AGREEMENT by and among CITIZENS SECURITY MUTUAL INSURANCE COMPANY, CITIZENS FUND INSURANCE COMPANY, INSURANCE COMPANY OF OHIO and VIS'N, INC. July 31, 1996 Table of Contents PageTOC \f RECITALS 1 Article I Definitions 1 Article II Retention of Vis'n 2 Article III Duties of Vis'n 2 Section 3.1 Standard of care 2 Section 3.2 Policies to be administered 2 Section 3.3 Covered Claims 3 Section 3.4 Claims processing 3 Section 3.5 Check preparation 4 Section 3.6 Catastrophes 4 Section 3.7 Customer service 4 Section 3.8 Reports to Citizens Insurance Companies 4 Section 3.9 Documentation 5 Section 3.10 Other services 5 Section 3.11 Insurance 5 Section 3.12 Notification requirements 5 Article IV Duties of the Citizens Insurance Companies 5 Section 4.1 Standard of care 5 Section 4.2 Payments to Vis'n 6 Section 4.3 Funding of Claims Account 6 Section 4.4 Copies of Policy Forms 6 Section 4.5 Reinsurance Recoverables 6 Article V Compensation 6 Section 5.1 Compensation and payment 6 Section 5.2 Billing 6 Section 5.3 Fees 7 Section 5.4 Services not specified in Agreement 8 Article VI Records 8 Section 6.1 Maintenance of records 8 Section 6.2 Confidentiality 8 Section 6.3 Inspection and audit by Citizens 8 Section 6.4 Inspection and audit by Vis'n 9 Article VII Term 9 Section 7.1 Effective date and duration 9 Section 7.2 Termination by a Citizens Insurance Company 9 Section 7.3 Termination by Vis'n 10 Section 7.4 Effect of termination 11 Section 7.5 Duties upon termination 11 Article VIII Indemnification 11 Section 8.1 Indemnification by Citizens Insurance Companies 11 Section 8.2 Indemnification by Vis'n 12 Section 8.3 Remedies 12 Article IX Miscellaneous 12 Section 9.1 Assignment and binding effect 12 Section 9.2 Choice of law 12 Section 9.3 Severability 12 Section 9.4 Notice 12 Section 9.5 Independent contractor 14 Section 9.6 Merger and amendment 14 Section 9.7 Counterparts 14 CLAIMS ADMINISTRATION AGREEMENT THIS CLAIMS ADMINISTRATION AGREEMENT (this "Agreement") is entered into as of July 31, 1996 (the "Contract Date"), by and among Citizens Security Mutual Insurance Company ("Citizens Mutual"), Citizens Fund Insurance Company ("Citizens Fund"), Insurance Company of Ohio ("Citizens Ohio") and Vis'n, Inc. ("Vis'n"). RECITALS A. Citizens Mutual is a mutual insurance company organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066. B. Citizens Fund is a stock insurance company organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066. C. Citizens Ohio is a stock insurance company organized under the laws of the State of Ohio, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066. D. Citizens Mutual, Citizens Fund and Citizens Ohio are jointly operated and managed under a management services agreement, a pooling reinsurance agreement and other arrangements. E. Vis'n is or will be a professional insurance claims administrator whose office and principal place of business is or will be located at 406 Main Street, Red Wing, Minnesota 55066. F. Citizens Mutual, Citizens Fund, Citizens Ohio (collectively, the "Citizens Insurance Companies") and Vis'n desire that Vis'n administer all of the insurance policies issued by the Citizens Insurance Companies in accordance with this Agreement. AGREEMENT In consideration of the mutual benefits to be received by the parties and the mutual covenants and agreements contained herein, the parties agree as follows: Article I Definitions The following terms have the meanings set forth below: (a) The term "Catastrophe Response Team" has the meaning set forth in Section 3.6. (b) The term "Citizens Insurance Companies" has the meaning set forth in Recital F. (c) The term "Citizens Fund" has the meaning set forth in the introductory paragraph. (d) The term "Citizens Mutual" has the meaning set forth in the introductory paragraph. (e) The term "Citizens Ohio" has the meaning set forth in the introductory paragraph. (f) The term "Claims Account" has the meaning set forth in Section 3.5. (g) The term "Commencement Date" has the meaning set forth in Section 5.3(a). (h) The term "Contract Date" has the meaning set forth in the introductory paragraph. (i) The term "Covered Claim" has the meaning set forth in Section 3.3. (j) The term "Direct Written Premium" has the meaning set forth in Section 5.3(a). (k) The term "Net Recoverables" has the meaning set forth in Section 5.3(b). (l) The term "Policies" has the meaning set forth in Section 3.2. (m) The term "Vis'n" has the meaning set forth in the introductory paragraph. Article II Retention of Vis'n The Citizens Insurance Companies hereby retain and authorize Vis'n to provide claims administration services as described in this Agreement. Vis'n hereby accepts such retention and authority and agrees to perform the claims administration services in accordance with this Agreement. Article III Duties of Vis'n Section 3.1. Standard of Care. Vis'n shall perform its obligations under this Agreement in good faith using reasonable care and professional judgment. Section 3.2. Policies to be Administered. Vis'n shall perform claim administrative services as outlined in this Agreement for the Citizens Insurance Companies in connection with all insurance policies issued or assumed by the Citizens Insurance Companies (collectively, the "Policies"). Section. 3.3. Covered Claims. A "Covered Claim" shall be any incurred claim that is properly payable under the Policies. Section 3.4. Claims Processing. Vis'n shall perform the following claims processing services for the Citizens Insurance Companies: (a) Vis'n shall receive claims and handle them in accordance with applicable law, this Agreement and the provisions of the Policies. As part of its duties, Vis'n shall determine whether each claim is a Covered Claim and, if so, in what amount; provided, however, that each Citizen Insurer shall have ultimate authority to accept or reject any claim received in connection with Policies that it issued. Vis'n shall also materially comply with the Citizens Insurance Companies' Standards and Guidelines for handling claims, and the parties agree that 85% compliance with each of the Standards and Guidelines shall constitute material compliance on any audit of a representative sample of not less than 100 files handled by a variety of adjusters. (b) Vis'n shall forward to the person designated by the appropriate Citizens Insurance Company a copy of each claim file for which a reserve has been established in excess of $25,000 so that the Citizens Insurance Company may supervise the handling of the claim. (c) The settlement authority of Vis'n shall be limited to $25,000 per claim, except for claims for material damage and medical payment coverages. Requests by Vis'n for settlement authority in excess of $25,000 shall be submitted to the person designated by the appropriate Citizens Insurance Company in a format prescribed by the Citizens Insurance Companies. (d) Vis'n shall forward for handling all first party lawsuits and suits with demands in excess of applicable policy limits to the person designated by the appropriate Citizens Insurance Company. Lawsuits with open extensions of time and workers' compensation filings where adjusters may appropriately continue the claim handling process will remain with Vis'n. (e) All letters disclaiming coverage must be approved and signed by a member of the Vis'n management team. Vis'n shall secure approval from the person designated by the appropriate Citizens Insurance Company before declining coverage on the basis of suspected fraud. (f) Vis'n shall be responsible for reinsurance recoverables and billables for individual claim files, unless the Citizens Insurance Companies make other arrangements. (g) Vis'n shall diligently pursue salvage and subrogation in accordance with the Standards and Guidelines for handling the Citizens Insurance Companies' claims and shall be compensated for such services as set forth in Section 5.3(b). (h) Vis'n shall document all claim activity for each claim file, including the volume and subject matter of telephone conversations and copies of any correspondence. Vis'n shall maintain and organize claim files in an orderly form consistent with the manner in which Meridian Insurance Group, Inc., and its affiliates have historically maintained their files. (i) Vis'n shall review "other insurance" provisions as it deems appropriate, investigate the applicability of such provisions, and inquire regarding duplicate coverage of Covered Claims with other insurance carriers. Section 3.5. Check Preparation. With respect to each of the Citizens Insurance Companies, Vis'n shall make claims payments from an account (the "Claims Account") established and funded by the Citizen Insurer with a bank that is a member of the Federal Reserve System. Vis'n shall draw checks on such account using the Citizens Insurer's check book and shall provide the Citizens Insurance Company with a periodic listing of all checks drawn. Section 3.6. Catastrophes. Vis'n shall inform the person designated by the Citizens Insurance Companies concerning the use of any Catastrophe Response Team, including the number of team members and the duration of the operation. For purposes of this Agreement, "Catastrophe Response Team" shall be any group of individuals assembled to respond to either an incident deemed a catastrophe by the Property Loss Research Bureau or any 100 losses generated by a single storm. Section 3.7. Customer Service. Vis'n shall respond to all telephone and written inquiries relating to the Policies and claims submitted under the Policies as outlined in the Standards and Guidelines for handling the Citizens Insurance Companies' claims. Vis'n shall maintain a special toll-free long distance (1-800) telephone number exclusively for use by insureds of the Citizens Insurance Companies. Throughout the term of this Agreement, Vis'n shall also maintain a recording system capable of receiving messages from insureds of the Citizens Insurance Companies outside of normal business hours. Section 3.8. Reports to Citizens Insurance Companies. Vis'n shall provide the following reports to the person designated by each Citizens Insurance Company: (a) weekly reports of all checks prepared on the Citizens Insurer's behalf during the preceding week, including any checks that may have been voided. The reports shall identify the insured's name, policy, payee, date and amount of each check; (b) monthly reports delivered on or before the 15th day of each month showing (i) claim files opened during the preceding month, (ii) claim files closed during the preceding month, both with and without payment, (iii) claims for which reserves have been established in excess of $25,000.00, (iv) first party lawsuits and suits with demands in excess of policy limits being handled by the Citizens Insurance Companies and (v) lawsuits with open extensions of time and workers' compensation filings being handled by Vis'n; and (c) any other reports as are from time to time reasonably requested by the Citizens Insurance Company and can be prepared under the WIN's Management Reporting System. Section 3.9. Documentaiton. Vis'n shall provide original claim files and other documentation reasonably requested by any of the Citizens Insurance Companies as set forth in Section 6.1. Section 3.10. Other Services. Vis'n shall provide such claims administration services not specified in this Agreement as may be mutually agreed upon by the parties. Vis'n shall respond in writing to a request for such services within five business days of receiving the request. Section 3.11. Insurance. Vis'n shall, at its own expense, maintain: (a) valuable papers and records coverage in an amount not less than $1,000,000 per occurrence and $2,000,000 in the aggregate (with a deductible not exceeding $5,000) for the protection of files, records, and other property of the Citizens Insurance Companies in the possession of Vis'n; (b) errors and omissions liability coverage in an amount not less than $1,000,000 per occurrence and $2,000,000 in the aggregate (with a deductible not exceeding $5,000). Section 3.12. Notification Requirements. Vis'n shall notify the Citizens Insurance Companies promptly by telephone, with confirmation in writing to follow immediately, should any of the following events occur: (a) Vis'n discharges or reassigns within a thirty (30) day period four or more individuals on its adjusting staff who are working on material matters within the scope of this Agreement; (b) Vis'n is unable to secure, in a timely fashion, copies of claims materials or other information required by Vis'n under this Agreement; or (c) Officers or directors of Vis'n become aware of any circumstance substantially affecting, or potentially substantially affecting, the ability of Vis'n to perform under this Agreement. Article IV Duties of the Citizens Insurance Companies Section 4.1. Standard of Care. The Citizens Insurance Companies shall perform their obligations under this Agreement in good faith using reasonable care and professional judgment. Section 4.2. Payments to Vis'n. The Citizens Insurance Companies shall provide compensation to and reimburse Vis'n in accordance with Article V. Section 4.3. Funding of Claims Account. Each Citizens Insurance Company shall maintain an average daily balance in its Claims Account in an amount mutually agreed to by the Citizens Insurance Company and Vis'n. Section 4.4. Copies of Policy Forms. The Citizens Insurance Companies shall provide Vis'n with forms of the Policies and any endorsements issued in connection with the Policies. Section 4.5. Reinsurance Recoverables. The Citizens Insurance Companies will make available accounting personnel to assist Vis'n in carrying out its duties under Section 3.4(f). Article V Compensation Section 5.1. Compensation and Payment. In consideration of the performance by Vis'n of the services under this Agreement, each Citizens Insurance Company agrees to pay with respect to services provided on its behalf, and Vis'n agrees to accept as compensation in full, the fee amounts to be calculated in accordance with this Article. Section 5.2. Billing. Vis'n shall submit monthly statements of its fees and expenses to the person designated by the Citizens Insurance Companies in a form mutually agreed upon by the parties. All fees payable pursuant to Section 5.3(a) shall be mailed by the tenth day of the month for which the services are to be provided. If the precise amount owed under Section 5.3(a) is not known at the time such amount is due to be mailed, the Citizens Insurance Companies shall inform Vis'n of that fact, mail Vis'n their best estimate of the amount owed on the due date, and adjust their next month's payment to reflect any over- or underpayment resulting from the estimate. The Citizens Insurance Companies shall mail the compensation due Vis'n under Section 5.3(b) within five working days after receipt of reports documenting gross subrogation and salvage recoveries, collection expenses and administrative fees incurred by Vis'n, and any deductible reimbursements issued to policyholders. If Vis'n does not receive the compensation owed under Section 5.3(a) or (b) within 3 days of the date such compensation was to be mailed, Vis'n shall send a written reminder notice to the Citizens Insurance Companies by fax or by hand delivery. If Vis'n does not receive the compensation owed under Section 5.3(a) or 5.3(b) within 5 days of the date such compensation was to be mailed, for every additional day that payment is not received, the Citizens Insurance Companies shall pay to Vis'n a late fee equal to .05% of the amount of compensation owed; provided, however, that no such late fee will be owed if the delay in payment was caused by any act or omission by Vis'n. Section 5.3. Fees. (a) Vis'n shall be compensated by the Citizens Insurance Companies as follows: (i) For the first month commencing on the date Vis'n becomes operational and able to perform its obligations under this Agreement (the "Commencement Date"), the Citizens Insurance Companies shall pay Vis'n a monthly fee of $212,500.00. For the remaining 11 months of the 12-month period commencing on the Commencement Date, the Citizens Insurance Companies shall pay Vis'n a monthly fee of 5.1 percent (5.1%) of the Citizens Insurance Companies' Direct Written Premium, as defined below, for the month preceding the month in which payment is due; and (ii) For the 12-month period commencing on the one-year anniversary of the Commencement Date, the Citizens Insurance Companies shall pay Vis'n a monthly fee of 4.75 percent (4.75%) of the Citizens Insurance Companies' Direct Written Premium, as defined below, for the month preceding the month in which payment is due; and (iii) For the 12-month period commencing on the second anniversary of the Commencement Date, the Citizens Insurance Companies shall pay Vis'n a monthly fee of 4.4 percent (4.4%) of the Citizens Insurance Companies' Direct Written Premium, as defined below, for the month preceding the month in which payment is due. The above charges shall be prorated for any partial month. For purposes of this section, "Direct Written Premium" means the total premiums written by the Citizens Insurance Companies other than premiums for reinsurance assumed by the Citizens Insurance Companies. Notwithstanding the above, the Citizens Insurance Companies agree that the monthly fee payable to Vis'n shall be based on annual Direct Written Premium of no less than $45 million. In the event the fees payable to Vis'n in any year do not meet the requirement of this paragraph, there shall be an adjustment in the payment made to Vis'n in the last month of the term of this Agreement so that the total amount paid meets the requirements of this paragraph. There shall also be an adjustment in the payment made to Vis'n in the last month of the term of this Agreement for any over- or underpayment that resulted from Vis'n being paid $212,500 in the first month rather than 5.1 percent of the Direct Written Premium for the first month. (b) In addition, as compensation for the salvage and subrogation services provided by Vis'n under Section 3.4(g), the Citizens Insurance Companies shall pay Vis'n a monthly fee of 15 percent (15%) of Net Recoverables. For purposes of this Agreement, "Net Recoverables" shall mean funds obtained in the preceding month as a result of the salvage and subrogation efforts of Vis'n, less collection expenses and administrative fees incurred by Vis'n, and less any deductible recoveries made and issued to policyholders. Vis'n shall refund a portion of the fees paid under this subsection under the following circumstances: (i) Vis'n shall refund 50% of the fees it received under this subsection during the first year following the Commencement Date, if the net salvage and subrogation recovery realized by the Citizens Insurance Companies (after payment of the monthly fees to Vis'n) during that first year is not at least 10% greater than the net recovery they realized over the 12 month period immediately preceding the Commencement Date; (ii) Vis'n shall refund 50% of the fees it received under this subsection during the second year following the Commencement Date, if the net salvage and subrogation recovery realized by the Citizens Insurance Companies (after payment of the monthly fees to Vis'n) during that second year is not at least 20% greater than the net recovery they realized over the 12 month period immediately preceding the Commencement Date; and (iii) Vis'n shall refund 50% of the fees it received under this subsection during the third year following the Commencement Date, if the net salvage and subrogation recovery realized by the Citizens Insurance Companies (after payment of the monthly fees to Vis'n) during that third year is not at least 30% greater than the net recovery they realized over the 12 month period immediately preceding the Commencement Date; provided that Vis'n shall not be required to refund the fees it received under this subsection in any year in which the Citizens Insurance Companies' Direct Written Premium is less than $45 million. Section 5.4. Services not specified in Agreement. Vis'n shall be compensated by the Citizens Insurance Companies for any services provided under Section 3.10 on a basis mutually agreed upon by the parties. Article VI Records Section 6.1. Maintenace of Records. Vis'n shall maintain records of its activities sufficient to inform the Citizens Insurance Companies of the services performed by Vis'n under this Agreement. All records and information obtained, assembled, produced and maintained by Vis'n under this Agreement shall be the property of the Citizens Insurance Companies and shall be maintained at the principal office of Vis'n, or the satellite processing center where the claim is handled. Vis'n will maintain for at least one year all material damage and property claim files. Vis'n will maintain all other claim files for at least three years. Upon expiration of the time periods noted, Vis'n will, on an annual basis, forward claim files to an offsite storage facility designated by the Citizens Insurance Companies. Section 6.2. Confidentiality. All records and information obtained from or on behalf of the Citizens Insurance Companies are confidential business records and shall not be disclosed by Vis'n, except as is reasonably necessary to pursue subrogation rights, or at the written direction of the appropriate Citizens Insurance Company or as required by law after notice to the appropriate Citizens Insurance Company. Section 6.3. Inspection and Audit by Citizens. The Citizens Insurance Companies and their designated representatives may inspect, copy and audit all records and any other information obtained, assembled, maintained or produced by or for Vis'n in any format pertaining to the performance of any of the services of Vis'n under this Agreement at the location where such records are maintained or at such other location as may be specified by the Citizens Insurance Companies. In connection with routine audits, the Citizens Insurance Companies anticipate that, at a minimum, they will require access to claim files, data files from which claim transactions can be extracted (with related file names and record layouts), claim check inventories and records accounting for the use of such inventories, on-line claim information, a means to identify the employees and agents of Vis'n and the Citizens Insurance Companies involved with each claim, and codes for policy coverages and claim transactions. Nothing in this paragraph shall confer on the Citizens Insurance Companies any right to inspect, copy, review or obtain any information relating to any contracts or arrangement between Vis'n and its vendors, suppliers, independent contractors or clients. Section 6.4. Inspection and Audit by Vis'n. Vis'n and its designated representatives may inspect, copy and audit all records and any other information maintained by the Citizen Insurance Companies that relates to or shows the manner of calculating the Citizens Insurance Companies' Direct Written Premium during the term of this Agreement. Article VII Term Section 7.1. Effective date and Duration. This Agreement shall be effective as of the Contract Date and shall remain in effect until terminated by Vis'n or any Citizens Insurance Company pursuant to this Article. Section 7.2. Terminaiton by a Citizens Insurance Company. A Citizens Insurance Company may terminate this Agreement: (a) Immediately upon giving notice to the other parties if the Commencement Date does not occur within one year of the Effective Time of the merger contemplated by the Acquisition and Affiliation Agreement dated as of March 20, 1996, by and among Meridian Insurance Group, Inc., Citizens Security Group, Inc., and Citizens Mutual, as such time is defined therein. (b) Immediately upon giving written notice to the other parties at any time after the institution of insolvency, bankruptcy or similar proceedings by or against Vis'n, any assignment or attempted assignment by Vis'n for the benefit of creditors, or any appointment, or application for such appointment, of a receiver for Vis'n; (c) Immediately upon giving written notice to the other parties at any time after the occurrence of any of the following events: (i) failure by Vis'n to comply with any material applicable federal, state or local law or regulation; (ii) falsification by Vis'n of any records or reports required hereunder; (iii) loss by Vis'n through failure to renew or because of suspension, cancellation or revocation, for a period of fifteen (15) days or more, of any federal, state or local license or permit required by law and necessary in carrying out the provisions of this Agreement or in maintaining its corporate status; (d) Immediately upon giving written notice to the other parties upon the occurrence of either of the following events relating to the performance standards set forth in Section 3.4: (i) Vis'n shall have failed to meet or exceed the same performance standard for three (3) consecutive audits covering at least one month each; provided that a notice of noncompliance, noting the specific standard that has not been met, shall have been delivered to Vis'n with respect to each such audit within 15 days after the files have been received by the Citizens Insurance Company or its designee for audit; or (ii) Vis'n shall have failed to meet or exceed any of the performance standards for twelve (12) consecutive audits covering at least one month each; provided that a notice of noncompliance, noting the specific standard that has not been met, shall have been delivered to Vis'n with respect to each such audit within 15 days after the files have been received by the Citizens Insurance Company or its designee for audit. (e) Immediately, without opportunity to cure, if a material breach by Vis'n of its obligations under this Agreement materially jeopardizes the financial well-being of the Citizens Insurance Company; (f) Immediately upon giving notice to the other parties upon occurrence of either of the following events relating to ownership of Vis'n: (i) Scott Broughton and Kirk Simmons cease to own directly a majority of the stock of Vis'n; or (ii) any of the stock of Vis'n is acquired by someone other than an employee of Vis'n; (g) Immediately upon giving notice to the other parties upon occurrence of either of the following events relating to ownership of Claims Solution, Inc., if Vis'n assigns its rights under this Agreement to Claims Solution, Inc., pursuant to Section 9.1: (i) Scott Broughton and Kirk Simmons cease to own directly or indirectly a majority of the stock of Claims Solution, Inc.; or (ii) any of the stock of Claims Solution, Inc., is acquired by someone other than an employee of Claims Solution, Inc.; or (h) Upon giving 60 days' prior written notice to the other parties at any time after the earlier of December 31, 1999, or three years following the Commencement Date, without cause. Section 7.3. Termination by Vis'n. Vis'n may terminate this Agreement with respect to a Citizens Insurance Company: (a) Immediately upon giving written notice to the other parties at any time after the institution of insolvency, bankruptcy or similar proceedings by or against the Citizens Insurance Company, any assignment or attempted assignment by the Citizens Insurance Company for the benefit of creditors, or any appointment, or application for such appointment, of a receiver for the Citizens Insurance Company; (b) Immediately upon giving written notice to the other parties at any time after the occurrence of any of the following events: (i) the Citizens Insurer's failure to comply with any material applicable federal, state or local law or regulation; (ii) the Citizens Insurer's falsification of any records or reports required hereunder; (iii) the Citizens Insurer's loss through failure to renew or because of suspension, cancellation or revocation, for a period of fifteen (15) days or more, of any federal, state or local license or permit required by law and necessary in carrying out the provisions of this Agreement or in maintaining its corporate status; (c) Immediately, without opportunity to cure, for a material breach by the Citizens Insurance Company of its obligations under this Agreement; or (d) Upon giving 60 days' prior written notice to the other parties at any time after the earlier of December 31, 1999, or three years following the Commencement Date, without cause. Section 7.4. Effect of Termination. If a Citizens Insurance Company terminates this Agreement pursuant to Section 7.2, all duties and obligations of the Citizens Insurance Company and of Vis'n with respect to the Citizens Insurance Company shall cease, but the Agreement shall remain in full force and effect with respect to all other Citizens Insurance Companies. If Vis'n terminates this Agreement with respect to a Citizens Insurance Company pursuant to Section 7.3, all duties and obligations of the Citizens Insurance Company and of Vis'n with respect to the Citizens Insurance Company shall cease, but the Agreement shall remain in full force and effect with respect to all other Citizens Insurance Companies. Section 7.5. Duties upon Termination. Upon termination of this Agreement, Vis'n shall provide for the return of all claim records to the Citizens Insurance Companies and shall cooperate fully to effect an orderly transfer of services to the Citizens Insurance Companies or a third party administrator designated by the Citizens Insurance Companies. The Citizens Insurance Companies shall be liable for all fees and expenses for services performed on their behalf by Vis'n under this Agreement as of the date of termination. In addition, if a Citizens Insurance Company terminates this Agreement pursuant to Section 7.2(e) prior to the earlier of December 31, 1999, or three years following the Commencement Date, the Citizens Insurance Company shall make a one-time severance payment to Vis'n in an amount equal to the fees paid by the Citizens Insurance Company to Vis'n for the three months immediately preceding the termination. Article VIII Indemnification Section 8.1. Indemnification by Citizens Insurance Companies. Each Citizens Insurance Company, severally but not jointly, hereby indemnifies and holds Vis'n harmless from and against all loss, damage, cost and expense of any nature, including legal, accounting and other professional fees, arising from (a) any breach of this Agreement by the Citizens Insurance Company, (b) any act or omission of the Citizens Insurance Company or its agents or employees that fails to comply with the standard of care set forth in Section 4.1, (c) any claim against Vis'n arising out of a denial by Vis'n of a claim submitted by an insured of the Citizens Insurance Company or an assignee of such insured, provided that Vis'n denied such claim in accordance with the standards set forth in this Agreement or (d) any claim against Vis'n arising out of a denial by the Citizens Insurance Company of a claim submitted by an insured of the Citizens Insurance Company or an assignee of such insured. Section 8.2. Indemnification by Vis'n. Vis'n hereby indemnifies and holds the Citizens Insurance Companies harmless from and against all loss, damage, cost and expense of any nature, including legal, accounting and other professional fees, arising from any breach of this Agreement by Vis'n or any act or omission of Vis'n, its agents or its employees that fails to comply with the standard of care set forth in Section 3.1. Section 8.3. Remedies. Except as provided in this Article, no party shall have any liability or responsibility, unless expressly and separately agreed to in advance in writing, for any other party's attorneys' fees, expenses of litigation or any award, and shall have no liability or responsibility for any penalty or interest assessed against any other party. Article IX Miscellaneous Section 9.1. Assignment and Binding Effect. Vis'n may assign its rights, interests and obligations under this Agreement to Claims Solutions, Inc., provided that Scott Broughton and Kirk Simmons are and remain the direct or indirect owners of a majority of the stock of Claims Solution, Inc. Vis'n may also contract with an entity to provide claims adjusting and investigation services called for by this Agreement where such entity is in closer proximity to the subject matter of any claim to be adjusted or investigated. Except as otherwise provided by this section, no party may assign its respective rights, interests, or obligations under this Agreement without the prior written consent of the other parties, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, all respective rights, interests, and obligations of the parties in, to and under this Agreement shall immediately succeed to or be assumed by any successor, by merger, consolidation or otherwise, of any of the parties. Section 9.2. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota notwithstanding any state's choice of law rules to the contrary. Section 9.3. Severability. If any part of this Agreement is contrary to, prohibited by, or deemed invalid under applicable law or regulations, that provision shall not apply and shall be omitted to the extent so contrary, prohibited, or invalid; but the remainder of this Agreement shall not be invalidated and shall be given full force and effect insofar as possible. Section 9.4. Notice. Any notice required or permitted to be given hereunder shall be deemed to be given upon receipt if mailed by certified mail, postage prepaid, faxed, hand delivered or sent by United States Postal Service or a commercial express document overnight delivery service which issues an individual delivery receipt, and addressed as follows: (a) If to Vis'n, to: Scott Broughton President Vis'n, Inc. 406 Main Street Red Wing, Minnesota 55061 Telephone: Fax: with a copy to: Joyce Wright Meridian Insurance Group, Inc. 2955 North Meridian Street, P.O. Box 1980 Indianapolis, Indiana 46206 Telephone: (317) 931-7000 Fax: (317) 931-7140 and a copy to: Meagher & Geer, P.L.L.P. Attn: Mary M.L. O'Brien 4200 Multifoods Tower 33 South Sixth Street Minneapolis, Minnesota 55402 Telephone: (612) 338-0661 Fax: (612) 338-8384 (b) If to a Citizens Insurance Company: William Haaland Citizens Security Mutual Insurance Company 406 Main Street Red Wing, Minnesota 55066 Telephone: Fax: (612) 388-0538 with a copy to: Joyce Wright Meridian Insurance Group, Inc. 2955 North Meridian Street, P.O. Box 1980 Indianapolis, Indiana 46206 Telephone: (317) 931-7000 Fax: (317) 931-7140 Each party shall be responsible for notifying the others promptly of any change in addressee or address in accordance with the notice procedures of this section. Section 9.5. Independent Contractor. Vis'n is an independent contractor and nothing in this Agreement shall create, or be construed to create, the relationship of employer and employee between the Citizens Insurance Companies and Vis'n or as principal and agent other than as expressly provided in this Agreement. None of the agents, officers, or employees of Vis'n shall be considered or construed to be the agents or employees of the Citizens Insurance Companies for any purpose whatsoever. Section 9.6. Merger and Amendment. This Agreement constitutes the entire agreement and merges and supersedes all prior oral or written agreements of the parties hereto. Any waiver of or failure to require adherence to any provision of this Agreement in any instance or series of instances by any party hereto shall not constitute a waiver of such provision in any other instance or constitute a modification of this Agreement, which may not be amended or modified except by a written instrument signed by the parties. Section 9.7. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been executed on the day and year subscribed: VIS'N, INC. By:___________________________________ Scott S. Broughton, President CITIZENS SECURITY MUTUAL INSURANCE COMPANY By:___________________________________ Norma J. Oman, Chairman of the Board and Chief Executive Officer CITIZENS FUND INSURANCE COMPANY By:_________________________________ Norma J. Oman, Chairman of the Board and Chief Executive Officer INSURANCE COMPANY OF OHIO By:__________________________________ Norma J. Oman, Chairman of the Board and Chief Executive Officer SOFTWARE AND HARDWARE SUPPORT AGREEMENT THIS SOFTWARE AND HARDWARE SUPPORT AGREEMENT (the "Agreement") is made and entered as of this 31st day of July, 1996 (the "Contract Date"), by and among VIS'N, INC. ("VIS'N"), a business corporation duly organized or to be duly organized and whose principal place of business is or will be located at 406 Main Street, Red Wing, Minnesota 55066, CITIZENS SECURITY MUTUAL INSURANCE COMPANY ("Citizens Mutual"), a mutual insurance company organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066, CITIZENS FUND INSURANCE COMPANY ("Citizens Fund"), a stock insurance company organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066, and INSURANCE COMPANY OF OHIO ("Citizens Ohio"), a stock insurance company organized under the laws of the State of Ohio, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066. In consideration of the mutual representations, warranties, covenants, agreements and undertakings herein set forth, the sufficiency of which is hereby acknowledged, the parties to this Agreement hereby agree as follows: ARTICLE 1 Purpose 1.1 Generally. Citizens Mutual, Citizens Fund and Citizens Ohio (collectively, the "Citizens Insurance Companies") desire to have certain Technical Support performed for computer software and hardware to allow for continuous and uninterrupted operation of their insurance businesses. VIS'N desires to take responsibility for the performance of the Technical Support required by the Citizens Insurance Companies. Citizens Insurance Companies further intend to request Meridian Insurance Group, Inc., a business corporation duly organized under the laws of the State of Indiana, whose office and principal place of business is located at 2955 North Meridian Street, Indianapolis, Indiana 46208 ("Meridian"), to provide technical and legal input and assistance to the Citizens Insurance Companies during the term of this Agreement, and the Citizens Insurance Companies intend to provide Meridian with access to and copies of back- ups, and consulting regarding the Citizens' Computer System, as a third-party beneficiary of this Agreement. ARTICLE 2 Term 2.1 Commencement. The respective responsibilities and obligations of VIS'N and the Citizens Insurance Companies specified in this Agreement shall commence at a date ("Commencement Date") mutually agreed upon in a writing that references this Agreement and which is signed by VIS'N and each of the Citizens Insurance Companies. 2.2 Expiration of Agreement. This Agreement shall expire on the date ("expiration date"), which shall be the earlier of three years from the Commencement Date or December 31, 1999. The expiration date may only be extended if mutually agreed upon in a writing that references this Agreement and which is signed by VIS'N and each of the Citizens Insurance Companies. This Agreement may be terminated by the Parties prior to the expiration date as provided in Articles 4, 8 and 12. ARTICLE 3 Payment 3.1 Generally. During the term of this Agreement, the Citizens Insurance Companies shall provide VIS'N with payments in the amount and at the times listed on Appendix A, attached hereto and made part hereof. Such payments are provided in consideration for the Technical Support defined in Appendix B. If VIS'N does not receive the compensation listed in Appendix A within 3 days of the date such compensation was to be mailed, VIS'N shall send a written reminder notice to the Citizens Insurance Companies by fax or by hand delivery. If VIS'N does not receive the compensation listed on Appendix A within 5 days of the date such compensation was to be mailed, for every additional day that payment is not received, the Citizens Insurance Companies shall pay to VIS'N a late fee equal to .05% of the amount of compensation owed; provided, however, that no such late fee will be owed if the delay in payment was caused by any act or omission by VIS'N. Failure by the Citizens Insurance Companies to meet the payment terms of Appendix A shall not be grounds for cessation of Technical Support by VIS'N until thirty (30) days elapse after the Citizens Insurance Companies receive the written reminder notice from VIS'N of the Citizens Insurance Companies purported payment failure. 3.2 Financial Records. VIS'N agrees to maintain receipts and invoices to support all out of pocket charges to the Citizens Insurance Companies, and will provide time reports substantively similar to the Citizens Insurance Companies Data Processing Servicing Request which at least indicate identity of personnel, time spent, description of service, and project to which service is applicable. The Citizens Insurance Companies shall have audit rights with respect to all such records. ARTICLE 4 Basic Support 4.1 Citizens' Computer System. VIS'N agrees to provide and/or have provided Technical Support, as recited in Appendix B, attached hereto and made part hereof, for the Citizens' Computer System. Such Technical Support shall be available twenty-four hours per day, seven days a week, fifty-two weeks a year. Technical Support personnel will remain in sufficient proximity to be on-site at the Citizens Insurance Companies to respond to a Citizens' Computer System error within one (1) hour of notification to VIS'N of the existence of such an error by the Citizens Insurance Companies, VIS'N or any third party ("error existence identification"). Identification of the existence of such an error by an employee of VIS'N shall for purposes of this Agreement be deemed a notification to VIS'N of the existence of such an error. VIS'N shall make a good faith effort to remedy or cause to be remedied any defect in the Citizens' Computer System within four (4) hours after error existence identification, and, if necessary and within such time frame, repair, replace any defective module or unit or swap the entire defective modules or unit, or report to the Citizens Insurance Companies as to the status of the remedy efforts. The Citizens Insurance Companies shall reimburse VIS'N for out of pocket expenses incurred in paying third parties to provide hardware necessary to remedy the defect in the Citizens' Computer System. In the event any defect in the Citizens' Computer System remains unresolved for five (5) days or more after the error existence identification, the Citizens Insurance Companies may, in their sole discretion, elect to immediately terminate this Agreement for cause. An Incident shall be defined as an occasion when a defect in the Citizens' Computer System is not remedied or caused to be remedied by VIS'N within twenty-four (24) hours (i.e. one calendar day) after error existence identification. In the event three or more Incidents occur within any twelve month period, the Citizens Insurance Companies may, in their sole discretion, elect to immediately terminate this Agreement for cause. 4.2 Agency Software. VIS'N agrees to provide and/or have provided Technical Support, as recited in Appendix B, attached hereto and made part hereof, for the Agency Software. Such Technical Support shall be available from 7:00 a.m. through 4:00 p.m., Central Standard time, Monday through Friday, except for the Citizens Insurance Companies designated holidays and other occasions as are necessary to maintain the Agency Software. 4.3 Warranty. VIS'N warrants that the Technical Support specified under this Agreement shall be provided by VIS'N and by other Persons on behalf of VIS'N, and that such Technical Support shall be provided in good faith and using a high standard of care. VIS'N further warrants to the Citizens Insurance Companies that VIS'N has acquired all rights or licenses necessary to provide the Technical Support specified under this Agreement and, to the best of its knowledge, providing such Technical Support will not infringe upon any rights, including but not limited to Intellectual Property Rights, of third parties. 4.4 Miscellaneous. VIS'N shall make a good faith effort to assure that any provision of Technical Support by VIS'N and/or any Person acting on behalf of VIS'N shall not interfere with, and shall be subordinate to, the ongoing insurance business operations of the Citizens Insurance Companies as reasonably determined by the management of the Citizens Insurance Companies. Subsequent to the date of legal incorporation of VIS'N, employees of the Citizens Insurance Companies may participate in the provision of Technical Support at the sole discretion of the management of the Citizens Insurance Companies. VIS'N shall have no warranty or indemnification obligation under this Agreement as to these acts of the Citizens Insurance Companies employees unless such acts are done at the direction of VIS'N. ARTICLE 5 Software Back-Ups 5.1 Generally. VIS'N agrees to create daily updates in which all data entries and transactions for each day and for all computer platforms are stored on a non-volatile storage media, such as magnetic tape and diskette (referred to as "back-ups" hereinafter). VIS'N further agrees to create full pack weekly back-ups on a non-volatile storage media. VIS'N warrants that by noon of the business day following their creation the daily back-ups and the full weekly back- ups shall be securely located at an off-site storage location. VIS'N agrees that the off-site storage location shall be approved in advance by the Citizens Insurance Companies. VIS'N agrees that the Citizens Insurance Companies and Meridian shall have reasonable access to all back-ups stored at the off-site storage location. VIS'N further agrees to supply Meridian with updated copies of the Citizens Insurance Companies' full back-ups including the software of the Citizens' Computer System at least once every month. VIS'N agrees to maintain software back-ups for the time periods set forth in Appendix C, attached hereto and made part hereof. ARTICLE 6 Disaster Recovery 6.1 Generally. The obligations and responsibilities of the Citizens Insurance Companies under this Agreement shall, at the option of the Citizens Insurance Companies, be subject to the satisfaction, at or prior to June 30, 1996, of VIS'N obtaining Meridian's written approval of a Disaster Recovery Plan ("Plan") providing for the resumption of computing operations for the Citizens Insurance Companies by VIS'N within forty-eight (48) hours of a disaster. If VIS'N has developed and submitted a proposed Plan to Meridian by April 30, 1996, for each day beyond May 30, 1996, that Meridian was tardy in conveying disapproval of the proposed Plan to VIS'N, then VIS'N shall have an additional day beyond June 30, 1996, to gain Meridian's approval for a Plan. For proposed Plans submitted after May 30, 1996, Meridian shall respond within seven (7) business days with specific objections to the Plan if appropriate. VIS'N shall pay any and all costs associated with developing the Plan. Additional costs associated with activating, utilizing and maintaining the Plan shall be specified within the Plan, and such additional costs shall be borne by VIS'N and the Citizens Insurance Companies as subsequently and mutually agreed upon in writing. ARTICLE 7 Contract Negotiation 7.1 Software. VIS'N shall negotiate all software contracts and maintenance contracts for the Citizens' Computer System and for the Agency Software. However, if any of the Citizens Insurance Companies are a party to a contract, any such software contract or maintenance contract requires the review and approval of the Citizens Insurance Companies' management prior to VIS'N's acceptance of such contract. The Citizens Insurance Companies' management further reserves the right to involve any Citizens Insurance Companies' personnel and any third parties to this Agreement, including but not limited to Meridian and its legal department, in the contract review process. On any occasion when VIS'N intends to enter into a software contract or maintenance contract affecting the Citizens Insurance Companies, VIS'N shall provide the Citizens Insurance Companies with a summary of the impact on the Citizens Insurance Companies of the intended contract. VIS'N shall make reasonable efforts to provide such a summary no less than seventy-two (72) hours prior to VIS'N legally entering into the intended contract. VIS'N further agrees that each contract negotiated by VIS'N with a software vendor for software solely for use on the Citizens' Computer System shall require that a copy of the vendor's software source code be held in escrow. A mutually agreeable escrow agent and escrow agreement shall be implemented. Unless the Citizens Insurance Companies agree to the contrary in writing, each contract for software solely for use on the Citizens' Computer System shall require a software vendor to notify the Citizens Insurance Companies in the event the software vendor faces insolvency, bankruptcy, cessation of business, or the inability to service the software. Unless the Citizens Insurance Companies agree to the contrary in writing, each contract for software solely for use on the Citizens' Computer System shall further provide that upon an occurrence which raises a reasonable concern by the Citizens Insurance Companies that a software vendor will be unable or unwilling to support the software, such an occurrence including but not limited to a vendor's insolvency, bankruptcy, cessation of business, and refusal or inability to service the software, the Citizens Insurance Companies may obtain a copy of the source code. 7.2 Hardware. Contracts with third parties for Maintenance of the Citizens' Computer System hardware and contracts with third parties for Enhancements of desk top computers and their peripherals will be negotiated by VIS'N on behalf of the Citizens Insurance Companies. All contracts to which any of the Citizens Insurance Companies are a party will be submitted to the Citizens Insurance Companies management for review and approval. The Citizens Insurance Companies shall have the right to involve any Citizens Insurance Companies' personnel and any third parties to this Agreement, including but not limited to Meridian and its legal department, in the hardware contract review process. ARTICLE 8 Enhancements 8.1 Generally. VIS'N agrees to upgrade the Citizens' Computer System to be year 2000 compliant as defined under this Article. Software Enhancements specified by the Citizens Insurance Companies will be cost estimated by VIS'N and submitted to the Citizens Insurance Companies for approval and authorization. Software Enhancements will be tested according to criteria provided in Appendix D, which is attached hereto and made part hereof. A comprehensive project plan addressing complete conversion of the Citizens' Computer System for year 2000 compliance by March 31, 1998 (the "Project Plan") shall be submitted by VIS'N to the Citizens Insurance Companies for review and approval by September 1, 1996. The Citizens Insurance Companies shall make reasonable efforts to approve or disapprove any Project Plan submitted by VIS'N within ten (10) business days of its receipt by the Citizens Insurance Companies. The Project Plan will identify stages of the conversion process, including but not limited to stages for year 2000 compliance for various software systems, and will specify proposed start and end dates for each stage. Commencement of each stage, meaning the start of work related to a stage for which the Citizens Insurance Companies shall be responsible for payment of such work, must be approved by the Citizens Insurance Companies. In the event the Citizens Insurance Companies do not receive the Project Plan by September 1, 1996, the Citizens Insurance Companies may immediately terminate this Agreement. In the event VIS'N fails to gain approval from the Citizens Insurance Companies by November 1, 1996 for both the Project Plan and the commencement of the stage of the Project Plan having the earliest start date, the Citizens Insurance Companies may immediately terminate this Agreement. Approval of the Project Plan and the earliest stage commencement shall not be unreasonably withheld. VIS'N shall allow the Citizens Insurance Companies and their designees to monitor all work undertaken to meet the requirements of the Project Plan to ensure that acceptable progress is made on each stage of the Project Plan. In the event any quality and/or timeliness requirement of a stage is not met to the reasonable satisfaction of the Citizens Insurance Companies, the Citizens Insurance Companies may immediately terminate this Agreement. The Citizens Insurance Companies reserve the right to withhold final approval of commencement of work on any stage(s) of the Project Plan having a proposed start date later than the proposed end date of another stage ("prior stage") until all quality and timeliness requirements relating to the prior stage are met to the reasonable satisfaction of the Citizens Insurance Companies. All software Enhancements, including but not limited to such Enhancements forming a necessary part of a stage of the Project Plan, that are negotiated by VIS'N and/or provided under this Agreement shall be year 2000 compliant. All software Enhancements shall be installed and in production, operating in accordance with the processing requirements of Article 9, as specified in project schedules proposed by VIS'N and/or Persons acting on behalf of VIS'N and approved in writing by Citizens Insurance Companies' management. Approval of the project schedules shall not be unreasonably withheld. Project schedules shall include timetables which conform to the Project Plan or are otherwise agreed to by the parties in writing. Failure of any software Enhancement for the Citizens' Computer System to be year 2000 compliant by the timetables specified in the project schedules or as otherwise agreed by the parties in writing shall be cause for the Citizens Insurance Companies to immediately terminate this Agreement. In the event any software Enhancement (including any year 2000 compliant software Enhancements) requires modification of any files, including but not limited to data files, utilities, libraries, copybooks, tables, batch files and/or other programs of the Citizens' Computer System to allow the Citizens Insurance Companies to conduct business operations in a timely, accurate and reasonable manner, then such modification shall be completed, at no additional cost to the Citizens Insurance Companies, by the time the respective software Enhancement is installed. 8.2 Computer System Changes. To the extent not completed by the Citizens Insurance Companies prior to the Commencement Date, VIS'N agrees to complete, to the reasonable satisfaction of the Citizens Insurance Companies' management, the Citizens Insurance Companies' RQ2 commercial lines upgrade, move then current management reports from the Unisys system to the AS400 system, move the billing system from the Unisys system to the system in development as of January 1, 1996 by the Citizens Insurance Companies and Programming Resources Company ("PRC"), and complete implementation of the Peat Marwick recommendations to the Citizens Insurance Companies contained in the Peat Marwick report provided in Appendix E, which is attached hereto and made part hereof. VIS'N agrees to complete the tasks specified under this section 8.2 without additional expense or charge to the Citizens Insurance Companies or Meridian. 8.3 Ownership. The Citizens Insurance Companies shall own all Intellectual Property Rights or other property rights in and to any Citizens Insurance Companies specific software Enhancements and associated manuals developed solely by VIS'N for the Citizens Insurance Companies under this Agreement. The Citizens Insurance Companies agree to grant and hereby grant to VIS'N a license to use, in the operation of VIS'N's business, all Citizens Insurance Companies specific software Enhancements developed solely by VIS'N for the Citizens Insurance Companies under this Agreement. The Citizens Insurance Companies shall have no obligation to provide any support for any software Enhancement. No costs associated with obtaining any Intellectual Property Rights with respect to such software Enhancements shall be borne by VIS'N. VIS'N agrees to perform such lawful acts, including but not limited to the execution of papers and the giving of lawful testimony, as may be required to enable the Citizens Insurance Companies to procure any Intellectual Property Rights for such software enhancements. 8.4 Training Provided. During the term of this Agreement, and at no additional charge, VIS'N shall provide the Citizens Insurance Companies with any and all training required or requested to operate Enhancements to the Citizens' Computer System. ARTICLE 9 Processing Requirements 9.1 Generally. The definition of a processing cycle for purposes of this Agreement is set forth in Appendix F, which is attached hereto and made part hereof. VIS'N represents and warrants that throughout the term of this Agreement, processing cycles for Citizens Insurance Companies data will be run on a daily basis Monday through Friday, except for holidays designated by the Citizens Insurance Companies (and except as noted specifically in Appendix F), and further will be run separately from cycles of other VIS'N clients. Entered data will be processed within one processing cycle in 98% of all instances. In no event will the processing of entered policy data exceed two daily processing cycles, as defined in Appendix F. ARTICLE 10 System Operation 10.1 Citizens' Computer System. Scheduled "up time" for the Citizens' Computer System shall be from 6 a.m. to 6 p.m. Monday through Friday, and 7 a.m. to 12 p.m. Saturdays, Central Standard Time, except for holidays designated by the Citizens Insurance Companies and other occasions as are necessary in the reasonable discretion of the Citizens Insurance Companies to maintain the system. Additional up time may be mutually agreed upon in writing by the Citizens Insurance Companies' management and VIS'N. VIS'N agrees to maintain on-line system availability at no less than 99% of system up time, wherein system availability is defined in Appendix G, which is attached hereto and made part hereof. System response time shall be 5 seconds or less 99% of time as measured according to Appendix G, so long as the Citizens Insurance Companies have in place appropriate hardware to meet this requirement. VIS'N further agrees that the Citizens Insurance Companies, Meridian and any affiliates shall have dial-in access via Carbon Copy and/or PC anywhere program to monitor all aspects of Citizens' Computer System operations. ARTICLE 11 Reports 11.1 Generally. VIS'N agrees to process and make available all reports, both in title and in substance, which the Citizens Insurance Companies processes and makes available as of the Commencement Date. VIS'N agrees that such reports shall include but shall not be limited to those specified in Appendix H, which is attached hereto and made part hereof. VIS'N agrees that reports subject to this Article will be processed and available upon request for review by the Citizens Insurance Companies and Meridian as follows: a) Monthly Reports--no later than 6th calendar day of the next month. b) Quarterly Reports--no later than 6th calendar day of the next month. c) Year-end Reports--no later than 10th calendar day of the next year. Systems Response Time reports, Systems Availability reports, and Disk Utilization reports, as defined in Appendix H, shall automatically be provided monthly by VIS'N to the Citizens Insurance Companies within six (6) months of the Commencement Date. Additional reports may be provided if mutually agreed upon by the parties. ARTICLE 12 Termination 12.1 Termination by the Citizens Insurance Companies. Except as otherwise specifically provided for within this Agreement, including but not limited to Articles 4 and 8, the Citizens Insurance Companies shall have right to terminate this Agreement prior to the expiration date in the event: a) VIS'N fails to provide or have provided the Technical Support identified in this Agreement, and VIS'N fails to cure such failing within thirty (30) days after written notice of such failing from any of the Citizens Insurance Companies; b) VIS'N fails to provide or have provided software and/or hardware capable of maintaining the present operation of the insurance businesses of the Citizens Insurance Companies, and VIS'N fails to cure such failing within thirty (30) days after written notice of such failing from any of the Citizens Insurance Companies; c) VIS'N or a Person acting on behalf of VIS'N breaches any warranty, covenant, or other provision of this Agreement and VIS'N fails to cure such breach within thirty (30) days after written notice of such breach from any of the Citizens Insurance Companies. VIS'N will be deemed to have cured such breach only if it takes steps reasonably adequate to alleviate any damage to the Citizens Insurance Companies resulting from the breach and to prevent a similar future breach. However, VIS'N shall have no opportunity or right to cure a breach of Article 16; d) The Commencement Date is not earlier than a date one (1) year after the Effective Time of the merger contemplated by the Acquisition and Affiliation Agreement dated as of March 20, 1996, by and among Meridian, Citizens Security Group, Inc., and Citizens Mutual, as such time is defined therein; e) VIS'N does not assign its rights under this Agreement pursuant to Article 17.2 and either (i) Scott Broughton and Kirk Simmons cease to own directly a majority of the stock of VIS'N, or (ii) any of the stock of VIS'N is acquired by someone other than an employee of VIS'N; or f) VIS'N assigns its rights under this Agreement to a new or existing corporate entity ("Corporate Entity") pursuant to Article 17.2 and either (i) Scott Broughton and Kirk Simmons cease to own directly or indirectly a majority of the stock of Corporate Entity, or (ii) any of the stock of Corporate Entity is acquired by someone other than an employee of Corporate Entity. 12.2 Termination by VIS'N. Except as otherwise specifically provided herein, VIS'N shall have right to terminate this Agreement for cause in the event: a) The Citizens Insurance Companies breach any warranty, covenant, or other provision of this Agreement and the Citizens Insurance Companies fail to cure such breach within thirty (30) days after written notice of such breach from VIS'N; or b) Meridian, to the extent Meridian enters into a written confidentiality agreement as described in Article 16, breaches such a confidentiality agreement with VIS'N. ARTICLE 13 Consulting 13.1 Generally. During the term of this Agreement, and provided operations of VIS'N shall not be unreasonably interrupted, VIS'N will provide consulting to employees of Meridian and insurance agents of the Citizens Insurance Companies to assist in maintaining day-to-day operations. Such consulting shall not require disclosure by VIS'N of any intellectual property or other proprietary information which is solely owned by VIS'N. The VIS'N personnel conducting any such consulting, the prices of any such consulting, and the schedules of any such consulting shall all subsequently be mutually agreed upon by VIS'N and the Citizens Insurance Companies. Consulting responsibilities provided under this Article shall not survive the termination of this Agreement ARTICLE 14 Transitional Period after Agreement 14.1 Generally. At the termination by VIS'N or expiration of this Agreement, and at the Citizens Insurance Companies' sole discretion, VIS'N shall provide the Citizens Insurance Companies or its designees with consulting services, including personnel and documentation, for a transitional period of up to sixty (60) calendar days from the termination by VIS'N or expiration of this Agreement. Such consulting services shall provide any and all information that the Citizens Insurance Companies or its designees may reasonably deem necessary to enable them to operate and maintain the Citizens' Computer System in a manner suitable to allow the Citizens Insurance Companies to continue to conduct their business operations in a timely, accurate and reasonable manner. The Citizens Insurance Companies agrees to reimburse VIS'N for all reasonable expenses incurred by VIS'N in supporting the Citizens Insurance Companies during the transitional period. Consulting service shall be provided at a rate and in an amount of hours to be agreed upon, and in no event shall the rate exceed $100.00 per hour. ARTICLE 15 Indemnification 15.1 Generally. VIS'N, at its own expense, shall indemnify and hold the Citizens Insurance Companies and any affiliate harmless and agrees to defend the Citizens Insurance Companies and any affiliate from and against any costs, expenses, including but not limited to attorney fees, and damages arising out of or based upon any breach of this Agreement by VIS'N or a Person acting on behalf of VIS'N, or any act or omission of VIS'N or a Person acting on behalf of VIS'N that fails to comply with the care requirements set forth in Article 4.3. VIS'N shall pay any costs, damages, or awards of settlement, including court costs and attorney fees, arising out of any such breach or act or omission. The Citizens Insurance Companies, at their own expense, shall indemnify and hold VIS'N and any affiliate harmless and agree to defend VIS'N and any affiliate from and against any costs, expenses, including but not limited to attorney fees, and damages arising out of or based upon any breach of this Agreement by the Citizens Insurance Companies or a Person acting on behalf of the Citizens Insurance Companies. The Citizens Insurance Companies shall pay any costs, damages, or awards of settlement, including court costs and attorney fees, arising out of any such breach. 15.2 Intellectual Property. VIS'N is generally familiar with the Citizens Insurance Companies' business and use of the Citizens' Computer System as of the Contract Date. VIS'N, at its own expense, shall indemnify and hold the Citizens Insurance Companies and any affiliate harmless and agrees to defend the Citizens Insurance Companies and any affiliate from and against any costs, expenses, including but not limited to attorney fees, and damages arising out of or based upon any claim, demand, or action alleging that Technical Support provided by or on behalf of VIS'N after the Commencement Date, either alone or in combination with the Citizens' Computer System, infringes or contributes to the infringement of any Intellectual Property Right of a third party. VIS'N shall pay any costs, damages, or awards of settlement, including court costs and attorney fees, arising out of any such claim, demand, or action. If a third-party infringement claim subjects the Citizens Insurance Companies to an injunction prohibiting continuing use of any software or software Enhancement for the Citizens' Computer System provided by or on behalf of VIS'N after the Commencement Date, then VIS'N shall, at its sole election and expense, and within thirty (30) days after the commencement of an injunction: (1) obtain for the Citizens Insurance Companies the right to continue to use the software or software Enhancement pursuant to this Agreement, or (2) replace or modify the software or software Enhancement to be non-infringing. The Citizens Insurance Companies, at their own expense, shall indemnify and hold VIS'N and any affiliate harmless and agree to defend VIS'N and any affiliate from and against any costs, expenses, including but not limited to attorney fees, and damages arising out of or based upon any claim, demand, or action alleging that acts of their employees, both prior and subsequent to the Commencement Date, infringe or contribute to the infringement of any Intellectual Property Right of a third party. The Citizens Insurance Companies shall pay any costs, damages, or awards of settlement, including court costs and attorney fees, arising out of any such claim, demand, or action. The Citizens Insurance Companies, at their own expense, shall indemnify and hold VIS'N and any affiliate harmless and agree to defend VIS'N and any affiliate from and against any costs, expenses, including but not limited to attorney fees, and damages arising out of or based upon any claim, demand, or action alleging that modification by the Citizens Insurance Companies of any software, including Enhancements, provided by or on behalf of VIS'N, or that use by the Citizens Insurance Companies of any software, including Enhancements, in a manner other than for uses for which such software was provided by or on behalf of VIS'N, infringes or contributes to the infringement of any Intellectual Property Right of a third party. The Citizens Insurance Companies shall pay any costs, damages, or awards of settlement, including court costs and attorney fees, arising out of any such claim, demand, or action. ARTICLE 16 Confidential Information 16.1 Generally. VIS'N and the Citizens Insurance Companies each agree not to disclose any confidential information received from the other to any third party, except for information the receiving party previously knew, information the receiving party comes to know through third parties not deriving that information from the disclosing party, and information which is in the public domain. Further, unless otherwise specified in writing, all documents and materials containing any confidential proprietary information shall remain the property of the disclosing party and shall be returned to the disclosing party, along with all copies of such proprietary information, upon disclosing party's request. Notwithstanding anything in this Agreement to the contrary, VIS'N shall have no obligation to furnish any confidential information to Meridian unless Meridian executes a confidentiality agreement as provided in Appendix I, attached hereto. ARTICLE 17 General Administrative Provisions 17.1 General Definitions. a) An "affiliate" of a specified corporation is any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the specified corporation. It is expressly confirmed that Citizens Mutual and Meridian Mutual Insurance Company are affiliates of Meridian. b) Agency Software has the meaning set forth in Appendix B. c) Breach means (i) a breach by a Party of a covenant or warranty herein, or (ii) a Material misrepresentation made hereunder. d) Citizens' Computer System means all operating system software, all application software, on all platforms, and all hardware, existing at the Citizens Insurance Companies at the Commencement Date, and all Enhancements for such software, but does not include any software packages purchased by individual users for installation in a stand-alone mode on personal computers, the Open Systems Accounting System, and the Agency Software. e) "Defect in the computer system" means any software or hardware related Material flaw or problem which unreasonably compromises the Citizens Insurance Companies's ability to conduct business operations in a timely, accurate and reasonable manner. f) Disaster means any occurrence, whether natural or man-made, that prevents the conduct of business at the current location of the Citizens Insurance Companies. g) Enhancements means modifications, upgrades, improvements and other activities intended to provide new or increased capabilities and functions to the existing Citizens' Computer System. h) Hereunder, herein, and similar terms refer to this Agreement. i) Include and similar terms (e.g., includes, including, included, comprises, comprising, e.g., for example), when used as part of a phrase including one or more specific items, are used by way of example and not of limitation. j) Intellectual Property Rights means any and all rights, existing from time to time, to exclude in a specified jurisdiction under patent law, copyright law, moral rights law, trade-secret law, semiconductor chip protection law, trademark law, unfair competition law, or other similar rights. k) Maintenance means repairs and adjustments intended to bring or keep the existing Citizens' Computer System in proper working order. l) Material, with respect to a particular matter (e.g., a Breach), means that the matter is shown to affect adversely (i) the rights and benefits of the other Party under this Agreement; or (ii) the ability of the other Party to perform its obligations hereunder; in either case to such a degree that a reasonable person in the management of his or her own affairs would be more likely than not to decline to enter into this Agreement in view of the matter in question. m) Party means a party to this Agreement unless otherwise clear from the context. n) Person means a natural person, a corporation (stock, mutual, for profit or not-for-profit), an association, a partnership (general or limited), a joint venture, a trust, a government or political department, subdivision, or agency, or any other entity. o) Technical Support means the services listed in Appendix B. 17.2 Assignment. VIS'N may assign its rights, interests and obligations under this Agreement to Corporate Entity, provided that Scott Broughton and Kirk Simmons are and remain the direct or indirect owners of a majority of the stock of Corporate Entity and only employees of Corporate Entity own any and all remaining stock. Except as otherwise provided by this section, no party may assign its respective rights, interests, or obligations under this Agreement without the prior written consent of the other parties, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, all respective rights, interests, and obligations of the parties in, to and under this Agreement shall immediately succeed to or be assumed by any successor, by merger, consolidation or otherwise, of any of the parties. 17.3 Authority and Other General Warranties. Each Party warrants to the other that: a) the Warranting Party, if a corporation, partnership, limited partnership, or other nonnatural Person, is duly organized and subsisting under the laws of the jurisdiction of its incorporation or existence; b) the Warranting Party has full power and authority to enter into this Agreement; c) the execution and/or performance of this Agreement does not and will not violate or interfere with any other agreement of the Warranting Party, which violation or interference would have a Material adverse effect on the Warranting Party; d) the Warranting Party will not enter into any agreement the execution and/or performance of which would violate or interfere with the Warranting Party's performance of this Agreement and have a Material adverse effect on the other Party; e) the Warranting Party is not presently the subject of a voluntary or involuntary petition in bankruptcy, does not presently contemplate filing any such voluntary petition, and is not aware of any intention on the part of any other Person to file such an involuntary petition against it; f) the Warranting Party is not presently the subject of, nor the proponent of, any claim that would have a Material adverse effect on the other Party; and g) the Person(s) executing this Agreement on behalf of the Warranting Party has actual authority to bind the Warranting Party to this Agreement. 17.4 Independent Parties. The Parties are independent contractors. Except as may be expressly and unambiguously provided in this Agreement, no partnership or joint venture is intended to be created by this Agreement, nor any principal-agent or employer-employee relationship. Except to the extent expressly provided in this Agreement, neither Party has, and neither Party shall attempt to assert, the authority to make commitments for or to bind the other Party to any obligation. 17.5 Entire Agreement. Except as may be expressly provided otherwise herein, this Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter of this Agreement and supersedes all previous negotiations, agreements and commitments (if any) relating to the subject matter of this Agreement. Each Party represents and warrants that, in entering into and performing its obligations under this Agreement, it does not and will not rely on any promise, inducement, or representation allegedly made by or on behalf of the other Party with respect to the subject matter hereof, nor on any course of dealings or custom and usage in the trade, except as such promise, inducement, or representation may be expressly set forth herein. No modification or amendment to this Agreement will be valid or binding unless reduced to writing and duly executed by the Party or Parties to be bound thereby. 17.6 Notices. Unless otherwise provided herein, all notices, demands and other communications under or in connection with this Agreement shall be written in the English language and shall be sent by registered mail, postage prepaid and addressed as follows, and all notices, demands and other communications shall be deemed to have been given on the date when deposited to the post. If to VIS'N: Scott Broughton President VIS'N, INC. 406 Main Street Red Wing, Minnesota 55061 with a copy to: Mary M. O'Brien Meagher & Geer, PLLP 4200 Multifoods Tower 33 South Sixth Street Minneapolis, Minnesota 55402 If to the Citizens Insurance Companies: William H. Beikes Vice President, Director of Information Resources Meridian Insurance Group, Inc. P.O. Box 1980 Indianapolis, Indiana 46206 with a copy to: J. Mark McKinzie, Esq. General Counsel Meridian Insurance Group, Inc. P.O. Box 1980 Indianapolis, Indiana 46206 Notwithstanding the above, any urgent notices, demands and other communications may be given by telex or facsimile addressed as follows and such notices, demands or communications shall be deemed to have been given at the time when confirmation of receipt of the telex or facsimile is received. If to VIS'N: Fax: (612) 338-8384 Attn: Mary O'Brien If to Citizens Insurance Companies: Fax: (317) 931-7930 Either party hereto may change its address or telex or facsimile number for the purpose of this section by notice given to the other party in the manner set forth above. 17.7 Remedies. Except as otherwise provided herein or in this Agreement, the remedies set forth herein or in this Agreement are not exclusive, and either Party will be entitled alternatively or cumulatively to damages for breach of this Agreement or any other remedy available under applicable law. 17.8 Choice Of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota without giving effect to any choice or conflicts of law provision or rule (whether of the State of Minnesota or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Minnesota. 17.9 No Waiver. The failure of either Party at any time to require performance by the other Party of any provision of this Agreement shall in no way affect the right of such Party to require performance of that provision. Any waiver by either Party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself or a waiver of any right under this Agreement. 17.10 Binding On Successors. This Agreement will be binding upon and inure to the benefit of the Parties and their successors and assigns permitted by this Agreement. 17.11 Section Headings. The headings contained in this Agreement are for reference purposes only and shall not in any way control the meaning or interpretation of this Agreement. 17.12 Representation of Counsel; Mutual Negotiation. Each Party has had the opportunity to be represented by counsel of its choice in negotiating this Agreement. This Agreement shall therefore be deemed to have been negotiated and prepared at the joint request, direction, and construction of the Parties, at arms length, with the advice and participation of counsel, and will be interpreted in accordance with its terms without favor to any Party. 17.13 Survival of Representations and Warranties. The representations and warranties made herein, including but not limited to Article 14, shall survive the termination of this Agreement except as may be expressly indicated otherwise herein. 17.14 Effect of Partial Invalidity. If any one or more of the provisions of this Agreement should be ruled wholly or partly invalid or unenforceable by a court or other government body of competent jurisdiction, then: a) the validity and enforceability of all provisions of this Agreement not ruled to be invalid or unenforceable will be unaffected; b) the effect of the ruling will be limited to the jurisdiction of the court or other government body making the ruling; c) the provision(s) held wholly or partly invalid or unenforceable will be deemed amended, and the court or other government body is authorized to reform the provision(s), to the minimum extent necessary to render them valid and enforceable in conformity with the Parties' intent as manifested herein; and d) if the ruling, and/or the controlling principle of law or equity leading to the ruling, is subsequently overruled, modified, or amended by legislative, judicial, or administrative action, then the provision(s) in question as originally set forth in this Agreement will be deemed valid and enforceable to the maximum extent permitted by the new controlling principle of law or equity. 17.15 Attorneys' Fees. If litigation or other action is commenced between the Parties concerning any dispute arising out of or relating to this Agreement, the prevailing Party in any contested ancillary proceeding relating to the action (e.g., motions to transfer, to compel discovery, etc.) and the prevailing Party in the action itself will be entitled, in addition to any other award that may be made, to recover all court costs or other official costs and all reasonable expenses associated with the ancillary proceeding or action, including without limitation reasonable attorneys' fees and expenses. IN WITNESS WHEREOF, the Parties have caused their duly authorized representatives to execute this Agreement as of the day and year first written above. VIS'N, INC. By:_______________________________________ Scott S. Broughton President CITIZENS SECURITY MUTUAL INSURANCE COMPANY By:_______________________________________ Norma J. Oman Chairman of the Board and Chief Executive Officer CITIZENS FUND INSURANCE COMPANY By:_______________________________________ Norma J. Oman Chairman of the Board and Chief Executive Officer INSURANCE COMPANY OF OHIO By:_______________________________________ Norma J. Oman Chairman of the Board and Chief Executive Officer AGENCY PROFIT SHARING AGREEMENT The Company and the Agent agree that: I. In addition to the commissions otherwise paid by the Company to the Agent and subject to requirements imposed by law and conditions set forth in this agreement, the Company shall pay to the Agent a Profit-Sharing Commission based on underwriting profits realized by the Company on all Qualified Business. II. Annual Written Premium must equal or exceed $250,000 in order to be eligible for Profit-Sharing. III. Definitions: A. "Income" means the total of all earned premiums on Qualified Business less any dividends paid to policyholders. B. "Outgo" means the sum of the following items relating to the Qualified Business. 1. Incurred losses (losses paid less salvage received and subrogations recovered, plus reserves for losses at the end of the year, less reserves for losses at the beginning of the year) shall not be less than zero. a) Incurred losses shall be limited to the first $100,000 for any one loss or occurrence on a policy per calendar year. 2. Loss-adjustment expenses (loss-adjustment expenses paid, plus reserves for loss adjustment expenses at the end of the year, less reserves for loss-adjustment expenses at the beginning of the year). Such expenses may be based on the Company ratio of loss expense to earned premium. 3. Commissions paid or credited by Company to Agent, excluding Profit-Sharing Commissions paid under this Agreement. 4. Company Underwriting expense, as determined from the consolidated Annual Statement of the Company, applied as a ratio of Underwriting expense to earned premium. 5. Uncollected premiums developed by audit or under reporting form policies for which the Agent is not responsible under the Agency Agreement. If the premiums due are collected, such premiums less expense shall be credited to Agent. 6. Profit and Surplus allowance, equal to five percent of Income. C. "Qualified Business" means all business placed with the Company through the Agent except "Excluded Business." D. "Annual Written Premium" means the total of all written premiums for the year on Qualified Business less return premiums. E. "Earned Premiums" shall be computed by the Company from its records on the business referred to in Section I. F. "Agent Profit" means the excess of Income over Outgo. G. "Agent Loss" means the excess of Outgo over Income. H. "Percentage of Profit" means Agent Profit divided by Earned Premium. I. "Excluded Business" means business excluded from profit sharing by law, business administered by underwriting associations, syndicates or pools or assigned-risk plans, special reinsurance placed by or at the request of the Agent, health insurance, premiums produced through safety or commercial group methods, retrospective rating premium developed as additional premium through operation of the retrospective rating plan, and any other premium or line of business determined to be Excluded Business by mutual agreement between the agent and the Company. Business written by the Agent in the State of Michigan under what is presently referred to as the Essential Insurance Plan shall not constitute Excluded Business. J. "Annual Growth Rate" means the rate of growth or decline in Annual Written Premium compared to prior year Annual Written Premium. Annual Growth Rate is calculated by dividing current year Annual Written Premium by prior year Annual Written Premium. The excess over 100 (or deficit below 100) is the Annual Growth Rate percentage shown in the IV. D. Table. "Initial Profit-Sharing Figure" means the result from performing all calculations in Steps 1 through 4 of Section IV.D. Table. IV. Profit-Sharing Commission: A. Following the close of the year, the Company shall compute Agent Profit or Loss for that year and report to the Agent. If there is an Agent Profit, the Profit- Sharing Commission is determined by applying (as a percentage) the Profit-Sharing Factor from the Table in Section D to the Agent Profit. The Profit-Sharing Factor is determined from three elements: (1) The Agent Annual Written Premium; (2) the Agent Annual Growth Rate; and (3) the Agent Percentage of Profit. The Profit-Sharing Factor is the percentage shown in the appropriate column of the Table corresponding to the Agent Percentage of Profit on the line corresponding to the Agent Annual Growth Rate as shown in the appropriate column for the Agent Annual Written Premium. If an Agent Loss existed in the prior year and (1) such Agent Loss is less than 50% for the Initial Profit-Sharing Figure, the prior year Agent Loss shall be subtracted from the Initial Profit-Sharing Figure and the resulting amount is the Profit-Sharing Commission, or (2) such Agent Loss is 50% or more of the Initial Profit-Sharing Figure, the Profit-Sharing Commission shall be 50% of the Initial Profit-Sharing Figure. B. The Company agrees that the Profit-Sharing Commission Report shall be in writing and delivered to the Agent within ninety (90) days of the close of the year. C. Any Profit-Sharing Commission payment shall be made by the Company within ninety (90) days after the close of the year, provided the Agent has paid all premiums outstanding for the year. No charge or deduction for Profit-Sharing Commission shall be made or claimed by the Agent in his accounts. D. Table. Steps in computing the Profit-Sharing Commissions are as follows: 1. Select column corresponding to Agent Annual Written Premium. 2. Determine Agent Annual Growth Rate and locate in column corresponding to Agent Annual Written Premium. 3. Determine Agent Percentage of Profit and select appropriate column in right-hand portion of Table. By going horizontally to the right from the Agent Annual Growth Rate (as located in Step 2) to the column containing the Agent Percentage of Profit (as located in Step 3), the intersecting figure is the Profit-Sharing Factor. PROFIT-SHARING TABLE
(STEP 1) IF ANNUAL WRITTEN PREMIUM IS: (STEP 3) THE PERCENTAGE OF PROFIT IS: OVER $4,000,001 $2,000,001 $1,000,001 $500,001 $250,000-- 5%or 5.1%to 10.1%to 15.1%to 20.1%to 25%or $6,000,000 $6,000,000 $4,000,000 $2,000,000 $1,000,000 $500,000 less 10% 15% 20% 25% more (STEP 2) AND ANNUAL GROWTH RATE IS: (STEP 4) THE PROFIT-SHARING FACTOR IS: (1) -15.0 -8.1 5 7 9 11 13 17 -15.0 -8.1 -8.0 0 6 8 10 12 14 18 -15.0 -8.1 -8.0 0 .1 4 7 9 11 13 15 19 -15.0 -12.1 -8.0 0 .1 4 4.1 8 8 10 12 14 16 20 -15.0 -12.1 -12 -8.1 .1 4 4.1 8 8.1 12 9 11 13 15 17 21 - -15.0 -12.1 -12 -8.1 -8.0 -4.1 4.1 8 8.1 12 12.1 16 10 12 14 16 18 22 - -12 -8.1 -8.0 -4.1 -4.0 0 8.1 12 12.1 16 16.1 20 11 13 15 17 19 23 -8.0 -4.1 -4.0 0 .1 2 12.1 16 16.1 20 20.1 24 12 14 16 18 20 24 -4.0 0 .1 1 2.1 4 16.1 20 20.1 24 24.1 28 13 15 17 19 21 25 .1 2 2.1 4 4.1 7 20.1 24 24.1 28 28.1 32 14 16 18 20 22 26 2.1 4 4.1 6 7.1 10 24.1 28 28.1 32 32.1 36 15 17 19 21 23 27 4.1 6 6.1 9 10.1 13 28.1 32 32.1 36 36.1 40 16 18 20 22 24 28 6.1 8 9.1 12 13.1 16 32.1 36 36.1 40 40.1 44 17 19 21 23 25 29 8.1 11 12.1 15 16.1 19 36.1 40 40.1 44 44.1 48 18 20 22 24 26 30 11.1 14 15.1 18 19.1 22 40.1 44 44.1 48 48.1 52 19 21 23 25 27 31 14.1 17 18.1 21 22.1 25 Over 44 Over 48 Over 52 20 22 24 26 28 32 17.1 20 21.1 24 25.1 28 21 23 25 27 29 33 Over 20 Over 24 Over 28 22 24 26 28 30 34 (1) Profit-Sharing Factors shown apply to agents with positive Annual Growth Rate only. For profitable agents with negative Annual Growth Rate, Profit-Sharing Factors will be one-half of the published factor.
V. Other Provisions. A. The Agreement supersedes all additional commission, bonus commission, growth opportunity bonus, contingent or profit-sharing agreements of any kind and any such previous agreements are terminated. B. The failure of the Company to enforce or apply at any time, any of the provisions of this Agreement, shall in no way be construed to be a waiver of such provisions, nor in any way to affect the right of the Company thereafter to enforce or apply each and every such provision. C. No Profit-Sharing Commission shall be payable for any calendar year in which the Agent's monthly account with the Company is delinquent in accordance with the Agency Agreement and the Agent is suspended as a result of such delinquency. D. The Agent and the Company recognize that the Company must record its transactions and activities in accordance with rules and regulations of insurance regulatory agencies. In addition, the parties recognize that their records may vary as regards the timing and accounting treatment of transaction entries. It is agreed that all definitions and computations under this Agreement shall reflect the records of the Company which are conclusively presumed to be correct. The Company will make a good faith effort to correct any errors in its records disclosed by computations under the Agreement, to the extent and in the manner permitted by insurance accounting regulations. E. This agreement may be terminated by either party following ninety (90) days prior written notice, or shall terminate automatically concurrent with the effective date of termination of the Agency Agreement or Agent's contract with the Company. Upon termination, only Profit-Sharing Commission accrued and unpaid at the end of the year prior to the year of termination shall be payable to Agent. IN WITNESS WHEREOF, Agent and Company have executed this Agreement on ____________, 19 ___, to be effective ________________, 19_______, and thereafter until terminated as provided herein. __________________________________________ herein referred to as "Agent" by________________________________________ Title ______________________________________ Meridian Mutual Insurance Company Meridian Security Insurance Company Meridian Mutual Insurance Company and Meridian Security Insurance Company Jointly Herein referred to as "Company" by _______________________________________ Title ______________________________________ MERIDIAN INSURANCE NEW AGENT'S INCENTIVE COMPENSATION PLAN I. PURPOSE The purpose of this Plan is to provide the Agent who is newly appointed with the Company with incentive compensation in addition to the commissions otherwise paid by the Company. This incentive compensation is based on Annual Written Premium and growth in Annual Written Premium during the first four years of the Agent's appointment. II.DEFINITIONS A. "Annual Written Premium" means the total of all written premiums for the applicable calendar year on Qualified Business less return premiums as computed on the Agency Production and Experience Report. B. "Excluded Business" means business excluded from incentive compensation by law, business administered by underwriting associations, syndicates, or pools or assigned-risk plans, special reinsurance placed by or at the request of the Agent, health insurance, premiums produced or placed through commercial group methods, retrospective rating premium through operation of the retrospective rating plan, and any other premium or line of business determined to be Excluded Business by mutual agreement between the Agent and the Company. Business written by the Agent in the State of Michigan under what is presently referred to as the Essential Insurance Plan shall not constitute Excluded Business. C. "Qualified Business" means all business placed with the Company through the Agent except Excluded Business. III. INCENTIVE COMPENSATION PAYMENT A. Following the close of each calendar year, the Company will compute the Incentive Compensation Payment for the previous calendar year in accordance with the following schedule and report to the Agent. B. SCHEDULE 1. Calendar Year 1(Calendar year in which Agent is appointed), Five percent (5%) of the Annual Written Premium provided Annual Written Premium averages $5,000 per month. 2. Calendar Year 2Five percent (5%) of the Increase in Annual Written Premium in Calendar Year 2 over Calendar Year 1, provided the increase equals $100,000 or more. 3. Calendar Year 3Five percent (5%) of the increase in Annual Written Premium in Calendar Year 3 over Calendar Year 2, provided the increase equals $75,000 or more. 4. Calendar Year 4Five percent (5%) of the increase in Annual Written Premium in Calendar Year 4 over Calendar Year 3 provided the increase equals $75,000 or more. C. The Incentive Compensation Payment payable under the above Schedule is limited to a maximum of $25,000 for any one calendar year. D. The Company agrees that the Incentive Compensation Report shall be in writing and delivered to the Agent within 90 days after the close of the calendar year. E. Any Incentive Compensation payment shall be made within 90 days after the close of the calendar year, provided the Agent has paid all premiums outstanding for the year. No charge or deduction for Incentive Compensation shall be made or claimed by the Agent in his accounts. IV. OTHER PROVISIONS A. The Agreement supersedes all additional commission, bonus commission, growth bonus, contingent or profit-sharing agreements of any kind and any such previous agreements are terminated. B. The failure of the Company to enforce or apply at any time, any of the provisions of this Agreement, shall in no way be construed to be a waiver of such provisions, nor in any way to affect the right of the Company thereafter to enforce or apply each and every such provision. C. No Incentive Compensation shall be payable for any calendar year in which the Agent's monthly account with the Company is delinquent in accordance with the Agency Agreement and the Agent is suspended as a result of such delinquency. D. The Agent and the Company recognize that the Company must record its transactions and activities in accordance with rules and regulations of insurance regulatory agencies. In addition, the parties recognize that their records may vary as regards the timing and accounting treatment of transaction entries. It is agreed that all definition and computations under this Agreement shall reflect the records of the Company which are conclusively presumed to be correct. The Company will make a good faith effort to correct any errors in its records disclosed by computations under the Agreement, to the extent and in the manner permitted by insurance accounting regulations. E. This Agreement may be terminated by either party following ninety (90) days' prior written notice, or shall terminate automatically concurrent with the effective date of termination of the Agency Agreement with the Company. Upon termination, only Incentive Compensation accrued and unpaid at the end of the calendar year prior to the year of termination shall be payable to the Agent. This Agreement shall automatically terminate on December 31 of the fourth year of appointment, unless otherwise terminated as provided in this paragraph, at which time the Agent becomes eligible for the Agency Profit-Sharing Agreement. IN WITNESS WHEREOF, Agent and Company have executed this Agreement on ___________________, 19_________, to be effective ___________________, 19_________, and thereafter until terminated as provided herein. THIS AGREEMENT WILL TERMINATE on ___________________, 19_________. Herein referred to as "Agent" By: Title Meridian Mutual Insurance Company Meridian Security Insurance Company Meridian Mutual Insurance Company and Meridian Security Insurance Company Jointly By: Title DRAFT AMENDMENT NO. 7 The Personal Excess Liability Reinsurance Agreement of June 1, 1969, between EMPLOYERS REINSURANCE CORPORATION of Overland Park, Kansas and MERIDIAN MUTUAL INSURANCE COMPANY, MERIDIAN SECURITY INSURANCE COMPANY, and VERNON FIRE AND CASUALTY INSURANCE COMPANY all of Indianapolis, Indiana, is hereby amended as follows: I. As respects occurrences under policies in force and those becoming effective on or after January 1, 1997, the designation of the REINSURED under this agreement is hereby amended to include the following. CITIZENS SECURITY MUTUAL INSURANCE COMPANY of Red Wing, Minnesota CITIZENS FUND INSURANCE COMPANY of Red Wing, Minnesota INSURANCE COMPANY OF OHIO of Mansfield, Ohio II. As soon as practicable after January 1, 1997, the REINSURED shall pay to the CORPORATION an amount equal to 96% of the unearned premiums as of January 1, 1997 with respect to policies in force as of January 1, 1997 and written by CITIZENS SECURITY MUTUAL INSURANCE COMPANY, CITIZENS FUND INSURANCE COMPANY and INSURANCE COMPANY OF OHIO. Such amount shall be subject to the ceding commission to the REINSURED. In all other respects not inconsistent herewith, said agreement shall remain unchanged. IN WITNESS WHEREOF, the parties hereto have caused this amendment to be executed in duplicate. MERIDIAN MUTUAL INSURANCE EMPLOYERS REINSURANCE COMPANY CORPORATION ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: MERIDIAN SECURITY INSURANCE VERNON FIRE AND CASUALTY COMPANY INSURANCE COMPANY ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: CITIZENS SECURITY MUTUAL CITIZENS FUND INSURANCE INSURANCE COMPANY COMPANY ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: INSURANCE COMPANY OF OHIO ______________________________ Title: ______________________________ Title: AMENDMENT NO. 5 The Multiple Layer Reinsurance Agreement of January 1, 1991, between EMPLOYERS REINSURANCE CORPORATION of Overland Park, Kansas and MERIDIAN MUTUAL INSURANCE COMPANY, MERIDIAN SECURITY INSURANCE COMPANY and VERNON FIRE AND CASUALTY INSURANCE COMPANY all of Indianapolis, Indiana, is hereby amended as follows: I. As respects occurrences under policies in force and those becoming effective on or after January 1, 1997, the designation of the REINSURED under this agreement is hereby amended to include the following: CITIZENS SECURITY MUTUAL INSURANCE COMPANY of Red Wing, Minnesota CITIZENS FUND INSURANCE COMPANY of Red Wing, Minnesota INSURANCE COMPANY OF OHIO of Mansfield, Ohio II. As respects occurrences taking place on or after January 1, 1997 and net premium income entered on the books and records of the REINSURED on and after such date, the Reinsurance Schedule, Article III-B, as set out in Amendment No. 4 and as further amended by Amendment No. 4, is hereby deleted and the attached Article III-C is substituted therefor. III. As soon as practicable after January 1, 1997, the REINSURED shall pay to the CORPORATION an amount equal to 2.90% of the unearned premium as of January 1, 1997 with respect to policies in force as of January 1, 1997 and written by CITIZENS SECURITY MUTUAL INSURANCE COMPANY, CITIZENS FUND INSURANCE COMPANY and INSURANCE COMPANY OF OHIO. In all other respects not inconsistent herewith, said agreement shall remain unchanged. IN WITNESS WHEREOF, the parties hereto have caused these presents to be executed in duplicate. MERIDIAN MUTUAL INSURANCE EMPLOYERS REINSURANCE COMPANY CORPORATION ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: MERIDIAN SECURITY INSURANCE VERNON FIRE AND CASUALTY COMPANY INSURANCE COMPANY ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: CITIZENS SECURITY MUTUAL CITIZENS FUND INSURANCE INSURANCE COMPANY COMPANY ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: INSURANCE COMPANY OF OHIO ______________________________ Title: ______________________________ Title: DRAFT AMENDMENT NO. 9 The Commercial and Personal Umbrella Reinsurance Agreement of June 1, 1986, between EMPLOYERS REINSURANCE CORPORATION of Overland Park, Kansas and MERIDIAN MUTUAL INSURANCE COMPANY of Indianapolis, Indiana, is hereby amended as follows: I. As respects occurrences under policies in force and those becoming effective on or after January 1, 1997, the designation of the REINSURED under this agreement is hereby amended to include the following. CITIZENS SECURITY MUTUAL INSURANCE COMPANY of Red Wing, Minnesota CITIZENS FUND INSURANCE COMPANY of Red Wing, Minnesota INSURANCE COMPANY OF OHIO of Mansfield, Ohio II. As soon as practicable after January 1, 1997, the REINSURED shall pay to the CORPORATION a portion of the unearned premiums as of January 1, 1997 for policies in force as of January 1, 1997 and written by CITIZENS SECURITY MUTUAL INSURANCE COMPANY, CITIZENS FUND INSURANCE COMPANY and INSURANCE COMPANY OF OHIO equal to the portion of the risk that is ceded to the CORPORATION. Such amount shall be subject to the ceding commission to the REINSURED. In all other respects not inconsistent herewith, said agreement shall remain unchanged. IN WITNESS WHEREOF, the parties hereto have caused this amendment to be executed in duplicate. MERIDIAN MUTUAL INSURANCE EMPLOYERS REINSURANCE COMPANY CORPORATION ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: CITIZENS SECURITY MUTUAL CITIZENS FUND INSURANCE INSURANCE COMPANY COMPANY ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: INSURANCE COMPANY OF OHIO ______________________________ Title: ______________________________ Title: BASKET REINSURANCE AGREEMENT Entered into between EMPLOYERS REINSURANCE CORPORATION of Overland Park, Kansas (hereinafter called the CORPORATION) and MERIDIAN MUTUAL INSURANCE COMPANY VERNON FIRE AND CASUALTY INSURANCE COMPANY MERIDIAN SECURITY INSURANCE COMPANY all of Indianapolis, Indiana CITIZENS SECURITY MUTUAL INSURANCE COMPANY CITIZENS FUND INSURANCE COMPANY both of Red Wing, Minnesota INSURANCE COMPANY OF OHIO of Mansfield, Ohio (hereinafter collectively called the REINSURED) EFFECTIVE DATE: January 1, 1997 In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE I APPLICATION OF AGREEMENT. This agreement applies to loss sustained by the REINSURED and retained by the REINSURED under the Property Per Risk Excess of Loss Reinsurance Agreement dated January 1, 1992 and the Multiple Layer Reinsurance Agreement dated January 1, 1991, between the parties hereto (hereinafter, respectively, called the "Property Agreement" and the "Multiple Layer Agreement", and collectively called the "Collateral Reinsurance Agreements"), as respects occurrences common to the Collateral Reinsurance Agreements taking place on or after the effective date and prior to the termination date of this agreement. The Insolvency Clause is attached hereto and made a part of this agreement. ARTICLE II RETENTION AND REINSURANCE. As respects such loss sustained and retained by the REINSURED as a result of each common occurrence, the REINSURED shall retain as its own net retention under this agreement the first $250,000 of such loss and the CORPORATION hereby agrees to indemnify the REINSURED against 100% of loss excess thereof, subject to a reinsurance limit of $200,000 each occurrence; provided, however, that as respects each such common occurrence, only loss pertaining to a single property risk shall be covered hereunder and in the event such common occurrence results in loss to two or more property risks, the REINSURED shall elect the property risk to be covered hereunder. ARTICLE III DEFINITIONS. Unless specifically defined herein, terms used herein shall have the definitions accorded them under the Collateral Reinsurance Agreements. ARTICLE IV REINSURANCE PREMIUM. Reinsurance premium paid by the REINSURED under the Collateral Reinsurance Agreements shall be deemed to include reinsurance premium for the reinsurance afforded by this agreement. ARTICLE V ALLOCATION OF LOSS. Recoveries hereunder shall be allocated to the Property Agreement and the Multiple Layer Agreement in the ratio that loss retained by the REINSURED under such agreements as respects each common occurrence constitute loss to which this agreement applies. ARTICLE VI CLAIMS. The REINSURED agrees that it will notify the CORPORATION of any occurrence which may give rise to a claim hereunder within a reasonable time after knowledge that such occurrence may result in a claim hereunder. ARTICLE VII OFFSET. The REINSURED or the CORPORATION may offset any balance, whether on account of premiums, commissions, loss or claim expenses due from one party to the other under this agreement or under any other reinsurance agreement heretofore or hereafter entered into between the REINSURED and the CORPORATION, whether acting as assuming reinsurer or ceding company. ARTICLE VIII TERMINATION. This agreement shall continue in effect until terminated by mutual consent, or by either party's giving to the other party not less than 90 days' notice by registered mail or express delivery service, prior to any calendar quarter stating the termination date. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed in duplicate. MERIDIAN MUTUAL INSURANCE EMPLOYERS REINSURANCE COMPANY CORPORATION ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: MERIDIAN SECURITY INSURANCE VERNON FIRE AND CASUALTY COMPANY INSURANCE COMPANY ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: CITIZENS SECURITY MUTUAL CITIZENS FUND INSURANCE INSURANCE COMPANY COMPANY ______________________________ ______________________________ Title: Title: ______________________________ ______________________________ Title: Title: INSURANCE COMPANY OF OHIO ______________________________ Title: ______________________________ Title: Addendum No. 1 to the 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 Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") It Is Hereby Agreed, effective May 10, 1996, in lieu of the provisions of paragraph A of Article XI - Profit Sharing - of the Contract, that the following shall apply to the Subscribing Reinsurer's share in the attached Contract: "A. If this reinsurance Contract is renewed for calendar years 1997 and 1998, and the premiums paid for the Company's Second Underlying Aggregate Excess Catastrophe Reinsurance Contract effective May 10, 1996, this Contract, and such 1997 and 1998 Contracts exceed the claims 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." The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Indianapolis, Indiana,this _______ day of ________________199___. ________________________________________________ Meridian Mutual Group Midland, Michigan,this _______ day of ____________________199___. _______________________________________________ Dorinco Reinsurance Company Addendum No. 1 to the 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 Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") It Is Hereby Agreed, effective May 10, 1996, in lieu of the provisions of paragraph A of Article XI - Profit Sharing - of the Contract, that the following shall apply to the Subscribing Reinsurer's share in the attached Contract: "A. If this reinsurance Contract is renewed for calendar years 1997 and 1998, and the premiums paid for the Company's Second Underlying Aggregate Excess Catastrophe Reinsurance Contract effective May 10, 1996, this Contract, and such 1997 and 1998 Contracts exceed the claims 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." The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Indianapolis, Indiana,this _______ day of _________________199___. _________________________________________________ Meridian Mutual Group Tokyo, Japan,this _______ day of _________________________ 199___. _________________________________________________ The Nissan Fire & Marine Insurance Co., Ltd. Addendum No. 1 to the 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 Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") It Is Hereby Agreed, effective May 10, 1996, in lieu of the provisions of paragraph A of Article XI - Profit Sharing - of the Contract, that the following shall apply to the Subscribing Reinsurer's share in the attached Contract: "A. If this reinsurance Contract is renewed for calendar years 1997 and 1998, and the premiums paid for the Company's Second Underlying Aggregate Excess Catastrophe Reinsurance Contract effective May 10, 1996, this Contract, and such 1997 and 1998 Contracts exceed the claims 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." The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Indianapolis, Indiana,this _______ day of _________________199___. __________________________________________________ Meridian Mutual Group Hamilton, Bermuda,this _______ day of _____________________199___. __________________________________________________ Renaissance Reinsurance Ltd. Addendum No. 1 to the 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 Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") It Is Hereby Agreed, effective May 10, 1996, in lieu of the provisions of paragraph A of Article XI - Profit Sharing - of the Contract, that the following shall apply to the Subscribing Reinsurer's share in the attached Contract: "A. If this reinsurance Contract is renewed for calendar years 1997 and 1998, and the premiums paid for the Company's Second Underlying Aggregate Excess Catastrophe Reinsurance Contract effective May 10, 1996, this Contract, and such 1997 and 1998 Contracts exceed the claims 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." The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Indianapolis, Indiana,this _______ day of _________________199___. __________________________________________________ Meridian Mutual Group Paris, France,this _______ day of _________________________199___. __________________________________________________ Cie Transcontinentale de Reassurance Excess Catastrophe Reinsurance Contract Effective: January 1, 1996 issued to 1, 1997 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company"as the "Company") by by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") "Reinsurer") Preamble The "Meridian Mutual Group" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Indianapolis, Indiana, Meridian Security Insurance Company and, Indianapolis, Indiana, Vernon Fire and Casualty Insurance Company, Indianapolis, Indiana, Citizens Security Mutual Insurance Company, Red Wing, all of Indianapolis, Indiana. It is understood thatMinnesota, Citizens Fund Insurance Company, Red Wing, Minnesota, and Insurance Company of Ohio, Mansfield, Ohio. The application of this Contract shall be to the parties comprising the Meridian Mutual Group as a group and not separately to each. 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 and 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 1997, 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. 1997, 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. This Contract excludes loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 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 B of Article VIII. C. No Claim shall be made under any excess layer of reinsurance coverage provided by this Contract in any one loss occurrence unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. For purposes of this Article, the Company shall be the sole judge of what constitutes one risk. 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: equal to the product of the following: 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 95.0% of the 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 95.0% of the 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 - Definitions "Ultimate net loss"A. "Ultimate net loss" as used herein is defined as the sum or sums (including interest on judgments, litigation expenseextra contractual obligations, litigation expenses, interest on judgments 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. B. "Extra contractual obligations" as used herein shall mean 80% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company as a result of an action against it by its insured or its insured's assignee, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. However, for the purposes of this Contract, extra contractual obligations arising out of any one loss occurrence shall not exceed 25% of the contractual loss under all policies involved in the loss occurrence. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. Article VIII - Other Reinsurance A. The Company shall maintain in force excess per risk reinsurance 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""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""loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence""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 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 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 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive 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 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze,""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""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 consecutive hours shall apply with respect to one event. C. However, as respects those "loss occurrences""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 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences,""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""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 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'"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 annualn annual deposit premium for each excess layer of an amount, shown as "Annual Deposit Premium"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 heretoan amount, shown as "Quarterly Deposit Premium" for that excess layer in Schedule A attached hereto, on January 1, April 1, on January 1, April 1, July 1 and October 1 of 1997. 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, Mobile Homeowners and Farmowners business, 70% of the total basic policy premium as respects Businessowners and Commercial Multiple Peril business 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 "$""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; 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,""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 expensess 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) 4118(a) of the New York Insurance Law or except (a) 1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (b) 2) 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 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 - Agency Agreement 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 XXV - Intermediary (BRMA 23A) E. W. Blanch 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, 1997 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 $ 638,400 $ 434,720 $ 433,200 $ 771,400 Premium Rate 0.819% 0.558% 0.556% 0.989% Annual Deposit Premium $ 798,000 $ 543,400 $ 541,500 $ 964,250 Quarterly Deposit $ 199,500 $ 138,850 $ 135,375 $ 241,062 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 210 I Classes of Business Reinsured 210 II Term 210 III Territory 211 IV Exclusions 211 V Retention and Limit 213 VI Reinstatement 214 VII Definitions 215 VIII Other Reinsurance 215 IX Loss Occurrence (NMA 2244/BRMA 27A) 216 X Loss Notices and Settlements 217 XI Salvage and Subrogation 217 XII Premium 217 XIII Offset (BRMA 36C) 218 XIV Access to Records (BRMA 1D) 218 XV Net Retained Lines (BRMA 32E) 218 XVI Errors and Omissions (BRMA 14F) 219 XVII Currency (BRMA 12A) 219 XVIII Taxes (BRMA 50C) 219 XIX Federal Excise Tax (BRMA 17A) 219 XX Unauthorized Reinsurers 219 XXI Insolvency 221 XXII Arbitration (BRMA 6J) 222 XXIII Service of Suit (BRMA 49C) 222 XXIV Agency Agreement 223 XXV Intermediary (BRMA 23A) 223 Schedule A Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1997 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") "Reinsurer") Preamble The "Meridian Mutual Group" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Vernon Fire and Casualty Insurance Company, Indianapolis, Indiana, Citizens Security Mutual Insurance Company, Red Wing, Minnesota, Citizens Fund Insurance Company, Red Wing, Minnesota, and Insurance Company of Ohio, Mansfield, Ohio. The application of this Contract shall be to the parties comprising the Meridian Mutual Group as a group and not separately to each. 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 and 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, 1997, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 1997, 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, Boatowners, 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. This Contract excludes loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 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 $6,322,000. The Reinsurer shall then be liable for 95.0% of the amount by which the Company's subject ultimate net loss for the term of this Contract exceeds the Company's retention, but the liability of the Reinsurer shall not exceed 95.0% of $10,000,000 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 $250,000 arising out of any one loss occurrence, not to exceed $5,750,000 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 $1,880,800. B. The Company shall pay the Reinsurer a deposit premium of $2,351,000 in four equal installments of $587,750 on January 1, April 1, July 1 and October 1 of 1997. 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, Mobile Homeowners 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 year 1998, and the premiums paid for the Underlying Aggregate Excess Catastrophe Reinsurance Contract effective January 1, 1996, this Contract, and such 1998 Contract exceed the claims 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 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) 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 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 expense 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 (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) 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 - Agency Agreement 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 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 Table of Contents Article Page Preamble 226 I Classes of Business Reinsured 226 II Term 227 III Territory 227 IV Exclusions 227 V Retention and Limit 229 VI Definition of Ultimate Net Loss 230 VII Loss Occurrence (NMA 2244/BRMA 27A) 230 VIII Loss Notices and Settlements 231 IX Salvage and Subrogation 232 X Premium 232 XI Profit Sharing 232 XII Offset (BRMA 36C) 233 XIII Access to Records (BRMA 1D) 233 XIV Net Retained Lines (BRMA 32B) 233 XV Errors and Omissions (BRMA 14F) 233 XVI Currency (BRMA 12A) 234 XVII Taxes (BRMA 50C) 234 XVIII Federal Excise Tax (BRMA 17A) 234 XIX Unauthorized Reinsurers 234 XX Insolvency 236 XXI Arbitration (BRMA 6J) 236 XXII Service of Suit (BRMA 49C) 237 XXIII Agency Agreement 238 XXIV Intermediary (BRMA 23A) 238 Addendum No. 1 to the Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company") It Is Hereby Agreed, effective January 1, 1997, with respect to losses arising out of loss occurrences commencing on or after that date, that this Contract shall be amended as follows: 1. The Preamble to this Contract shall be deleted and the following substituted therefor: "Preamble The `Meridian Mutual Group' for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Vernon Fire and Casualty Insurance Company, Indianapolis, Indiana, Citizens Security Mutual Insurance Company, Red Wing, Minnesota, Citizens Fund Insurance Company, Red Wing, Minnesota, and Insurance Company of Ohio, Mansfield, Ohio. The application of this Contract shall be to the parties comprising the Meridian Mutual Group as a group and not separately to each." 2. Subparagraph 16 of Article IV - Exclusions - shall be deleted and the following substituted therefor: "16. This Contract excludes loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy." The provisions of this Contract shall remain otherwise unchanged. 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 Addendum No. 1 to the Interests and Liabilities Agreement of Dorinco Reinsurance Company Midland, Michigan (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective January 1, 1997. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Midland, Michigan,this _______ day of _____________________199___. __________________________________________________ Dorinco Reinsurance Company Addendum No. 1 to the Interests and Liabilities Agreement of Erie Insurance Exchange Erie, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective January 1, 1997. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Erie, Pennsylvania,this _______ day of ____________________199___. __________________________________________________ Erie Insurance Exchange Addendum No. 1 to the 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 Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective January 1, 1997. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Tokyo, Japan,this _______ day of __________________________199___. __________________________________________________ The Nissan Fire & Marine Insurance Co., Ltd. Addendum No. 1 to the Interests and Liabilities Agreement of Renaissance Reinsurance Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective January 1, 1997. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Hamilton, Bermuda,this _______ day of _____________________199___. __________________________________________________ Renaissance Reinsurance Ltd. Addendum No. 1 to the Interests and Liabilities Agreement of Shelter Mutual Insurance Company Columbia, Missouri (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective January 1, 1997. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Columbia, Missouri,this _______ day of ____________________199___. __________________________________________________ Shelter Mutual Insurance Company Addendum No. 1 to the 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 Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective January 1, 1997. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York,this _______ day of ____________________199___. __________________________________________________ SOREMA North America Reinsurance Company Addendum No. 1 to the Interests and Liabilities Agreement of Cie Transcontinentale de Reassurance Paris, France (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Second Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: May 10, 1996 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective January 1, 1997. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Paris, France,this _______ day of _________________________199___. __________________________________________________ Cie Transcontinentale de Reassurance Sixth Excess Catastrophe Reinsurance Contract Effective: January 1, 1997 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to 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, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Vernon Fire and Casualty Insurance Company, Indianapolis, Indiana, Citizens Security Mutual Insurance Company, Red Wing, Minnesota, Citizens Fund Insurance Company, Red Wing, Minnesota, and Insurance Company of Ohio, Mansfield, Ohio. The application of this Contract shall be to the parties comprising the Meridian Mutual Group as a group and not separately to each. Article I - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company arising from the peril of Earthquake and fire following earthquake 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 and 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, 1997, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 1999, both days inclusive. B. In the event a loss occurrence covered hereunder is in progress at the end of any contract year, the entire loss arising out of the loss occurrence shall be charged to the contract year in which the loss occurrence commenced, subject to the other terms and conditions of this Contract. C. "Contract year" as used in this Contract shall mean the period from January 1, 1997 to December 31, 1997, both days inclusive, and each respective twelve-month period thereafter that this Contract continues in force. Article III - Revision Clause The contracting parties will mutually agree to change the conditions of this Contract if an inequity should arise for one or the other partner. In this case, conditions shall be stipulated which have been agreed upon by the contracting parties as if they had considered the changed circumstances at the beginning of this Contract. If a mutual agreement is not achievable and a continuation of the Contract at unchanged conditions is unreasonable for one of the contracting parties, the Contract can be terminated by this party. Article IV - Territory The liability of the Reinsurer shall be limited to losses under policies covering property located within the territorial limits of the States of Iowa, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee and Wisconsin, 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 V - Exclusions This Contract does not apply to and specifically excludes the following: 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. This Contract excludes loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 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. Article VI - Retention and Limit A. The Company shall retain and be liable for the first $65,000,000 of ultimate net loss arising out of each loss occurrence. The Reinsurer shall then be liable for 95% of the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed 95% of $25,000,000 as respects any one loss occurrence. B. In addition to its initial retention each loss occurrence, the Company shall retain 5% of the excess ultimate net loss to which this Contract applies. C. No claim shall be made under this Contract in any one loss occurrence unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. For purposes of this Article, the Company shall be the sole judge of what constitutes one risk. Article VII - Reinstatement A. In the event all or any portion of the reinsurance hereunder 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 equal to the product of the following: 1. The percentage of the occurrence limit reinstated (based on the loss paid by the Reinsurer); times 2. The earned reinsurance premium for the contract year during which the occurrence commenced (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any loss hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer. If the earned reinsurance premium for the contract year has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the contract year has been finally determined. Any reinstatement premium shown to be due the Reinsurer as reflected by any such statement (less prior payments, if any) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss. 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 hereunder shall not exceed 95% of $25,000,000 as respects loss or losses arising out of any one loss occurrence, nor shall it exceed 95% of $50,000,000 in all during the term of this Contract. Article VIII - Definitions "Ultimate net loss"A. "Ultimate net loss" as used herein is defined as the sum or sums (including interest on judgments, litigation expenseextra contractual obligations, litigation expenses, interest on judgments 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. B. "Extra contractual obligations" as used herein shall mean 80% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company as a result of an action against it by its insured or its insured's assignee, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. However, for the purposes of this Contract, extra contractual obligations arising out of any one loss occurrence shall not exceed 25% of the contractual loss under all policies involved in the loss occurrence. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. Article IX - 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 X - Loss Occurrence 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 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." B. 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. Article XI - 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 this Contract, shall be binding upon the Reinsurer, and 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. Article XII - 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 XIII - Premium A. As premium for the reinsurance provided hereunder for each contract year, the Company shall pay the Reinsurer .00872% of its Insurance In Force calculated on June 30 of each respective contract year, subject to an annual minimum premium of $418,000. B. The Company shall pay the Reinsurer a deposit premium of $522,500 for each contract year, payable in four equal installments of $130,625 on January 1, April 1, July 1 and October 1, of each contract year. C. Within 60 days after the end of each contract year, 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. Article XIV - 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 XV - 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 XVI - 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 XVII - 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 XVIII - 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 XIX - 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 XX - 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 XXI - 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 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. 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 expense 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 B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXII - 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 (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) 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 XXIII - 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 XXIV - 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 XXV - Agency Agreement 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 XXVI - 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 248 I Classes of Business Reinsured 248 II Term 249 III Revision Clause 249 IV Territory 249 V Exclusions 249 VI Retention and Limit 252 VII Reinstatement 252 VIII Definitions 252 IX Other Reinsurance 253 X Loss Occurrence 253 XI Loss Notices and Settlements 254 XII Salvage and Subrogation 254 XIII Premium 254 XIV Offset (BRMA 36C) 255 XV Access to Records (BRMA 1D) 255 XVI Net Retained Lines (BRMA 32E) 255 XVII Errors and Omissions (BRMA 14F) 255 XVIII Currency (BRMA 12A) 255 XIX Taxes (BRMA 50C) 256 XX Federal Excise Tax (BRMA 17A) 256 XXI Unauthorized Reinsurers 256 XXII Insolvency 257 XXIII Arbitration (BRMA 6J) 258 XXIV Service of Suit (BRMA 49C) 259 XXV Agency Agreement 259 XXVI Intermediary (BRMA 23A) 259 Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1997 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to 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, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Vernon Fire and Casualty Insurance Company, Indianapolis, Indiana, Citizens Security Mutual Insurance Company, Red Wing, Minnesota, Citizens Fund Insurance Company, Red Wing, Minnesota, and Insurance Company of Ohio, Mansfield, Ohio. The application of this Contract shall be to the parties comprising the Meridian Mutual Group as a group and not separately to each. Article I - Classes of Business Reinsured By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company arising from the peril of Earthquake and related losses 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 and 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, 1997, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 1997, 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 States of Iowa, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee and Wisconsin, 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 does not apply to and specifically excludes the following: 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. This Contract excludes loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy. 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. Article V - Retention and Limit A. The Company shall retain and be liable for the first $90,000,000 of ultimate net loss arising out of each loss occurrence. The Reinsurer shall then be liable for 95% of the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer shall not exceed 95% of $25,000,000 as respects any one loss occurrence. B. In addition to its initial retention each loss occurrence, the Company shall retain 5% of the excess ultimate net loss to which this Contract applies. C. No claim shall be made under this Contract in any one loss occurrence unless at least two risks insured or reinsured by the Company are involved in such loss occurrence. For purposes of this Article, the Company shall be the sole judge of what constitutes one risk. Article VI - Reinstatement A. In the event all or any portion of the reinsurance hereunder 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 equal to the product of the following: 1. The percentage of the occurrence limit reinstated (based on the loss paid by the Reinsurer); times 2. The earned reinsurance premium for the term of this Contract (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any loss hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer. If the earned reinsurance premium 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 shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer as reflected by any such statement (less prior payments, if any) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss. 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 hereunder shall not exceed 95% of $25,000,000 as respects loss or losses arising out of any one loss occurrence, nor shall it exceed 95% of $50,000,000 in all during the term of this Contract. Article VII - Definitions "Ultimate net loss"A. "Ultimate net loss" as used herein is defined as the sum or sums (including interest on judgments, litigation expenseextra contractual obligations, litigation expenses, interest on judgments 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. B. "Extra contractual obligations" as used herein shall mean 80% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company as a result of an action against it by its insured or its insured's assignee, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. However, for the purposes of this Contract, extra contractual obligations arising out of any one loss occurrence shall not exceed 25% of the contractual loss under all policies involved in the loss occurrence. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. 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 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 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." B. 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. 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 this Contract, shall be binding upon the Reinsurer, and 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. 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 the reinsurance provided hereunder, the Company shall pay the Reinsurer .487% of its net earned premium for the term of this Contract, subject to a minimum premium of $380,000. B. The Company shall pay the Reinsurer a deposit premium of $475,000 in four equal installments of $118,750 on January 1, April 1, July 1 and October 1 of 1997. 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, Farmowners and Mobile Homeowners business, 70% of the total basic policy premium as respects Businessowners and Commercial Multiple Peril business 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 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. 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 expense 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 B(1) or B(3), or in the case of B(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 (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) 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 - Agency Agreement 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 XXV - 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 262 I Classes of Business Reinsured 262 II Term 263 III Territory 263 IV Exclusions 263 V Retention and Limit 265 VI Reinstatement 266 VII Definitions 266 VIII Other Reinsurance 267 IX Loss Occurrence 267 X Loss Notices and Settlements 267 XI Salvage and Subrogation 268 XII Premium 268 XIII Offset (BRMA 36C) 268 XIV Access to Records (BRMA 1D) 269 XV Net Retained Lines (BRMA 32E) 269 XVI Errors and Omissions (BRMA 14F) 269 XVII Currency (BRMA 12A) 269 XVIII Taxes (BRMA 50C) 269 XIX Federal Excise Tax (BRMA 17A) 270 XX Unauthorized Reinsurers 270 XXI Insolvency 271 XXII Arbitration (BRMA 6J) 272 XXIII Service of Suit (BRMA 49C) 273 XXIV Agency Agreement 273 XXV Intermediary (BRMA 23A) 273 TERM LOAN AGREEMENT NBD BANK, N.A., a national banking association (the "Bank") agrees to extend the loan described below (the "Loan") to MERIDIAN INSURANCE GROUP, INC. (the "Borrower") under the terms and conditions set forth in this agreement. 1. Definitions. As used herein, the following terms shall have the meanings hereinafter set forth: "Affiliates" means all stock insurance companies affiliated with the Borrower after consummation of the Transaction, including without limitation, Meridian Security, Vernon, Citizens Fund and ICO. "Available Ordinary Dividends" means for any fiscal year, the greater of ten percent (10.0%) of a company's or group of companies' statutory capital stock and surplus as of the preceding December 31 or its net income for the preceding calendar year as determined on a statutory basis. "Borrower" means Meridian Insurance Group, Inc. "Citizens" means prior to the consummation of the Transaction, Citizens Security Group, Inc., a publicly held Minnesota corporation, and after consummation of the Transaction, a Minnesota corporation which is an indirect wholly owned subsidiary of the Borrower. "Citizens Fund" means Citizens Fund Insurance Company, a Minnesota stock insurance company and a subsidiary of Citizens. "Citizens Mutual" means Citizens Security Mutual Insurance Company, a Minnesota mutual insurance company. "Debt Service Coverage Ratio" means at any point in time, the ratio of (i) the last calculated Available Ordinary Dividends for a company or group of companies as of the end of a calendar year, as derived from the last available annual statutory financial statements, to (ii) the combined aggregate of principal payments on borrowed funds to be made or accrued by such company or group of companies during the four fiscal quarters following the time of measurement and interest payments on borrowed funds made or accrued by such company or group of companies during the four fiscal quarters preceding the time of measurement . "ICO" means Insurance Company of Ohio, an Ohio stock insurance company and a wholly owned subsidiary of Citizens. "Meridian Mutual" means Meridian Mutual Insurance Company, an Indiana mutual insurance company. "Meridian Security" means Meridian Security Insurance Company, an Indiana stock insurance company which is a wholly owned subsidiary of the Borrower. "Transaction" means the creation of a Minnesota corporation wholly owned by the Borrower which will be merged with and into Citizens, the redemption and cancellation of all ownership by former Citizens shareholders leaving Citizens a wholly owned subsidiary of the Borrower and the entering into various reinsurance and pooling agreements and management services agreements which will affiliate the insurance companies owned and operated Meridian Mutual and by Citizens Mutual. "Vernon" means Vernon Fire and Casualty Insurance Company, an Indiana stock insurance company, which is a wholly owned subsidiary of the Borrower . 2. Loan and Purpose. The Bank agrees to extend the Loan to the Borrower, which will be an amortizing term loan in the initial amount of Twelve Million and 00/100 Dollars ($12,000,000). The Loan shall be evidenced by a Business Loan Note executed concurrently with this agreement (referred to in this agreement with all extensions, renewals and amendments as the "Note"). The proceeds of the Loan shall be used exclusively to consummate the Transaction. 3. Fees and Expenses. 3.1 Fees. Upon execution of this agreement, the Borrower shall pay the Bank a facility fee of $15,000.00. 3.2 Out-of-Pocket Expenses. In addition to any fee set forth in Section 3.1 above, the Borrower shall reimburse the Bank for its out-of-pocket expenses not part of its ordinary overhead, allocated to the Loan, which are customary in transactions similar to the Loan and typically paid by a borrower. 4. Security. Unless otherwise agreed to in the future, the Loan will be unsecured. 5. Affirmative Covenants. So long as the Loan remains outstanding, the Borrower, and each of its subsidiaries, will: 5.1 Insurance. Maintain insurance with financially sound and reputable insurers covering its properties and business against those casualties and contingencies and in the types and amounts as shall be in accordance with sound business and industry practices. 5.2 Existence. Maintain its existence and business operations as presently in effect in accordance with all applicable laws and regulations, pay its debts and obligations when due under normal terms, and pay on or before their due date all taxes, assessments, fees and other governmental monetary obligations, except as they may be contested in good faith if they have been properly reflected on its books and, at the Bank's request, adequate funds or security has been pledged to insure payment. 5.3 Pooling and Servicing Agreements. Maintain in full force and effect the pooling and reinsurance agreements among Meridian Mutual, Citizens Mutual and the Affiliates and the management services sharing agreements among Meridian Mutual, the Borrower, Citizens Mutual and the Affiliates and other affiliated companies related to certain operating expenses, as amended from time to time in the ordinary course of business. 5.4 Financial Records. Maintain proper books and records of account, in accordance with generally accepted accounting principles where applicable, and consistent with financial statements previously submitted to the Bank. 5.5 Financial Reports. Furnish to the Bank whatever information, books, and records the Bank may reasonably request, including at a minimum: A. Within 45 days after each quarterly period: (1) For Meridian Security and its Affiliates a combining statutory balance sheet as of the end of that period and a combining statutory statement of operations, policyholders' surplus and cashflow, from the beginning of that fiscal year to the end of that period, certified as correct, sub- ject to year-end adjustments, by one of its authorized agents. (2) A compliance certificate setting forth a calculation of any financial covenant required under this agreement, provided however that such compliance certificate need only calculate the risk based capital ratio on an annual basis. B. Within 60 days after the end of each of the first three quarterly periods: (1) A copy of SEC Form 10-Q for the Borrower. (2) A copy of the shareholders report sent by the Borrower to its shareholders. C. Within 90 days after each annual fiscal period: (1) A copy of the annual certification of reserves filed by Meridian Security and the Affiliates. (2) A copy of the management discussion and analysis for Meridian Security and its Affiliates. (3) A detailed set of the combined annual statutory financial statements Meridian Security and its Affiliates including all exhibits and schedules as filed with the Indiana Department of Insurance or the Minnesota Department of Insurance. ii. Within 120 days after each annual fiscal period: (1) The annual SEC Form 10-K filed by the Borrower. (2) A copy of the annual shareholders' report for the Borrower. iii. Within 150 days after each annual period: (1) For Meridian Security and Affiliates, a combined statutory balance sheet as of the end of that period and a combined statutory statement of operations, policy holders surplus and cashflow, from the beginning of that fiscal year to the end of that period, audited and certified by an independent certified public accountant. 2. Negative Covenants. a. Unless otherwise noted, the financial requirements set forth in this Section 6 shall be computed in accordance with statutory accounting principles applied on a basis consistent with financial statements previously submitted by the Borrower to the Bank. b. Without the written consent of the Bank, so long as any loan remains outstanding, the Borrower will not: (where appropriate, covenants shall apply on a consolidated basis) i. Risk Based Capital. Permit the ratio of the combined total adjusted capital of Meridian Mutual, Meridian Security and its Affiliates to its company action level to be less than 200.0%, as calculated at the end of each fiscal year. ii. Debt Service Coverage Ratio. Permit its Debt Service Coverage Ratio to be less than 1.5 to 1.0 for any consecutive four (4) fiscal quarters. iii. Total Debt Ratio. Permit the ratio of (i) the total liabilities for borrowed money and capitalized leases of Borrower, Meridian Security and its Affiliates, to (ii) the sum of combined policyholders' surplus and liabilities for borrowed money and capitalized leases to be greater than .20 to 1.00. iv. Policyholders' Surplus. Permit the policyholders' surplus of Meridian Security and its Affiliates to be less than $75,000,000, which minimum amount will increase at each fiscal year end by 25.0% of the combined statutory net income of Meridian Security and its Affiliates. v. Investment in Meridian Security. Permit its ownership of the outstanding shares of Meridian Security to be less than 100.0% of the total number of shares issued and outstanding of Meridian Security. vi. Debt. Incur, or permit to remain outstanding, debt for borrowed money or installment obligations, except (i) debt reflected in the latest financial statement of the Borrower furnished to the Bank prior to execution of this agreement and which is not to be paid with proceeds of the Loan, (ii) debt to the Bank, and (iii) other debt which would not give rise to a violation of any of the terms and conditions of this Agreement. For purposes of this covenant, capitalized leases and the sale of any accounts receivable shall be deemed the incurring of debt for borrowed money. vii. Liens. Create or permit to exist any lien on any of its property, real or personal, except: existing liens known to the Bank; liens to the Bank; liens incurred in the ordinary course of business securing current nondelinquent liabilities for taxes, worker's compensation, unemployment insurance, social security and pension liabilities; and liens being contested in good faith. viii.Mergers, Sales, Consolidations. Consolidate with or merge into any other entity, or permit any entity to merge into it; convey, lease or sell all or a material portion of its assets or business, except in the ordinary course of business; or lease, purchase or otherwise acquire all or a material portion of the assets or business of any other entity, except in the ordinary course of business. Notwithstanding the foregoing: (a) The Borrower may merge or consolidate with another entity or acquire the all or a material part of the assets of another entity, provided that the Borrower, as a continuing entity, shall be the surviving corporation and immediately after the consummation of any such transaction, and after giving effect to it and to any concurrent transactions, no Event of Default would exist; and (b) The Borrower may sell any of its assets outside the ordinary course of business to any other entity, provided that (i) in the opinion of the Board of Directors of the Borrower the transaction is for fair value and is in the best interests of the Borrower, and (ii) immediately after the consummation of and after giving effect to the transaction, no Event of Default would exist. 3. Representation. Borrower represents that it is a corporation duly organized and existing under the laws of the State of Indiana, and that the execution and delivery of this agreement and the Notes, and the performance of the obligations they impose, are within its corporate powers, have been duly authorized by all necessary action of its board of directors and do not contravene the terms of its articles of incorporation or by-laws. Borrower represents that the execution and delivery of this agreement and the Note, and the performance of the obligations they impose, do not violate any law, do not conflict with any agreement by which it is bound, do not require the consent or approval of any governmental authority or any third party, and that this agreement and the Notes are valid and binding agreements, enforceable in accordance with their terms. Borrower also represents that the Notes evidence business loans exempt from the Federal Truth In Lending Act (15 USC 1601, et seq), the Federal Reserve Board's Regulation Z (12 CFR 226, et seq), and the Indiana Uniform Consumer Credit Code (IC 24-4.5-1- 101, et seq). Borrower further represents that all balance sheets, profit and loss statements, and other financial statements, if any, furnished to the Bank are accurate and fairly reflect the financial condition of the organizations and persons to which they apply on their effective dates, including contingent liabilities of every type, which financial condition has not changed materially and adversely since those dates. 4. Acceleration. a. Events of Default/Acceleration. If any of the following events occurs: i. The Borrower fails to pay when due any amount payable under the Loan; ii. The Borrower (a) fails to observe or perform any other term of this agreement or the Notes; (b) makes any materially incorrect or misleading representation, warranty, or certificate to the Bank; (c) makes any materially incorrect or misleading representation in any financial statement or other information delivered to the Bank; or (d) defaults under the terms of any agreement or instrument relating to any debt for borrowed money (other than the Loans) such that the creditor declares the debt due before its maturity; iii. There is a default under the terms of any mortgage, security agreement or any other document executed in connection with the Loan; iv. A "reportable event" (as defined in the Employee Retirement Income Security Act of 1974 as amended) occurs that would permit the Pension Benefit Guaranty Corporation to terminate any employee benefit plan of the Borrower or any affiliate of the Borrower; v. The Borrower or any Affiliate becomes insolvent or unable to pay its debts as they become due; vi. The Borrower or any Affiliate (a) makes an assignment for the benefit of creditors; (b) consents to the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (c) commences any proceeding under any bankruptcy, reorganization, liquidation or similar laws of any jurisdiction; vii. A custodian, receiver or trustee is appointed for the Borrower or any Affiliate or for a substantial part of its assets without its consent and is not removed within 60 days after such appointment; viii.Proceedings are commenced against the Borrower or any Affiliate under any bankruptcy, reorganization, liquidation, or similar laws of any jurisdiction, and such proceedings remain undismissed for 60 days after commencement; or the Borrower consents to the commencement of such proceedings; ix. Any judgment is entered against the Borrower or any Affiliate and any attachment, levy or garnishment is issued against any property of the Borrower; or x. There is a substantial change in the management or ownership, or the existing or prospective financial condition of the Borrower which the Bank reasonably and in good faith determines to be materially adverse; then, whether or not the Bank has made demand, the Loans shall become due immediately, without notice, at the Bank's option. 5.6 Remedies. If the Loans are not paid at maturity, whether by acceleration or otherwise, the Borrower and Bank shall have all of the rights and remedies provided by any law or agreement. Any requirement of reasonable notice shall be met if the Bank sends the notice to the Borrower at least twenty one (21) days prior to the date of sale, disposition or other event giving rise to the required notice. The Borrower shall be liable for any deficiency remaining after disposition of any Collateral, and waives all valuation and appraisement laws. The Borrower is liable to the Bank for all reasonable costs and expenses of every kind incurred in the making or collection of the Loan, including, without limitation, reasonable attorneys' fees and court costs. These costs and expenses shall include, without limitation, any costs or expenses incurred by the Bank in any bankruptcy, reorganization, insolvency or other similar proceeding. 6. Miscellaneous. 6.1 Notice from one party to another relating to this agreement shall be deemed effective if made in writing (including telecommunications) and delivered to the recipient's address, telex number or facsimile number set forth under its name below by any of the following means: (a) hand delivery, (b) registered or certified mail, postage prepaid, with return receipt requested, (c) first class or express mail, postage prepaid, (d) Federal Express, Purolator Courier or like overnight courier service. Notice made in accordance with this section shall be deemed delivered upon receipt if delivered by hand 3 business days after mailing if mailed by first class, registered or certified mail, or one business day after mailing or deposit with an overnight courier service if delivered by express mail or overnight courier. 6.2 No delay on the part of the Bank in the exercise of any right or remedy shall operate as a waiver. No single or partial exercise by the Bank of any right or remedy shall preclude any other future exercise of it or the exercise of any other right or remedy. No waiver or indulgence by the Bank of any default shall be effective unless in writing and signed by the Bank, nor shall a waiver on one occasion be construed as a bar to or waiver of that right on any future occasion. 6.3 This agreement, the Note, and any related loan documents embody the entire agreement and understanding between the Borrower and the Bank and supersede all prior agreements and understandings relating to their subject matter. If any one or more of the obligations of the Borrower under this agreement or the Note shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Borrower shall not in any way be affected or impaired, and such validity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Borrower under this agreement or the Note in any other jurisdiction. 6.4 This agreement is delivered in the State of Indiana and governed by Indiana law. This agreement is binding on the Borrower and its successors, and shall inure to the benefit of the Bank, its successors and assigns. 6.5 Section headings are for convenience of reference only and shall not affect the interpretation of this agreement. 7 WAIVER OF JURY TRIAL BY BANK AND BORROWER. The Bank and the Borrower, after consulting or having had the opportunity to consult with counsel, knowingly, voluntarily and intentionally waive any right either of them may have to a trial by jury in any litigation based upon or arising out of this agreement or any related instrument or agreement or any of the transactions contemplated by this agreement or any course of conduct, dealing, statements (whether oral or written), or actions of either of them. Neither the Bank nor the Borrower shall seek to consolidate, by counterclaim or otherwise, any action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. These provisions shall not be deemed to have been modified in any respect or relinquished by either the Bank or the Borrower except by a written instrument executed by both of them. Dated: ________________, 1996 MERIDIAN INSURANCE GROUP, INC. By: ________________________________ Norma J. Oman, President and Chief Executive Officer Address: P.O. Box 1980 Indianapolis, Indiana 46206-1980 Tel.: _____________________ Fax: _____________________ NBD BANK, N.A. By: ________________________________ Charles A. Liles, Authorized Agent Address: One Indiana Square, Suite 308 Indianapolis, Indiana 46266 Tel.: (317) 266-6540 Fax: (317) 266-6042 BUSINESS CREDIT NOTE Due: August 1, 2003 $12,000,000.00 Note No. _________________ Date: ____________, 1996 Account No. _______________ Promise to Pay: On or before August 1, 2003, for value received, the undersigned MERIDIAN INSURANCE GROUP, INC. ("Borrower") promises to pay to NBD BANK, N.A., a national banking association (the "Bank") or order, at any office of the Bank in Indiana, the sum of TWELVE MILLION AND 00/100 DOLLARS ($12,000,000.00) or such lesser sum as is indicated on Bank records as having been disbursed by the Bank to or for the benefit of Borrower, plus interest as hereinafter described. .1 Definitions. In addition to the terms defined elsewhere in this Note, the following terms have the meanings indicated for purposes of this Note: A "Adjustment Date" means any date specified on which the Borrower elects to convert an Advance of any type to an Advance of another type. B "Advance" means a loan made by Bank to the Borrower pursuant to this Note and the Agreement which may be a Variable Rate Advance, a Eurodollar Advance or a Fixed Rate Advance. C "Agreement" means the Term Loan Agreement between the Borrower and Bank of even date, as amended or supplemented from time to time. D "Applicable Margin" means with respect to Eurodollar Advances one half of one percent (0.5%) per annum. E "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of Indiana are authorized or required to close under the laws of the State of Indiana, and, if the applicable Business Day relates to any Eurodollar Advance, means such a day on which dealings in dollars are also carried on in the London interbank market. F "Eurocurrency Liabilities" has the meaning assigned to such term in Regulation D of the Federal Reserve Board, as in effect from time to time. G "Eurodollar Advance" means that amount of the Loan on which interest is or is to be calculated with reference to the Eurodollar Rate. H "Eurodollar Rate" means, for each Interest Period for a Eurodollar Advance, an interest rate per annum determined pursuant to the following formula: Eurodollar Rate = LIBOR 1.00-Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means, for each Interest Period in respect of a Eurodollar Advance, the maximum reserve percentage in effect on the date LIBOR for such Interest Period is determined (whether or not applicable to the Bank) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period; and "LIBOR" means, for each Interest Period in respect of a Eurodollar Advance, the rate of interest determined by the Bank to be the rate of interest at which dollar deposits for such Interest Period and in an amount approximately equal to the principal amount of the Eurodollar Advance to be made or maintained by the Bank during such Interest Period would be offered to major banks in the London interbank market at their request at or about 11:00 a.m. (London time) on the second Business Day before the commencement of such Interest Period. I "Federal Funds Rate" means, for any period a fluctuating interest rate per annum equal for each day during such period to (i) the weighed average of the rate on overnight Federal fund transactions with members of the Federal Reserve System arranged by Federal fund brokers, as published for such day (or if such day is not a Business day, for the preceding Business Day) by the Federal Reserve Bank of New York, or, (ii) if such rate is not so published for any day which is a Business Day, the average of the quotation for such day such transaction received by the Bank from three (3) Federal fund brokers of recognized standing selected by Bank. J "Federal Reserve Board" means the Board of Governors of the Federal Reserve System of the United States of America or any successor thereof. K "Fixed Rate" means _______________ percent (______%) per annum. L "Fixed Rate Advance" means the amount of principal of this note on which interest is or is to be calculated with respect to the Fixed Rate. M "Interest Period" shall mean: (1) With respect to each Eurodollar Advance, the period commencing on the Business Day such Advance is disbursed or on the Adjustment Date on which an Advance is converted to such Eurodollar Advance and ending on the date one (1), two (2) or three (3) months thereafter as selected by the Borrower pursuant to Section 2 (b); provided: _ In the case of continuation of a Eurodollar Advance pursuant to Section 3, the Interest Period applicable after the continuation of such Advance shall commence on the last day of the preceding Interest Period; _ Any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the preceding Business Day; and _ Any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is not a numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period. (1) With respect to a Variable Rate Advance, the period commencing on the Business Day such Advance is disbursed or on the Adjustment Date on which an Advance is converted to such Variable Rate Advance and ending on a date such Variable Rate Advance is converted to an Advance of any other type as selected by the Borrower pursuant to Section 2 (b); provided any Interest Period which would end on a day which is not a Business Day shall be extended to the next succeeding Business Day. (2) Notwithstanding anything to the contrary contained in this definition of Interest Period, the Borrower may not select an Interest Period for any Advance which ends after the maturity of this note. ii. "Interest Period Payment Date" means the first day of each February, May, August and November. iii. "Prime Rate" means that rate of interest announced from time to time by NBD Bank, N.A. as its prime rate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Bank may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. iv. "Variable Rate Advance" means the amount of principal of this note on which interest is or is to be calculated with respect to the Variable Rate. v. "Variable Rate" means the higher of (i) the Federal Funds Rate plus one half of one percent per annum (0.5%), or (ii) the "Prime Rate". b. Advances. i. The entire principal balance of this Note shall be disbursed to or for the benefit of the Borrower at once, and once repaid, may not be reborrowed. The Borrower shall designate whether the principal balance of this Note shall bear interest at (i) one or more fluctuating rates (a "Fluctuating Rate") equal to either (a) the Variable Rate, or (b) a a rate indexed to a Eurodollar Rate, with Interest Periods selected by the Borrower, or (ii) the Fixed Rate. The Borrower shall designate which part of the original balance of this Note be allocated to bear interest at a Fixed Rate (the "Fixed Rate Component"), and which part at a Fluctuating Rate (the "Fluctuating Rate Component"). If Borrower elects to have any part of the principal of this Note bear interest at a Eurodollar Rate, the Borrower shall submit a request in accordance with the terms of this Section, a request ("Request") specifying the amount thereof, and the Interest Period related thereto. N Each Eurodollar Advance shall not be less than $500,000.00 and any higher integral multiple of $100,000.00 thereof, and there shall not be more than five Eurodollar Advances outstanding hereunder at any point in time; O The Requests for Eurodollar Advances must take cognizance of the required principal payments hereunder, and Interest Periods must be scheduled to avoid the requirement for prepayment of a Eurodollar Advance if a principal payment is required to be made hereunder. P Each Request, which shall be irrevocable once received, must be received by the Bank not later than 11:00 a.m., Indianapolis time, on the day such Advance is to be made if such Advance is a Variable Rate Advance and two (2) days prior to the day on such Advance is to be made if such Advance is a Eurodollar Advance. Requests may be made by telephone and Bank may, without further inquiry, rely on such telephonic requests as the act of the Borrower through any individual authorized by the Borrower in operating resolutions supplied from time to time by the Borrower to the Bank. Q The Bank will advance to the Borrower the amount so requested unless the Bank determines that any condition precedent set forth in the Agreement shall not be fulfilled as of the date of such Advance. All Advances will be made to the Borrower by a credit to the Borrower's account maintained at the Bank, or as otherwise directed by the Borrower. R All notices, (including Requests) received by the Bank after 11:00 a.m. Indianapolis time (or such other time as is specified in any section hereof) on a Business Day shall be deemed received on the next succeeding Business Day. .2 Conversion and Renewal of Advances. A The Borrower may, subject to the terms hereof, upon notice to the Bank received not later than 11:00 a.m. Indianapolis time, on the day of the proposed conversion or renewal and two (2) days on a Eurodollar Advance prior to the relevant Adjustment Date: (1)Elect to convert on any Business Day all or any portion of any Variable Rate Advance into a Eurodollar Advance; (2)Elect to convert on any Interest Period Payment Date, all or any portion of any Eurodollar Rate Advance maturing on such Interest Period Payment Date into a Variable Rate Advance; or (3)Elect to renew, on any Interest Period Payment Date, all or any portion of any Eurodollar Advance maturing on such Interest Period Payment Date by selecting the duration of the next Interest Period thereof; provided, however, that if any such Eurodollar Rate Advance is a Eurodollar Advance with an outstanding principal balance of less than Five Hundred Thousand and 00/100 Dollars ($500,000.00), such Advance shall be renewed as a Variable Rate Advance, and further provided, that any such Advance subject to renewal shall automatically convert to a Variable Rate Advance if the Borrower fails to convert such Advance to another type of Advance; B If, upon the expiration of any Interest Period applicable to an Advance, the Borrower has failed to select a new Interest Period to be applicable to such Advance, the Borrower shall be deemed to have elected to convert such Advance into a Variable Rate Advance effective as of the expiration of the current Interest Period applicable thereto; C Subject to the other provisions of this Agreement, if a Variable Rate is converted to or renewed as a Eurodollar Advance, the Borrower shall repay the principal amount of such Advance on the last day of the Interest Period applicable thereto with either a Variable Rate Advance or a Eurodollar Advance with the same or another Interest Period. .3 Interest. A Each Advance shall bear interest on the outstanding principal balance thereof from the date made until the due date, at a rate per annum equal to the Eurodollar Rate plus the Applicable Margin, or Variable Rate, or the Fixed Rate, as the case may be. B Interest shall be payable on each Interest Period Payment Date. C All computations of interest and fees under this Agreement shall be made on the basis of a year of three hundred sixty (360) days and calculated for the actual days elapsed. Interest shall accrue on any principal balance outstanding from and including the date of an Advance to but excluding the date on which such principal balance is repaid. D Notwithstanding anything to the contrary in this Agreement, all principal hereunder not paid when due, whether by lapse of time or by acceleration, shall bear interest after maturity at a rate equal to three percent (3.0%) per annum plus the otherwise applicable rate. .4 Repayment of Principal. Each Eurodollar Advance shall mature and the principal amount thereof shall be due and payable on the last day of the Interest Period for such Eurodollar Advance, subject however to the Borrower's rights to renew or convert such Eurodollar Advance, and further subject to the principal reduction requirements hereinafter set forth. In addition to interest, the Borrower will be obligated to make quarterly principal reductions, due on the first day of each February, May, August and November, commencing November 1, 1996, in accordance with the following schedule: from November 1, 1996 through August 1, 1997 - $125,000 from November 1, 1997 through August 1, 1998 - $250,000 from November 1, 1998 through August 1, 1999 - $375,000 from November 1, 1999 through August 1, 2001 - $500,000 from November 1, 2001 through August 1, 2003 - $625,000 The principal payments made shall be applied to the Fluctuating Rate Component and the Fixed Rate Component of this Note on a pro-rata basis, based on the percentage of each component designated by the Borrower at execution of this Note. 6. Prepayment. A The Borrower may not prepay a Eurodollar Advance at any time prior to the last day of the Interest Period applicable thereto, and/or may not prepay this note if it is bearing interest at the Fixed Rate prior to its maturity, without paying a premium calculated by the Bank equal to the Bank's investment loss, if any, assuming a reinvestment of prepaid funds in U.S. Treasury obligations of comparable maturities to the amounts being prepaid. B The Borrower may prepay a Variable Rate Advance at any time without premium or penalty. .6 Method of Payment. Each payment of principal, due under this note shall be made by the Borrower to the Bank at its main office in Indianapolis, Indiana and each payment of interest and other sums due under this Agreement shall be made without set-off or counterclaim in immediately available funds on a Business Day not later than 11:00 a.m. Indianapolis time. All sums received after such time shall be deemed received on the next Business Day. Any payment due on a day that is not a Business Day shall be made on the next Business Day. .7 Evidence of Credit Extensions. Bank shall record the date, amount and maturity of each Advance and the amount of each payment of principal made by the Borrower with respect thereto on the grids attached thereto or, at the option of the Bank, in its records, and Bank's record shall be conclusive absent manifest error. Any statement of the Bank to the Borrower setting forth the Borrower's account regarding the Advances and payments shall be considered true and correct and binding on the Borrower unless Bank is notified in writing of any discrepancy or exception within thirty (30) days from the mailing by the Bank to the Borrower of any such monthly statement. Notwithstanding the foregoing, the failure to make, or an error in making, a notation with respect to any Advance shall not limit or otherwise affect the obligation of the Borrower hereunder or under this Note. .8 Increased Cost. If any applicable domestic or foreign law, treaty, rule or regulation now or later in effect or any interpretation or administration thereof by any governmental authority charged with its interpretation or administration, or compliance by the Bank with any guideline, request or directive of such an authority (whether or not having the force of law), including any risk-based capital guidelines, affects or would affect the amount of capital required or expected to be maintained by the Bank with respect to this note if it is bearing interest at a Fixed Rate and the Bank determines that the amount of such capital is increased by or based upon the existence of the Bank's obligations under this agreement and the increase has the effect of reducing the rate of return on such Fixed Rate to a level below that which the Bank could have achieved but for such circumstances by an amount deemed by the Bank to be material, then the Borrower shall pay to the Bank, from time to time, upon request by the Bank, additional amounts sufficient to compensate the Bank for any increase in the amount of capital and reduced rate of return which the Bank reasonably determines to be allocable to the existence of the Bank's obligations under this agreement. A statement as to the amount of such compensation, prepared in good faith and in reasonable detail by the Bank and submitted by the Bank to the Borrower, shall be conclusive for all purposes absent manifest error in computation. RELATED DOCUMENTS: The terms of any other document executed as part of the loan evidenced by this note are incorporated by reference. EVENTS OF DEFAULT/ACCELERATION: If any event of default described in the Agreement occurs or is continuing, then this note shall become due immediately, without notice, at the Bank's option. REMEDIES: If this note is not paid at maturity, whether by demand, acceleration or otherwise, the Bank shall have all of the rights and remedies provided by any law or agreement. Any requirement of reasonable notice shall be met if the Bank sends the notice to the Borrower at least seven (7) days prior to the date of sale, disposition or other event giving rise to the required notice. The Borrower is liable to the Bank for all reasonable costs and expenses of every kind incurred in the making or collection of this note, including, without limitation, reasonable attorneys' fees and court costs. These costs and expenses shall include, without limitation, any costs or expenses incurred by the Bank in any bankruptcy, reorganization, insolvency or other similar proceeding. WAIVER: Each endorser and any other party liable on this note severally waives demand, presentment, notice of dishonor and protest, and consents to any extension or postponement of time of its payment without limit as to the number or period, to any substitution, exchange or release of all or any part of the Collateral, to the addition of any party, and to the release or discharge of, or suspension of any rights and remedies against, any person who may be liable for the payment of this note. No delay on the part of the Bank in the exercise of any right or remedy shall operate as a waiver. No single or partial exercise by the Bank of any right or remedy shall preclude any other future exercise of it or the exercise of any other right or remedy. No waiver or indulgence by the Bank of any default shall be effective unless in writing and signed by the Bank, nor shall a waiver on one occasion be construed as a bar to or waiver of that right on any future occasion. MISCELLANEOUS: This note shall be binding on Borrower and its successors, and shall inure to the benefit of the Bank, its successors and assigns. Any reference to the Bank shall include any holder of this note. This note is governed by Indiana law. Section headings are for convenience of reference only and shall not affect the interpretation of this note. This note and any related loan documents embody the entire agreement between the Borrower and the Bank regarding the terms of the loan evidenced by this note and supersede all oral statements and prior writings relating to that loan. WAIVER OF JURY TRIAL BY BANK AND BORROWER: The Bank and the Borrower, after consulting or having had the opportunity to consult with counsel, knowingly, voluntarily and intentionally waive any right either of them may have to a trial by jury in any litigation based upon or arising out of this note or any related instrument or agreement or any of the transactions contemplated by this note or any course of conduct, dealing, statements (whether oral or written), or actions of either of them. Neither the Bank nor the Borrower shall seek to consolidate, by counterclaim or otherwise, any action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. These provisions shall not be deemed to have been modified in any respect or relinquished by either the Bank or the Borrower except by a written instrument executed by both of them. MERIDIAN INSURANCE GROUP, INC. By:_______________________________________ Norma J. Oman, President and Chief Executive Officer P.O. Box 1980 Indianapolis, IN 46206-1980 Tel: (317) __________________ Fax: (317) __________________ Borrower hereby designates that: an initial amount of $0.00 or 0.0% of the principal balance of this Note will bear interest at the Fixed Rate; and an initial amount of $12,000,000.00 or 100.0% of the principal balance of this Note will bear interest at a Fluctuating Rate. MERIDIAN INSURANCE GROUP, INC. By:_______________________________________ Norma J. Oman, President and Chief Executive Officer P.O. Box 1980 Indianapolis, IN 46206-1980 Tel.: (317) __________________ Fax: (317) __________________ DRAFT CLOSING CHECKLIST BORROWER: MERIDIAN INSURANCE GROUP, INC. LENDER: NBD BANK, N.A., a national banking association LOAN: $ 12,000,000 Term Loan PURPOSE : Capital contribution to subsidiary to accomplish the acquisition of Citizens Security Group, Inc. and its affiliates, and affiliation of Meridian entities with Citizens entities ENABLING DOCUMENTS 8 Copy of articles of incorporation, bylaws 9 Certificate of existence 10 Resolution authorizing borrowing 11 Opinion of Counsel LOAN DOCUMENTS 12 Term Loan Agreement 13 Note MISCELLANEOUS 14 Copy of filed plan of merger (Certificate of merger to follow) 15 Copy of replacement Reinsurance Pooling Agreement, including Citizens entities 16 Copy of executed Management Services Sharing Agreements, including Citizens entities 17 Copy of closing statement for Acquisition and Affiliation Transaction 18 Closing Statement for Loan NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made this 3rd day of March, 1997, between Meridian Insurance Group, Inc., with its principal office at Indianapolis, Indiana, (hereinafter called the "Corporation") and ________________________________, residing at _________________, ________, __________, __________, (hereinafter called the "Employee"). WITNESSETH THAT: WHEREAS, the directors of the Corporation adopted the 1996 Employee Incentive Stock Plan (the "Plan") on December 6, 1995, and the shareholders of the Corporation approved the Plan at their meeting held on May 1, 1996; 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 ________ shares of the Corporation's common shares at a price of $15.75 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 on such dates: one-third (1/3) on March 3, 1998, one-third (1/3) on March 3, 1999, and one- third (1/3) on March 3, 2000. No part of the Option shall lapse by reason of any omission to exercise the Option or any part thereof prior to March 3, 2007. 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 1996 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___________________________________________ Printed________________________________________ Title___________________________________________ Employee_______________________________________ INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT, made this 3rd day of March, 1997, by and between Meridian Insurance Group, Inc., with its principal office at Indianapolis, Indiana (hereinafter called the "Corporation"), and ______________________, residing at _______________________, ___________, ___________, __________, (hereinafter called the "Employee"). WITNESSETH THAT: WHEREAS, the directors of the Corporation adopted the 1996 Employee Incentive Stock Plan (the "Plan") on December 6, 1995, and the shareholders of the Corporation approved the Plan at their meeting held on May 1, 1996; 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 _______ shares of the Corporation's common shares at a price of $15.75 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 on such dates: one-third on March 3, 1998; one-third on March 3, 1999, and one-third on March 3, 2000. No part of the Option shall lapse by reason of any omission to exercise the Option or any part thereof prior to March 3, 2007. 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 1996 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 months 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-month 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 months 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 so 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 my 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:_____________________________ Employee Title:____________________________ MERIDIAN INSURANCE PARTICIPANT DESCRIPTION FISCAL YEAR 1996 ANNUAL EXECUTIVE INCENTIVE PLAN Participant Name: Title: PURPOSE Meridian's 1996 Annual Incentive Plan is designed to provide you with a very competitive opportunity to increase your cash compensation and your ownership of MIGI stock for the attainment of the annual financial objectives. You have been selected to participate in this plan because you are in a position to substantially influence the accomplishment of the corporate objectives. 1996 ANNUAL PLAN CONCEPTS The Plan is structured to pay a cash award based on meeting or exceeding the 1996 combined pre-tax income goals of the property- casualty operations. Each plan participant's total award is based on how well the companies do overall. The size of your cash award may vary from ThresholdPercent to MaximumPercent of your annual base salary as of December 31, 1996, and is based on meeting at least the threshold pre-tax income goal. PLAN DETAILS The target cash award amount is calculated as a percent of your 1996 year-end salary. For example, your target cash bonus is TargetPercent. Using your salary as of December 31, 1995, your target award would be $TargetAward. No incentive plan payment shall be made to any plan participant in years when the pre-tax income result fails to meet a minimum acceptable level. For fiscal year 1996, no incentives shall be paid if the combined pre-tax income is less than $X. The corporate goals are established each year as part of the budgeting process. Applicable company goals and your accompanying awards are as follows: CORPORATE FINANCIAL PERFORMANCE Award Payout Schedule as a % of Base Salary Pre-Tax Income Your Award Potential Maximum (120% of $X X% of base salary goal) Target (100% of $X X% of base salary goal) Threshold (80% of $X X% of base salary goal) Pre-tax income results must fully reach the threshold level to result in an award payout. The award will be pro-rated for results between threshold and maximum pre-tax income levels. For example, if pre-tax income is $X (halfway between target and maximum), then your bonus would be X percent (or halfway between the target and maximum award). The Company has been motivated to adopt this plan, in part, to encourage and allow participants to increase their equity holdings in MIGI. As always, the timing of stock purchase(s) should be consistent with the safe harbor periods permitted by insider trading requirements. The Legal Department or Human Resources should be contacted in advance of any MIGI stock transaction to verify permissible timeframes. AWARD PAYMENT Barring unforeseen circumstances, individual cash awards will be finalized after the close of the fiscal year for payment in March. Normally, the award will be paid in cash at that time. All appropriate taxes will be deducted from the award payment. TERMINATION OF EMPLOYMENT No bonuses are payable in the event of a participant's termination during the Plan year other than by death, permanent disability or normal retirement, in which event a discretionary payment may be made. Generally, in order to be eligible for a bonus payout, the participant must be a full-time active employee of the Company at the time of the cash bonus payment. An employee for whom a formal leave of absence has been granted by the Company may be construed to be a full-time active employee of the Company at the time of cash bonus payment with the approval of the President. The Joint Compensation Committee reserves the right to modify or terminate this incentive plan as necessary. MERIDIAN INSURANCE PARTICIPANT DESCRIPTION FISCAL YEAR 1997 ANNUAL EXECUTIVE INCENTIVE PLAN Participant Name: Title: PURPOSE Meridian's 1997 Annual Incentive Plan is designed to provide you with a very competitive opportunity to increase your cash compensation and your ownership of MIGI stock for the attainment of the annual financial objectives. You have been selected to participate in this plan because you are in a position to substantially influence the accomplishment of the corporate objectives. 1997 ANNUAL PLAN CONCEPTS The Plan is structured to pay an award in cash, in Meridian Insurance Group, Inc. stock or a combination of both, based on meeting or exceeding the 1997 consolidated combined pre-tax income goals of the property-casualty operations. Each plan participant's total award is based on how well the companies do overall. The size of your cash award may vary from ThresholdPercent percent to MaximumPercent percent of your annual base salary as of December 31, 1997, and is based on meeting at least the threshold pre-tax income goal. PLAN DETAILS The target cash award amount is calculated as a percent of your 1997 year-end salary. For example, your target cash bonus is TargetPercent percent. Using your salary as of December 9, 1996, your target award would be $TargetAward. No incentive plan payment shall be made to any plan participant in years when the pre-tax income result fails to meet a minimum acceptable level. For fiscal year 1997, no incentives shall be paid if the combined pre-tax income is less than $X. The corporate goals are established each year as part of the budgeting process. Applicable company goals and your accompanying awards are as follows: CORPORATE FINANCIAL PERFORMANCE Award Payout Schedule as a % of Base Salary Pre-Tax Income Your Award Potential Maximum (120% of $X X% of base salary goal) Target (100% of $X X% of base salary goal) Threshold (80% of $X X% of base salary goal) Pre-tax income results must fully reach the threshold level to result in an award payout. The award will be pro-rated for results between threshold and maximum pre-tax income levels. For example, if pre-tax income is $X (halfway between target and maximum), then your bonus would be ExamplePercent percent (or halfway between the target and maximum award). The Company has been motivated to adopt this plan, in part, to encourage and allow participants to increase their equity holdings in MIGI. As always, the timing of stock purchase(s) should be consistent with the safe harbor periods permitted by insider trading requirements. The Legal Department or Human Resources should be contacted in advance of any MIGI stock transaction to verify permissible timeframes. AWARD PAYMENT Barring unforeseen circumstances, individual cash awards will be finalized after the close of the fiscal year for payment in March. The award is payable in cash, in stock of Meridian Insurance Group, Inc. or a combination of both payment methods. All appropriate taxes will be deducted from the award payment. TERMINATION OF EMPLOYMENT No bonuses are payable in the event of a participant's termination during the Plan year other than by death, permanent disability or normal retirement, in which event a discretionary payment may be made. Generally, in order to be eligible for a bonus payout, the participant must be a full-time active employee of the Company at the time of the cash bonus payment. An employee for whom a formal leave of absence has been granted by the Company may be construed to be a full-time active employee of the Company at the time of cash bonus payment with the approval of the President. The Joint Compensation Committee reserves the right to modify or terminate this incentive plan as necessary. DIRECTORS' NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made this ___day of _______, 199__, between Meridian Insurance Group, Inc., with its principal office at Indianapolis, Indiana, (hereinafter called the "Corporation") and ____________________________, residing at _________________________________, _________, __________, ___________, (hereinafter called the "Director"). WITNESSETH THAT: WHEREAS, the Directors of the Corporation adopted the 1994 Outside Directors' Stock Option Plan (the "Plan") on March 4, 1994, and the shareholders of the Corporation approved the Plan at their meeting held on May 4, 1994; and WHEREAS, the Director has been designated, in accordance with the terms of the Plan, as a Director 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 Director, 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 $___ per share. This Option is for all purposes pursuant and subject to the provisions of the Plan, and the Director 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 ________________, 199__, provided the Director is a member of the Board of Directors of the Corporation on such date. No part of the Option shall lapse by reason of any omission to exercise the Option or any part thereof prior to _____________, 200__. 3. This Option may be exercised only by written notice to the Corporation specifying the number of shares, which may not be less than 100 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 Director 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 Director. 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 Director 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 Director, and upon giving of any such notice, all Options shall become immediately exercisable in full; 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 Director, and upon giving of any such notice, all Options shall become immediately exercisable in full, and all rights of the Director under this Agreement shall be deemed to be terminated upon such dissolution or liquidation. 6. The Director 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 Director 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 Director 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 Director 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 Director 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 Director 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 Director shall cease to be a Director of a Company in the Meridian Group (as defined in the 1994 Outside Directors' Stock Option Plan) for reasons other than death, the Director 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) Should the Director die either while serving as an Outside Director of a Company in the Meridian Group or after termination of such service, the Option rights of the deceased Director may be exercised by his or her Personal Representative until the earlier of one year after the Director's death or three years after his or her termination of service 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 Director granted an Option should die within thirty days prior to the expiration date of such Option, if on the date of death the Director was then entitled to exercise such Option, and if the Option expires without being exercised, the Personal Representative of the Director shall receive in settlement a cash payment from the Corporation 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. 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 Director 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. 11. 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 Director. 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:______________________________________ Printed:___________________________________ Title:_____________________________________ Director___________________________________ DEFERRED COMPENSATION PLAN AGREEMENT THIS AGREEMENT, made and entered into as of this 1st day of August, 1995, by and between Citizens Security Mutual Insurance Company, a Minnesota corporation, with principal offices in Red Wing, Minnesota (hereinafter referred to as the "Company"), and Scott Broughton, an individual residing in the City of Red Wing, Minnesota (hereinafter referred to as the "Employee"), WITNESSETH THAT: WHEREAS, the Employee is employed by the Company; and WHEREAS, the Company recognizes the valuable services heretofore performed for it by the Employee and wishes to encourage his continued employment; and WHEREAS, the Employer wishes to provide Employee with deferred compensation and Employee wishes to defer such compensation; and WHEREAS, the parties hereto wish to provide the terms and conditions upon which the Company shall pay such deferred compensation to the Employee or his designated beneficiary; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement, maintained primarily to provide deferred compensation benefits for the Employee, a member of select group of management or highly compensated employees of the Company, for purposes of the Employee Retirement Income Act of 1974, as amended; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree as follows: 1. DEFINITION OF TERMS. Certain words and phrases are defined when first used in later paragraphs of this Agreement. In addition, the following words and phrases when used herein, unless the context clearly requires otherwise, shall have the following respective meanings: (a) Agreement. This Agreement, together with any and all amendments or supplements thereto. (b) Early Retirement Date: The date the Employee attains fifty-five (55) years of age. (c) Fiscal Year: The taxable year of the Company. (d) Normal Retirement Date: The date the Employee attains sixty-five (65) years of age. (e) Retirement Account: Book entries maintained by the Company reflecting Deferred Amounts and Additions thereon; provided, however, that the existence of such book entries and the Retirement Account shall not create and shall not be deemed to create a trust of any kind, or a fiduciary relationship between the Company and the Employee, his designated beneficiary, or other beneficiaries under this Agreement. 1. DEFERRED COMPENSATION. Commencing on the date this Agreement is made, and continuing through the date on which the Employee's employment terminates as herein provided or because of his death, early retirement, normal retirement, disability, or any other cause, (whichever shall first occur), the Employee and the Company agree that the Company shall credit to Employee's Retirement Account Seven Thousand Dollars ($7,000.00) (herein "Annual Deferral Sum"), on August 1, 1995 and on the first business day in August of each year thereafter. The amounts so credited to Employee's Retirement Account are hereinafter collectively referred to as "Deferred Amounts." 2. ACCRUED BENEFIT. The term Accrued Benefit when used with regard to the Employee shall mean the sum of all Deferred Amounts, plus any increases or decreases in value allocated to them, due and owing to the Employee or the Employee's beneficiaries on the date of retirement, disability retirement, termination or death, as the case may be; provided, however, that Accrued Benefit with regard to the Employee or the Employee's beneficiaries, shall never be less than the total of all Deferred Amounts deposited into that Employee's Retirement Account. 3. (a) Retirement Benefit. The Company agrees that, from and after the retirement of the Employee from the service of the Company upon reaching his Early Retirement Date or Normal Retirement Date, the Company shall thereafter pay as a retirement benefit ("Retirement Benefit") to the Employee the Employee's entire Accrued Benefit, plus an additional "Yield Amount" as determined below, payable in equal monthly installments for a period of two hundred forty (240) months, commencing with the first day of the first month following the Employee's retirement ("Commencement Date"). The additional Yield Amount to be paid shall be determined by applying the amount of yield on a U.S. Treasury Bond with a maturity occurring twenty (20) years after the Commencement Date, to the Accrued Benefit (or any balance of the Accrued Benefit which has not been paid to the Employee) as reported in the Wall Street Journal. (a) Election of Benefits Upon Early Retirement Date or Normal Retirement Date. The Employee shall have the option, upon attaining his Early Retirement Date or Normal Retirement Date, to elect to receive his Retirement Benefit, notwithstanding his continued employment with the Company after he has attained his Early Retirement Date or Normal Retirement Date. The Employee's election to receive his Retirement Benefit notwithstanding his continued employment must be made in writing at least fifteen (15) days prior to his Early Retirement Date or Normal Retirement Date, whichever applies. The Retirement Benefit payable upon election pursuant to this paragraph 4(b) shall be the amount that would have been payable had the Employee retired from service with the Company as of his Early Retirement Date or Normal Retirement Date, whichever applies. Any such election shall be irrevocable, and shall result in the termination of the Employee's right to any further deferrals hereunder. 4. DISABILITY RETIREMENT. Notwithstanding any other provision hereof, the Employee shall be entitled to receive payments hereunder prior to his Early Retirement Date or Normal Retirement Date, whichever applies, in any case in which it is determined by a duly licensed physician selected by the Company that, because of ill health, accident, disability or general inability because of age, the Employee is no longer able, properly and satisfactorily, to perform his regular duties as an Employee. If the Employee's employment is terminated pursuant to this paragraph 5, the disability retirement benefit payable hereunder ("Disability Retirement Benefit") shall be that amount that would have been payable as a Retirement Benefit had the Employee attained his Normal Retirement Date on the date of the physician's disability determination. The Disability Retirement Benefit payable under this paragraph 5 shall be distributed in accordance with the provisions of paragraph 4(a) as if the Employee had retired on the date of the physician's disability determination. 5. (a) Death Benefit Prior to Commencement of Retirement Benefits. In the event of the Employee's death while in the employment of the Company and prior to the commencement of Retirement Benefits or Disability Retirement Benefits, the Company shall pay the Accrued Benefit in the Employee's Retirement Account as of the date of his death in equal monthly installments for a period of one hundred twenty (120) months to the Employee's designated beneficiary, in accordance with the last such designation received by the Company from the Employee prior to his death. If no such designation has been received by the Company from the Employee prior to his death or if said payments are otherwise to be made as provided herein, said payments shall be made to the Employee's then living spouse, so long as she shall live and thereafter to such person or persons, including her estate, as she may appoint under her Will, making specific reference hereto; if the Employee is not survived by a spouse or if she shall fail to so appoint, then said payments shall be made to the then living children of the Employee, if any, in equal shares, for their joint and survivor lives; and if none, or after their respective joint and survivor lives, any balance thereof in one lump sum to the estate of the Employee. Such payments shall commence on the first day of the first month following the Employee's death. (a) Death Benefit After Commencement of Benefits. In the event of the Employee's death after the commencement of Retirement Benefits, Normal Retirement Benefits, or Disability Retirement Benefits, but prior to the completion of all such payments due and owing hereunder, the Company shall continue to make such payments, in equal monthly installments, over the remainder of the period specified in paragraph 4 or 5 hereof that would have been applicable to the Employee had he survived. Such continuing payments shall be made to the Employee's designated beneficiary, in accordance with the last such designation received by the Company from the Employee prior to his death or if said payments are otherwise to be made as provided herein, said payments shall be made to the Employee's then living spouse, so long as she shall live and thereafter to such person or person, including her estate, as she may appoint under her Will, making specific reference hereto; if the Employee is not survived by a spouse or if she shall fail to so appoint, then said payments shall be made to the then living children of the Employee, if any, in equal shares, for their joint and survivor lives; and if none, or after their respective joint and survivor lives, any balance thereof in one lump sum to the estate of the Employee. Such continuing payments shall commence on the first day of the first month following the Employee's death. 6. TERMINATION BENEFIT. In the event of the Employee's termination of employment with the Company before his Early Retirement Date for any reason, other than his disability retirement or his death, the Company shall pay to the Employee, as compensation for services rendered prior to such termination, a single sum equal to the entire Accrued Benefit hereunder, including additions thereto, (the "Termination Benefit"); provided however, if the termination of the Employee by the Company is for just cause, payment of the Accrued Benefit, shall be exclusive of additions thereto, and any and all additions credited to the Employee's Retirement Account shall be forfeited to the Company. The Termination Benefit shall be payable on the first day of the first month following the termination of the Employee's employment with the Company. Just cause is defined as either serious criminal conduct by the Employee against the Company, or conduct which the Employee knew was against the best interests of the Company at the time it was committed by the Employee. 7. HARDSHIP BENEFIT. In the event the Employee suffers a financial hardship (as hereinafter defined), the Company may, if it deems advisable in its sole and absolute discretion, distribute to or utilize on behalf of the Employee as a hardship benefit (the "Hardship Benefit") any portion of the Employee's Retirement Account up to, but not in excess of, the Termination Benefit to which the Employee would have been entitled as of the date a Hardship Benefit is distributed or utilized. Any Hardship Benefit shall be distributed or utilized at such times as the Company shall determine, and the Accrued Benefit in the Employee's Retirement Account shall be reduced by the amount so distributed and/or utilized. Financial Hardship shall mean dire financial need of the Employee caused by temporary or permanent disability or incapacity, medical or educational expenses, the purchase or maintenance of a residence, or a material reduction in family income. 8. BENEFICIARY DESIGNATION. The Employee shall have the right, at any time, to submit in substantially the form attached hereto as Exhibit A, a written designation of primary and secondary beneficiaries to whom payment under this Agreement shall be made in the event of his death prior to complete distribution of the benefits due and payable under the Agreement. Each beneficiary designation shall become effective only when receipt thereof is acknowledged in writing by the Company. 9. NO TRUST CREATED. Nothing contained in this Agreement, and no action taken pursuant to its provisions by either party hereto shall create, or be construed to create, a trust of any kind, or a fiduciary relationship between the Company and the Employee, his designated beneficiary, other beneficiaries of the Employee or any other person. 10. BENEFITS PAYABLE ONLY FROM GENERAL CORPORATE ASSETS; UNSECURED GENERAL CREDITOR STATUS OF EMPLOYEE (a) The payments to the Employee or his designated beneficiary or any other beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Company; no person shall have any interest in any such assets by virtue of the provisions of this Agreement. The Company's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. To the extent that any person acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Company; no such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Company. (b) In the event that, in its discretion, the Company purchases an insurance policy or policies insuring the life of the Employee (or any other property), to allow the Company to recover the cost of providing benefits, in whole or in part, hereunder, neither the Employee, his designated beneficiary nor any other beneficiary shall have any rights whatsoever therein or in the proceeds therefrom. The Company shall be the sole owner and beneficiary of any such insurance policy and shall possess and may exercise all incidents or ownership therein. No such policy, policies or other property shall be held in any trust for the Employee or any other person nor as collateral security for any obligation of the Company hereunder. 11. NO CONTRACT OF EMPLOYMENT. Nothing contained herein shall be construed to be a contract of employment for any term of years, nor as conferring upon the Employee the right to continue to be employed by the Company in his present capacity, or in any capacity. It is expressly understood by the parties thereto that this Agreement relates to the payment of deferred compensation for the Employee's services, payable after termination of his employment with the Company, and is not intended to be an employment contract. 12. BENEFITS NOT TRANSFERRABLE. Neither the Employee, his designated beneficiary, nor any other beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part of all of the amounts payable hereunder. No such amounts shall be subject to seizure by any creditor of any such beneficiary, by a proceeding at law or in equity, nor shall such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Employee, his designated beneficiary, or any other beneficiary hereunder. Any such attempted assignment or transfer shall be void. 13. DETERMINATION OF BENEFITS a. Claim. A person who believes that he or she is being denied a benefit to which he or she it entitled under the Plan (hereinafter referred to as a "Claimant") must first file a written request for such benefit with the Company, setting forth his or her claim. The request must be addressed to the President of the Company at its then principal place of business. b. Claim Decision. Upon receipt of a claim, the Company shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Company may, however, extend the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Company shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (f) The specific reason or reasons for such denial; (g) The specific reference to pertinent provisions of this Agreement on which such denial is based; (h) A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary; (i) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (j) The time limits for requesting a review under subsection c. and for review under subsection d. hereof. b. Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant must request in writing that the Secretary of the Company review the determination of the Company. Such request must be addressed to the Secretary of the Company, at its then principal place of business. The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Company. If the Claimant does not request a review of the Company's determination by the Secretary of the Company within such sixty (60) day period, he shall be barred and estopped from challenging the Company's determination. c. Review of Decision. Within sixty (60) days after the Secretary's receipt of a request for review, he will review the Company's determination. After considering all materials presented by the Claimant, the Secretary will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 1. AMENDMENT. This Agreement may not be amended, altered or modified, except by a written instrument signed by the parties hereto, or their respective successors, and may not be otherwise terminated except as provided herein. 2. TERMINATION. The Agreement may be terminated at any time by either party by written notice to the other party. All rights and obligations of the parties with regard to Accrued Benefits shall continue in full force and effect, but the Employer shall not be required to credit any additional Annual Deferral Sums to Employee's Retirement Account, after termination. 3. INUREMENT. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns, and the Employee, his successors, heirs, executors, administrators and beneficiaries. 4. NOTICE. Any notice, consent or demand required or permitted to be given under the provisions of this Agreement shall be in writing, and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed to a party hereto, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Company. The date of such mailing shall be deemed the date of notice, consent or demand. Either party may change the address to which notice is to be sent by giving notice of the change of address in the manner aforesaid. 5. GOVERNING LAW. This Agreement, and the rights of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have executed this Agreement, in duplicate, effective as of the day and year first above written. CITIZENS SECURITY MUTUAL INSURANCE COMPANY By Jerry Olson, Vice President and Corporate Secretary Scott Broughton AGENCY AGREEMENT THIS AGREEMENT made this __________________ day of _________________ ,19___, by and between Citizens Security Group, Red Wing, Minnesota, (hereinafter called "Company") and ___________________________________________________________ city of _________________________________ in the county of ________________________ and the state of _______________________ (hereinafter called "Agent") agreed as follows: I. AUTHORITY OF AGENT A. The Agent is an independent contractor, not an employee of the Company, and subject to requirements and prohibitions imposed by law, the terms of this Agreement, and the underwriting rules and regulations of the Company, is authorized to: 1. Solicit, receive and transmit to the Company proposals for insurance contracts. 2. Bind and execute insurance contracts as provided in the then current Instructions to Agents. 3. Provide all usual and customary services of an insurance agent on all insurance contracts placed by the Agent with the Company. 4. Collect and receipt for premiums and, except as to direct bill business or premium finance payments, as full compensation to retain commissions out of premiums so collected. The Agent agrees to refund return commissions on policy cancellations or reductions at the same rate at which commissions were originally retained. 5. Exercise his authority personally or through his authorized employees. 6. Represent other companies. 7. Exercise exclusive and independent control of his time and the conduct of his agency. II. PREMIUM ACCOUNTING The Agent and the Company shall comply with the following accounting procedures on insurance written in the Company and billed to the Agent: A. Itemized statements will be prepared monthly by the Company, or, when mutually agreed upon, by the Agent. These statements will be mailed by the 15th day following the account month reported. B. Each item owed by the Agent of the Company will be due 45 days after the end of the account month for which the statement was prepared. C. The omission of any items from the monthly statement will not affect the responsibility of either party to account for and pay all amounts due to the other party. D. Final additional premiums or interim premiums developed by audit or those premiums developed under reporting form policies may, by written notice, be turned over to the Company for collection provided that: 1. The Agent will have no further responsibility for collection of the premiums; 2. The Agent notifies the Company in writing within 45 days after the month in which the premiums first appeared on his statement; 3. No commission will be due the Agent on premiums collected by the Company. E. The Agent's financial and accounting records pertaining to Company business will be subject to inspection and audit at all reasonable times by Company representatives. III. DIRECT BILL POLICY PROCEDURES The following procedures apply to direct bill business: A. The completed application shall be submitted to the Company in accordance with the provisions of the Company's direct bill program. B. The Company will be responsible for all premium billing and collection on renewals unless otherwise mutually agreed upon by the Agent and the Company. C. When the Company collects the premium, commissions will be paid to the Agent within 30 days after the end of the month in which premiums are received and recorded by the Company, subject to any return commissions due from Agent. D. A copy of all underwriting requests, audits, engineering reports, recommendations, cancellation or renewal notices, endorsements and statements, except for budget or premium finance notices, sent to the insured by the Company will be sent to the Agent. E. The Agent will be given an advance release of all mailings of informational material designed for sales promotion prior to actual mailing to the insured. F. The Agent's name will be clearly and prominently displayed on renewal policies, continuation notices or renewal certificates, and premium statements in print no smaller than any produced by the Company's electronic data processing on that document. G. Unless authorized by the Agent, the Company will not use, or permit use of, its records of business placed by the Agent with the Company to individually solicit policyholders for the sale of other lines of insurance or other products or services. When the Agent grants this authorization, he will be allowed the regular commission on sales resulting from the use of these records, and will retain ownership and control of any expirations arising from these sales. IV. AGENCY SALE OR TRANSFER A. The Agent agrees to give advance notice to the Company of any sale or transfer of his business, or its consolidation with a successor firm, in order that the Company may, at its election and with the consent of the parties of interest: (1) Consent to the assignment of this Agreement to the successor, or (2) Enter into a new Agency Agreement with the successor. If neither (1) or (2) fo the foregoing are agreed upon, then the Company will place in effect a Limited Agency Agreement with the successor. B. There shall not be any interruption in service to policyholders upon the sale or transfer of the Agent's business. V. COMPENSATION As full compensation for services, the Company shall pay the Agent commissions on premiums written and paid for, at the rates specified in current "commission schedules". The Agent shall pay the Company return commission at the same rates on any return premiums, including return premium on cancellations ordered or made by the Company. Where no commission rate has been specified, but insurance has been submitted and accepted by the Company, the rates shall be determined by the Company. The schedule(s) of commissions allowable shall be subject to change provided the Company gives the Agency prior written notice not less than 90 days or the minimum number of days allowed by the applicable state statutes. VI. CHANGES IN AGREEMENT A. This Agreement may be revised at any time by mutual agreement of the Agent and the Company. B. This Agreement may be revised by the Company only after it gives the Agent at least 60 days advance notice which sets forth the proposed revision and its effective date. C. The Agent and the Company each agree to confirm in writing and sign any revisions of this Agreement. VII. AMENDMENT AND TERMINATION PROCEDURES A. If the Agent is delinquent in payment of monies due the Company, the Company may, by written notice to the Agent, immediately suspend the Agent's authority under items 1, 2, 3, and 4 of Authority of Agent, to whatever extent the Company may elect, during the period the Agent remains delinquent in such payment. Routine differences in account which are minor in amount will not constitute delinquency in payment under this provision. B. This Agreement shall terminate: 1. Automatically, if any public authority cancels or declines to renew the Agent's license or certificate of authority; 2. Upon either party giving at least 60 days written notice in advance to the other. C. In the event this Agreement is terminated in accordance with Section B2 above, the Company will: 1. At the Agent's request, provide the Agent with a complete list of existing direct bill policies placed by the Agent with the Company, including the expiration date of such policies. 2. At the Agent's request, authorize the reinsurance of all existing policies with another company, in which event the Agent shall, at no cost to the Company, arrange with an other insurer acceptable to the Company for the prompt assumption of such risks on terms acceptable to the Company and Agent. The reinsurance will be effective as of the termination date of this Agreement, and the Company agrees to promptly deliver to the assuming company a bordereau of the business reinsured. D. In the event of termination of this Agreement, the Agent having and continuing to promptly account for and pay to the Company the premiums for which he may be liable, the Agent's records, use and control of expirations will remain the property of the Agent and be left in his undisputed possession; otherwise the records, use and control of all expirations of business placed with the Company will become vested in the Company. If, in disposing of these records and expirations, the Company does not realize sufficient money to discharge in full the Agent's indebtedness to the Company, the Agent will remain liable for the balance of the indebtedness. Any amount realized in excess of indebtedness, less expense of disposing of the records and expirations, will be returned to the Agent. VIII. INDEMNIFICATION OF AGENT A. The Company shall indemnify and hold the Agent harmless from liability for damages arising out of Company error or omission in the preparation or handling of any insurance contract or billing statement to which this Agreement applies, except to the extent that the Agent has caused, contributed to or compounded the error or omission. B. The Agent shall promptly notify the Company of any claim for damages as outlined above; and the Company, at its option, will have the right to assume or associate in the defense thereof. C. The Agent shall not, except at his own expense, voluntarily make any payment, assume any liability, or incur any expense related to such claim without the consent of the Company. D. Providing the Agent has complied with the above provisions the Company agrees to pay all expenses including legal fees reasonably incurred by the Agent in connection with the investigation or defense of any such claim. E. The Company shall indemnify and hold the Agent harmless against actual pecuniary damages which the Agent becomes obligated to pay, including costs of defense, due solely to the failure of the Company to comply with the requirements of Public Law 91-508 (The Fair Credit Reporting Act) in the procurement or use of consumer reports ordered by the Company, except to the extent that such damages are caused or contributed to by any act or omission of the Agent. The Agent shall immediately notify the Company of any claim or action relating to the Fair Credit Reporting Act, and the Company shall be entitled to defend such action with counsel of its choice. IX. ARBITRATION In the event of any dispute arising out of or under this contract between the Agent and the Company, both agree to submit such dispute to arbitration, and the expenses will be borne equally. A. There will be three arbitrators; one will be selected by the Agent, one will be selected by the Company, and a third will be selected by those two arbitrators. B. The determination of the arbitrators will be final and binding on all parties hereto. X. CONDITIONS A. The provisions of this Agreement will not apply to business subject to the administration or control of any underwriting association, pool, plan or syndicate. B. This Agreement supersedes all previous agency agreements, including any amendments, whether written or oral, between the Company and the Agent. C. All sums paid by policyholders to the Agent or his representatives less any commission due the agent, shall be held in trust for the Company by the Agent and shall not be used to pay any expenses or other obligations. The making of payments or rendering of accounts pursuant to this Agreement do not convert the relationship to debtor and creditor as to such sums. D. Flat cancellations must be effected not later than forty-five (45) days after effective date of insurance or in conformity with the rule of the Rating Bureau having jurisdiction. The Agent shall not be entitled to credit for flat cancellation until proof of such cancellation satisfactory to the Company be furnished to the Company. E. Any policy forms, policies, manuals and other like Company supplies furnished to the Agent by the Company shall always remain the property of the Company and shall be returned to the Company, or its representative, promptly upon demand. FOR THE COMPANY _____________________________________ _____________________________________ *If Agent is operating under a trade or firm name, such name should be shown followed by the name and title or position of the individual signing such trade or firm name as Agent; in case of a Partnership, the names of all partners should be shown and this Agreement signed by at least one partner; if a Corporation, or a concern doing business under a name indicating incorporation, this Agreement should be signed in the name of the corporation or concern by proper officials. AGENCY AGREEMENT THIS AGREEMENT made this __________________ day of _________________ ,19___, by and between Citizens Security Mutual Insurance Company, Red Wing, Minnesota, (hereinafter called "Company") and ___________________________________________________________ city of _________________________________ in the county of ________________________ and the state of _______________________ (hereinafter called "Agent") agreed as follows: I. AUTHORITY OF AGENT A. The Agent is an independent contractor, not an employee of the Company, and subject to requirements and prohibitions imposed by law, the terms of this Agreement, and the underwriting rules and regulations of the Company, is authorized to: 1. Solicit, receive and transmit to the Company proposals for insurance contracts. 2. Bind and execute insurance contracts as provided in the then current Instructions to Agents. 3. Provide all usual and customary services of an insurance agent on all insurance contracts placed by the Agent with the Company. 4. Collect and receipt for premiums and, except as to direct bill business or premium finance payments, as full compensation to retain commissions out of premiums so collected. The Agent agrees to refund return commissions on policy cancellations or reductions at the same rate at which commissions were originally retained. 5. Exercise his authority personally or through his authorized employees. 6. Represent other companies. 7. Exercise exclusive and independent control of his time and the conduct of his agency. II. PREMIUM ACCOUNTING The Agent and the Company shall comply with the following accounting procedures on insurance written in the Company and billed to the Agent: A. Itemized statements will be prepared monthly by the Company, or, when mutually agreed upon, by the Agent. These statements will be mailed by the 15th day following the account month reported. B. Each item owed by the Agent of the Company will be due 45 days after the end of the account month for which the statement was prepared. C. The omission of any items from the monthly statement will not affect the responsibility of either party to account for and pay all amounts due to the other party. D. Final additional premiums or interim premiums developed by audit or those premiums developed under reporting form policies may, by written notice, be turned over to the Company for collection provided that: 1. The Agent will have no further responsibility for collection of the premiums; 2. The Agent notifies the Company in writing within 45 days after the month in which the premiums first appeared on his statement; 3. No commission will be due the Agent on premiums collected by the Company. E. The Agent's financial and accounting records pertaining to Company business will be subject to inspection and audit at all reasonable times by Company representatives. III. DIRECT BILL POLICY PROCEDURES The following procedures apply to direct bill business: A. The completed application shall be submitted to the Company in accordance with the provisions of the Company's direct bill program. B. The Company will be responsible for all premium billing and collection on renewals unless otherwise mutually agreed upon by the Agent and the Company. C. When the Company collects the premium, commissions will be paid to the Agent within 30 days after the end of the month in which premiums are received and recorded by the Company, subject to any return commissions due from Agent. D. A copy of all underwriting requests, audits, engineering reports, recommendations, cancellation or renewal notices, endorsements and statements, except for budget or premium finance notices, sent to the insured by the Company will be sent to the Agent. E. The Agent will be given an advance release of all mailings of informational material designed for sales promotion prior to actual mailing to the insured. F. The Agent's name will be clearly and prominently displayed on renewal policies, continuation notices or renewal certificates, and premium statements in print no smaller than any produced by the Company's electronic data processing on that document. G. Unless authorized by the Agent, the Company will not use, or permit use of, its records of business placed by the Agent with the Company to individually solicit policyholders for the sale of other lines of insurance or other products or services. When the Agent grants this authorization, he will be allowed the regular commission on sales resulting from the use of these records, and will retain ownership and control of any expirations arising from these sales. IV. AGENCY SALE OR TRANSFER A. The Agent agrees to give advance notice to the Company of any sale or transfer of his business, or its consolidation with a successor firm, in order that the Company may, at its election and with the consent of the parties of interest: (1) Consent to the assignment of this Agreement to the successor, or (2) Enter into a new Agency Agreement with the successor. If neither (1) or (2) fo the foregoing are agreed upon, then the Company will place in effect a Limited Agency Agreement with the successor. B. There shall not be any interruption in service to policyholders upon the sale or transfer of the Agent's business. V. COMPENSATION As full compensation for services, the Company shall pay the Agent commissions on premiums written and paid for, at the rates specified in current "commission schedules". The Agent shall pay the Company return commission at the same rates on any return premiums, including return premium on cancellations ordered or made by the Company. Where no commission rate has been specified, but insurance has been submitted and accepted by the Company, the rates shall be determined by the Company. The schedule(s) of commissions allowable shall be subject to change provided the Company gives the Agency prior written notice not less than 90 days or the minimum number of days allowed by the applicable state statutes. VI. CHANGES IN AGREEMENT A. This Agreement may be revised at any time by mutual agreement of the Agent and the Company. B. This Agreement may be revised by the Company only after it gives the Agent at least 60 days advance notice which sets forth the proposed revision and its effective date. C. The Agent and the Company each agree to confirm in writing and sign any revisions of this Agreement. VII. AMENDMENT AND TERMINATION PROCEDURES A. If the Agent is delinquent in payment of monies due the Company, the Company may, by written notice to the Agent, immediately suspend the Agent's authority under items 1, 2, 3, and 4 of Authority of Agent, to whatever extent the Company may elect, during the period the Agent remains delinquent in such payment. Routine differences in account which are minor in amount will not constitute delinquency in payment under this provision. B. This Agreement shall terminate: 1. Automatically, if any public authority cancels or declines to renew the Agent's license or certificate of authority; 2. Upon either party giving at least 60 days written notice in advance to the other. C. In the event this Agreement is terminated in accordance with Section B2 above, the Company will: 1. At the Agent's request, provide the Agent with a complete list of existing direct bill policies placed by the Agent with the Company, including the expiration date of such policies. 2. At the Agent's request, authorize the reinsurance of all existing policies with another company, in which event the Agent shall, at no cost to the Company, arrange with an other insurer acceptable to the Company for the prompt assumption of such risks on terms acceptable to the Company and Agent. The reinsurance will be effective as of the termination date of this Agreement, and the Company agrees to promptly deliver to the assuming company a bordereau of the business reinsured. D. In the event of termination of this Agreement, the Agent having and continuing to promptly account for and pay to the Company the premiums for which he may be liable, the Agent's records, use and control of expirations will remain the property of the Agent and be left in his undisputed possession; otherwise the records, use and control of all expirations of business placed with the Company will become vested in the Company. If, in disposing of these records and expirations, the Company does not realize sufficient money to discharge in full the Agent's indebtedness to the Company, the Agent will remain liable for the balance of the indebtedness. Any amount realized in excess of indebtedness, less expense of disposing of the records and expirations, will be returned to the Agent. VIII. INDEMNIFICATION OF AGENT A. The Company shall indemnify and hold the Agent harmless from liability for damages arising out of Company error or omission in the preparation or handling of any insurance contract or billing statement to which this Agreement applies, except to the extent that the Agent has caused, contributed to or compounded the error or omission. B. The Agent shall promptly notify the Company of any claim for damages as outlined above; and the Company, at its option, will have the right to assume or associate in the defense thereof. C. The Agent shall not, except at his own expense, voluntarily make any payment, assume any liability, or incur any expense related to such claim without the consent of the Company. D. Providing the Agent has complied with the above provisions the Company agrees to pay all expenses including legal fees reasonably incurred by the Agent in connection with the investigation or defense of any such claim. E. The Company shall indemnify and hold the Agent harmless against actual pecuniary damages which the Agent becomes obligated to pay, including costs of defense, due solely to the failure of the Company to comply with the requirements of Public Law 91-508 (The Fair Credit Reporting Act) in the procurement or use of consumer reports ordered by the Company, except to the extent that such damages are caused or contributed to by any act or omission of the Agent. The Agent shall immediately notify the Company of any claim or action relating to the Fair Credit Reporting Act, and the Company shall be entitled to defend such action with counsel of its choice. IX. ARBITRATION In the event of any dispute arising out of or under this contract between the Agent and the Company, both agree to submit such dispute to arbitration, and the expenses will be borne equally. A. There will be three arbitrators; one will be selected by the Agent, one will be selected by the Company, and a third will be selected by those two arbitrators. B. The determination of the arbitrators will be final and binding on all parties hereto. X. CONDITIONS A. The provisions of this Agreement will not apply to business subject to the administration or control of any underwriting association, pool, plan or syndicate. B. This Agreement supersedes all previous agency agreements, including any amendments, whether written or oral, between the Company and the Agent. C. All sums paid by policyholders to the Agent or his representatives less any commission due the agent, shall be held in trust for the Company by the Agent and shall not be used to pay any expenses or other obligations. The making of payments or rendering of accounts pursuant to this Agreement do not convert the relationship to debtor and creditor as to such sums. D. Flat cancellations must be effected not later than forty-five (45) days after effective date of insurance or in conformity with the rule of the Rating Bureau having jurisdiction. The Agent shall not be entitled to credit for flat cancellation until proof of such cancellation satisfactory to the Company be furnished to the Company. E. Any policy forms, policies, manuals and other like Company supplies furnished to the Agent by the Company shall always remain the property of the Company and shall be returned to the Company, or its representative, promptly upon demand. FOR THE COMPANY _____________________________________ _____________________________________ *If Agent is operating under a trade or firm name, such name should be shown followed by the name and title or position of the individual signing such trade or firm name as Agent; in case of a Partnership, the names of all partners should be shown and this Agreement signed by at least one partner; if a Corporation, or a concern doing business under a name indicating incorporation, this Agreement should be signed in the name of the corporation or concern by proper officials. AGENCY AGREEMENT THIS AGREEMENT made this __________________ day of _________________ ,19___, by and between Insurance Company of Ohio, Red Wing, MN, (hereinafter called "Company") and ____________________________________________________________ ___________ city of _____________________________________in the county of _________________________ and the state of _______________________ (hereinafter called "Agent") agreed as follows: I. AUTHORITY OF AGENT A. The Agent is an independent contractor, not an employee of the Company, and subject to requirements and prohibitions imposed by law, the terms of this Agreement, and the underwriting rules and regulations of the Company, is authorized to: 1. Solicit, receive and transmit to the Company proposals for insurance contracts. 2. Bind and execute insurance contracts as provided in the then current Instructions to Agents. 3. Provide all usual and customary services of an insurance agent on all insurance contracts placed by the Agent with the Company. 4. Collect and receipt for premiums and, except as to direct bill business or premium finance payments, as full compensation to retain commissions out of premiums so collected. The Agent agrees to refund return commissions on policy cancellations or reductions at the same rate at which commissions were originally retained. 5. Exercise his authority personally or through his authorized employees. 6. Represent other companies. 7. Exercise exclusive and independent control of his time and the conduct of his agency. II. PREMIUM ACCOUNTING The Agent and the Company shall comply with the following accounting procedures on insurance written in the Company and billed to the Agent: A. Itemized statements will be prepared monthly by the Company, or, when mutually agreed upon, by the Agent. These statements will be mailed by the 15th day following the account month reported. B. Each item owed by the Agent of the Company will be due 45 days after the end of the account month for which the statement was prepared. C. The omission of any items from the monthly statement will not affect the responsibility of either party to account for and pay all amounts due to the other party. D. Final additional premiums or interim premiums developed by audit or those premiums developed under reporting form policies may, by written notice, be turned over to the Company for collection provided that: 1. The Agent will have no further responsibility for collection of the premiums; 2. The Agent notifies the Company in writing within 45 days after the month in which the premiums first appeared on his statement; 3. No commission will be due the Agent on premiums collected by the Company. 4. Commercial Audit Premiums are direct billed through CAP account when the audited policy term was direct billed on CAP. E. The Agent's financial and accounting records pertaining to Company business will be subject to inspection and audit at all reasonable times by Company representatives. III. DIRECT BILL POLICY PROCEDURES The following procedures apply to direct bill business: A. The completed application shall be submitted to the Company in accordance with the provisions of the Company's direct bill program. B. The Company will be responsible for all premium billing and collection on renewals unless otherwise mutually agreed upon by the Agent and the Company. C. When the Company collects the premium, commissions will be paid to the Agent within 30 days after the end of the month in which premiums are received and recorded by the Company, subject to any return commissions due from Agent. D. A copy of all underwriting requests, audits, engineering reports, recommendations, cancellation or renewal notices, endorsements and statements, except for budget or premium finance notices, sent to the insured by the Company will be sent to the Agent. E. The Agent's name will be clearly and prominently displayed on renewal policies, continuation notices or renewal certificates, and premium statements in print no smaller than any produced by the Company's electronic data processing on that document. F. Unless authorized by the Agent, the Company will not use, or permit use of, its records of business placed by the Agent with the Company to individually solicit policyholders for the sale of other lines of insurance or other products or services. When the Agent grants this authorization, he will be allowed the regular commission on sales resulting from the use of these records, and will retain ownership and control of any expirations arising from these sales. IV. AGENCY SALE OR TRANSFER A. The Agent agrees to give advance notice to the Company of any sale or transfer of his business, or its consolidation with a successor firm, in order that the Company may, at its election and with the consent of the parties of interest: (1) Consent to the assignment of this Agreement to the successor, or (2) Enter into a new Agency Agreement with the successor. If neither (1) or (2) fo the foregoing are agreed upon, then the Company will place in effect a Limited Agency Agreement with the successor. B. There shall not be any interruption in service to policyholders upon the sale or transfer of the Agent's business. V. COMPENSATION As full compensation for services, the Company shall pay the Agent commissions on premiums written and paid for, at the rates specified in current "commission schedules". The Agent shall pay the Company return commission at the same rates on any return premiums, including return premium on cancellations ordered or made by the Company. Where no commission rate has been specified, but insurance has been submitted and accepted by the Company, the rates shall be determined by the Company. The schedule(s) of commissions allowable shall be subject to change provided that the Company gives the Agency prior written notice not less than 90 days or the minimum number of days allowed by the applicable state statutes. VI. CHANGES IN AGREEMENT A. This Agreement may be revised at any time by mutual agreement of the Agent and the Company. B. This Agreement may be revised by the Company only after it gives the Agent at least 60 days advance notice which sets forth the proposed revision and its effective date. C. The Agent and the Company each agree to confirm in writing and sign any revisions of this Agreement. VII. AMENDMENT AND TERMINATION PROCEDURES A. If the Agent is delinquent in payment of monies due the Company, the Company may, by written notice to the Agent, immediately suspend the Agent's authority under items 1, 2, 3, and 4 of Authority of Agent, to whatever extent the Company may elect, during the period the Agent remains delinquent in such payment. Routine differences in account which are minor in amount will not constitute delinquency in payment under this provision. B. If the Agent's license is suspended by the State Insurance Department, the Agent's authority under items 1 & 2 of Authority of Agent are suspended for duration of State Insurance Department suspension. C. This Agreement shall terminate: 1. Automatically, if any public authority cancels or declines to renew the Agent's license or certificate of authority; 2. Upon the Company giving at least 180 days written notice in advance to the Agent unless a shorter time period is mutually agreed upon. D. In the event this Agreement is terminated in accordance with Section C2 above, the Company will: 1. At the Agent's request, provide the Agent with a complete list of existing direct bill policies placed by the Agent with the Company, including the expiration date of such policies. 2. At the Agent's request, authorize the reinsurance of all existing policies with another company, in which event the Agent shall, at no cost to the Company, arrange with an other insurer acceptable to the Company for the prompt assumption of such risks on terms acceptable to the Company and Agent. The reinsurance will be effective as of the termination date of this Agreement, and the Company agrees to promptly deliver to the assuming company a bordereau of the business reinsured. E. In the event of termination of this Agreement, the Agent having and continuing to promptly account for and pay to the Company the premiums for which he may be liable, the Agent's records, use and control of expirations will remain the property of the Agent and be left in his undisputed possession; otherwise the records, use and control of all expirations of business placed with the Company will become vested in the Company. If, in disposing of these records and expirations, the Company does not realize sufficient money to discharge in full the Agent's indebtedness to the Company, the Agent will remain liable for the balance of the indebtedness. Any amount realized in excess of indebtedness, less expense of disposing of the records and expirations, will be returned to the Agent. VIII. INDEMNIFICATION OF AGENT A. The Company shall indemnify and hold the Agent harmless from liability for damages arising out of Company error or omission in the preparation or handling of any insurance contract or billing statement to which this Agreement applies, except to the extent that the Agent has caused, contributed to or compounded the error or omission. B. The Agent shall promptly notify the Company of any claim for damages as outlined above; and the Company, at its option, will have the right to assume or associate in the defense thereof. C. The Agent shall not, except at his own expense, voluntarily make any payment, assume any liability, or incur any expense related to such claim without the consent of the Company. D. Providing the Agent has complied with the above provisions the Company agrees to pay all expenses including legal fees reasonably incurred by the Agent in connection with the investigation or defense of any such claim. E. The Company shall indemnify and hold the Agent harmless against actual pecuniary damages which the Agent becomes obligated to pay, including costs of defense, due solely to the failure of the Company to comply with the requirements of Public Law 91-508 (The Fair Credit Reporting Act) in the procurement or use of consumer reports ordered by the Company, except to the extent that such damages are caused or contributed to by any act or omission of the Agent. The Agent shall immediately notify the Company of any claim or action relating to the Fair Credit Reporting Act, and the Company shall be entitled to defend such action with counsel of its choice. IX. ARBITRATION In the event of any dispute arising out of or under this contract between the Agent and the Company, both agree to submit such dispute to arbitration, and the expenses will be borne equally. A. There will be three arbitrators; one will be selected by the Agent, one will be selected by the Company, and a third will be selected by those two arbitrators. B. The determination of the arbitrators will be final and binding on all parties hereto. X. CONDITIONS A. The provisions of this Agreement will not apply to business subject to the administration or control of any underwriting association, pool, plan or syndicate. B. This Agreement supersedes all previous agency agreements, including any amendments, whether written or oral, between the Company and the Agent. C. All sums paid by policyholders to the Agent or his representatives less any commission due the agent, shall be held in trust for the Company by the Agent and shall not be used to pay any expenses or other obligations. The making of payments or rendering of accounts pursuant to this Agreement do not convert the relationship to debtor and creditor as to such sums. D. Flat cancellations must be effected not later than forty-five (45) days after effective date of insurance or in conformity with the rule of the Rating Bureau having jurisdiction. The Agent shall not be entitled to credit for flat cancellation until proof of such cancellation satisfactory to the Company be furnished to the Company. E. Any policy forms, policies, manuals and other like Company supplies furnished to the Agent by the Company shall always remain the property of the Company and shall be returned to the Company, or its representative, promptly upon demand. FOR THE COMPANY _____________________________________ _____________________________________ *If Agent is operating under a trade or firm name, such name should be shown followed by the name and title or position of the individual signing such trade or firm name as Agent; in case of a Partnership, the names of all partners should be shown and this Agreement signed by at least one partner; if a Corporation, or a concern doing business under a name indicating incorporation, this Agreement should be signed in the name of the corporation or concern by proper officials. LIMITED AGENCY AGREEMENT THIS AGREEMENT made this __________________ day of _________________ ,19___, by and between Citizens Security Mutual Insurance Company, Red Wing, Minnesota, (hereinafter called "Company") and ____________________________________________________________ ___________ city of _________________________________ in the county of ________________________ and the state of _______________________ (hereinafter called "Agent") agreed as follows: I. AUTHORITY OF AGENT A. The Agent is an independent contractor, not an employee of the Company, and subject to requirements imposed by law, the terms of this Agreement, and the underwriting rules and regulations of the Company, is authorized to: 1. Represent the Company for the sole purpose of servicing and renewing members of the following Association(s):_____________________________________________ ____________________________________________________________ _____insurance contracts placed by the Agent and with the Company. (Hereinafter called the "Association".) 2. Issue and countersign appropriate endorsements on contracts for members of the Association, provided that without prior approval of the Company, the endorsement will not increase the Company's liability or extend the term of any insurance contract. 3. Collect and receipt for premiums: All members of the Association will be billed through Citizens Account Plan (CAP). Agencies shall receive the Company's standard commission rates. Policies submitted require (2) months premium included with the application. Business shall be submitted using the Company's applications. Commissions shall be paid on an annual or semi-annual basis. The Agent agrees to refund commissions on policy cancellations or reductions at the same rate at which commissions were originally retained. 4. Exercise his authority personally or through his authorized employees. 5. Represent other companies. 6. Exercise exclusive and independent control of his time and the conduct of his agency. II. PREMIUM ACCOUNTING The following procedures apply to all Association members' policies: A. The Company will be responsible for all premium billing and collection, unless otherwise mutually agreed upon by the Agent and the Company. B. Commissions will be paid to the Agent within 30 days after the end of the month in which premiums are received and recorded by the Company, subject to any return commissions due from the Agent. C. A copy of all underwriting requests, audits, engineering reports, recommendations, cancellation or renewal notices, endorsements and statements, except for budget or premium finance notices, sent to the insured by the Company will be sent to the Agent. III. AGENCY SALE OR TRANSFER A. The Agent agrees to give advance notice to the Company of any sale or transfer of business, or its consolidation with a successor firm, in order that the Company may, at its election and with the consent of the parties of interest: (1) Consent to the assignment of this Agreement to the successor, or (2) Enter into a new agency agreement with the successor. B. There shall not be any interruption in service to policyholders upon the sale or transfer of the Agent's business. IV. CHANGES IN AGREEMENT A. This Agreement may be revised at any time by mutual agreement of the Agent and the Company. B. This Agreement may be revised by the Company only after it gives the Agent at least 60 days advance notice which sets forth the proposed revision and its effective date. C. The Agent and the Company each agree to confirm in writing and sign any revisions of this Agreement. V. AMENDMENT AND TERMINATION PROCEDURES A. If the Agent is delinquent in payment of monies due the Company, the Company may, by written notice to the Agent, immediately suspend the Agent's authority to whatever extent the Company may elect, during the period the Agent remains delinquent in such payment. Routine differences in account which are minor in amount will not constitute delinquency in payment under this provision. B. This Agreement shall terminate: 1. Automatically, if any public authority cancels or declines to renew the Agent's license or certificate of authority; 2. One year after the Termination Date. C. In the event this Agreement is terminated in accordance with Section B2 above, the Company will: 1. At the Agent's request, provide the Agent with a complete list of existing direct bill policies placed by the Agent with the Company, including the expiration date of such policies. D. In the event of termination of the Agreement, the Agent having promptly accounted for and paid to the Company the premiums for which he may be liable, the Agent's records, use and control of expirations will remain the property of the Agent and be left in his undisputed possession; otherwise the records, use and control of all expirations of business placed with the company will become vested in the company. If, in disposing of these records and expirations, the company does not realize sufficient money to discharge in full the Agent's indebtedness to the Company, the Agent will remain liable for the balance of the indebtedness. Any amount realized in excess of indebtedness, less expense of disposing of the records and expirations, will be returned to the Agent. VI. INDEMNIFICATION OF AGENT A. The Company shall indemnify and hold the Agent harmless from liability for damages arising out of Company error or omission in the preparation or handling of any insurance contract or billing statement to which the Agreement applies, except to the extent that the Agent has caused, contributed to or compounded the error or omission. B. The Agent shall promptly notify the Company of any claim for damages as outlined above; and the Company, at its option, will have the right to assume or associate in the defense thereof. C. The Agent shall not, except at his own expense, voluntarily make any payment, assume any liability, or incur any expense related to such claim without the consent of the Company. D. Providing the Agent has complied with the above provisions, the Company agrees to pay all expenses including legal fees reasonably incurred by the Agent in connection with the investigation or defense of any such claim. E. The Company shall indemnify and hold the Agent harmless against actual pecuniary damages which the Agent becomes obligated to pay, including costs of defense, due solely to the failure of the Company to comply with the requirements of Public Law 91-508 (The Fair Credit Reporting Act) in the procurement or use of consumer reports ordered by the Company, except to the extent that such damages are caused or contributed to by any act or omission of the Agent. The Agent shall immediately notify the Company of any claim or action relating to the Fair Credit Reporting Act, and the Company shall be entitled to defend such action with counsel of its choice. VII. ARBITRATION In the event of any dispute arising out of or under the contract between the Agent and the Company, both agree to submit such dispute or arbitration and the expenses will be borne equally. A. There will be three arbitrators; one will be selected by the Agent, one will be selected by the Company, and a third will be selected by those two arbitrators. B. The determination of the arbitrators will be final and binding on all parties thereto. VIII. CONDITIONS A. The provisions of this Agreement will only apply to business subject to members of the Association. This Agreement will not apply to the administration or control of any other. B. This Agreement supercedes all previous agency agreements, including any amendments, whether written or oral, between the Company and the Agent. C. All sums paid by policyholders to the Agent or his representative less any commission due the Agent, shall be held in trust for the Company by the Agent and shall not be used to pay any expense or other obligations. The making of payments or rendering of accounts pursuant to this Agreement do not convert the relationship to debtor and creditor as to such sums. FOR THE COMPANY: FOR THE AGENT: ________________________ ________________________________ ________________________ ________________________ _______________________________ PERSONAL PARTNER AGENCY AGREEMENT THIS AGREEMENT is made this __________________ day of ___________________ ,19___, by and between Citizens Security Mutual Insurance Company and Citizens Fund Insurance Company, Red Wing, Minnesota, (hereinafter called "Company") and ____________________________________________________________ __________, city of _________________________________ in the county of _________________________ and the state of _______________________ (hereinafter called "Agent"). The Company and Agent agree as follows: I. AUTHORITY OF AGENT A. The Agent is an independent contractor, not an employee of the Company, and subject to requirements and prohibitions imposed by law, the terms of this Agreement, and the underwriting rules and regulations of the Company, and is authorized to: 1. solicit, receive and transmit to the Company proposals for insurance contracts; 2. bind and execute insurance contracts in accordance with the Company's underwriting guidelines; 3. provide all usual and customary services of an insurance agent on all insurance contracts placed by the Agent with the Company; 4. exercise authority personally or through authorized employees; 5. represent other companies; and 6. exercise exclusive and independent control of time and conduct of agency. II. DIRECT BILL POLICY PROCEDURES A. All premiums will be billed through the direct bill plan. B. The Company will be responsible for all premium billing and collection on renewals unless otherwise mutually agreed upon by the Agent and the Company. C. Commissions will be paid to the Agent within 30 days after the end of the month in which the premium appears on the Agent's statement, subject to any return commissions due from Agent. D. A copy of all underwriting requests, audits, engineering reports, recommendations, cancellation or renewal notices, endorsements and statements, except for budget or premium finance notices, sent to the insured by the Company will be sent to the Agent. Additionally, all underwriting requests, applications, inspections, audits, engineering reports, cancellations or renewal notices generated by the Agent will be kept in the Agent's file and will be subject to audit by the company. E. The Agent's name will be clearly and prominently displayed on renewal policies, continuation notices or renewal certificates, and premium statements in print no smaller than any produced by the Company's electronic data processing on that document. F. The Agent's financial and accounting records pertaining to Company business will be subject to inspection and audit at all reasonable times by Company representatives. G. No commission will be due the Agent on premiums turned over to a collection agency by the Company. III. AGENCY SALE OR TRANSFER The Agent agrees to give advance notice to the Company of any sale or transfer of business, or Agency consolidation with a successor firm. This provides the Company the opportunity to: (1) consent to the assignment of this agreement to the successor, (2) enter into a new agreement with the successor, or (3) offer, in good faith, to purchase the book of business at a fair market price. IV. COMPENSATION As full compensation for services, the Company shall pay the Agent commissions on premiums written, at the rates specified in current "commission schedules". The Agent shall pay the Company return commission at the same rates on any return premiums, including return premium on cancellations ordered or made by the Company. Where no commission rate has been specified, but insurance has been submitted and accepted by the Company, the rates shall be determined by the Company. The schedule(s) of commissions allowable shall be subject to change provided the Company gives the Agency prior written notice not less than six months or the minimum number of days allowed by the applicable state statutes. V. CHANGES IN AGREEMENT A. This Agreement may be revised at any time by mutual agreement of the Agent and the Company. B. This Agreement may be revised by the Company only after it gives the Agent at least 90 days advance notice which sets forth the proposed revision and its effective date. C. The Agent and the Company must confirm in writing revisions to this Agreement. VI. TERMINATION PROCEDURES A. This Agreement shall terminate: 1. automatically, if any public authority cancels or declines to renew the Agent's license or certificate of authority; 2. if the Agency does not inform the Company in advance of using any Agency file information (including MVRs, CBRs, CLUE Reports, and Inspection Reports) for which the Agency was reimbursed, to transfer or solicit such accounts to another carrier; 3. upon either party giving at least 90 days written notice in advance to the other; or 4. automatically, if any portion of the Personal Partner Software is given or demonstrated, in whole or in part, to any third party without the written consent of the Company. VII. INDEMNIFICATION OF AGENT A. The Company shall indemnify and hold the Agent harmless from liability for damages arising out of Company error or omission in the preparation or handling of any insurance contract or billing statement to which this Agreement applies, except to the extent that the Agent has caused, contributed to or compounded the error or omission. B. The Agent shall promptly notify the Company of any claim for damages as outlined above, and the Company, at its option, will have the right to assume or associate in the defense thereof. C. The Agent shall not, except at the Agent's own expense, voluntarily make any payment, assume any liability, or incur any expense related to such claim outside of the authority granted through the Company's E-Z Claim Draft Authority Program. D. Providing the Agent has complied with the above provisions, the Company agrees to pay all expenses including legal fees reasonably incurred by the Agent in connection with the investigation or defense of any such claim. E. The Company shall indemnify and hold the Agent harmless against actual pecuniary damages which the Agent becomes obligated to pay, including costs of defense, due solely to the failure of the Company to comply with the requirements of Public Law 91-508 (The Fair Credit Reporting Act) in the procurement or use of consumer reports ordered by the Company or Agency, except to the extent that such damages are caused or contributed to by any act or omission of the Agent. The Agent shall immediately notify the Company of any claim or action relating to the Fair Credit Reporting Act, and the Company shall be entitled to defend such action with counsel of its choice. VIII. ARBITRATION In the event of any dispute arising out of or under this contract between the Agent and the Company, both agree to submit such dispute to arbitration, and the expenses will be borne equally. A. There will be three arbitrators: one selected by the Agent, one selected by the Company, and a third selected by those two arbitrators. B. The determination of the arbitrators will be final and binding on all parties hereto. IX. CONDITIONS A. The provisions of this Agreement will not apply to business subject to the administration or control of any underwriting association, pool, plan or syndicate. B. This Agreement supersedes all previous agency agreements, including any amendments, whether written or oral, between the Company and the Agent as they apply to new personal lines business processed through or in conjunction with the Partners System. C. All sums paid by policyholders to the Agent or the Agent's representatives less any commission due the agent, shall be held in trust for the Company by the Agent and shall not be used to pay any expenses or other obligations. The making of payments or rendering of accounts pursuant to this Agreement do not convert the relationship to debtor and creditor as to such sums. D. Flat cancellations must be effected not later than forty-five (45) days after effective date of insurance or in conformity with the rule of the rating bureau having jurisdiction. The Agent shall not be entitled to credit for flat cancellation until proof of such cancellation, satisfactory to the Company, be furnished to the Company. E. Policy forms, individual account information, policies, manuals, computer hardware and software, and other like Company supplies furnished to the Agent by the Company shall always remain the property of the Company and shall be returned to the Company, or its representative, promptly upon demand. In addition, within fourteen (14) days following termination of this Agreement, the Agent will notify the Company, in writing, that all Company software has been removed from the Agent's hardware. F. The Agency will have a policy in force of no less than $500,000 Errors and Omissions insurance coverage. G. The Agency will file an annual business plan with the Company covering marketing area, growth, goals, balance of business, etc. H. The Agent will solicit business within a defined marketing area. The marketing area will be defined annually by the Agent and Company to accommodate the exclusivity of the program to all participants and the potential expansion of the Agent's operation. I. The Personal Partner System, excluding the Boeckh Cost Estimator, is a proprietary system and may not be used to solicit or process business other than the Company's personal lines related business. FOR THE COMPANY _____________________________________ _____________________________________ *If Agent is operating under a trade or firm name, such name should be shown followed by the name and title or position of the individual signing such trade or firm name as Agent. In case of a partnership, the names of all partners should be shown and this Agreement signed by at least one partner. If a corporation, or a concern doing business under a name indicating incorporation, this Agreement should be signed in the name of the corporation or concern by proper officials. Personal Partner Contingency Plan Citizens provides this Partner Contingency Plan on the net profits of business written and produced through the Partner as shown by the home office records of Citizens for each period and during the time this plan is in force. This agreement applies only to personal lines policies processed through the Partner system. For the purpose of this agreement, the profit on business produced by the Partner during the year under consideration will be determined by the following formula: I. PHASE I Each December 31, the agency will be paid a flat 5% growth commission on premiums processed through the Partners program for the most recent prior calendar year, beginning each January 1, subject to a minimum of $100,000 per calendar year as reported on Citizens' AG01 reports. Phase I applies for the first three years of the Partner Agreement or until the agency reaches $350,000 in annual written premium (whichever is first). Phase II will apply for the following year if the agency reaches $350,000 during the current year. II. PHASE II At the end of each profit sharing year, the Net Profit or Loss shall be calculated as follows: A. Earned Premiums $_________________ Subtract 1. Incurred Losses $_________________ 2. Company Home Office Expense at 32.5% of Written Premium $_________________ 3. IBNR Factor at 2.5% of Written Premium $_________________ 4. Actual Allocated Loss Adjusting Expense Incurred $_________________ 5. Previous Year's Deficit (if applicable) $_________________ B. Total $_________________ C. Profit (deficit) $_________________ D. Profit Share Earned (50% of C; not to exceed 10% of WP) $_________________ III. FORMULA DEFINITIONS A. Earned Premiums are defined as the Written Premiums on business produced during the Profit Sharing Year minus the Unearned Premiums as of the end of the same year plus the Unearned Premiums as of the end of the prior year. B. Incurred Losses are defined as net losses paid during the Profit Sharing Year plus reserve for unpaid losses as of the end of the same year and minus reserve for unpaid losses as of the end of the prior year. If a negative total results, a zero total will be used. C. Annual Net Written Premiums are gross premiums less credits for premiums on cancellations and returns written by and recorded by Citizens during the Profit Sharing Year. D. Partners' Home Office Expense shall be 32.5% of Written Premiums as defined above. E. Net Paid Losses shall mean the amount of money paid by Citizens on behalf of the insured for insured events less deduction for all salvage and subrogation recoveries from third parties. F. The Previous Year's Deficit is defined as II. (C) above on the prior year's profit share calculation and applies only when the number is less than zero. The maximum deficit carry forward for any single profit share year is three years. G. Allocated Loss Adjustment Expense shall mean the expenses incurred in connection with the settlement of a claim or a suit including expenses of litigation, expenses incurred to obtain subrogation and salvage recoveries, a pro rata portion of the salaries and expenses of the COMPANY'S field employees related to the adjusting of losses chargeable hereunder and expenses of the COMPANY'S officials incurred in connection with the settlement of losses chargeable hereunder. Salaries of the COMPANY'S officials and normal overhead charges, such as rent, heat, light, etc., shall not be considered as part of the loss adjustment expense. IV. OTHER PROVISIONS A. The Partner agent will be provided with a Profit Sharing Statement within a reasonable time after the close of the Profit Sharing period, and if a net profit is shown, the Company will promptly remit the resultant Profit Sharing payment to the Partner, if all premiums and other current indebtedness for the period have been paid. The Profit Sharing allowed the Partner, if any, is not payable unless the Partner has complied with all terms of this plan and the Partner Agreement. (No charge or deduction for Profit Sharing payment shall be made or claimed by the Partner in its accounts, and is payable only by Citizens' check.) B. Citizens' Partner home office records shall be considered binding and conclusive as to all information pertaining to this statement. C. A deficit is incurred any time the total of the Partner's Earned Premiums are less than the total of the following: 1. Incurred Losses; 2. Citizens' Home Office Expense factor of 32.5% of Written Premium; 3. Citizens' Allocated Loss Adjustment Expenses Incurred; 4. IBNR Factor of 2.5%; and 5. The Previous Year's Deficit. D. The maximum loss charged to your Partner Contingency Plan on any one loss will be $150,000. E. The maximum single year profit share earned II. (D) is capped at 10% of written premium. F. In the event of a change in the Partner's organizational structure during the Profit Sharing period, any Profit Sharing earned during that period shall be payable by Citizens to an assigned recipient as mutually agreed on by Citizens and the agency. G. Neither this plan, nor any rights hereunder shall be assignable, but the plan may be altered or amended at any time by written instrument to that effect. H. This plan pertains only to the business written through the Partners contract. I. This Citizens' Partner Contingency Plan is automatically canceled when the Partner's Agreement is canceled, and the Plan does not apply to premiums earned during a calendar year in which the Partner Agreement is canceled. J. The Citizens' Partner Contingency Plan is a voluntary plan on the part of the Citizens and is not, nor does it become, a part of any Agency Agreement now in force or subsequently executed between Citizens and the Partner; and Citizens reserves the right to amend or withdraw the Plan at any time. NETWORK AGENCIES PROFIT SHARING PLAN Citizens Security Group (hereafter called "Citizens") provides this Profit Sharing Plan on the net profits of the business written and produced through the a Network of four (4) or more agencies as shown by the Home Office records of the Citizens for each period and during the time this plan is in force; the first such period beginning January 1, and ending on December 31, and each calendar year thereafter. Profit Sharing payments shall not be payable to the Network for any Profit Sharing Year unless the Network's annual written premiums are: $250,000 as of 12/31/96 The provisions of this plan do not pertain to premium production of underwriting associations, pools, or individual agency networks of three (3) or less. For the purpose of this agreement, the profit on the business produced by the Network during the year under consideration will be determined by the following formula: I. FORMULA At the end of each Profit Sharing Year (the accounting period beginning January 1 and ending December 31 of the same calendar year), the Net Profit or Loss shall be calculated as follows: A. Earned premiums $_______________ B. Incurred Losses (not less than zero) $_______________ C. Incurred Losses Percentage (B/A x 100) $_______________% D. Gross Profit Percentage (50% - C) $_______________% E. Gross Profit (D x A) $_______________ F. Base Profit Share Due Network (___% x E) $_______________ G. Profit Share Due Network $_______________ II. FORMULA DEFINITIONS (Letters refer to lettered items listed under Section I.) A. Annual Written Premiums are defined as gross premiums less credits for premiums on cancellations and returns written by agent and recorded by Company during the Profit Sharing Year. B. Earned Premiums are defined as the Written Premiums on business produced during the Profit Sharing Year minus the Unearned Premiums as of the end of the same year plus the Unearned Premium as of the end of the prior year. C. Incurred Losses are defined as net losses paid during the Profit Sharing Year plus reserve for unpaid losses as of the end of same year and minus reserve for unpaid losses as of the beginning of the same year. If a negative total results, a zero total will be used. The maximum amount charged for any one loss shall be the net amount paid or reserved, subject to Section VI. paragraph D. Incurred Losses Percentage is calculated by dividing the Incurred Losses by the Earned Premiums times 100. If such Percentage is greater than 50%, no further calculation will be made. D. Gross Profit Percentage is calculated by subtracting the Incurred Loss Percentage from 50%. E. Gross Profit is calculated by multiplying Earned Premiums by the Gross Profit Percentage. F. Base Profit Share Due Network shall be calculated by multiplying the Net Profit by the applicable Profit Share Percentage set forth in the following table: (a) (b) Annual Profit Share Written Premiums Percentage 0 - 124,999 .0% 125,000 - 250,000 10.0% 250,001 - 500,000 12.5% 500,001 -1,000,000 15.0% 1,000,001 -2,000,000 20.0% 2,000,001 - over 25.0% Determination of base Profit Share Percentage: The percentage figure which is opposite the written premiums for the Profit Sharing Year is the base Profit Share Percentage (enter in Section I. F). G. Profit Share Due Network shall be the base profit share plus or minus any Bonus Plan percentages as set forth in Section III., Bonus Plan. III. BONUS PLAN A. Growth Bonus 1. Citizens agrees to include the following Growth Bonus percentage points to the current year's base profit share percentage (Section II. F (b)) when the policy count as of 12/31 to the policy count of 1/1 of the same year as shown in Citizens agency statement is: % of Policy Count Growth Bonus .949% and less -1.0% +1.050% to +1.15% +1.0% +1.151% and above +2.0% B. Retention Bonus 1. Citizens agrees to include the following Retention Bonus percentage points to the base profit share percentage (Section II. F (b)) when policies in force as of 12/31 divided by the same policies in force as of 1/1 of the same year are: Retention In Force Retention Bonus Points 80.0% - 90.99% +2% 91.0% - 100.00% +3% C. Loss Ratio Bonus 1. Citizens agrees to include the following Loss Ratio Bonus percentage points to the current year's base profit share percentage (Section II. F (b)) when the current year plus the preceding two years' loss ratios are: Loss Ratio 3 Year Loss Ratios Bonus Points 0 - 25.99% +4% 26.0% - 39.99% +3% 40.0% - 49.99% +2% 50.0% - 59.99% 0% 60.0% - 69.99% -2% 70.0% - 79.99% -3% 80.0% - Over -4% IV. DELINQUENCIES Citizens agrees to reduce the Network's total profit sharing percentage .5 points for each member agency of the Network delinquent more than once in payment of their account as provided in our Agency Agreement. Payments are based on the twelve (12) monthly statements which make up the Profit Sharing Period. V. INDIVIDUAL MEMBER MINIMUM PREMIUM REQUIREMENT A. Citizens agrees to reduce the Network's total profit sharing percentage .5 points for each member agency below $25,000 in volume with Citizens as of 12/31. Network members appointed within eighteen (18) months of 12/31 shall not be subject to this $25,000 minimum volume requirement. B. Citizens agrees to add .25 points to the total Network's total profit sharing percentage for each member agency above $100,000 in volume with Citizens as of 12/31. C. It is agreed to increase Section V. A to $50,000 and Section V. B to $200,000 effective 12/31/94. VI. OTHER PROVISIONS A. Citizens agrees to submit to the Network a Profit Sharing Statement within a reasonable time after the close of the Profit Sharing period, and if a net profit is shown, the Company will promptly remit the resultant profit sharing payment to the Network, if all premiums and other current indebtedness for the period have been paid. The profit sharing allowed the Network, if any, is not payable unless the Network has complied with all terms of this plan and our Agency Agreement. No charge or deduction for profit sharing payment shall be made or claimed by the Network in its accounts and is payable only by the Citizens' check. B. Citizens records shall be considered binding and conclusive as to all information pertaining to this Agreement. C. A deficit is incurred anytime the Network's Loss Percentage is in excess of 50%. There is no deficit carry-over, except as it may apply to the Loss Ratio Bonus, Section III. C (1). D. The maximum loss charged to Section I. B "Incurred Losses" per Network member for a Profit Sharing Year will be $100,000 on any one occurrence. Section III. C (1) shall include total losses incurred for the Bonus Period calculation. E. In the event of a change in Network ownership during the Profit Sharing Period, any profit sharing earned during that period shall be payable by the Citizens to the agency delegated by at least three (3) current Network members to Citizens at the close of that Profit Sharing period. It is also agreed, for the purpose of computing Profit Sharing, that the purchaser receive credit for all the earned premiums and is charged with all the incurred losses of the purchased agency subject to the terms of this agreement. F. Neither this plan, nor any rights hereunder shall be assignable, but the plan may be altered or amended at any time by written instrument to that effect. G. This plan supersedes all previous agreements, whether written or oral. H. This Network Profit Sharing Plan is automatically cancelled when the Network Agency Agreement is cancelled, and the Plan does not apply to premiums earned during a calendar year in which the Network Agreement is cancelled. I. The Network's Profit Sharing Plan is a voluntary plan on the part of the Citizens and is not, nor does it become, a part of any individual Agency or Network Agreement now in force or subsequently executed between the Company and any of its Agencies or Networks; and the Citizens reserves the right to amend or withdraw the Plan at any time. INDIVIDUAL AGENCY PROFIT SHARING PLAN Citizens Security Group (hereafter called "Citizens") provides this Profit Sharing Plan on the net profits of the business written and produced through the Agency as shown by the Home Office records of the Citizens for each period and during the time this plan is in force; the first such period beginning January 1, and ending on December 31, and each calendar year thereafter. Profit Sharing payments shall not be payable to the Agency for any Profit Sharing Year unless the Agency's annual written premiums are: $75,000 as of 12/31/96 otherwise this plan will be inoperative. The provisions of this plan do not pertain to premium production of underwriting associations, pools, or network/cluster agencies of four (4) or more. No profit sharing will be paid if an Agency has been delinquent more than once in payment of account as provided in the Company's Agency Agreement. Payments are based on the twelve (12) monthly statements which make up the profit sharing. For the purpose of this agreement, the profit on the business produced by the Agent during the year under consideration will be determined by the following formula: I. FORMULA At the end of each Profit Sharing Year (the accounting period beginning January 1 and ending December 31 of the same calendar year), the Net Profit or Loss shall be calculated as follows: A. Earned premiums $______________ B. Incurred Losses (not less than zero) $______________ C. Incurred Losses Percentage (B/A x 100) $______________% D. Gross Profit Percentage (50% - C) $______________% E. Gross Profit (D x A) $______________ F. Base Profit Share Due Agent (___% x E) $______________ G. Profit Share Due Agent $______________ II. FORMULA DEFINITIONS (Letters refer to lettered items listed under Section I.) A. Annual Written Premiums are defined as gross premiums less credits for premiums on cancellations and returns written by agent and recorded by Company during the Profit Sharing Year. B. Earned Premiums are defined as the Written Premiums on business produced during the Profit Sharing Year minus the Unearned Premiums as of the end of the same year plus the Unearned Premium as of the end of the prior year. C. Incurred Losses are defined as net losses paid during the Profit Sharing Year plus reserve for unpaid losses as of the end of same year and minus reserve for unpaid losses as of the beginning of the same year. If a negative total results, a zero total will be used. The maximum amount charged for any one loss shall be the net amount paid or reserved subject to Section V, paragraph D.Incurred Loss Percentage is calculated by dividing the Incurred Losses by the Earned Premiums times 100. If such Percentage is greater than 50%, no further calculation will be made. D. Gross Profit Percentage is calculated by subtracting the Incurred Loss Percentage from 50%. E. Gross Profit is calculated by multiplying Earned Premiums by the Gross Profit Percentage. F. Base Profit Share Due Agent shall be calculated by multiplying the Net Profit by the applicable Profit Share Percentage set forth in the following table: (a) (b) Annual Base Profit Share Written Premiums Percentage 0 - 49,999 0% 50,000 - 100,000 10.0% 100,001 - 250,000 15.0% 250,001 - 500,000 20.0% 500,001 - Over 25.0% Determination of base Profit Share Percentage: The percentage figure which is opposite the written premiums for the Profit Sharing Year is the base Profit Share Percentage (Enter in Section I. F). G. Profit Share Due Agent shall be the base profit share plus or minus any Bonus Plan percentages as set forth in Section III. and Section IV., Bonus Plan. III. BONUS PLAN - Agencies with annual written premiums of $50,000 to $250,000: A. Growth Bonus 1. The Citizens agrees to pay 1.25 times the dollar amount shown in Section I. F when the policy count as of 12/31 is in excess of 1.149% of the policy count as of 1/1 of the current year as shown in Citizens' agency statement. 2. The Citizens agrees to pay .75 times the dollar amount shown in Section I. F when the policy count as of 12/31 is less than .949% of the policy count as of 1/1 of the current year as shown in Citizens' agency statement. Profit Sharing calculation ends here for agencies BELOW $250,000 annual written premiums. IV. BONUS PLAN - Agencies with annual written premiums of $250,001 to $1,000,000: A. Growth Bonus 1. Citizens agrees to include the following Growth Bonus percentage points to the current year's base profit share percentage (Section II. F (b)) when the policy count as of 12/31 to the policy count of 1/1 of the current year as shown in Citizens agency statement is: % of Policy Count Growth Bonus .949% and less -1.0% +1.050% to +1.15% +1.0% +1.151% and above +2.0% B. Retention Bonus 1. Citizens agrees to include the following Retention Bonus percentage points to the base profit share percentage (Section II. F (b)) when policies in force as of 12/31 divided by the same policies in force as of 1/1 of the current year are: Current Retention Retention Percentage Bonus Points 80.0% - 90.99% +2% 91.0% - 100.00% +3% C. Loss Ratio Bonus 1. Citizens agrees to include the following Loss Ratio Bonus percentage points to the current year's base profit share percentage (Section II. F (b)) when the current year plus the preceding two years' total incurred losses to earned premiums loss ratio is: Loss Ratio 3 Year Loss Ratios Bonus Points 0 - 25.99% +4% 26.0% - 39.99% +3% 40.0% - 49.99% +2% 50.0% - 59.99% 0% 60.0% - 69.99% -2% 70.0% - 79.99% -3% 80.0% - Over -4% V. OTHER PROVISIONS A. The Citizens agrees to submit to the Agency a Profit Sharing Statement within a reasonable time after the close of the Profit Sharing period, and if a net profit is shown, the Company will promptly remit the resultant profit sharing payment to the Agency, if all premiums and other current indebtedness for the period have been paid. The profit sharing allowed the agency, if any, is not payable unless the Agency has complied with all terms of this plan and our Agency Agreement. No charge or deduction for profit sharing payment shall be made or claimed by the Agency in its accounts and is payable only by the Citizens' check. B. Citizens records shall be considered binding and conclusive as to all information pertaining to this Agreement. C. A deficit is incurred anytime Agency's Loss Percentage is in excess of 50%. There is no deficit carry- over, except as it may apply to the Loss Ratio Bonus, Section IV. C (1). D. The maximum loss charged to Section I. B "Incurred Losses" for a Profit Sharing Year will be $100,000 on any one occurrence. Section IV. C (1), shall include total losses incurred for the Bonus Period calculation. E. In the event of a change in agency ownership during the Profit Sharing Period, any profit sharing earned during that period shall be payable by the Citizens to the agency owner shown on the Citizens records at the close of that Profit Sharing period. It is also agreed, for the purpose of computing Profit Sharing, that the purchaser receive credit for all the earned premiums and is charged with all the incurred losses of the purchased agency subject to the terms of this agreement. F. Neither this plan, nor any rights hereunder shall be assignable, but the plan may be altered or amended at any time by written instrument to that effect. G. This plan supersedes all previous agreements, whether written or oral. H. The Agent's Profit Sharing Plan is automatically cancelled when an Agency Agreement is cancelled, and the Plan does not apply to premiums earned during a calendar year in which the Agency Agreement is cancelled. I. The Agent's Profit Sharing Plan is a voluntary plan on the part of the Citizens and is not, nor does it become, a part of any Agency Agreement now in force or subsequently executed between the Company and any of its Agents; and the Citizens reserves the right to amend or withdraw the Plan at any time. EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in Registration No. 33-81768 on Form S-8 and in Registration Statement No. 33-10947 on Form S-8 of Meridian Insurance Group, Inc. of our report, dated February 26, 1997, on our audits of the consolidated financial statements and financial statement schedules of Meridian Insurance Group, Inc. as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Indianapolis, Indiana March 27, 1997 EX-27 4
7 1000 YEAR DEC-31-1996 DEC-31-1996 238,343 0 1,327 40,630 704 0 281,689 3,128 45,850 16,690 397,798 161,309 84,066 0 0 11,875 0 0 44,078 78,096 397,798 167,304 14,908 3,794 562 130,101 36,443 13,767 5,950 150 5,800 0 0 0 5,800 0.86 0.86 123,577 137,817 (7,716) 93,199 30,470 161,309 (7,716)
EX-2 5 ACQUISITION AND AFFILIATION AGREEMENT By and Among CITIZENS SECURITY GROUP INC., CITIZENS SECURITY MUTUAL INSURANCE COMPANY, and MERIDIAN INSURANCE GROUP, INC. March 20, 1996 TABLE OF CONTENTS RECITALS 1 AGREEMENT 4 ARTICLE I THE MERGER 4 Section 1.1. Merger 4 Section 1.2. Effective Time of the Merger 4 Section 1.3. Conversion of Citizens' Shares 5 Section 1.4. Conversion of Merger Company's Shares 8 Section 1.5. Employee Stock Ownership Plan 9 Section 1.6. Stock Options 10 Section 1.7. Board of Directors of Citizens Mutual 10 ARTICLE II REPRESENTATIONS AND WARRANTIES OF CITIZENS AND CITIZENS MUTUAL 10 Section 2.1. Organization 11 Section 2.2. Organization of Subsidiaries 11 Section 2.3. Capitalization 12 Section 2.4. Authority to Conduct Insurance Business 13 Section 2.5. Consents and Approvals and No Defaults 14 Section 2.6. Authority Relative to this Agreement 15 Section 2.7. GAAP Financial Statements 16 Section 2.8. Statutory Financial Statements 17 Section 2.9. Reserves 18 Section 2.10. No Undisclosed Liabilities 18 Section 2.11. Regulatory Filings 19 Section 2.12. SEC Reports 19 Section 2.13. Litigation 20 Section 2.14. Compliance With Law 20 Section 2.15. Properties 21 Section 2.16. Intellectual Property 22 Section 2.17. Environmental Laws and Permits 23 Section 2.18. Taxes 23 Section 2.19. Employee Benefit Plans 24 Section 2.20. Contracts and Commitments 28 Section 2.21. Related Party Transactions 29 Section 2.22. No Finders 29 ARTICLE III REPRESENTATIONS AND WARRANTIES OF MERIDIAN 29 Section 3.1. Organization 29 Section 3.2. Corporate Power and Authority, Etc. 29 Section 3.3. No Conflicts 30 Section 3.4. Consents 30 Section 3.5. Funds Available 31 Section 3.6. Merger Company 31 Section 3.7. GAAP Financial Statements 32 Section 3.8. Statutory Financial Statements 32 Section 3.9. Reserves 33 Section 3.10. No Undisclosed Liabilities 34 Section 3.11. Regulatory Filings 34 Section 3.12. SEC Reports 35 Section 3.13. Litigation 36 Section 3.14. Compliance With Law 36 Section 3.15. Authority to Conduct Insurance Business 37 Section 3.16. Properties 38 Section 3.17. Intellectual Property 38 Section 3.18. Environmental Laws and Permits 38 Section 3.19. Taxes 39 Section 3.20. Employee Benefit Plans 40 Section 3.21. Contracts and Commitments 40 ARTICLE IV PRE-CLOSING COVENANTS 40 Section 4.1. General 40 Section 4.2. Notices and Consent 41 Section 4.3. Operation of Business 41 Section 4.4. Full Access 43 Section 4.5. Shareholders' Meeting 43 Section 4.6. Acquisition Negotiations 44 Section 4.7. Policyholders' Meeting 45 Section 4.8. Representation Letter of ESOP Trustee 46 ARTICLE V OTHER COVENANTS 46 Section 5.1. General 46 Section 5.2. Continuity of Identity and Operations for Citizens Insurance Companies 46 Section 5.3. Indemnification; Directors and Officers Insurance 47 Section 5.4. Citizens Employees 49 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF MERIDIAN 52 Section 6.1. No Misrepresentation or Breach of Covenants or Warranties 53 Section 6.2. Officers' Certificates 53 Section 6.3. Letter as to Transaction Cost 54 Section 6.4. Approval of Citizens' Shareholders and Citizens Mutual's Policyholders 55 Section 6.5. Dissenting Shares 55 Section 6.6. Regulatory Approval 55 Section 6.7. Hart-Scott-Rodino 56 Section 6.8. Third Party Consents 56 Section 6.9. Boards of Directors 56 Section 6.10. Officers 57 Section 6.11. Reinsurance Pooling Agreement 57 Section 6.12. Management Services Agreements 57 Section 6.13. No Material Adverse Change 58 Section 6.14. Certain Personnel Matters 58 Section 6.15. Vis'n Matters 58 Section 6.16. ESOP and Plan Matters 60 Section 6.17. Opinion of Counsel for Citizens and Citizens Mutual 60 Section 6.18. Fairness Opinion 60 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OFCITIZENS AND CITIZENS MUTUAL 61 Section 7.1. No Misrepresentation or Breach of Covenants or Warranties 61 Section 7.2. Shareholder and Policyholder Approval 61 Section 7.3. Officers' Certificates 62 Section 7.4. Regulatory Approval 62 Section 7.5. Hart-Scott-Rodino 63 Section 7.6. Boards of Directors 63 Section 7.7. Third Party Consents 63 Section 7.8. Reinsurance Pooling Agreement 64 Section 7.9. Management Services Agreements 64 Section 7.10. Certain Personnel Matters 64 Section 7.11. Vis'n Matters 64 Section 7.12. No Material Adverse Change 65 Section 7.13. Opinion of Counsel for Meridian 65 Section 7.14. Fairness Opinions 65 Section 7.15. Payment of ESOP Note 65 ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES 66 Section 8.1. Survival of Representations and Warranties 66 ARTICLE IX TERMINATION 66 Section 9.1. Termination 66 Section 9.2. Termination Fee 67 Section 9.3. Survival of Rights 69 ARTICLE X MISCELLANEOUS 69 Section 10.1. Notices 69 Section 10.2. Expenses 71 Section 10.3. Titles and Headings 72 Section 10.4. No Third-Party Beneficiaries 72 Section 10.5. Entire Agreement 72 Section 10.6. Public Announcements 72 Section 10.7. Waiver 73 Section 10.8. Governing Law 73 Section 10.9. Binding Effect 73 Section 10.10. No Assignment 74 Section 10.11. Invalid Provisions 74 Section 10.12. Construction 74 Section 10.13. Execution in Counterparts 74 ACQUISITION AND AFFILIATION AGREEMENT This ACQUISITION AND AFFILIATION AGREEMENT ("Agreement") is made and entered into as of March 20, 1996, by and among CITIZENS SECURITY GROUP INC. ("Citizens"), a business corporation organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066, CITIZENS SECURITY MUTUAL INSURANCE COMPANY ("Citizens Mutual"), a mutual insurance company organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066, and MERIDIAN INSURANCE GROUP, INC. ("Meridian"), a business corporation organized under the laws of the State of Indiana, whose office and principal place of business is located at 2955 North Meridian Street, Indianapolis, Indiana 46208. RECITALS A. Citizens is a publicly-held insurance holding company. Citizens directly owns all of the issued and outstanding shares of capital stock of Citizens Fund Insurance Company ("Citizens Fund"), a stock insurance company organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066, and all of the issued and outstanding shares of capital stock of Insurance Company of Ohio ("Citizens Ohio"), a stock insurance company organized under the laws of the State of Ohio, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066. (Citizens Fund and Citizens Ohio are sometimes referred to herein as the "Citizens Subsidiaries.") Citizens was organized by Citizens Mutual, which presently owns approximately 20% of the issued and outstanding shares of Citizens Common Stock (as defined in Section 2.3) and all of the issued and outstanding shares of Citizens Preferred Stock (as defined in Section 2.3). Citizens Mutual also owns all of the issued and outstanding shares of capital stock of Mississippi Valley Corporation ("Mississippi Valley"), a business corporation organized under the laws of the State of Minnesota, whose office and principal place of business is located at 406 Main Street, Red Wing, Minnesota 55066. (Citizens Mutual, Citizens, Citizens Fund, Citizens Ohio and Mississippi Valley are collectively referred to herein as the "Citizens Companies.") B. Citizens Mutual, Citizens Fund and Citizens Ohio (collectively, the "Citizens Insurance Companies") are jointly operated and managed under a management services agreement and a reinsurance pooling agreement. C. Meridian is a publicly-held insurance holding company. Meridian directly owns all of the issued and outstanding shares of capital stock of Meridian Security Insurance Company ("Meridian Security"), a stock insurance company organized under the laws of the State of Indiana, whose office and principal place of business is located at 2955 North Meridian Street, Indianapolis, Indiana 46208. Meridian was organized by Meridian Mutual Insurance Company ("Meridian Mutual"), a mutual insurance company organized under the laws of the State of Indiana, whose office and principal place of business is located at 2955 North Meridian Street, Indianapolis, Indiana 46208; Meridian Mutual presently owns approximately 47% of the issued and outstanding shares of common stock of Meridian. Meridian, Meridian Security and Meridian Mutual (such companies are collectively referred to herein as the "Meridian Companies") are jointly operated and managed under a reinsurance pooling agreement and shared management services arrangements. D. The parties to this Agreement entered into a non- binding letter of intent (the "Letter of Intent") dated January 29, 1996 and accepted by Citizens and Citizens Mutual on February 1, 1996. E. In order to consummate the acquisition of Citizens by Meridian as contemplated by the Letter of Intent and this Agreement, Meridian will cause a corporation to be formed under the laws of the State of Minnesota ("Merger Company"). All of the issued and outstanding capital stock of Merger Company will be owned by Meridian or by Meridian Security. F. The Boards of Directors of Citizens, Citizens Mutual, Meridian and Meridian Mutual have determined that it is in the best interest of their respective corporations that Citizens be acquired by Meridian pursuant to the merger of Merger Company with and into Citizens (the "Merger"), and the Boards of Directors of Citizens Mutual, Meridian and Meridian Mutual have determined that it would be in the best interests of their respective corporations that Citizens Mutual become affiliated with Meridian, all upon and subject to the terms and conditions of this Agreement. G. Citizens, Citizens Mutual and Meridian desire to make certain representations, warranties, covenants and agreements in connection with the transactions contemplated by the Letter of Intent and this Agreement and to prescribe various conditions precedent to the transactions contemplated hereby. AGREEMENT In consideration of the foregoing and the mutual representations, warranties, covenants and agreements herein set forth, the parties to this Agreement hereby agree as follows: ARTICLE I THE MERGER Section 1.1. Merger. Subject to the terms and conditions of this Agreement and the Plan of Merger substantially in the form attached hereto as Exhibit A (the "Plan of Merger"), at the Effective Time (as defined in Section 1.2) Merger Company shall merge with and into Citizens in accordance with the applicable laws of the State of Minnesota and the separate existence of Merger Company shall cease (except insofar as continued by applicable law). Articles of Merger, with the Plan of Merger attached, shall be filed with the Secretary of State of the State of Minnesota in connection with the closing of the Merger and other transactions contemplated by this Agreement (the "Closing"). Section 1.2. Effective Time of the Merger and Closing . Unless otherwise agreed by the parties or otherwise provided by law, the Merger shall become effective at 11:59 p.m., Eastern Standard Time, on a date as soon as practicable after the conditions to the Merger pursuant to Articles VI and VII are satisfied or waived, or such other date as the parties may agree (the "Effective Time"). The parties anticipate that the Effective Time will be on or about June 30, 1996. The Closing shall take place at the offices of Meridian, or such other place as the parties may agree. Section 1.3. Conversion of Citizens' Shares. (a) At the Effective Time of the Merger, the shares of Citizens Common Stock and Citizens Preferred Stock issued and outstanding immediately prior to the Effective Time, and all rights with respect thereto, shall by reason of the Merger and without any further action on the part of the holders thereof, be cancelled and converted into rights to receive cash (except for Dissenting Shares, as defined in Section 1.3(f)), as follows: (i) Citizens Common Stock. The holders of Citizens Common Stock shall be entitled to receive, for each share held, an amount of cash equal to the portion of the "Final Common Stock Merger Price" (as hereinafter defined) which bears the same proportion to the total Final Common Stock Merger Price as one share of Citizens Common Stock bears to all issued and outstanding shares of Citizens Common Stock as of the Effective Time. The term "Final Common Stock Merger Price" as used in this Agreement means: $24,957,312, less 85.1% of the Transaction Costs Adjustment, if any, as that term is defined in Section 10.2. (ii) Citizens Preferred Stock. Citizens Mutual, as the holder of all of the issued and outstanding shares of Citizens Preferred Stock, shall be entitled to receive for all of such shares, an amount of cash equal to: $4,375,000, less 14.9% of the Transaction Costs Adjustment, if any, as that term is defined in Section 10.2. No Dissenting Shares shall be converted into or represent a right to receive cash. Dissenting Shares shall be subject to the provisions of Section 1.3(f). (b) Immediately following the Effective Time, each holder of an outstanding certificate representing shares of Citizens Common Stock, upon surrender of the certificate or certificates therefor, properly endorsed, to a bank appointed by Citizens with the prior approval of Meridian (which approval shall not be unreasonably withheld) to act as exchange agent (the "Exchange Agent"), shall be entitled to receive the amount of cash as provided herein. The cash payment will be made by check payable to the registered holder of each certificate representing shares of Citizens Common Stock in the name of each such holder, or to such other person as that holder may specify in writing to the Exchange Agent. Immediately following the Effective Time, Citizens Mutual, upon surrender to Citizens of the certificate or certificates representing the Citizens Preferred Stock, properly endorsed, shall be entitled to receive the amount of cash as provided herein. The cash payment shall be made by direct wire transfer of funds to a bank account of Citizens Mutual specified in writing to Meridian not less than two business days prior to the Closing, or in such other manner as Citizens Mutual and Meridian may agree. (c) All rights with respect to shares of Citizens Common Stock and Citizens Preferred Stock owned by holders thereof as of the Effective Time shall cease and terminate, notwithstanding that any certificates for such shares shall not have been surrendered to the Exchange Agent or Citizens, and the holders of such shares shall have no interest in nor claims against Citizens, the surviving corporation in the Merger, except the right to receive the cash payment specified herein, without interest (except for Dissenting Shares, the holders of which shall be subject to Section 1.3(f)). (d) Meridian shall cause to be deposited with the Exchange Agent and with Merger Company on or prior to Closing, funds immediately available as shall be necessary for the cash distribution by the Exchange Agent and Citizens described herein. No interest shall accrue or be payable with respect to any funds held by the Exchange Agent or Merger Company or Citizens for the benefit of the former holders of Citizens Common Stock or Citizens Preferred Stock. All interest or other investment income earned on the funds on deposit with the Exchange Agent shall, from time to time, be paid to Merger Company prior to the Effective Time or to Citizens following the Effective Time. (e) To the extent permitted by law, the appointment of the Exchange Agent may be terminated by Citizens at any time after twelve months following the Effective Time; and upon termination of such appointment, any unclaimed funds for cash payments shall be returned to Citizens, as the surviving corporation in the Merger, and thereafter the holders of certificates formerly representing shares of Citizens Common Stock who have not received their cash payments for whatever reason may surrender such certificates to Citizens and (subject to applicable abandoned property, escheat and similar laws) receive in exchange therefor the cash payment to which they are entitled under this Agreement. (f) Each share of Citizens Common Stock, the holder of which has taken all of the steps required by Section 302A.473 of the Minnesota Business Corporation Act (the "Minnesota Dissenters' Rights Statute") to establish such holder's shares as dissenting shares as therein defined, is herein referred to as a "Dissenting Share." Dissenting Shares owned by each holder thereof shall not be converted into or represent the right to receive cash and shall be entitled only to receive the value of such Dissenting Shares in accordance with the Minnesota Dissenters' Rights Statute, provided that such holder complies with the procedures contemplated by and set forth therein. If any holder of Dissenting Shares shall effectively withdraw or lose such holder's dissenters' rights, such Dissenting Shares shall be converted into the right to receive cash in accordance with the provisions of Section 1.3(a). (g) Citizens shall give Meridian (i) prompt notice of any written notices, demands for payment, withdrawals of notices or demands and any other instrument served pursuant to the Minnesota Dissenters' Rights Statute and received by Citizens (such notice by Citizens shall, to the extent available to Citizens, set forth the name and address of, and the number of shares of Citizens Common Stock held by, the holder making such objection or giving such notice), and (ii) the opportunity to direct all negotiations or proceedings with respect to holders of Dissenting Shares. Citizens shall not voluntarily make any payment with respect to any demands for payment for shares under the Minnesota Dissenters' Rights Statute, and shall not, except with the prior written consent of Meridian, settle or offer to settle any such demands. Section 1.4. Conversion of Merger Company's Shares. At the Effective Time of the Merger, the shares of capital stock of Merger Company issued and outstanding immediately prior to the Effective Time shall, by reason of the Merger and without any further action on the part of the holder thereof, be cancelled and converted into all of the issued and outstanding shares of capital stock of Citizens. Immediately following the Effective Time, the holder of the certificate representing all of the shares of capital stock of Merger Company issued and outstanding immediately prior to the Effective Time, upon surrender to Citizens of the certificate therefor, properly endorsed, shall be entitled to receive a certificate representing all of the issued and outstanding shares of capital stock of Citizens following the Effective Time. Section 1.5. Employee Stock Ownership Plan. Prior to the Closing and the Effective Time, Citizens and Citizens Mutual shall take such actions in connection with the Citizens Security Employee Stock Ownership Plan (the "ESOP") as may be necessary to: (a) cause National City Bank of Minneapolis, as Trustee of the ESOP (the "ESOP Trustee"), to surrender to the Exchange Agent the certificates representing all shares of Citizens Common Stock owned by the ESOP for payment at the Effective Time in accordance with the terms of the Merger; (b) cause (i) the repayment, by ESOP Trustee, of the outstanding amounts due under the Promissory Note of the ESOP dated October 30, 1992, executed on behalf of the ESOP by the ESOP Trustee and payable to the order of Citizens Mutual (the "ESOP Note"), (ii) the cancellation of the ESOP Note, and (iii) the release of the assets held as collateral in the ESOP suspense account, as of the Effective Time; (c) allow for the allocation of the unallocated assets held by the ESOP, after repayment of the outstanding amounts due under the ESOP Note, to the ESOP participants as provided in the ESOP and to the fullest extent permitted by applicable law, as soon as practicable after the Effective Time; and (d) at the Effective Time, cause the ESOP participants who were employed by Citizens Mutual as of February 8, 1996, to become fully vested in their ESOP accounts and cause ESOP participation to be limited to those individuals employed by Citizens Mutual on or before the Closing. Section 1.6. Stock Options. Prior to the Closing and the Effective Time, Citizens shall make any necessary amendments to or adjustments in outstanding stock options for the purchase of shares of Citizens Common Stock, or the plan under which those options were issued, so that: (a) such options may be exercised immediately prior to the Effective Time (including payment to Citizens in cash of the exercise price), (b) the shares of Citizens Common Stock issued in respect of such exercises may be tendered for payment in accordance with the terms of the Merger, and (c) any unexercised options and any stock option plans of Citizens shall, as of the Effective Time, terminate, no longer be exercisable, and otherwise not represent any claim against Citizens or Merger Company for the issuance of capital stock or other securities or for the payment of cash or other consideration. Section 1.7. Board of Directors of Citizens Mutual. At the Effective Time, the Board of Directors of Citizens Mutual shall be reconstituted so that it consists of the six current directors of Meridian Security, plus the current Vice President of Marketing of Citizens Mutual and the current President of Citizens Mutual. ARTICLE II REPRESENTATIONS AND WARRANTIES OF CITIZENS AND CITIZENS MUTUAL Citizens and Citizens Mutual hereby represent and warrant to Meridian as follows; subject, however, to the exceptions set forth on the attached Disclosure Schedule which specifies the particular section or sections to which each exception relates; and further subject to the exception that the representations and warranties of Citizens Mutual set forth in this Article II and pertaining solely to Citizens or to the Citizens Subsidiaries are limited and made to the knowledge of Citizens Mutual, its officers, directors and employees who are not officers, directors or employees of Citizens or the Citizens Subsidiaries: Section 2.1. Organization. Each of Citizens and Citizens Mutual is a corporation duly organized and validly existing under the laws of the State of Minnesota. Each of Citizens and Citizens Mutual has the corporate power and authority to own, operate and lease its properties and assets and to carry on its business as now being conducted. Section 2.2. Organization of Subsidiaries. Citizens Mutual has no direct or indirect subsidiaries other than Citizens (and its subsidiaries) and Mississippi Valley, and Citizens has no direct or indirect subsidiaries other than the Citizens Subsidiaries. Schedule 2.2 sets forth for Mississippi Valley and for each Citizens Subsidiary the authorized capital stock, the number of shares duly issued and outstanding, and the owners of such shares and the number of shares held by each owner. The shares of capital stock of Mississippi Valley owned by Citizens Mutual, and the shares of capital stock of each Citizens Subsidiary owned directly or indirectly by Citizens are duly authorized, validly issued, fully paid and non-assessable, and are owned free and clear of any liens, claims, charges or encumbrances. No equity security of Mississippi Valley or either Citizens Subsidiary is or may be required to be issued by reason of any option, warrant, right to subscribe to, call, or commitment of any character whatsoever relating to, or security or right convertible into, shares of any capital stock, and there are no contracts, commitments, understandings, or arrangements by which Mississippi Valley or either Citizens Subsidiary is bound to issue additional shares of its capital stock, or options, warrants, or rights to purchase or acquire any additional shares of its capital stock. None of the Citizens Companies has any investment in any partnership, joint venture or limited liability company, and all loans or advances to its independent insurance agents are listed on Schedule 2.2 (including the relevant amounts, outstanding balances and dates thereof). Each of Mississippi Valley and the Citizens Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority to own or lease its properties and carry on its business as now being conducted. Section 2.3. Capitalization. The authorized capital stock of Citizens consists of (i) 5,000,000 shares of preferred stock, par value $0.01 per share, of which the only authorized series is 1,250,000 shares of Series A Preferred Stock, par value $0.01 per share (the "Citizens Preferred Stock"), and (ii) 10,000,000 shares of common stock, par value $0.01 per share (the "Citizens Common Stock"). As of the date of this Agreement, the only issued and outstanding shares of Citizens' capital stock are 1,250,000 shares of Citizens Preferred Stock and 1,661,585 shares of Citizens Common Stock. The only outstanding options, warrants, or other rights to purchase shares of Citizens Common Stock or Preferred Stock are the employee and nonemployee director stock options covering a total of 335,000 shares of Citizens Common Stock referred to in Section 1.6 above. All shares of capital stock of Citizens which are outstanding as of the date hereof, or which will be outstanding immediately prior to the Effective Time, are or will be duly authorized, validly issued, fully paid and non-assessable, and are not or will not be subject to or issued in violation of, any preemptive rights. Except as set forth above, there are no shares of capital stock of Citizens authorized or outstanding and there are no subscriptions, options to purchase shares of the capital stock of Citizens, conversion or exchange rights, warrants, preemptive rights or other arrangements, claims or commitments of any nature whatsoever (whether firm or conditional) obligating Citizens to issue, transfer, deliver or sell, or cause to be issued, transferred, delivered or sold, additional shares of the capital stock or other securities or interests of Citizens or obligating Citizens to grant, extend or enter into any such agreement or commitment. Section 2.4. Authority to Conduct Insurance Business. Each of Citizens Mutual and the Citizens Subsidiaries is an insurance company licensed or authorized to write the kinds of insurance coverage set forth on Schedule 2.4 in its respective state of incorporation and in each of the jurisdictions specified in such schedule in which it writes insurance. Each of Citizens Mutual and the Citizens Subsidiaries holds a license and is fully qualified as a foreign insurer to conduct its business in each of those jurisdictions, and there is no other jurisdiction in which the failure to hold a license or to be so qualified to conduct the business as now being conducted by the respective company would have a material adverse effect on the business of the Citizens Companies (considered as a whole) or on the consolidated results of operations or consolidated financial condition of Citizens and the Citizens Subsidiaries (considered as a whole) or of Citizens Mutual and Mississippi Valley (considered as a whole) (hereinafter referred to as a "Citizens Material Adverse Effect"). No license or certificate of authority identified in Schedule 2.4 has been revoked, restricted, suspended, limited or modified nor is any license or certificate of authority the subject of, nor, to the knowledge of Citizens or Citizens Mutual, is there a basis for, a proceeding for, or a threatened proceeding for, revocation, restriction, suspension, limitation or modification, nor is Citizens Mutual or either of the Citizens Subsidiaries operating under any formal or informal agreement or understanding with the licensing authority of any state that restricts its authority to do business or requires any such company to take, or refrain from taking, any action. Section 2.5. Consents and Approvals and No Defaults. The execution and delivery by Citizens and Citizens Mutual of this Agreement, the performance by Citizens and Citizens Mutual of their obligations hereunder, and the consummation by Citizens and Citizens Mutual of the transactions contemplated hereby do not require Citizens or Citizens Mutual to obtain any consent, approval or action of, or make any filing with or give any notice to, any corporation, person or firm or any public, governmental or judicial authority, other than any consents or approvals from, or any filings or notices to, any corporations, persons or firms in connection with any agreements or other instruments that individually or in the aggregate are not material to Citizens or Citizens Mutual. This Agreement is the valid and binding obligation of each of Citizens and Citizens Mutual, enforceable against each of them in accordance with its terms, subject to bankruptcy, receivership, insolvency, reorganization, moratorium or similar laws affecting or relating to creditors' rights generally and subject to general principles of equity. Provided the required approvals of agencies of any government (including, without limitation, the Insurance Division of the Minnesota Department of Commerce (the "Minnesota Department") and the Ohio Department of Insurance (the "Ohio Department")) are obtained, neither the execution, delivery, and performance by Citizens or Citizens Mutual of this Agreement, nor the consummation of the transactions contemplated hereby, nor compliance by Citizens or Citizens Mutual with any of the provisions hereof, will: (A) violate, conflict with, or result in a breach of any provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of any lien, security interest, charge, or encumbrance upon any of the properties or assets of the Citizens Companies under, any of the terms, conditions, or provisions of: (i) their respective articles of incorporation or by-laws, or (ii) any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement, or other material instrument or obligation to which any of the Citizens Companies is a party or by which any of such companies may be bound, or to which any Citizens Company or any of their properties or assets may be subject; or (iii) any governmental license, permit or authorization material to the business of any Citizens Company; or (B) violate any judgment, ruling, order, writ, injunction, decree, statute, rule, or regulation applicable to any Citizens Company or any of their respective properties or assets. Section 2.6. Authority Relative to this Agreement. Each of Citizens and Citizens Mutual has all requisite corporate power and authority to enter into and deliver this Agreement, and the execution and delivery hereof has been duly approved and authorized by the Boards of Directors of Citizens and Citizens Mutual. Subject to approvals by the holders of the Citizens Preferred Stock and the Citizens Common Stock and such approvals of governmental agencies having regulatory authority over the Citizens Companies (including the Minnesota Department and the Ohio Department) and such further action of the Board of Directors of Citizens and Citizens Mutual as may be required by the Minnesota Insurance Law or the Indiana Insurance Law, Citizens and Citizens Mutual have or will have all requisite corporate power and authority to effectuate the Merger. The holders of Citizens Preferred Stock and the holders of Citizens Common Stock are entitled to vote as separate classes on the Merger in person or by proxy at a meeting convened to approve the Merger (with each such holder being entitled to one vote per share), and the vote at such meeting is the only vote of the holders of Citizens Preferred Stock or Citizens Common Stock necessary to approve the Merger. Section 2.7. GAAP Financial Statements. Citizens has previously delivered to Meridian true and complete copies of audited financial statements (the "GAAP Financial Statements") for the years ended December 31, 1993, December 31, 1994, and December 31, 1995 for Citizens (prepared on a consolidated basis). The GAAP Financial Statements so provided were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis and present fairly, in all material respects, the financial condition, results of operations and changes in financial position of Citizens as of the dates or for the periods covered thereby, in conformity with GAAP. Citizens has also previously delivered to Meridian true and complete copies of the internally prepared unaudited financial statements for the years ended December 31, 1993, December 31, 1994, and December 31, 1995, for Mississippi Valley (the "Mississippi Valley Financial Statements"). The Mississippi Valley Financial Statements were prepared by personnel of Citizens Mutual based on the accounting records of Mississippi Valley, which accounting records were prepared by personnel of Citizens Mutual in the ordinary course and in accordance with customary business practices, and the Mississippi Valley Financial Statements fairly present in all material respects the financial condition and results of operations of Mississippi Valley for the periods covered by the Mississippi Valley Financial Statements. Section 2.8. Statutory Financial Statements. (a) Citizens has previously delivered to Meridian true and complete copies of the audited statutory financial statements of Citizens Mutual and each Citizens Subsidiary (including statements of operations, unassigned surplus and cash flows) for the fiscal years ended December 31, 1990 to 1995 (the "Audited SAP Financials"). The Audited SAP Financial Statements present fairly in all material respects the financial condition of the respective companies at such dates and results of operations for such periods and were prepared in accordance with statutory accounting principles ("SAP"). (b) Annual Statements required to be filed with applicable insurance regulatory authorities on the respective forms prescribed or permitted by such authorities (the "Annual Statements") for Citizens Mutual and each Citizens Subsidiary for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 have been filed with the appropriate regulatory authorities in all jurisdictions in which such filing is required. The Annual Statements were prepared in accordance with accounting practices prescribed or permitted by such regulatory authorities, applied on a consistent basis throughout the related periods except as otherwise stated therein, and presented fairly in all material respects the statutory financial position of the respective company at the dates of, and the statutory results of operations for the respective company for the periods covered by, such statutory statements. Section 2.9. Reserves. The aggregate actuarial reserves and other actuarial amounts held in respect of liabilities with respect to Citizens Mutual and each of the Citizens Subsidiaries as established or reflected in their respective financial statements as of December 31, 1995: (a) (i) were determined in accordance with generally accepted actuarial standards consistently applied, (ii) were fairly stated in accordance with sound actuarial principles, and (iii) were based on reasonable and appropriate actuarial assumptions; (b) met the requirements of the applicable insurance laws of the States of Minnesota and Ohio, or any other state having such jurisdiction in all material respects; and (c) were adequate (under generally accepted actuarial standards consistently applied) to cover the total amount of all reasonably anticipated matured and unmatured liabilities of Citizens Mutual and each Citizens Subsidiary under all outstanding insurance policies pursuant to which Citizens Mutual or either Citizens Subsidiary has any liability. Section 2.10. No Undisclosed Liabilities. As of December 31, 1995, none of the Citizens Companies had any debts, obligations or liabilities of whatever kind or nature, either direct or indirect, absolute or contingent, matured or unmatured (the "Citizens Liabilities"), except debts, obligations and liabilities that are fully reflected in, or reserved against on, the GAAP Financial Statements or the Audited SAP Financial Statements, except for liabilities arising from the ordinary course of business that are not required to be reflected in a balance sheet prepared in accordance with GAAP or SAP (as the case may be). Since such date, there have been no changes in the Citizens Liabilities except for changes arising from the ordinary course of business, none of which changes, individually or in the aggregate, have had a Citizens Material Adverse Effect. Section 2.11. Regulatory Filings. Citizens has previously delivered to Meridian true and complete copies of all filings which were made by Citizens, Citizens Mutual or any Citizens Subsidiary within the past three years with the Minnesota Department, the Ohio Department or any other department of insurance in any jurisdiction where Citizens, Citizens Mutual or any Citizens Subsidiary is required to make such filings. Each of such filings, as of its respective date, complied as to form and content in all material respects with the provisions of applicable law. Section 2.12 . SEC Reports. Citizens has delivered to Meridian (i) each registration statement, Current Report on Form 8-K, Quarterly Report on Form 10-Q, annual report to shareholders, and proxy statement or information statement prepared by it since January 1, 1992, (ii) an Annual Report on Form 10-K for each of the years ended December 31, 1991, 1992, 1993 and 1994, and (iii) a Quarterly Report on Form 10-Q for each of the periods ended March 31, June 30 and September 30, 1995, each in the form (including exhibits) filed with Securities and Exchange Commission (collectively, the "Citizens SEC Reports"). As of its respective date, each of the Citizens SEC Reports did not contain any untrue statements of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. Each of the balance sheets included in or incorporated by reference into the Citizens SEC Reports (including the related notes and schedules) fairly presents the financial position of Citizens as of its date, and each of the statements of income, of shareholders' equity and of cash flows included in or incorporated by reference into the Citizens SEC Reports (including the related notes and schedules) fairly presents the results of operations, shareholders' equity and cash flows, as the case may be, of Citizens for the period set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments which will not be material to Citizens in amount or effect), in each case in accordance with generally accepted accounting principals consistently applied during the periods involved, except as may be noted therein. Other than the Citizens SEC Reports, Citizens has not filed any other definitive reports or statements with the Securities and Exchange Commission since January 1, 1992. Section 2.13. Litigation. There are no proceedings or investigations (other than claims in the ordinary course of the insurance business), pending or threatened against, relating to, involving or otherwise affecting any of the Citizens Companies, which individually exceed $10,000 or in the aggregate may have a Citizens Material Adverse Effect. Section 2.14. Compliance With Law. (a) None of the Citizens Companies is in violation in any material respect (or, with notice or lapse of time or both, would be in violation in any material respect) of any term or provision of any applicable law, regulation, rule, ordinance, order, judgment, writ or injunction of any federal, state or local government or instrumentality or agency thereof, or of any court, which violation may reasonably be expected to have a Citizens Material Adverse Effect, and Citizens and Citizens Mutual are not aware of any facts or circumstances which may constitute or result in any such violation. (b) None of the Citizens Companies is a party to any contract with or other undertaking to, or is subject to any order by, or is a recipient of any supervisory letter or other oral or written communication of any kind from, any governmental entity that (i) currently materially and adversely affects the business of the Citizens Companies (considered as a whole) or the consolidated financial condition of either Citizens and the Citizens Subsidiaries (considered as a whole) or Citizens Mutual and Mississippi Valley (considered as a whole), including without limitation, reserve adequacy, investment, sales or trade practices and policies, underwriting practices and policies, or management, or (ii) may reasonably be expected to materially and adversely affect the business or financial condition of any of the Citizens Companies. None of Citizens, Citizens Mutual or any Citizens Subsidiary has been advised by a governmental entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any order, contract or other communication of the kind described above in this Section 2.14. Section 2.15. Properties. Each of Citizens Companies has good title to all properties and assets material to the conduct of its business, which it purports to own, including, without limitation, all property reflected in the GAAP Financial Statements or Audited SAP Financial Statements or Mississippi Valley Financial Statements dated December 31, 1995, or acquired since that date (except in all cases to the extent such assets or properties have been sold or otherwise disposed of in the ordinary and usual course of business since that date). All such properties and assets are owned, free and clear of all liens, charges and encumbrances, other than (i) those set forth on Schedule 2.15, (ii) any liens and assessments for taxes not yet due and payable or being contested in good faith by appropriate proceedings, and (iii) such imperfections of title, or encumbrances and liens, if any, as do not materially detract from the value or interfere with the actual or intended use of the properties owned by any of the Citizens Companies or otherwise materially impair the business operations of any of the Citizens Companies. All material leases pursuant to which any of the Citizens Companies leases real or personal property are valid and binding on the respective Citizens Company, enforceable against such Citizens Company in accordance with their respective terms subject to bankruptcy, receivership, insolvency, reorganization, moratorium or similar laws affecting or relating to creditors' rights generally and subject to general principles of equity (and Citizens and Citizens Mutual do not know of any reason that such leases would not be valid and binding upon or enforceable against the other parties thereto), and there is not under any of such leases any existing default or event of default on the part of any Citizens Company, or any event which with notice or lapse of time, or both, would constitute a default on the part of any Citizens Company (and Citizens and Citizens Mutual do not know of any default, event of default or event which with notice or lapse of time, or both, would constitute a default, in each case on the part of the other party thereto), the consequence of which would have a Citizens Material Adverse Effect. Section 2.16. Intellectual Property. There are no copyrights, trademarks, trade names, service marks or patents covered under federal or state common law or statutory law, whether or not registered, used by any of the Citizens Companies (the "Intellectual Property") that are material to the conduct of their respective businesses. Set forth on Schedule 2.16 is a listing of any federal or state registered Intellectual Property that any of the Citizens Companies uses in the conduct of its respective business. There are no infringement suits pending, or to the best knowledge of Citizens or Citizens Mutual threatened, against any of the Citizens Companies with respect to the Intellectual Property, and neither Citizens nor Citizens Mutual knows of any fact or condition which could give rise to any such infringement suit. Section 2.17. Environmental Laws and Permits. Each of the Citizens Companies is in compliance with any and all laws, regulations, rules, ordinances, orders, judgments, permits, agreements, licenses or other governmental restrictions or requirements relating to health, the environment or the release by such Citizens Company of any materials into the environment, now in effect in any and all jurisdictions, in which the Citizens Companies are or from time to time may be doing business (collectively the "Environmental Laws"), except where such failure to comply would not have a Citizens Material Adverse Effect. Section 2.18. Taxes. (a) All federal income tax returns required to be filed by the Citizens Companies have been properly and timely filed with the Internal Revenue Service, (b) all state and local income tax returns required to be filed by the Citizens Companies have been properly and timely filed with the appropriate state or local taxing authorities, except where the failure so to file such state and local income tax returns would not have a Citizens Material Adverse Effect, and (c) all federal, state and local tax information returns required to be filed by the Citizens Companies have been properly and timely filed with the appropriate federal, state or local taxing authorities, except where the failure so to file such information returns would not have a Citizens Material Adverse Effect. Such income tax returns were true, correct and complete in all material respects at the time filed, and the Citizens Companies have paid all taxes shown to be due on such returns. The Citizens Companies have adequately reserved, in accordance with GAAP, on the GAAP Financial Statements, and in accordance with SAP, on the Audited SAP Financial Statements, for the payment of all unpaid federal, state and local taxes, including interest and penalties, payable in respect of any taxable event or period (including interim periods) ending on the dates of such financial statement and for all periods prior thereto. There are no outstanding deficiencies, assessments or proceedings for the assessment or collection of taxes or any material dispute as to taxes against or involving any of the Citizens Companies. Section 2.19. Employee Benefit Plans. (a) Except for the Citizens Companies, there are no other trades or businesses, whether or not incorporated, which, together with any of the Citizens Companies, would be deemed to be a "single employer" within the meaning of Code Sections 414(b), (c) or (m) of the Internal Revenue Code of 1986, as amended (the "Code"). (b) Schedule 2.19 sets forth a true and a complete list of (i) each employee benefit plan, as defined in Section 3 (3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") that any of the Citizens Companies currently maintains or has maintained within the three year period preceding the Effective Time (the "ERISA Plans"), and (ii) each other plan, arrangement, program and agreement providing employee benefits, including, but not limited to, deferred compensation, bonuses, severance pay and fringe benefits, that are presently maintained for the benefit of any current or former employees of any of the Citizens Companies (the ERISA Plans and each other plan listed on Schedule 2.19 hereafter, collectively, the "Plans"). Citizens has delivered or made available to Meridian copies of all Plans and any related documents or instruments establishing the Plans or any related trusts or funding arrangements; the most recent determination letter, or any outstanding request for a determination letter, from the Internal Revenue Service (the "IRS") with respect to each ERISA Plan intended to satisfy the requirements of Code Section 401(a) and a copy of the application on which the determination letter or request for determination letter is based; actuarial valuations, if applicable, for the most recent three plan years for which such valuations are available; current summary plan descriptions; annual returns/reports on Form 5500 and summary annual reports for each of the most recent three plan years; Form 5310 and any related filings with the IRS, the Department of Labor ("DOL") or the Pension Benefit Guaranty Corporation ("PBGC") within the last five years preceding the date of this Agreement; and any material correspondence to or from the IRS, DOL or PBGC within the last three years preceding the Effective Time in connection with any Plan. (c) Each ERISA Plan intended to be qualified under Code Section 401(a) has received a favorable determination letter from the IRS that the Plan, in its current form, is qualified and satisfies all legal requirements, including the requirements of the Tax Reform Act of 1986 and subsequent legislation enacted through the date hereof. Nothing has occurred since the dates of the respective IRS favorable determination letters that could adversely affect the qualification of the Plans and their related trusts. (d) None of the Citizens Companies currently maintains or contributes to, or has ever maintained or contributed to, a "multiemployer plan" as defined in ERISA Section 3(37), and none of the Citizens Companies currently maintains or contributes to a defined benefit pension plan, as defined in ERISA Section 3 (35). None of the Citizens Companies has any unpaid liability or is threatened with any liability for the termination of any Plan, and each terminated Plan was terminated in accordance with all provisions of applicable law. Each terminated ERISA Plan that was intended to be qualified under Code Section 401(a) received a favorable determination letter from the IRS that such Plan was qualified upon termination. (e) The written terms of each of the Plans, and any related trust agreement, group annuity contract, insurance policy or other funding arrangement are in substantial compliance with all applicable laws, rules and regulations, including without limitation, the rules and regulations promulgated by the DOL, PBGC or IRS pursuant to the provisions of ERISA and the Code, and each of such Plans has been administered in substantial compliance with such requirements. (f) Except with respect to income taxes on benefits paid or provided, no income, excise or other tax or penalty (federal or state) has been waived or excused, has been paid or is owed by any person (including, but not limited to, any Plan, any Plan fiduciary or any of the Citizens Companies) with respect to the operations of, or any transactions with respect to, any Plan. No action has been taken by any of the Citizens Companies, nor has there been any failure by any of the Citizens Companies to take any action, nor is any action or failure to take action contemplated by any of the Citizens Companies, that would subject any person or entity to any liability, tax or penalty imposed by the IRS, DOL, or PBGC, in connection with any Plan. No reserve for any taxes or penalties has been established with respect to any Plan by any of the Citizens Companies, nor has any advice been given to any of the Citizens Companies with respect to the need to establish such a reserve. (g) There are no (i) actions, suits, arbitrations or claims (other than routine claims for benefits), (ii) legal, administrative or other proceedings or governmental investigations or audits, or (iii) complaints to or by any governmental entity, which are pending, anticipated or threatened, against any Plan or its assets, or against any Plan fiduciary or administrator, or against any of the Citizens Companies or their officers or employees with respect to any Plan. (h) The present value of the future cost of post- retirement medical benefits that any of the Citizens Companies is obligated to provide, calculated on the basis of actuarial assumptions Citizens Mutual considers reasonable estimates of future experience and which have been provided to Meridian, does not exceed the amount specified on Schedule 2.19. (i) None of the Citizens Companies, nor any of the Plans, nor any trust created thereunder, nor any trustee or administrator thereof has engaged in a transaction in connection with which any of the Citizens Companies, any of the Plans, any such trust, or any trustee or administrator thereof, or any party dealing with the Plans or related trusts could be subject to either a civil penalty assessed pursuant to ERISA Sections 409 or 502 or a tax imposed pursuant to Code Sections 4975 or 4976. None of the Citizens Companies is, or, as a result of any actions, omissions, occurrences or state of facts existing prior to or at the Effective Time, may become liable for any tax imposed under Code Sections 4978 or 4978(B). (j) There are no leased employees, as defined in Code Section 414(n), that must be taken into account with respect to the requirements under Code Section 414(n)(3). (k) Total employer contributions to each Plan with respect to the most recent plan year are listed in Scheduled 2.19 and the employer contributions to all Plans required for the current plan year are not estimated to be materially more than contributions for the prior plan year. (l) Each Plan may be terminated directly or indirectly by Meridian, in its discretion, at any time after the Effective Time of the Merger in accordance with its terms, without any liability to Meridian, or any of the Citizens Companies, to any person, entity or government agency for any conduct, practice or omission of any of the Citizens Companies which occurred prior to the Effective Time of the Merger, except for liabilities to and the rights of the employees thereunder accrued prior to the Effective Time of the Merger, or if later, the time of termination, and except for continuation rights required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, or other applicable law. Section 2.20. Contracts and Commitments. None of the Citizens Companies is in default under any material agreement, commitment, arrangement, lease, insurance policy, or other instrument, whether entered into in the ordinary course of business or otherwise, and there has not occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default, except, in all cases, where such default would not have a Citizens Material Adverse Effect. Section 2.21. Related Party Transactions. None of the Citizens Companies has made any loan to any director, officer or other affiliate of any of the Citizens Companies which remains outstanding, nor has any of the Citizens Companies entered into any agreement for the purchase or sale of any property or services from or to any director, officer or other affiliate of any of the Citizens Companies. Section 2.22. No Finders. None of the Citizens Companies has made any representation, contract or commitment by which any such party or Meridian might be obligated to pay any finder's fee, brokerage commission or similar payment for bringing the parties together or bringing about the transactions contemplated by this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF MERIDIAN Meridian represents and warrants to Citizens and Citizens Mutual that: Section 3.1. Organization. Meridian is a corporation duly organized and validly existing under the laws of the State of Indiana and has the corporate power and authority to carry on its business as it is now being conducted and to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. Section 3.2. Corporate Power and Authority, Etc. The execution, delivery and performance by Meridian of this Agreement and the consummation by Meridian of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Meridian. This Agreement has been duly and validly executed and delivered by Meridian and constitutes the valid and binding obligation of Meridian, enforceable against it in accordance with its terms, subject to bankruptcy, receivership, insolvency, reorganization, moratorium or similar laws affecting or relating to creditors' rights generally and subject to general principles of equity. Section 3.3. No Conflicts. The execution, delivery and performance by Meridian of this Agreement and the consummation by Meridian of the transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, (i) violate any provision of law, statute, rule or regulation to which Meridian is subject, (ii) violate any order, judgment or decree applicable to Meridian or (iii) conflict with, or result in a breach or default under, any term or condition of the Articles of Incorporation or By-Laws of Meridian or any material agreement or other material instrument to which Meridian or any of its subsidiaries is a party or by which any of them may be bound; except for violations, conflicts, breaches or defaults which in the aggregate would not materially hinder or impair the consummation of the transactions contemplated hereby. Section 3.4. Consents. Except as set forth on Schedule 3.4, no consent, approval or authorization of, exemption by, or filing with, any governmental or regulatory authority, or any third party, is required in connection with the execution, delivery and performance by Meridian of this Agreement or the consummation by Meridian of the transactions contemplated hereby. Section 3.5. Funds Available. Meridian and Merger Company have or will have available to them sufficient funds to perform all of their respective obligations pursuant to this Agreement. Section 3.6. Merger Company. At or prior to the Closing: (a) Merger Company shall be a corporation duly organized and validly existing under the laws of the State of Minnesota, with the corporate power and authority to adopt, deliver and perform the Plan of Merger and to consummate the transactions of Merger Company contemplated thereby and by this Agreement. (b) The adoption, delivery and performance by Merger Company of the Plan of Merger and the consummation by Merger Company of the transactions contemplated thereby and by this Agreement shall have been duly authorized by all necessary corporate action on the part of Merger Company, and the Plan of Merger shall have been duly and validly adopted by Merger Company and constitute its valid and binding obligation, enforceable against Merger Company in accordance with its terms, subject to bankruptcy, receivership, insolvency, reorganization, moratorium or similar laws affecting or relating to creditors' rights generally and subject to general principles of equity. (c) The adoption, delivery and performance by Merger Company of the Plan of Merger and the consummation by Merger Company of the transactions contemplated thereby and by this Agreement will not, with or without the giving of notice or the lapse of time, or both, (i) violate any provision of law, statute, rule or regulation to which Merger Company is subject, (ii) violate any order, judgment or decree applicable to Merger Company, or (iii) conflict with, or result in a breach or default under, any term or condition of the Articles of Incorporation or By-Laws of Merger Company. Section 3.7. GAAP Financial Statements. Meridian has previously delivered to Citizens and Citizens Mutual true and complete copies of audited financial statements (the "Meridian GAAP Financial Statements") for the years ended December 31, 1993, December 31, 1994, and December 31, 1995 for Meridian (prepared on a consolidated basis). The Meridian GAAP Financial Statements so provided were prepared in accordance with GAAP applied on a consistent basis and present fairly, in all material respects, the financial condition, results of operations and changes in financial position of Meridian as of the dates or for the periods covered thereby, in conformity with GAAP. Section 3.8. Statutory Financial Statements. (a) Meridian has previously delivered to Citizens and Citizens Mutual true and complete copies of (i) the audited combined statutory financial statements of Meridian Mutual and affiliates (including statements of operations, unassigned surplus and cash flows) for the fiscal years ended December 31, 1990 to 1994 (the "Meridian Audited SAP Financial Statements"), and (ii) the unaudited combined statutory financial statements of Meridian Mutual and affiliates for the interim periods ended March 31, 1995, June 30, 1995 and September 30, 1995 (the "Meridian Unaudited Interim SAP Financials"). The Meridian Audited SAP Financial Statements present fairly in all material respects the combined financial condition of Meridian Mutual and affiliates at such dates and results of operations for such periods and were prepared in accordance with SAP, and the Meridian Unaudited Interim SAP Financial Statements present fairly in all material respects the combined financial condition of Meridian Mutual and affiliates at such dates and results of operations for such periods and were prepared in accordance with SAP, except for the absence of notes and subject to normal year-end adjustments which are not material to the Meridian Companies in amount or effect. (b) Annual Statements required to be filed with applicable insurance regulatory authorities on the respective forms prescribed or permitted by such authorities (the "Meridian Annual Statements") for Meridian Mutual and Meridian Security for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 have been filed with the appropriate regulatory authorities in all jurisdictions in which such filing is required. The Meridian Annual Statements were prepared in accordance with accounting practices prescribed or permitted by such regulatory authorities, applied on a consistent basis throughout the related periods except as otherwise stated therein, and presented fairly in all material respects the statutory financial position of the respective company at the dates of, and the statutory results of operations for the respective company for the periods covered by, such statutory statements. Section 3.9. Reserves. The aggregate actuarial reserves and other actuarial amounts held in respect of liabilities with respect to Meridian Mutual and Meridian Security as established or reflected in their combined financial statements as of September 30, 1995: (a) (i) were determined in accordance with generally accepted actuarial standards consistently applied, (ii) were fairly stated in accordance with sound actuarial principles, and (iii) were based on reasonable and appropriate actuarial assumptions; (b) met the requirements of the applicable insurance laws of the State of Indiana, or any other state having such jurisdiction, in all material respects; and (c) were adequate (under generally accepted actuarial standards consistently applied) to cover the total amount of all reasonably anticipated matured and unmatured liabilities of Meridian Mutual and Meridian Security under all outstanding insurance policies pursuant to which Meridian Mutual or Meridian Security has any liability; subject, however, to normal year-end adjustments which shall not be material to the Meridian Companies in amount or effect. Section 3.10. No Undisclosed Liabilities. None of the Meridian Companies has any debts, obligations or liabilities of whatever kind or nature, either direct or indirect, absolute or contingent, matured or unmatured (the "Meridian Liabilities"), except debts, obligations and liabilities that are fully reflected in, or reserved against on, the Meridian GAAP Financial Statements, the Meridian Audited SAP Financial Statements or the Meridian Unaudited Interim SAP Financial Statements, except for liabilities arising from the ordinary course of business that are not required to be reflected in a balance sheet prepared in accordance with GAAP or SAP (as the case may be), and except for changes in the Meridian Liabilities arising from the ordinary course of business since the respective dates of such financial statements, none of which changes, individually or in the aggregate, have had a Meridian Material Adverse Effect. Section 3.11. Regulatory Filings. Meridian has previously delivered or made available to Citizens and Citizens Mutual true and complete copies of all filings which were made by the Meridian Companies within the past three years with the Indiana Department of Insurance (the "Indiana Department") or any other department of insurance in any jurisdiction where any of the Meridian Companies is required to make such filings. Each of such filings, as of its respective date, complied as to form and content in all material respects with the provisions of applicable law. Section 3.12 . SEC Reports. Meridian has delivered or made available to Citizens and Citizens Mutual (i) each registration statement, Current Report on Form 8-K, Quarterly Report on Form 10-Q, annual report to shareholders, proxy statement or information statement prepared by it since January 1, 1992, (ii) an Annual Report on Form 10-K for each of the years ended December 31, 1991, 1992, 1993 and 1994, and (iii) a Quarterly Report on Form 10-Q for each of the periods ended March 31, June 30 and September 30, 1995, each in the form (including exhibits) filed with Securities and Exchange Commission (collectively, the "Meridian SEC Reports"). As of its respective date, each of the Meridian SEC Reports did not contain any untrue statements of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. Each of the balance sheets included in or incorporated by reference into the Meridian SEC Reports (including the related notes and schedules) fairly presents the financial position of Citizens as of its date, and each of the statements of income, of shareholders' equity and of cash flows included in or incorporated by reference into the Meridian SEC Reports (including the related notes and schedules) fairly presents the results of operations, shareholders' equity and cash flows, as the case may be, of Meridian for the period set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments which will not be material to Meridian in amount or effect), in each case in accordance with generally accepted accounting principals consistently applied during the periods involved, except as may be noted therein. Other than the Meridian SEC Reports, Meridian has not filed any other definitive reports or statements with the Securities and Exchange Commission since January 1, 1992. Section 3.13. Litigation. There are no proceedings or investigations (other than claims in the ordinary course of the insurance business), pending or threatened against, relating to, involving or otherwise affecting any of the Meridian Companies, which individually or in the aggregate may have a material adverse effect on the business, results of operations or financial condition of the Meridian Companies (considered as a whole) (a "Meridian Material Adverse Effect"). Section 3.14. Compliance With Law. (a) None of the Meridian Companies is in violation in any material respect (or, with notice or lapse of time or both, would be in violation in any material respect) of any term or provision of any applicable law, regulation, rule, ordinance, order, judgment, writ or injunction of any federal, state or local government or instrumentality or agency thereof, or of any court, which violation may reasonably be expected to have a Meridian Material Adverse Effect, and Meridian and Meridian Mutual are not aware of any facts or circumstances which may constitute or result in any such violation. (b) None of the Meridian Companies is a party to any contract with or other undertaking to, or is subject to any order by, or is a recipient of any supervisory letter or other oral or written communication of any kind from, any governmental entity that (i) currently materially and adversely affects the business, results of operations or financial condition of the Meridian Companies (considered as a whole), including without limitation, reserve adequacy, investment, sales or trade practices and policies, underwriting practices and policies, or management, or (ii) may reasonably be expected to materially and adversely affect the business, results of operations or financial condition of any of the Meridian Companies. None of the Meridian Companies has been advised by a governmental entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any order, contract or other communication of the kind described above in this Section 3.14. Section 3.15. Authority to Conduct Insurance Business. Each of Meridian Mutual and Meridian Security is an insurance company licensed or authorized to write insurance coverages in its state of incorporation, and each of Meridian Mutual and Meridian Security holds a license and is fully qualified as a foreign insurer to conduct its respective business in each jurisdiction in which such licensure or qualification is required therefor, and there is no other jurisdiction in which the failure to hold a license or to be so qualified to conduct the business as is now being conducted by the respective company would have a Meridian Material Adverse Effect. No such license or certificate of authority has been revoked, restricted, suspended, limited or modified nor is any license or certificate of authority the subject of, nor, to the knowledge of Meridian, is there a basis for, a proceeding for, or a threatened proceeding for, revocation, restriction, suspension, limitation or modification, nor is Meridian Mutual or Meridian Security operating under any formal or informal agreement or understanding with the licensing authority of any state that restricts its authority to do business or requires any such company to take, or refrain from taking, any action. Section 3.16. Properties. Each of Meridian Companies has good title to all properties and assets material to the conduct of its business, which it purports to own, including, without limitation, all property reflected in the Meridian GAAP Financial Statements or Meridian Audited SAP Financial Statements, or acquired since the date of such financial statements, except (a) in all cases to the extent such assets or properties have been sold or otherwise disposed of in the ordinary and usual course of business since that date or (b) to the extent such failure to have good title would not have a Meridian Material Adverse Effect. Section 3.17. Intellectual Property. There are no infringement suits pending, or to the best knowledge of Meridian, threatened, against any of the Meridian Companies with respect to any copyright, trademark, trade name, service mark, or patent covered under federal or state common law or statutory law, whether or not registered, used by any of the Meridian Companies in a way that is material to the conduct of their respective businesses, which would have a Meridian Material Adverse Effect, and neither Meridian nor Meridian Mutual knows of any fact or condition which could give rise to any such infringement suit. Section 3.18. Environmental Laws and Permits. Each of the Meridian Companies is in compliance with any and all laws, regulations, rules, ordinances, orders, judgments, permits, agreements, licenses or other governmental restrictions or requirements relating to health, the environment or the release by such Meridian Company of any materials into the environment, now in effect in any and all jurisdictions, in which the Meridian Companies are or from time to time may be doing business, except where such failure to comply would not have a Meridian Material Adverse Effect. Section 3.19. Taxes. (a) All federal income tax returns required to be filed by the Meridian Companies have been properly and timely filed with the Internal Revenue Service, (b) all state and local income tax returns required to be filed by the Meridian Companies have been properly and timely filed with the appropriate state or local taxing authorities, except where the failure so to file such state and local income tax returns would not have a Meridian Material Adverse Effect, and (c) all federal, state and local tax information returns required to be filed by the Meridian Companies have been properly and timely filed with the appropriate federal, state or local taxing authorities, except where the failure so to file such information returns would not have a Meridian Material Adverse Effect. Such income tax returns were true, correct and complete in all material respects at the time filed, and the Meridian Companies have paid all taxes shown to be due on such returns. The Meridian Companies have adequately reserved, in accordance with GAAP, on the GAAP Financial Statements, and in accordance with SAP, on the Audited SAP Financial Statements, for the payment of all unpaid federal, state and local taxes, including interest and penalties, payable in respect of any taxable event or period (including interim periods) ending on the dates of such financial statement and for all periods prior thereto, except where any deficiencies would not have a Meridian Material Adverse Effect. There are no outstanding deficiencies, assessments or proceedings for the assessment or collection of taxes or any material dispute as to taxes against or involving any of the Meridian Companies that would have a Meridian Material Adverse Effect. Section 3.20. Employee Benefit Plans. All employee benefit plans, as defined in Subsection 3(3) of ERISA, and all other arrangements, agreements, or programs for deferred compensation, bonuses, severance pay, or employee fringe benefits covering current or former employees of the Meridian Companies that the Meridian Companies currently maintain or to which the Meridian Companies contribute, or are obligated to contribute, and all related trusts and insurance contracts comply in form and in operation in all material respects with all applicable laws and regulations, including, without limitation, the applicable requirements of ERISA and the Code, except where any failure to comply would not have a Meridian Material Adverse Effect. Section 3.21. Contracts and Commitments. None of the Meridian Companies is in default under any material agreement, commitment, arrangement, lease, insurance policy, or other instrument, whether entered into in the ordinary course of business or otherwise, and there has not occurred any event that, with the lapse of time or giving of notice or both, would constitute such a default, except, in all cases, where such default would not have a Meridian Material Adverse Effect. ARTICLE IV PRE-CLOSING COVENANTS From the date hereof through the Closing Date, the parties covenant and agree as follows: Section 4.1. General. Each of the parties will use its good faith efforts to take all action and to do all things necessary, proper or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including, without limitation, the Merger, the reconfiguration of the Citizens Mutual Board of Directors as contemplated by Section 1.7, and the satisfaction, but not waiver, of the closing conditions set forth in Articles VI and VII below); provided, however, that nothing contained in this Agreement shall constitute an obligation or agreement of Citizens Mutual to vote its shares of Citizens Common Stock and Citizens Preferred Stock in favor of the Merger and other transactions contemplated by this Agreement at the meeting of the shareholders of Citizens contemplated by Section 4.5(a). Section 4.2. Notices and Consent. Each of the parties to this Agreement will, individually and in cooperation with the other parties, give any notices to, make any filing with, and use good faith efforts to obtain any authorizations, consents, and approvals of, governments and governmental agencies and any other third parties that are necessary, proper or advisable in connection with the transactions contemplated by this Agreement (including, without limitation, the Merger and the reconfiguration of the Citizens Mutual Board of Directors as contemplated by Section 1.7). Without limiting the generality of the foregoing, each of the parties will file any Notification and Report Forms and related material that it may be required to file with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the Hart-Scott-Rodino Act, will use good faith efforts to obtain a waiver from the applicable waiting period, and will make any further filings pursuant thereto that may be necessary, proper or advisable. Section 4.3. Operation of Business. Except as set forth in Schedule 4.3, as otherwise contemplated by this Agreement or as Meridian may otherwise consent to in writing: (a) each of the Citizens Companies will: (i) operate only in the ordinary course of business in substantially the same manner as its business has historically been conducted; (ii) use good faith efforts to keep available the services of its present executive officers and key employees; and (iii) use good faith efforts to preserve its relationships with employees and agents, lenders, suppliers, policyholders, licensors and licensees, insurance departments and others having material business dealings with the Citizens Companies; and (b) none of the Citizens Companies will: (i) issue, sell or deliver any shares of its capital stock or issue or sell any securities convertible into or exchangeable for, or options with respect to, or warrants to purchase or rights to subscribe to any of its capital stock; (ii) effect any recapitalization, reclassification, stock dividend, stock split or similar change in capitalization; (iii) merge with or into, consolidate or otherwise combine with, or acquire all or substantially all of the assets of, any other entity (except as may be permitted under Section 4.6 of this Agreement); (iv) make any commitments that extend beyond the Closing Date in an amount individually exceeding $25,000; (v) change any provision of its Articles of Incorporation or By-Laws or similar governing documents; (vi) permit any material insurance policy naming it as a beneficiary or a loss payable payee to be cancelled or terminated or any of the coverage thereunder to lapse unless simultaneously with such termination or cancellation replacement policies reasonably satisfactory to Meridian are in full force and effect; (vii) enter into any material contract, lease or other agreement other than in the ordinary course of business, that extends by its terms beyond the Effective Time; (viii) amend or cancel or agree to the amendment or cancellation of any reinsurance agreement, treaty or arrangement; (ix) make any material change in any accounting methods or practices; (x) effect any increases in salary, bonuses or otherwise increase or enhance any employee or officer compensation or benefits other than in the ordinary course of business consistent with past practices or make any employment commitments to existing employees that extend by their terms beyond the Effective Time, except such as are consistent with Section 5.4 and Section 7.10(c) hereof; or (xi) enter into any agreement or understanding to do any of the things described in clauses (i) through (x) above. Section 4.4. Full Access. Citizens and Citizens Mutual shall permit representatives of Meridian to have full access at all reasonable times to all premises, properties, personnel, books, records (including tax records), contracts, and documents of or pertaining to the Citizens Companies. Section 4.5. Shareholders' Meeting. (a) Citizens shall prepare and file with the Securities and Exchange Commission (the "SEC"), as soon as is reasonably practicable, the required proxy materials relating to shareholder approval of the Merger and shall use its good faith efforts to obtain clearance by the SEC of the mailing of such material to the Citizens shareholders. After such clearance is obtained, Citizens shall promptly call a meeting of its shareholders to be held at the earliest date that is reasonably practicable for the purpose of voting on this Agreement and the transactions contemplated hereby. Subject to the provisions of Section 4.5(b) hereof, Citizens shall, through its Board of Directors, recommend to its shareholders approval of the Merger and of the other transactions contemplated by this Agreement (to the extent such shareholder approval is required for such other transactions). (b) The Board of Directors of Citizens may fail to make the foregoing recommendation, or withdraw, modify or change any such recommendation in a manner adverse to Meridian or approval of the Merger, if such Board of Directors, after having consulted with and considered the advice of outside counsel, has reasonably determined in good faith that the making of such recommendation, or the failure to withdraw, modify or change its recommendation, would constitute a breach of the fiduciary duty of the members of such Board of Directors under applicable law. Section 4.6. Acquisition Negotiations. During the period from the date of this Agreement to the Effective Time, Citizens shall not without the prior written consent of Meridian authorize or permit any of its officers, directors, employees or agents to directly or indirectly solicit, initiate or encourage any inquiries relating to, or the making of any proposal which constitutes, a Takeover Proposal (as defined below), or recommend or endorse any Takeover Proposal, or participate in any discussions or negotiations, or provide third parties with any nonpublic information, relating to any such inquiry or proposal or otherwise facilitate any effort or attempt to make or implement a Takeover Proposal; provided, however, that, following prior written notice to Meridian, Citizens may, and may authorize and permit its officers, directors, employees and agents to, (i) provide a third party with nonpublic information (subject to execution of an appropriate confidentiality agreement requiring, that all confidential or non-public information provided to such third party or its representatives shall be used exclusively for the purpose of evaluating the possible Takeover Proposal and not for any other purpose) or otherwise facilitate any offer or attempt by that third party to make a Takeover Proposal, (ii) participate in discussions and negotiations with that third party relating to any Takeover Proposal, and (iii) recommend or endorse any Takeover Proposal with or by that third party, if the Board of Directors of Citizens, after having consulted with and considered the advice of outside counsel, has reasonably determined in good faith that the failure to do so would cause the members of such Board of Directors to breach their fiduciary duties under applicable law. The prior written notice to Meridian required by the foregoing sentence shall include the identity of the third party and shall be maintained by Meridian on a confidential basis. As used in this Agreement, "Takeover Proposal" shall mean, with respect to any person, any tender or exchange offer, proposal for a merger, consolidation or other business combination involving any of the Citizens Companies or any proposal or offer to acquire in any manner a substantial equity interest in, or a substantial portion of the assets of, any of the Citizens Companies other than the transactions contemplated or permitted by this Agreement. Section 4.7. Policyholders' Meeting. Citizens Mutual shall promptly call a meeting of its policyholders to be held at the earliest date that is reasonably practicable for the purpose of ratifying this Agreement and voting on the reconstitution of the Board of Directors of Citizens Mutual, as contemplated by Section 1.7 of this Agreement, and Citizens Mutual shall (absent the existence of an event which has a Meridian Material Adverse Effect), through its Board of Directors, recommend to its policyholders the ratification of this Agreement and the approval of such reconstitution of the Board of Directors, as contemplated by Section 1.7 of this Agreement. Section 4.8. Representation Letter of ESOP Trustee. Citizens and Citizens Mutual shall use their good faith efforts to cause the ESOP Trustee to provide to Meridian and Citizens Mutual the ESOP Trustee's written representations, dated the date of Closing and substantially in the form of Exhibit J (Representation Letter of ESOP Trustee), that the ESOP Trustee has made an independent investigation of the proposed Merger and the transactions contemplated by this Agreement (including use of the Merger proceeds to pay the outstanding balance due under the ESOP Note) and determined that such Merger and transactions are in the best interests of the ESOP and its beneficiaries, and that all allocated and unallocated ESOP Shares have been voted in accordance with the provisions of the ESOP and applicable laws. ARTICLE V OTHER COVENANTS The parties agree as follows with respect to the period following the Closing: Section 5.1. General. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes and interest of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as any other party reasonably may request, all at the sole cost and expense of the requesting party. Section 5.2. Continuity of Identity and Operations for Citizens Insurance Companies. Meridian acknowledges the importance of Citizens Mutual and the Citizens Subsidiaries to the community of Red Wing, Minnesota. Accordingly, through at least December 31, 1999, Meridian shall cause Citizens Mutual to continue to operate under its present corporate name and shall cause Citizens Mutual and the Citizens Subsidiaries to continue to maintain substantial business operations and employment in the Red Wing, Minnesota, area. Section 5.3. Indemnification; Directors and Officers Insurance. (a) For a period of at least five years after the Effective Time, Meridian shall not, and shall not permit any of its affiliates to, take any action to change, alter or diminish the rights to indemnification and reimbursement or advancement of expenses by the Citizens Companies now existing in favor of each present and former director, officer, employee and agent of any of the Citizens Companies (the "Indemnified Parties") as provided in their respective articles or certificate of incorporation in effect on the date hereof; provided that, in the event any claim or claims are asserted or made within such five-year period, all rights to indemnification and reimbursement or advancement of expenses with respect of any such claim or claims shall continue until final disposition of any and all such claims. (b) To the extent not otherwise provided for in the rights to indemnification referred to in Section 5.3(a) hereof, Meridian shall, subject to the terms set forth herein, indemnify and hold harmless an Indemnified Party, and advance costs and expenses (including reasonably attorneys' fees) as incurred, in each case to the fullest extent permitted under applicable law (provided, the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification), in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the transactions contemplated by this Agreement, for a period of five years after the Effective Time; provided that, in the event any claim or claims are asserted or made within such five-year period, all rights to such indemnification and advancement of expenses in respect of the defense of any such claim or claims shall continue until final disposition of any and all such claims. (c) Any Indemnified Party wishing to claim indemnification under Section 5.3(a) or (b), upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify Meridian thereof, but the failure to so notify shall not relieve Meridian of any liability it may have to such Indemnified Party except to the extent such failure materially prejudices Meridian. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) Meridian shall have the right to assume the defense thereof, and Meridian shall not be liable to such Indemnified Parties for any advancement of legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that, if Meridian elects not to assume such defense or if counsel for the Indemnified Parties advises that there are issues which raise conflicts of interest between Meridian and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and Meridian shall advance all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that (i) Meridian shall be obligated to advance costs and expenses for only one firm of counsel for all Indemnified Parties in any jurisdiction unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest, and (ii) all Indemnified Parties shall cooperate in good faith in the defense of any such matter. If full indemnity is not available with respect to any Indemnified Party, Meridian and the Indemnified Party shall contribute to the amount payable in such proportion as is appropriate to reflect faults and benefits. (d) For a period of five years from the Effective Time, Meridian shall use good faith efforts to provide that portion of directors' and officers' liability insurance that serves to reimburse the present and former officers and directors of each of the Citizens Companies (determined immediately prior to the Effective Time) with respect to claims against such officers and directors arising from facts or events which occurred before the Effective Time but were not previously reported to the Citizens Companies' insurance carriers, which insurance shall contain substantially at least the same coverage and amounts, and contain terms and conditions substantially no less advantageous, as that coverage currently provided by the Citizens Companies; provided, that officers and directors of the Citizens Companies may be required to make application and provide customary representations and warranties to Meridian's or the Citizens Companies' insurance carrier for the purpose of obtaining such insurance; and provided, further, that such coverage will have a single aggregate for such five-year period in an amount not less than the annual aggregate of such coverage currently provided by the Citizens Companies. (e) The provisions of this Section 5.3 shall survive the Closing , shall be binding on all successors and assigns of Meridian, and are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives. Section 5.4. Citizens Employees. This Section 5.4 sets forth certain agreements of Meridian with Citizens and Citizens Mutual regarding the employees of Citizens Mutual (the "Citizens Employees") following the Closing. At or prior to the Closing, Meridian and Citizens Mutual shall provide a joint letter to each of the Citizens Employees establishing the applicable agreements contained in this Section 5.4. (a) The Citizens Employees listed on Schedule 5.4(a) will be offered continued employment in Red Wing, Minnesota in their present or similar capacities with Citizens Mutual (and at not less than their current cash compensation levels) until the earlier of (i) the date on which such Citizens Employees are offered employment with Vis'n (as defined in Section 6.15 hereof) or (ii) the first anniversary date of the date of the Closing; and until the earlier of such dates the employment of such Citizens Employees may not be terminated except for failure to meet reasonable performance expectations consistent with their respective job descriptions, failure to comply with applicable employment policies, or misconduct. (b) The Citizens Employees listed on Schedule 5.4(b) will be offered continued employment in Red Wing, Minnesota in their present or similar capacities with Citizens Mutual (and at not less than their current cash compensation levels) after the date of the Closing, and, during the period beginning on such Closing date through December 31, 1997, the employment of such Citizens Employees may not be terminated except for failure to meet reasonable performance expectations consistent with their respective job descriptions, failure to comply with applicable employment policies, or misconduct. Such employment shall continue to be in Red Wing, Minnesota throughout such period. (c) The Citizens Employees listed on Schedule 5.4(c) will be offered continued employment in Red Wing, Minnesota in their present or similar capacities with Citizens Mutual (and at not less than their current cash compensation levels) after the date of the Closing, and, during the period beginning on such Closing date through December 31, 1998, the employment of such Citizens Employees may not be terminated except for failure to meet reasonable performance expectations consistent with their respective job description, failure to comply with applicable employment policies, or misconduct. Such employment shall continue to be in Red Wing, Minnesota throughout such period. (d) Continued employment following the Closing is not contemplated with respect to the Citizens Employees listed on Schedule 5.4(d). In the event the employment of any such Citizens Employee is terminated on or after the date of the Closing, such terminated Citizens Employee will be offered a severance package, substantially as follows: (i) supervisory employees would be offered their then current salary and benefits for a period of eight weeks, plus an additional week for each full year of service with Citizens Mutual as of the time of termination of employment, and (ii) non- supervisory employees would be offered their then current salary and benefits for a period of four weeks, plus an additional week for each full year of service with Citizens Mutual as of the date of termination of employment. (e) No severance package (other than existing arrangements or agreements contemplated by this Agreement) or offer of continued employment will be made to the Citizens Employees and other persons listed on Schedule 5.4(e). Citizens and Citizens Mutual represent and warrant that the Schedules provided for in this Section 5.4 include all of the Citizens Employees. (f) All employment policies and benefit plans for continuing employees of Citizens Mutual will continue in full force and effect until December 31, 1996. Effective January 1, 1997, all existing Citizens Mutual employee benefit plans will be terminated or merged into or amended to be consistent with Meridian employee benefit plans, and all other existing Citizens Mutual employment policies and practices will be changed to be consistent with Meridian employment policies and practices. For purposes of determining participation and vesting (but not for calculating benefits) under the employee benefit plans of Meridian, each Citizens Employee will be credited with his or her length of service while employed by Citizens Mutual. After December 31, 1996, and except as otherwise provided in this Section 5.4, Citizens Employees will be governed by Meridian's employment policies and practices as they may be changed from time to time. (g) The provisions of this Section 5.4 are not intended and shall not be construed to give any Citizens Employee or any person other than the parties to this Agreement any legal or equitable right, remedy or claim under or in respect of this Agreement. Any rights of the Citizens Employees contemplated by this Section 5.4 shall be established by and arise under the separate joint letter to be provided to each of the Citizens Employees, as contemplated by this Section 5.4 and by Section 7.10. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF MERIDIAN The obligations of Meridian under this Agreement shall, at the option of Meridian, be subject to the satisfaction, at or prior to the time of the Closing, of the following conditions: Section 6.1. No Misrepresentation or Breach of Covenants or Warranties. As of the time of Closing, (a) there shall have been no material breach by Citizens or Citizens Mutual in the performance of any of its covenants and agreements herein, (b) each of the representations and warranties of Citizens and Citizens Mutual contained in this Agreement shall have been true and correct as of the date of execution of this Agreement, and (c) each of the representations and warranties of Citizens and Citizens Mutual contained in this Agreement, without regard to any qualification, materiality threshold or reference to immateriality or a Citizens Material Adverse Effect, shall be true and correct as of the date of the Closing as though made on and as of such date (provided, that each of the representations and warranties made as of a particular date need only be true and correct as of that date), except for any inaccuracies which, individually or in the aggregate, have not had a Citizens Material Adverse Effect; provided, however, that there shall be deemed not to be such a Citizens Material Adverse Effect to the extent that such effect is the result of the announcement of the Merger or the result of transactions contemplated by this Agreement. Section 6.2. Officers' Certificates. Citizens and Citizens Mutual shall have delivered to Meridian a certificate, dated the date of the Closing and executed by the chief executive officer and by the chief financial officer or an executive vice president of Citizens and Citizens Mutual, certifying that the conditions set forth in Section 6.1 hereof have been fulfilled. In addition, Citizens and Citizens Mutual shall have delivered to Meridian a certificate, dated the date of the Closing and executed by the corporate secretary or assistant corporate secretary of Citizens and Citizens Mutual, certifying as to: the articles of incorporation, by-laws and corporate existence of each of the Citizens Companies; that the resolutions (true and complete copies of which shall be attached to the certificate) of the Boards of Directors of Citizens and Citizens Mutual with respect to this Agreement and the transactions contemplated hereby have been duly and validly adopted and are in full force and effect; that the resolutions (true and complete copies of which shall be attached to the certificate) of the shareholders of Citizens with respect to this Agreement and the transactions contemplated hereby have been duly and validly adopted and are in full force and effect; that any resolutions (true and complete copies of which shall be attached to the certificate) of the policyholders or members of Citizens Mutual with respect to this Agreement and the transactions contemplated hereby, if any such resolutions are required, have been duly and validly adopted and are in full force and effect; and as to the incumbency and signatures of certain officers of Citizens and Citizens Mutual. Section 6.3. Letter as to Transaction Cost. Citizens and Citizens Mutual shall have delivered to Meridian a letter, dated the date of the Closing and executed by the chief financial officer and the treasurer of Citizens and Citizens Mutual, setting forth all Transaction Costs (as defined in Section 10.2) paid or incurred by the Citizens Companies (whether paid or payable before or after the Effective Time), in connection with this Agreement or the transactions contemplated hereby, and specifying in reasonable detail the amount of such Transaction Costs in a manner that will enable the parties to determine the amount of the Transaction Costs Adjustment, if any, as that term is defined in Section 10.2. Such letter shall be based upon facts and such good faith estimates as may be reasonable under the circumstances; provided, however, that the letter shall clearly indicate the amounts that are estimated and the basis for the estimates. Section 6.4. Approval of Citizens' Shareholders and Citizens Mutual's Policyholders. (a) The Merger shall have been approved and adopted at a duly called meeting of the shareholders of Citizens by the requisite vote of the issued and outstanding shares of Citizens Common Stock and Citizens Preferred Stock entitled to vote thereon, voting as separate classes. (b) This Agreement and the reconstitution of the Board of Directors of Citizens Mutual, as contemplated by Section 1.7 of this Agreement, shall have been approved at a duly called meeting of the policyholders of Citizens Mutual by the requisite vote of policyholders entitled to vote thereon. Section 6.5. Dissenting Shares. The holders of not more than 5% of the issued and outstanding shares of Citizens Common Stock at the Effective Time shall have delivered written notice of intent to demand payment of the fair value of their shares of Citizens Common Stock pursuant to the Minnesota Dissenters' Rights Statute, and Citizens Mutual shall not have delivered written notice of intent to demand payment of the fair value of the shares of Citizens Preferred Stock pursuant to the Minnesota Dissenters' Rights Statute. Section 6.6. Regulatory Approval. All approvals, authorizations and consents from governmental and regulatory bodies required for the transactions contemplated by this Agreement and to permit the business currently carried on by the Citizens Companies to continue to be carried on substantially in the same manner following the Effective Time, shall have been obtained and shall be in full force and effect (including, without limitation, approvals by appropriate insurance regulators in the states of Minnesota, Indiana and Ohio), and Meridian shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such approvals, authorizations and consents. There shall not have been any action taken by any court, arbitration tribunal or any governmental or regulatory body prohibiting or making illegal at the time of the Closing or the Effective Time any of the transactions contemplated by this Agreement. Section 6.7. Hart-Scott-Rodino. The waiting period required under the Hart-Scott-Rodino Act, including any extension thereof, shall have terminated or expired prior to the time of the Closing. Section 6.8. Third Party Consents. All consents, permits and approvals from parties to material contracts or other material agreements with the Citizens Companies required in connection with the transactions contemplated hereby shall have been obtained (including, without limitation, any consents required for the continued use by the Citizens Companies of computer software or hardware material to the business of the Citizens Companies licensed or leased to Citizens Mutual for use by any of the other the Citizens Companies). Section 6.9. Boards of Directors. The respective Boards of Directors of the Citizens Companies shall be reconstituted as follows: (a) Citizens Subsidiaries: The six current directors of Meridian Security, plus the current President and the current Vice President of Marketing of Citizens. (b) Citizens Mutual: The six current directors of Meridian Security, plus the current Vice President of Marketing of Citizens Mutual and the current President of Citizens Mutual. (c) Mississippi Valley Corporation: Such persons as may be designated by Meridian not less than five days prior to the Closing. In addition, any amendments to the articles or certificate of incorporation or bylaws of any of the Citizens Companies necessary for the foregoing shall have been adopted and become effective. Section 6.10. Officers. Each officer of each of the Citizens Insurance Companies shall have tendered his or her resignation as an officer, effective as of the Effective Time, and arrangements reasonably satisfactory to Meridian shall have been made providing for the appointment of the Chief Executive Officer of Meridian as the Chairman of the Board, President and Chief Executive Officer of each of the Citizens Insurance Companies, effective at the Effective Time. In addition, each officer of each other Citizens Company shall have tendered his or her resignation as an officer, effective as of the Effective Time. Section 6.11. Reinsurance Pooling Agreement. All regulatory approvals necessary for the execution of the Reinsurance Pooling Agreement, substantially in the form of Exhibit B, by all parties thereto shall have been obtained, and the Citizens Insurance Companies shall have entered into that Pooling Reinsurance Agreement, effective as of the Effective Time. Section 6.12. Management Services Agreements. All regulatory approvals necessary for the execution of the Management Services Agreements, substantially in the forms of Exhibits C-1 and C-2, by all parties thereto shall have been obtained, and the Citizens Insurance Companies shall have entered into those Management Services Agreements, effective as of the Effective Time. Section 6.13. No Material Adverse Change. Since December 31, 1995, there shall have been no material adverse change in the business of the Citizens Companies (considered as a whole) or in the consolidated results of operations or consolidated financial condition of either Citizens (considered as a whole) or Citizens Mutual (considered as a whole); provided, however, that there shall be deemed not to be such a material adverse change to the extent that such change is the result of the announcement of the Merger or the result of transactions contemplated by this Agreement. Section 6.14. Certain Personnel Matters. (a) Spencer Broughton shall have entered into the Consulting Services Agreement, substantially in the form of Exhibit D. (b) Scott Broughton shall have entered into the Employment Agreement, substantially in the form of Exhibit E. Section 6.15. Vis'n Matters. Scott Broughton, Kirk Simmons, Meridian and Citizens Mutual shall have entered into a letter agreement (the "Vis'n Letter") regarding a corporation to be organized by Scott Broughton and Kirk Simmons ("Vis'n"). The Vis'n Letter shall provide among other matters that, upon Vis'n's formation and Meridian's reasonable satisfaction that Vis'n is then or will be authorized to conduct business and to enter into the contracts and transactions contemplated by this Section 6.15, Vis'n or Vis'n and Citizens Mutual, as the case may be, will do the following: (a) Vis'n will offer employment, with at least substantially the same compensation as provided by Citizens Mutual, to the Citizen employees listed on Schedule 5.4(a), such employment to be effective on or about the commencement date of the Claims Administration Agreement and Software and Hardware Systems Agreement referred to in Sections 6.15(c) and (d) hereof; and Vis'n will immediately reimburse Citizens Mutual or Meridian for any required payments in respect of unused vacation time or personal leave time made to such Citizens Employees who accept Visn's employment offer (or will allow Citizens Mutual or Meridian to deduct such payments from amounts otherwise payable to Vis'n under the Claims Administration Agreement and Software and Hardware Support Agreement referred to in Sections 6.15(c) and (d) hereof); (b) Vis'n and Citizens Mutual will enter into the Real Estate Sublease Agreement, substantially in the form of Exhibit F. (c) Vis'n and Citizens Mutual will enter into the Claims Administration Agreement, substantially in the form of Exhibit G. (d) Vis'n and Citizens Mutual will enter into the Software and Hardware Support Agreement, substantially in the form of Exhibit H. (e) Vis'n and Citizens Mutual will enter into the Office Equipment Lease Agreement, substantially in the form of Exhibit I. (f) Vis'n will pay $3,000 of the monthly consulting fees payable by Citizens Mutual to Michael L. Halvorson under a certain Independent Consultant Agreement with Citizens Mutual. Section 6.16. ESOP and Plan Matters. The actions to be taken by or in respect of the ESOP described in Section 1.5 shall have been taken. Section 6.17. Opinion of Counsel for Citizens and Citizens Mutual. Meridian shall have received from separate counsel for Citizens and for Citizens Mutual, opinions dated the date of the Closing, in form and substance reasonably satisfactory to Meridian. Section 6.18. Fairness Opinion. The fairness opinion Meridian has received from the investment banking firm of McDonald & Company Securities, Inc., to the effect that the consideration to be paid by Meridian to the shareholders of Citizens pursuant to the Merger is fair, from a financial point of view, to the shareholders of Meridian, shall have been updated to the time of Closing in form and substance reasonably satisfactory to the Board of Directors of Meridian. Section 6.19. Halvorson Arrangements. The First Amended Software Agreement, dated March 21, 1996, between Michael L. Halvorson and Citizens Mutual shall be in effect. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF CITIZENS AND CITIZENS MUTUAL The obligations of Citizens and Citizens Mutual under this Agreement shall, at the option of Citizens and Citizens Mutual, be subject to the satisfaction, at or prior to the time of the Closing, of the following conditions: Section 7.1. No Misrepresentation or Breach of Covenants or Warranties. As of the time of the Closing, (a) there shall have been no material breach by Meridian in the performance of any of its covenants herein, (b) each of the representations and warranties of Meridian contained in this Agreement shall have been true and correct as of the date of the execution of this Agreement, and (c) each of the representations and warranties of Meridian contained in this Agreement, without regard to any qualification, materiality threshold or reference to immateriality or a Meridian Material Adverse Effect, shall be true and correct as of the date of the Closing as though made on and as of such date (provided, that each of the representations and warranties made as of a particular date need only be true and correct as of that date), except for any inaccuracies which, individually or in the aggregate, have not had a Meridian Material Adverse Effect; provided, however, that there shall be deemed not to be such a Meridian Material Adverse Effect to the extent that such effect is the result of the announcement of the Merger or the result of transactions contemplated by this Agreement. Section 7.2. Shareholder and Policyholder Approval. (a) The Merger shall have been approved and adopted at a duly called meeting of the shareholders of Citizens by the requisite vote of the issued and outstanding shares of Citizens Common Stock and Citizens Preferred Stock entitled to vote thereon, voting as separate classes. (b) This Agreement and the reconstitution of the Board of Directors of Citizens Mutual, as contemplated by Section 1.7 of this Agreement, shall have been approved at a duly called meeting of the policyholders of Citizens Mutual by the requisite vote of such policyholders entitled to vote thereon. Section 7.3. Officers' Certificates. Meridian shall have delivered to Citizens and Citizens Mutual a certificate, dated the date of the Closing and executed by the chief executive officer and by the chief financial officer or an executive vice president of Meridian, certifying that the conditions set forth in Section 7.1 hereof have been fulfilled. In addition, Meridian shall have delivered to Citizens and Citizens Mutual a certificate, dated the date of the Closing and executed by the corporate secretary or assistant corporate secretary of Meridian and Merger Company, certifying as to: the articles of incorporation, by-laws and corporate existence of Meridian and Merger Company; that the resolutions (true and complete copies of which shall be attached to the certificate) of the Boards of Directors of Meridian and Merger Company with respect to this Agreement and the transactions contemplated hereby have been duly and validly adopted and are in full force and effect; and as to the incumbency and signatures of certain officers of Meridian and Merger Company. Section 7.4. Regulatory Approval. All approvals, authorizations and consents from governmental and regulatory bodies required for the transactions contemplated by this Agreement shall have been obtained and shall be in full force and effect (including, without limitation, approvals by appropriate insurance regulators in the states of Minnesota, Indiana and Ohio), and Citizens and Citizens Mutual shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such approvals, authorizations and consents. There shall not have been any action taken by any court, arbitration tribunal or any governmental or regulatory body prohibiting or making illegal at the time of the Closing or the Effective Time any of the transactions contemplated by this Agreement. Section 7.5. Hart-Scott-Rodino. The waiting period required under the Hart-Scott-Rodino Act, including any extension thereof, shall have terminated or expired prior to the time of the Closing. Section 7.6. Boards of Directors. Arrangements reasonably satisfactory to Citizens and Citizens Mutual shall have been made providing for: (a) the Boards of Directors of each of the Citizens Subsidiaries to include the current President and the current Vice President of Marketing of Citizens, (b) for the Board of Directors of Citizens Mutual to include the current Vice President of Marketing of Citizens Mutual and the current President of Citizens Mutual, and (c) for the Board of Directors of Meridian to include the current President of Citizens and Citizens Mutual; in each case, as of immediately following the Effective Time. Section 7.7. Third Party Consents. All consents, permits and approvals from parties to material contracts or other material agreements with the Meridian Companies required in connection with the transactions contemplated hereby shall have been obtained. Section 7.8. Reinsurance Pooling Agreement. All corporate and regulatory approvals necessary for the execution of the Reinsurance Pooling Agreement substantially in the form of Exhibit B, by all parties thereto, shall have been obtained; and Meridian Mutual and Meridian Security shall have entered into that Reinsurance Pooling Agreement, effective as to the Effective Time. Section 7.9. Management Services Agreements. All corporate and regulatory approvals necessary for the execution of the Management Services Agreements substantially in the forms of Exhibit C-1 and C-2, by the respective parties thereto, shall have been obtained; and Meridian, Meridian Mutual and Meridian Security shall have entered into those Management Services Agreements, effective as of the Effective Time. Section 7.10. Certain Personnel Matters. (a) Meridian shall have entered into the Consulting Services Agreement with Spencer Broughton, substantially in the form of Exhibit D. (b) Meridian shall have entered into the Employment Agreement with Scott Broughton, substantially in the form of Exhibit E. (c) The letter or letters to Citizens Employees referred to in Section 5.4, in a form or forms reasonably satisfactory to Citizens and Citizens Mutual, shall have been provided to such Citizens Employees, or arrangements therefor reasonably satisfactory to Citizens and Citizens Mutual shall have been made. Section 7.11. Vis'n Matters. The Vis'n Letter referred to in Section 6.15 shall have been entered into. Section 7.12. No Material Adverse Change. Since December 31, 1995, there shall have been no material adverse change in the business, results of operations or financial condition of the Meridian Companies (considered as a whole); provided, however, that there shall be deemed not to be such a material adverse change to the extent that such change is the result of the announcement of the Merger or the result of transactions contemplated by this Agreement. Section 7.13. Opinion of Counsel for Meridian. Citizens and Citizens Mutual shall have received from counsel for Meridian, an opinion dated the date of the Closing, in form and substance reasonably satisfactory to Citizens and Citizens Mutual. Section 7.14. Fairness Opinions. The fairness opinion Citizens has received from the investment banking firm of Goldsmith, Agio, Helms Securities, Inc., to the effect that the consideration to be received in the Merger by the holders of Citizens Common Stock and Citizens Preferred Stock is fair to such holders from a financial point of view, shall have been updated to the date of the proxy statement referred to in Section 4.5(a) and to the time of Closing, in form and substance reasonably satisfactory to the Board of Directors of Citizens. Section 7.15. Payment of ESOP Note. The ESOP note shall have been repaid as contemplated by Section 1.5(b). ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES Section 8.1. Survival of Representations and Warranties. The representations and warranties made in this Agreement by the parties hereto shall not survive the Closing. Notwithstanding the foregoing, the covenants set forth in Article V shall survive the Effective Time. ARTICLE IX TERMINATION Section 9.1. Termination. This Agreement and the transactions contemplated by this Agreement may be terminated at any time prior to the filing of the Articles of Merger with the Secretary of State of Minnesota, whether before or after action by the shareholders of Citizens as contemplated by Section 4.5(a), of this Agreement and without further approval by the shareholders of Citizens: (a) By mutual written consent of Meridian, Citizens and Citizens Mutual; (b) By Citizens and Citizens Mutual, by written notice to Meridian, if the number of votes in favor of the Merger and this Agreement cast by the shareholders of Citizens and required for the consummation of the Merger shall not have been obtained at the meeting of Citizens' shareholders or at any adjournment thereof duly held for such purpose; (c) By either Citizens and Citizens Mutual, on the one hand, or by Meridian, on the other hand, by written notice to the other, if the Minnesota Department fails by September 30, 1996, to approve, or give its consent to any of the material transactions contemplated by this Agreement that the Minnesota Department is required to approve or consent to under applicable law; (d) By Meridian, in the event a condition set forth in Article VI of this Agreement cannot be satisfied; (e) By Citizens and Citizens Mutual, in the event a condition set forth in Article VII of this Agreement cannot be satisfied; or (f) By either Meridian, on the one hand, or by Citizens and Citizens Mutual, on the other hand, by written notice to the other if the Merger is not consummated by September 30, 1996. Section 9.2. Termination Fee. (a) If Citizens and Meridian fail to consummate the Merger and: (i) Citizens enters into a letter of intent, commitment letter or other written agreement with a third party regarding a merger, consolidation, sale of assets or other similar transaction involving Citizens or Citizens Mutual prior to January 1, 1997; and (ii) Meridian shall have complied with all of its obligations under this Agreement required to be performed by it through the date of the earliest relevant event described in Section 9.2(a)(i); and (iii) this Agreement shall not have been terminated by mutual written consent of all of the parties pursuant to Section 9.1(a); then Citizens shall promptly pay to Meridian an amount equal to $586,646 plus the amounts of all Transaction Costs paid or incurred by Meridian or its affiliates, and Citizens and Citizens Mutual shall have no further liability or obligation to Meridian with respect to this Agreement. (b) If Citizens and Meridian fail to consummate the Merger and: (i) either (A) the Board of Directors of Citizens refuses or fails to make the recommendation to the shareholders of Citizens contemplated by Section 4.5(a), or withdraws, modifies or changes any such recommendation in a manner adverse to Meridian or to approval of the Merger, (B) any party terminates this Agreement pursuant to Section 9.1(c) because the Minnesota Department does not approve the Merger due to the amount of consideration to be received by any shareholders in the Merger, (C) Citizens Mutual shall not have voted its shares of Citizens Common Stock or Citizens Preferred Stock in favor of the Merger and other transactions contemplated by this Agreement at the meeting of the shareholders of Citizens contemplated by Section 4.5(a) (it being understood that Citizens Mutual is not obligated by this Agreement or otherwise to vote in favor of the Merger and such transactions) or (D) the First Amended Software Agreement, dated March 21, 1996, between Michael L. Halvorson and Citizens Mutual shall not have remained in effect; and (ii) Meridian shall have complied with all of its obligations under this Agreement required to be performed by it through the date of the earliest relevant event described in Section 9.2(b)(i); and (iii) this Agreement shall not have been terminated by mutual written consent of all of the parties pursuant to Section 9.1(a), then Citizens shall pay and reimburse to Meridian all Transaction Costs paid or incurred by Meridian or its affiliates, promptly upon receipt from Meridian of a reasonably detailed accounting thereof; and Citizens and Citizens Mutual shall have no further liability or obligations to Meridian with respect to this Agreement except as may arise under Section 9.2(a). Section 9.3. Survival of Rights. Except as otherwise provided in Sections 9.1 and 9.2, nothing in this Article IX or in this Agreement shall be construed as limiting the rights of any party in the event of a breach by any party of this Agreement. ARTICLE X MISCELLANEOUS Section 10.1. Notices. All notices or other communications required or permitted hereunder shall be in writing and shall be given by confirmed telecopy or registered mail addressed: (a) If to Citizens or Citizens Mutual: Mr. Scott S. Broughton President, Chief Operating Officer and Chief Financial Officer Citizens Security Group Inc. Citizens Security Mutual Insurance Company 406 Main Street Red Wing, Minnesota 55066 Fax: (612) 388-0538 If to Citizens, a copy to: Jay L. Swanson, Esq. Dorsey & Whitney LLP 220 South Sixth Street Minneapolis, Minnesota 55402-1498 Fax: (612) 340-8738 If to Citizens Mutual, a copy to: Thomas H. Borman, Esq. Maslon Edelman Borman & Brand 3300 Norwest Center 90 S. Seventh Street Minneapolis, Minnesota 55402-4140 Fax: (612) 672-8397 (b) If to Meridian: Ms. Norma J. Oman President and Chief Executive Officer Meridian Insurance Group, Inc. 2955 North Meridian Street Indianapolis, Indiana 46208 Fax: (317) 927-8119 with copies to: J. Mark McKinzie, Esq. General Counsel 2955 North Meridian Street Indianapolis, Indiana 46208 Fax: (317) 931-7930 and Tibor D. Klopfer, Esq. Baker & Daniels 300 North Meridian Street, Suite 2700 Indianapolis, Indiana 46204 Fax: (317) 237-1000 All notices and other communications required or permitted under this Agreement that are addressed as provided in this Section 10. 01 will (i) if delivered personally, be deemed given upon delivery, (ii) if delivered by facsimile transmissions, be deemed given when sent and confirmation or receipt is received, and (iii) if delivered by mail in the manner described above, be deemed received on the date of receipt. Any party from time to time may change its address for the purpose of notices to that party by giving notice to the other parties hereto specifying a new address, but no such notice will be deemed to have been given until it is actually received by the party sought to be charged with the contents thereof. Section 10.2. Expenses. (a) Except as otherwise provided herein, each party hereto shall pay its own expenses, including without limitation, legal and accounting fees and expenses, incident to its negotiation and preparation of this Agreement and to its performance and compliance with the provisions contained herein ("Transaction Costs"). (b) In the event that the aggregate Transaction Costs paid or incurred by the Citizens Companies exceed $650,000, the excess over that amount (the "Transaction Costs Adjustment") shall reduce the amount of cash payable to the holders of Citizens Common Stock and Citizens Preferred Stock, as provided in Section 1.3(a). The parties acknowledge that the Transaction Costs Adjustment, if any, may be based in part upon reasonable good faith estimates and projections made immediately prior to the Closing and shall be determined in the manner provided in Section 6.3. Section 10.3. Titles and Headings. Titles and headings to Articles and Sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 10.4. No Third-Party Beneficiaries. Except as otherwise provided in Section 5.3 of this Agreement, nothing in this Agreement or in any agreement attached hereto as an exhibit is intended or shall be construed to give any person, other than the parties hereto any legal or equitable right, remedy or claim under or in respect of this Agreement or any agreement attached hereto as an exhibit or any provision contained herein or therein. Section 10.5. Entire Agreement. This Agreement, together with the contracts executed and delivered pursuant hereto, supersedes all prior discussions and agreements between the parties with respect to the subject matter of this Agreement, and this Agreement, including documents, certificates and contracts executed and delivered pursuant hereto, contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. Notwithstanding the foregoing, the parties agree that the terms and conditions of the Confidentiality and Non- Disclosure Agreement shall continue to remain in full force and effect. Section 10.6. Public Announcements. At all times at or before the Closing, Citizens and Citizens Mutual and Meridian will consult with the other before issuing or making any reports, statements, or releases to the public with respect to this Agreement or the transactions contemplated hereby and will use good faith efforts to obtain the other party's approval of the text of any public report, statement, or releases to be made on behalf of such party. If either party is unable to obtain the approval of its public report, statement, or release from the other party and such report, statement, or release is, in the opinion of legal counsel to such party, required by law in order to discharge such party's disclosure obligations, then such party may make or issue the legally required report, statement, or release and promptly furnish the other party with a copy thereof. Section 10.7. Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof. A waiver on one occasion will not be deemed to be a waiver of the same or any other breach on a future occasion. All remedies, either under this Agreement, or by law or otherwise afforded, will be cumulative and not alternative, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such terms or conditions. Section 10.8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the state of Indiana without giving effect to any choice or conflicts of law provision or rule (whether of the State of Indiana or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Indiana. Section 10.9. Binding Effect. This Agreement is binding upon and will inure to the benefit of the parties and their respective successors and permitted assignees. Section 10.10. No Assignment. This Agreement or any right or obligation hereunder may not be assigned by any party hereto without the prior written consent of the other parties hereto and any attempt to do so will be void. Section 10.11. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of the parties under this Agreement will not be materially and adversely affected thereby: (a) such provision will be fully severable; (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof; (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom; and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. Section 10.12. Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. Section 10.13. Execution in Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when one or more counterparts have been signed by each of the parties and delivered to each of the other parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. MERIDIAN INSURANCE GROUP, INC. By:___________________________ Norma J. Oman, President and Chief Executive Officer CITIZENS SECURITY GROUP INC. By:___________________________ Name:_________________________ Title:________________________ CITIZENS SECURITY MUTUAL INSURANCE COMPANY By:___________________________ Name:_________________________ Title:________________________ LIST OF EXHIBITS ATTACHED TO THE ACQUISITION AND AFFILIATION AGREEMENT BY AND AMONG CITIZENS SECURITY GROUP INC., CITIZENS SECURITY MUTUAL INSURANCE COMPANY, AND MERIDIAN INSURANCE GROUP, INC. Following is a description of the exhibits attached to the Acquisition and Affiliation Agreement by and among Citizens Security Group Inc., Citizens Security Mutual Insurance Company, and Meridian Insurance Group, Inc.: Exhibit A - Plan of Merger, copy of which follows this list of Acquisition Agreement exhibits. Exhibit B - Reinsurance Pooling Agreement Amended and Restated as of August 1, 1996, copy of which is attached as a separate exhibit to Form 10-K for the fiscal year ended December 31, 1996. Exhibit C - Management Services Agreement Between Meridian Mutual Insurance Company and its Affiliates, a copy of which is attached as a separate exhibit to Form 10-K for the fiscal year ended December 31, 1996. Exhibit D - Consulting Services Agreement between the Company and Spencer A. Broughton, former Chairman and Chief Executive Officer of Citizens Security Group Inc., with a Stock Option Agreement granting Mr. Broughton the right to purchase up to 20,000 Common Shares of the Company. Exhibit E - Consulting Services Agreement and Stock Option Agreement between the Company and Scott S. Broughton, with copies of both agreements attached as separate exhibits to Form 10-K for the fiscal year ended December 31, 1996. Exhibit F - Sublease Agreement under which VIS'N, Inc. subleases a portion of the office space leased by Citizens Security Mutual Insurance Company. Exhibit G - Claims Administration Agreement by and among Citizens Security Mutual Insurance Company, Citizens Fund Insurance Company, Insurance Company of Ohio and VIS'N, Inc., a copy of which agreement is attached as a separate exhibit to the Form 10-K for the fiscal year ended December 31, 1996. Exhibit H - Software and Hardware Support Agreement by and among Citizens Security Mutual Insurance Company, Citizens Fund Insurance Company, Insurance Company of Ohio, and VIS'N, Inc., a copy of which agreement is attached as a separate exhibit to the Form 10K for the fiscal year ended December 31, 1996. Exhibit I - Office Equipment Lease Agreement between Citizens Security Mutual Insurance Company as Lessor and VIS'N, Inc. as Lessee. Exhibit J - Representation Letter of ESOP Trustee. EX-3 6 BY-LAWS OF MERIDIAN INSURANCE GROUP, INC. INCLUDING ALL AMENDMENTS December 4, 1996 ARTICLE I Certificates for Shares Section 1. Certificates. Each holder of shares of the Corporation shall be entitled to a certificate signed by the President or a Vice President and attested by the Secretary or an Assistant Secretary, certifying the number of shares owned by such shareholder and such other information as may be required by law. The form of such certificate shall be prescribed by resolution of the Board of Directors. Section 2. Lost or Destroyed Certificates. If a certificate of any shareholder is lost or destroyed, a new certificate may be issued to replace such lost or destroyed certificate. Unless waived by the Board of Directors, the shareholder shall make an affidavit or affirmation of the fact that his certificate is lost or destroyed, shall advertise the same in such manner as the Board of Directors may require, and shall give the Corporation a bond of indemnity in the amount and form which the Board of Directors may prescribe. Section 3. Transfer of Shares. Shares of the Corporation shall be transferable only on the books of the Corporation upon presentation of the certificate representing the same, endorsed by an appropriate person or persons and accompanied by (1) reasonable assurance that those endorsements are genuine and effective and (2) a request to register such transfer. Transfers of shares shall be otherwise subject to the provisions of Article 8 of the Indiana Uniform Commercial Code, Ind. Code Chapter 26-1- 8, as amended. Section 4. Recognition of Shareholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner notwithstanding any equitable or other claim to, or interest in, such shares on the part of any other person. ARTICLE II Meetings of Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders of the Corporation shall be held within the first six months of the calendar year on such date and at such place as designated by the Board of Directors. Section 2. Special Meetings. Special meetings of the shareholders may be called by the President, by the Board of Directors, or by shareholders who hold not less than two- thirds (2/3) of all the outstanding shares which may be voted on the business proposed to be transacted thereat. Special meetings of shareholders shall be held at such place as the Board of Directors may designate. Section 3. Notice of Meetings. Written notice stating the date, time and place of any meeting of shareholders and, in the case of special meetings or when otherwise required by law, the purpose for which any such meeting is called, shall be delivered or mailed by the Secretary of the Corporation to each shareholder of record entitled to vote at such meeting, at such address as appears upon the records of the Corporation and at least ten (10) but no more than sixty (60) days before the date of such meeting, on being notified of the date, time and place thereof by the person or persons calling the meeting. Section 4. Waiver of Notice. Notice of any meeting may be waived in writing by any shareholder before or after the date and time for such meeting stated in the notice. -2- Attendance at any meeting in person, or by proxy when the instrument of proxy sets forth in reasonable detail the purposes of such meeting, shall constitute a waiver of notice of such meeting. Section 5. Date of Determination of Voting Rights. The Board of Directors may fix in advance a date as a record date, not exceeding sixty (60) days prior to the date of any meting of shareholders for the purpose of determining the shareholders entitled to notice of and to vote at such meeting, to demand a special meeting, or to take any other action. In the absence of action by the Board of Directors to fix a record ate as herein provided, the record date shall be the fourteenth (14th) day prior to the date of the meeting. Section 6. Voting by Proxy. A shareholder entitled to vote at any meeting of shareholders may vote either in person or by proxy executed in writing by the shareholder or a duly authorized attorney-in-fact of such shareholder. No proxy shall be voted at any meeting of shareholders unless the same shall be filed with the Secretary of the meeting prior to the commencement of such meeting. The general proxy of a fiduciary shall be given the same effect as the general proxy of any other shareholder. Section 7. Voting Lists. The Secretary shall make, at least five (5) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of each and the number of shares held by each, which list shall be kept on file at the principal office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours for a period of five (5) days prior to such meeting. The list shall also be produced and kept open at the time and place of such meeting and shall be subject to inspection by any shareholder during such meeting or any adjournment. Section 8. Quorum. At any meeting of shareholders, the holders of a majority of the outstanding shares which may be voted on the business to be transacted at such meeting, represented thereat in person or by proxy, shall constitute a quorum, and a majority vote of such quorum shall be necessary for the transaction of any business by the meeting, unless a greater number is required by law, the Articles of Incorporation or these By-Laws. Section 9. Action by Consent. Any action required to be taken at a meeting of shareholders, or any action which may be taken at a meeting of shareholders, may be taken without a meeting but with the same effect as a unanimous vote at a meeting, if, prior to such action, a consent in writing, setting forth the action so taken, shall be signed by all shareholders entitled to vote with respect thereto, and such consent is filed with the minutes of shareholders' proceedings or the Corporation's records. ARTICLE III Board of Directors Section 1. Duties and Qualifications. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors, except as may be otherwise provided by law or the Articles of Incorporation. Section 2. Number and Terms of Office. There shall be at least nine (9) directors of its Corporation who shall be divided into three (3) classes containing, as nearly as possible, an equal number of directors in each class. The term of office of each of the directors in each class shall expire in the same year so that each class shall be elected at succeeding annual meetings for a three-year term; except as shorter terms may be required for individual directors so as to maintain, as nearly as possible, an equal number of directors in each class. Section 3. Annual Meeting. Unless otherwise agreed upon, the Board of Directors shall meet immediately following the annual meeting of the shareholders, at the place where such meeting of shareholders was held, for the purpose of election of officers of the Corporation and consideration of any other business which may be brought before the meeting. No notice shall be necessary for the holding of this annual meeting. Section 4. Other Meetings. Regular meetings of the Board of Directors may be held pursuant to a resolution of the Board to such effect. No notice shall be necessary for any regular meeting. Special meetings of the Board of Directors may be held upon the call of the President or of any two (2) members of the Board and upon twenty-four (24) hours' notice specifying the date, time, and place of the meeting, given to each director either orally in person or by telephone, or in writing delivered in person, by mail, or by expedited courier service, or by telegram or photographic, telecopy, or equivalent reproduction of a writing. Notice of a special meeting may be waived in writing before the time of the meeting, at the time of the meeting, or after the time of the meeting. Attendance at any special meeting shall constitute waiver of notice of such meeting, except as otherwise provided by law. Section 5. Quorum. A majority of the actual number of directors elected and qualified, from time to time, shall be necessary to constitute a quorum for the transaction of any business except the filling of vacancies, and the act of the majority of the directors present at a meeting when a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by law, the Articles of Incorporation, or these By-Laws. Section 6. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if prior to such action a written consent to such action is signed by all members of the Board and such consent is filed with the minutes of proceedings of the board or the Corporation's records. Section 7. Committees. The Board of Directors, by resolution adopted by a majority of the actual number of directors elected and qualified, may designate from among its members an executive Committee and one or more other committees, each of which, to the extent provided in such resolution, may have and exercise all the authority of the Board of Directors, except as may otherwise be provided by law or the Articles of Incorporation. Section 8. Participation in Meetings. A member of the Board of Directors or of the executive committee or other committee designated by the Board may participate in a meeting of the Board or executive or other committee of the Board by means of a conference telephone or similar communications equipment by which all directors participating may simultaneously hear each other during the meeting; and participation by these means constitutes presence in person at the meeting for all purposes under these By-Laws. ARTICLE IV Offices Section 1. Offices and Qualification Therefor. The officers of the Corporation shall consist of a Chairman of the Board of Directors, a President, one (1) or more Vice Presidents, a Secretary, a Treasurer and such assistant officers as the Board of Directors shall designate. The President shall be chosen from among the directors. Any two (2) or more offices may be held by the same person. Section 2. Terms of Office. Each officers of the Corporation shall be elected annually by the Board of Directors at its annual meeting and shall hold office for a term of one (1) year and until his successor shall be duly elected and qualified. Section 3. Vacancies. Whenever any vacancies shall occur in any of the offices of the Corporation for any reason, the same may be filled by the Board of Directors at any meeting thereof, and any officer so elected shall hold office until the next annual meeting of the Board of Directors and until his successor shall be duly elected and qualified. Section 4. Removal. Any officer of the Corporation may be removed, with or without cause, by the Board of Directors whenever a majority of such Board shall vote in favor of such removal. Section 5. Compensation. Each officer of the Corporation shall receive such compensation for his service in such office as may be fixed by action of the Board of Directors, duly recorded. ARTICLE V Powers and Duties of Officers Section 1. Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of shareholders and directors, a duty which he may delegate to the President, or in the absence of the President, to any other director at his discretion. The Chairman shall have such other powers and duties as these By- Laws or the Board of Directors may prescribe. Section 2. President. Subject to the general control of the Board of Directors, the president shall manage and supervise all the affairs and personnel of the Corporation and shall discharge all the usual functions of the chief executive officer of a corporation. Shares of other corporations owned by this Corporation shall be voted by the President or by such proxies as the President shall designate. The President shall have authority to execute, with the Secretary, powers of attorney appointing other corporations, partnerships or individuals as the agents of the Corporation, subject to law, the Articles of Incorporation, and these By-Laws. Section 3. Vice Presidents. The Vice Presidents, in the order designated by the Board of Directors, shall have all the powers of, and perform all the duties incumbent upon, the President during his absence or disability and shall have such other powers and duties as these By-Laws or the Board of Directors may prescribe. Section 4. Secretary. The Secretary shall attend all meetings of the shareholders and of the Board of Directors, and shall keep or cause to be kept, a true and complete record of the proceedings of such meetings, and he shall perform a like duty, when required, for all standing committees appointed by the Board of Directors. If required, he shall attest the execution by the Corporation of deeds, leases, agreements and other official documents. He shall attend to the giving and serving of all notices of the Corporation required by these By-Laws, shall have custody of the books (except books of account) and records of the Corporation, and in general shall perform all duties pertaining to the office of Secretary and such other duties as these By-Laws or the Board of Directors may prescribe. Section 5. Treasurer. The Treasurer shall keep correct and complete records of account, showing accurately at all times the financial condition of the Corporation. He shall have charge and custody of, and be responsible for, all funds, notes, securities and other valuables which may from time to time come into the possession of the Corporation. he shall deposit, or cause to be deposited, all funds of the Corporation with such depositories as the Board of Directors shall designate. He shall furnish at meetings of the Board of Directors, or whenever requested, a statement of the financial condition of the Corporation, and in general shall perform all duties pertaining to the office of Treasurer and such other duties as these By-Laws or the Board of Directors may prescribe. Section 6. Assistant Officers. The Board of Directors may from time to time designate and elect assistant officers who shall have such powers and duties as the officers whom they are elected to assist shall specify and delegate to them, and such other powers and duties as these By-Laws or the Board of Directors may prescribe. An Assistant Secretary may, in the event of the absence or the disability of the Secretary, attest the execution of all documents by the Corporation. ARTICLE VI Miscellaneous Section 1. Corporate Seal. The Corporation shall have no seal. Section 2. Execution of Contracts and Other Documents. Unless otherwise ordered by the Board of Directors, all written contracts and other documents entered into by the Corporation shall be executed on behalf of the Corporation by the President or a Vice President, and, if required, attested by the Secretary or an Assistant Secretary. Section 3. Fiscal Year. The fiscal year of the Corporation shall begin on January 1 of each year and end on the December 31 immediately following. ARTICLE VII Amendments Subject to law and the Articles of Incorporation, the power to make, alter, amend or repeal all or any part of these By-Laws is vested in the Board of Directors. The affirmative vote of two-thirds (2/3) of the entire Board of Directors then in office shall be required to effect any alteration, amendment or repeal of these By-Laws. EX-21 7 MERIDIAN INSURANCE GROUP, INC. Listing of Subsidiaries As of December 31, 1996 State of Incorporation Name of Subsidiary or Organization Meridian Security Insurance Company Indiana Citizens Security Group, Inc. Minnesota Citizens Fund Insurance Company Minnesota Insurance Company of Ohio Ohio Meridian Service Corporation Indiana -----END PRIVACY-ENHANCED MESSAGE-----