-----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, Em6hcx3FapDCWHaNidQusPXODEkgR1w3yG4Y5um9Vske4SmPGgaxJKACR8bfBg1m reCr2fV3mNOUJ3OIgsEOlQ== 0000809801-99-000002.txt : 19990330 0000809801-99-000002.hdr.sgml : 19990330 ACCESSION NUMBER: 0000809801-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: SEC FILE NUMBER: 000-15852 FILM NUMBER: 99575300 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, 1998. ( ) 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 5, 1999, based on the closing sales price, was $18.25. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 7,259,661 Common Shares at March 5, 1999. The Index of Exhibits is located at page 53 in the sequential numbering system. Total number of pages, including cover page: 290 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 1999 Annual Meeting of Shareholders of Registrant MERIDIAN INSURANCE GROUP, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 1998 PART I PAGE ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 15 ITEM 3. LEGAL PROCEEDINGS 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 50 ITEM 11. EXECUTIVE COMPENSATION 50 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 50 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 51 PART I ITEM 1: BUSINESS General Meridian Insurance Group, Inc. ("the Company"), is a holding company principally engaged in the business of underwriting property and casualty insurance through its wholly-owned subsidiaries, Meridian Security Insurance Company ("Meridian Security"), Meridian Citizens Security Insurance Company ("Meridian Citizens Security"), formerly known as Citizens Fund Insurance Company and Insurance Company of Ohio ("ICO"). Meridian Citizens Security and ICO, along with their holding company, Citizens Security Group, Inc. ("CSGI"), were purchased by Meridian Security on July 31, 1996. During the first quarter of 1997, the Company dissolved CSGI. The assets and liabilities of CSGI were merged into Meridian Security. 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. Approximately 47.8 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. Since August 1, 1996, Meridian Security, Meridian Citizens Security, ICO, Meridian Mutual and Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual"), formerly known as Citizens Security Mutual Insurance Company, the former majority shareholder of CSGI, have been parties to a reinsurance pooling agreement ("pooling agreement") under which business written is 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. Effective July 1, 1998, the pooling arrangement was amended to include business solicited through direct response marketing as well as the non-standard automobile product introduced during 1998, effectively pooling all business written by the insurance companies. Collectively, the insurance companies ("Meridian") participating in this reinsurance pooling arrangement write a broad line of property and casualty insurance, including personal and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Business is written through approximately 1,370 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, Washington and Wisconsin. Relationships with Meridian Mutual and Meridian Citizens Mutual All of the Company's corporate officers are officers of Meridian Mutual and six of the nine members that constitute the Company's Board of Directors are also directors of Meridian Mutual. All of the directors and officers of Meridian Citizens Mutual are corporate officers of the Company. Effective January 1, 1997, the Company became the employer for all of the employees of Meridian Mutual and Meridian Citizens Mutual and the related employee benefit plans were merged into the Company's plans. Prior to January 1, the Company had no employees and was dependent upon Meridian Mutual and Meridian Citizens Mutual for the sale and underwriting of insurance, the servicing of policyholder claims and all other aspects of the Company's operations. 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, Meridian Citizens Mutual or the Company are paid by the company to which the expense is attributable. 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 currently covers all of the property and casualty insurance written by Meridian Mutual, Meridian Citizens Mutual, Meridian Security, Meridian Citizens Security, and ICO. Under the pooling agreement, 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. Since August 1, 1996, the participation percentages of the Company's insurance subsidiaries totaled 74 percent. The participation rates were determined 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 CSGI acquisition. Prior to August 1, Meridian Mutual and Meridian Security were the only participants in the pooling agreement, under 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 Meridian Citizens 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 it owns of the Company, changes in the capital structure or asset values of Meridian Mutual, Meridian Security, Meridian Citizens Mutual, Meridian Citizens Security, 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 Meridian Citizens 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 Meridian Citizens 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 Meridian Citizens Mutual. 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 Meridian Citizens 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 Meridian Citizens Mutual also owe fiduciary duties to the policyholders of Meridian Mutual and Meridian Citizens 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, Meridian Citizens Security, ICO or Meridian Citizens 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 the terminating party, and each party would receive assets from the other in an amount equal to the amount of the policy liabilities received. If the pooling agreement had been terminated at December 31, 1998, approximately 12% 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, Meridian Citizens Security and ICO. The Company would maintain the employee force but would have reduced sales operations through a 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, the Meridian group rating of "A" was also given to Meridian Citizens Security, ICO and Meridian Citizens Mutual. Best is an independent company which rates insurance companies on the basis of their opinion as to 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 As a result of the Citizens Security Insurance Group acquisition in 1996, the Company's operating territory was expanded into four additional states (Minnesota, Missouri, South Dakota, and North Dakota) and the premium base was enlarged in the states of Iowa, Ohio and Wisconsin. Meridian has also expanded organically into additional states in recent years. Additional state expansion, including Arizona, Georgia, Kansas and Maryland is planned for 1999. This geographic expansion enables the Company to spread its risk across a larger region. The Company has achieved certain economies of scale by consolidating functions within its operations. During 1998, the Meridian Citizens information systems, as well as two Meridian Mutual regional claim offices, were consolidated into the Indianapolis operation. Further operational consolidations may be considered over time. Underwriting The underwriting functions are separated into personal, commercial and farm lines of business. The Company's underwriting personnel are responsible for establishing risk-selection guidelines for agents and for the underwriting and monitoring of policy issuance in order to insure adherence to established guidelines. The underwriting departments also determine the product pricing and are responsible for the development of new products and enhancements. The underwriting personnel work closely with sales representatives and consult regularly with agents to assess current market conditions. In establishing prices, underwriting personnel analyze studies of statistical and actuarial data concerning the impact of price changes in the markets served and consider data compiled by industry organizations. This allows for a more accurate assessment of the anticipated costs of risks underwritten. Over the last several years, the Company has continued efforts to reduce the loss ratio by implementing underwriting programs related to proper risk selection. The Company also continues to monitor rate adequacy and agency profitability, taking action where appropriate. The Company's 1998 statutory combined ratio of 102.9 percent was a 4.2 percentage point improvement from the 107.1 combined ratio reported in 1997. The improvement was achieved despite the record level of catastrophic weather-related claims incurred in 1998 of approximately $14.7 million, more than double the $7.3 million reported in 1997. The Company continues to focus on reducing per-unit costs and other expenses in order to improve its loss adjustment and underwriting expense ratios through increased automation and expense consolidation. The 1997 installation of the automated personal lines underwriting system now enables the majority of applications to be processed by computers via pre-set standards. Human intervention is only necessary when an application falls outside of specified parameters. This allows the Company to process a larger volume of business without proportionally expanding the size of the underwriting staff, thereby reducing per-unit costs. The Company currently issues most personal automobile and homeowners policies via the automated underwriting system. Products and Marketing-Meridian Meridian writes a broad line of property and casualty insurance including personal, non-standard, and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Meridian recently began to offer personal automobile products through direct response marketing in the states of Washington and Virginia. Meridian markets most of its insurance through independent insurance agents. 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. The Meridian agency network numbers approximately 1,370 independent insurance agencies spread throughout 15 states. Meridian's independent agencies are primarily small to medium-sized firms with no agency producing more than 2 percent of the total written premium. 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 will be rehabilitated or 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. Agencies also collect/remit premiums and submit business subject to Meridian's underwriting guidelines. 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 also offers an agency profit-sharing agreement under which agencies attaining designated premium volume and profitability requirements receive a bonus. 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, offering broad coverages and product enhancements, and relying on automation to improve efficiency will increase penetration of existing markets. Meridian is a leader in the area of agency interface automation. Additionally, the company has an automated personal lines underwriting system which processes a majority of personal lines new business. Lower operating costs and strict adherence to underwriting guidelines will allow Meridian to be competitive and grow in the personal lines marketplace. By emphasizing and targeting select lines of business, Meridian believes moderate growth in personal lines business is achievable without significantly increasing risk exposure. During 1998, Meridian launched a growth initiative by entering into a marketing and sales arrangement with GROUPadvantage. This arrangement makes Meridian's personal lines products available through franchised indepedent agencies to Sam's Club members in certain states. (GROUPadvantage is a registered service mark of Consumer Insurance Services of America "CISA" and is used under license from CISA.) During the fourth quarter, Meridian began marketing personal lines products to members of Sam's Clubs in Michigan and Illinois, with the expectation that several additional states will be added in 1999. 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 mid-sized accounts in the $15,000 to $50,000 range of annual premium volume. Meridian also writes commercial business through association programs. Over 35 associations have endorsed Meridian for their insurance program. Association business is desired in agricultural, veterinary, optometry, and funeral home associations, as well as four other classes of business. Meridian's farm strategy emphasizes increased penetration into existing markets, as well as expanding its farm products geographically into Iowa, Minnesota and Wisconsin. Meridian targets medium to large farms which meet the Company's underwriting guidelines. Management believes Meridian enjoys a competitive advantage in the farmowners market because of its years of experience, regional focus and the fact that some national insurers have vacated this market. The following table sets forth for the periods indicated the net premiums written, the net underwriting gain (loss), loss and loss adjustment expense ("LAE") ratios, expense ratios and combined ratios for the Company's insurance operations, prepared in accordance with statutory accounting principles. The combined ratio does not reflect investment income, federal income taxes, or other non-underwriting income or expense, all of which are included in determining net income. Year Ended December 31, 1998 1997 1996 1995 1994 (Dollars in thousands) Net Premiums Written Personal lines: Automobile $ 81,219 $ 78,270 $ 68,219 $ 59,444 $ 54,325 Homeowners 24,260 28,051 21,964 19,526 17,080 Other 2,544 2,901 4,819 2,178 1,887 Total personal lines 108,023 109,222 95,002 81,148 73,292 Farmowners 10,961 10,826 9,417 8,775 7,892 Commercial lines: Automobile 17,514 18,229 14,343 13,107 11,740 Workers' compensation 22,326 23,901 23,380 22,438 21,587 Commercial multi-peril 24,934 27,766 23,453 19,509 19,110 Other 4,313 4,575 3,600 3,764 2,525 Total commercial lines 69,087 74,471 64,776 58,819 54,961 Total premium written $188,071 $194,519 $169,195 $148,742 $136,145 Net Underwriting Loss $ (5,099) $(13,726) $(13,868) $ (1,610) $ (2,751) Loss and Loss Adjustment Expense Ratio Personal lines: Automobile 69.3% 78.8% 75.0% 75.0% 69.2% Homeowners 101.7 104.1 110.7 81.2 82.9 Other 43.2 60.9 63.0 34.0 56.0 Total personal lines 76.3% 84.5% 83.2% 75.5% 72.2% Farmowners 73.4% 59.4% 95.0% 68.6% 62.7% Commercial lines: Automobile 84.0% 86.1% 77.5% 89.1% 80.0% Workers' compensation 45.4 52.8 54.2 58.6 62.7 Commercial multi-peril 72.6 75.0 85.5 45.8 70.3 Other 38.1 46.1 36.9 47.1 27.4 Total commercial lines 64.7% 68.3% 68.7% 60.5% 67.5% Total loss & LAE ratio 71.8% 76.8% 78.0% 69.2% 69.8% Expense Ratio 31.1% 30.3% 30.0% 31.0% 32.0% Combined Ratio 102.9% 107.1% 108.0% 100.2% 101.8% Claims Meridian's claim division is responsible for developing and implementing policies and procedures for the payment and disposition of claims and for establishing claim reserves. In connection therewith, it resolves questions concerning policy coverage and manages reinsurance recoveries and salvage and subrogation matters. Claims litigation is managed in conjunction with the legal division. During the fourth quarter of 1998, regional claim operations in Louisville, Kentucky and East Lansing, Michigan were closed. All claim services for Meridian are now handled through the claim service centers in Indianapolis, Indiana. 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. The Company's 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 $100,000 or more are reviewed by additional levels of claims divisions management, and all claims in excess of $200,000 must be approved by the claim division director. If litigation is involved, the legal division director reviews all claims in excess of $100,000. A claim review committee provides for the periodic evaluation of certain claims, including those involving special circumstances, to enhance the investigation and decision-making process. Reserves Loss reserves are estimates at a given time, based on facts then known, of what an insurer predicts its exposure to be in connection with incurred losses. Loss adjustment expense reserves are estimates of the ultimate liability of the expenses in settling all claims, including investigation and litigation costs resulting from such claims. The ultimate liability of the insurer for all losses and loss adjustment expenses reserved at any point in time may be greater or less than these estimates. Meridian maintains reserves for the eventual payment of losses and loss adjustment expenses with respect to both reported and unreported claims. Two principal methods are followed in establishing reserves. For coverages which involve a large volume of claims for 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 periodically, based on claims experience. 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 is often necessary to adjust estimates of future liability as additional facts regarding individual claims become known. Meridian also establishes reserves for claims which have been incurred but which have not been reported, utilizing 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 an average or a case-by-case basis. Meridian consults periodically with an independent actuarial firm concerning the adequacy of 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 Meridian Citizens Security and ICO at the date of acquisition. Year Ended December 31, 1998 1997 1996 (In thousands) Balance at beginning of period $ 169,801 $ 161,309 $ 123,577 Less reinsurance recoverables 48,872 41,819 31,204 Net balance at beginning of period 120,929 119,490 92,373 Net reserves acquired through --- --- 20,685 acquisition Incurred related to: Current year 145,328 165,577 137,817 Prior years (8,708) (16,358) (7,716) Total incurred 136,620 149,219 130,101 Paid related to: Current year 93,790 97,448 93,199 Prior years 51,308 50,332 30,470 Total paid 145,098 147,780 123,669 Net balance at end of period 112,451 120,929 119,490 Plus reinsurance recoverables 41,802 48,872 41,819 Balance at end of period $ 154,253 $ 169,801 $ 161,309 The reconciliations for 1998 and 1997 show approximately $8.7 million and $16.4 million reductions, respectively in previously established loss reserves. Favorable loss developments resulting from decreases in the frequency and severity of claims in prior accident years for the Company's personal automobile liability, workers' compensation lines and commercial multiple-peril lines of business were the primary factors in the reductions. 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 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 1998 but incurred in 1991 is included in the cumulative redundancy amount for each of the years from 1991 through 1997. The table does not present accident or policy-year development data. The Company's share of pooled losses increased from 62 percent as of April 1, 1987, 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 Meridian Citizens Security and ICO. 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 established. 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,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 (Dollars in thousands) Net reserves for losses & loss adjustment expenses $112,451 $120,929 $119,490 $92,373 $91,940 $89,630 $72,006 $68,102 $64,742 $62,281 $53,569 Cumulative paid as a percent of year- end reserves: One year later 42.4% 42.1% 40.7% 39.0% 40.7% 29.0% 42.4% 46.6% 46.1% 47.2% Two years later 61.1% 65.4% 59.0% 59.0% 51.7% 55.0% 68.5% 68.9% 68.1% Three years later 78.1% 70.9% 68.9% 62.6% 67.5% 74.7% 81.3% 81.3% Four years later 76.1% 74.6% 67.8% 74.9% 81.6% 84.1% 87.4% Five years later 77.5% 71.3% 77.4% 85.7% 88.0% 88.6% Six years later 73.7% 79.9% 87.5% 90.1% 90.7% Seven years later 81.4% 88.9% 91.8% 92.3% Eight years later 89.7% 93.0% 93.5% Nine years later 93.6% 94.7% Ten years later 95.1% Reserves re-estimated as a percent of year-end reserves: One year later 93.3% 91.1% 96.6% 92.9% 92.3% 93.6% 97.5% 103.2% 99.7% 102.3% Two years later 90.8% 103.4% 94.9% 89.0% 84.6% 93.0% 99.0% 100.7% 100.6% Three years later 101.9% 93.1% 89.2% 83.3% 89.0% 97.9% 99.2% 100.4% Four years later 91.1% 89.2% 83.6% 89.3% 95.3% 99.3% 99.7% Five years later 87.6% 83.8% 89.2% 96.3% 97.9% 100.3% Six years later 83.0% 89.7% 95.4% 98.4% 99.5% Seven years later 89.3% 96.5% 97.9% 100.0% Eight years later 96.5% 99.5% 100.2% Nine years later 99.9% 101.9% Ten years later 101.9% Redundancy (deficiency) 6.7% 9.2% -1.9% 8.9% 12.4% 17.0% 10.7% 3.5% 0.1% -1.9%
Reinsurance Meridian follows the customary industry practice of limiting 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 Meridian's principal reinsurer providing property and liability excess of loss coverage. Meridian uses a large number of reinsurers for property's 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 Company management. The reinsurance purchased 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 which require specific agreement of the reinsurer as to limits of coverage provided ("facultative reinsurance"). Meridian Mutual, Meridian Security, Meridian Citizens Mutual, Meridian Citizens Security, and ICO were each named as insured parties under the treaty reinsurance contracts, and the coverages under those contracts applied to all risks written by each of the companies. Treaty reinsurance coverage was purchased to cover property and liability exposures in excess of $200,000 and $350,000, respectively, up to the limits set forth in the individual treaty. In 1997, the retention was $200,000 for property and $ 250,000 for liability. Facultative reinsurance was purchased to cover exposures on both property and liability coverages from losses over and above the limits provided by the treaty reinsurance. Catastrophe reinsurance provided 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 contractual limits for windstorms of $65,000,000 and for earthquakes of $115,000,000. Two other catastrophe reinsurance treaties provided coverage for 95 percent of losses sustained from multiple catastrophic events which aggregated beyond specified retentions and per event deductibles, up to the contractual limits. As of December 31, 1998, the Company had approximately $41.8 million of reinsurance recoverable on unpaid losses. Of this amount, approximately $22.9 million was recoverable from Employers Reinsurance Corporation and approximately $12.9 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 the reinsurance contracts are negotiated annually. If the relationships were to be terminated with the current reinsurers, management believes that, under current circumstances, relationships with other reinsurers could be established without a material adverse effect on its business. Meridian assumes a limited amount of reinsurance from third parties. This business accounted for less than one percent of net premiums written in 1998. Investments Investments of the Company are principally held by Meridian Security, Meridian Citizens Security 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 six directors of the Company, four 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, 1998 and 1997 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 investment strategy. This strategy considers, among other factors, the impact of the alternative minimum tax. Tax-exempt bonds, on a carrying value basis, made up approximately 17.9 percent and 29.5 percent of the total fixed maturity portfolio at December 31, 1998 and 1997, respectively. On a carrying value basis, sinking fund preferred stocks made up approximately 9.2 percent and 14.2 percent of the total fixed maturity portfolio of the Company at December 31, 1998 and 1997, respectively. The Company also holds investments in mortgage-backed pass-through securities and collateralized mortgage obligations ("CMO") which had a carrying value of $44.9 million and $43.4 million at December 31, 1998 and 1997, 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 4.4 years. The Company, as approved by the Finance and Investment Committee, has increased its equity security holdings over the past four years. Equity securities primarily consist of common stocks and had a fair market value of $64.0 million and $54.4 million at December 31, 1998 and 1997, respectively. Equity securities accounted for 20.4 percent and 17.6 percent of the total investment portfolio at December 31, 1998 and 1997, 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, Kansas, Kentucky, Michigan, Minnesota, Ohio, Pennsylvania, Tennessee, Virginia, Washington, and Wisconsin. Meridian Citizens Security and Meridian Citizens Mutual hold licenses to write in Iowa, Minnesota, North Dakota, Ohio, South Dakota, and Wisconsin. Meridian Citizens Mutual is also licensed to write insurance in Illinois, Indiana, Kentucky, Michigan, Missouri, Pennsylvania, and Tennessee. ICO is admitted as an insurer in the state of 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. 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. Additionally, the companies are required to participate in various mandatory pools or underwriting associations. 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 14 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, Meridian Citizens Mutual, Meridian Citizens Security, 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, Meridian Citizens Mutual, Meridian Citizens Security, and ICO compete with other insurers writing through independent agents (including insurers represented by the independent agents who represent Meridian), with insurers having their own agency organizations and with direct sellers of insurance products. There are numerous companies competing for business in the geographic areas in which the Company, Meridian Mutual and Meridian Citizens Mutual operate. No single company dominates the marketplace, but many of Meridian's competitors have more established national reputations and substantially greater financial resources and market share. Employees On January 1, 1997, the Company became the employer of all employees that were formerly employed by Meridian Mutual and Meridian Citizens Mutual. This transfer allows for more freedom in compensation planning, such as flexibility in the use of the Company's common stock as compensation, and improves internal efficiencies by combining employee benefit plans. Prior to the change, the Company had no employees and relied upon Meridian Mutual and Meridian Citizens Mutual to provide all management and administrative services required by the Company. The Company employs approximately 600 people and believes that its relationship with its employees is satisfactory. Audit Practices The Board of Directors has an Audit Committee composed of four 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 the Company's internal audit function. The Company retains the firm of PricewaterhouseCoopers LLP 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 Committee. ITEM 2: PROPERTIES The headquarters building of the Company 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. Expansion efforts completed in 1995, have allowed the Company and Meridian Mutual to consolidate the two Indianapolis satellite offices, two regional claim offices, and the information resources function for Meridian Citizens Mutual previously in Red Wing, Minnesota into the home office facility. The principal office space for the operations of Meridian Citizens Security and Meridian Citizens Mutual is located in Red Wing, Minnesota. The space consists of approximately 28,000 square feet with the lease expiring on December 31, 2002. Approximately 10,325 feet of this space is subleased to the Red Wing Hotel Corporation. 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 5, 1999, approximately 47.8 percent of the common stock was owned by Meridian Mutual and the balance was spread among approximately 240 common shareholders of record, including many brokers holding shares for their individual clients. The number of individual shareholders on the same date was approximately 1,150. The number of Common Shares outstanding on March 5, 1999, totaled 7,259,661. 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 1998 and 1997. 1998 1997 Quarter Ended High Low Close High Low Close March 31 $17.95 $15.00 $17.04 $14.66 $12.27 $12.73 June 30 $18.52 $16.25 $17.39 $14.21 $12.05 $13.86 September 30 $20.00 $16.25 $16.93 $17.50 $13.53 $16.48 December 31 $20.25 $14.54 $20.25 $17.05 $14.21 $15.23 Dividend Policy Since the first quarter of 1996, and prior to the December 1998 ten percent stock dividend, the Company paid a quarterly cash dividend of $0.08 per common share. In 1995, the Company paid quarterly dividends of $0.06 per share. Subsequent to the stock dividend, the cash dividend rate remained at $0.08 per common share, effectively increasing the dividend by ten percent. 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 14 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, 1998 1997 1996 1995 1994 (In thousands, except per share data and ratios) Operating data: Premiums earned $189,188 $194,587 $167,304 $143,866 $135,002 Net investment income 17,246 16,372 14,908 14,564 13,996 Realized investment gains 7,342 4,477 3,794 1,538 286 Other income (expense) (59) 1,042 563 (146) 54 Total revenues 213,717 216,478 186,569 159,822 149,338 Losses and loss adjustment expenses 136,620 149,219 130,101 99,124 93,971 General operating expenses 16,686 16,505 13,767 14,156 14,527 Interest expense 672 732 308 --- --- Amortization expenses 42,918 42,894 36,443 30,820 29,304 Total expenses 196,896 209,350 180,619 144,100 137,802 Income before taxes and change in accounting method 16,821 7,128 5,950 15,722 11,536 Income taxes 4,670 207 150 4,105 2,415 Net income $ 12,151 $ 6,921 $ 5,800 $ 11,617 $ 9,121 Weighted average shares outstanding* 7,292 7,352 7,457 7,447 7,414 Basic earnings per share* $ 1.67 $ 0.94 $ 0.78 $ 1.56 $ 1.23 Diluted earnings per share*$ 1.65 $ 0.93 $ 0.77 $ 1.56 $ 1.23 Dividends declared per share* $ 0.30 $ 0.29 $ 0.29 $ 0.26 $ 0.22 Underwriting ratios (statutory basis): Loss and loss adjustment expense ratio 71.8% 76.8% 78.0% 69.2% 69.8% Expense ratio 31.1 30.3 30.0 31.0 32.0 Combined ratio 102.9% 107.1% 108.0% 100.2% 101.8% Balance sheet data at end of period: Total investments $313,822 $308,427 $281,689 $254,694 $219,461 Total assets 408,858 413,586 397,798 322,588 291,406 Total liabilities 266,889 281,692 275,624 204,346 197,154 Shareholders' equity 141,969 131,894 122,174 118,243 94,252 Shareholders' equity per share* $ 19.60 $ 18.09 $ 16.38 $ 15.88 $ 12.71 * Retroactively restated to reflect the 10 percent stock dividend declared in December 1998. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview: Results of operations improved significantly during 1998 despite a record level of weather-related catastrophe losses. This improvement results in large part from actions taken in 1997 and 1998 to improve underwriting profitability. Such efforts included underwriting programs related to proper risk selection, certain premium rate changes, and various agency management actions. These actions were necessary, even though in the short- term they negatively affected growth in premium revenue. Given the improved underwriting profitability of the Company's core business, the focus is now on a number of growth initiatives including state expansion, the continued roll-out of the non-standard auto product and affinity group marketing. During recent years, the Company has aggressively expanded its operations into new states. At the end of 1994, Meridian operated in seven states, entirely in the Midwest. The Company has significantly increased its geographic diversification and presently operates in 15 states. Additional state expansion, including Arizona, Georgia, Kansas and Maryland, is planned for 1999. During 1998, Meridian introduced its new non-standard automobile coverage. Non-standard automobile insurance covers drivers with no prior insurance or with driving records that do not qualify them for standard premium rates. Non-standard policies are generally sold at higher premiums to offset increased risk of loss. The non-standard auto policies are currently marketed through the Company's independent agency force, key non-standard specialty agents and direct sales. Marketing products through independent agents has always been the Company's primary source of distribution. The Company continues to build these relationships, increasing the independent agency count from 1,300 to 1,370 during 1998. The Company's growth strategy requires adding additional distribution methods. Meridian recently established an affinity marketing relationship with a bank in Virginia and is actively seeking affiliations with additional banks and other affinity partners, through which it will use direct response techniques. Participation in a marketing and sales partnership with GROUPadvantage offers promising opportunities. This sales arrangement makes Meridian's personal lines products available through franchised independent agencies to Sam's Club members in certain states. Specifically, in October we began marketing our products to Sam' Club members in Michigan. Shortly thereafter, Illinois was added and we expect to make our products available to Sam's Club members in several additional states during 1999. (GROUPadvantage is a registered service mark of Consumer Insurance Services of America (CISA) and is used under license from CISA.) In addition to growth initiatives, the Company is working to increase profitability through consistent exercise of underwriting discipline, sound investment management, enhanced customer service and cost control. Enhanced use of automated tools, such as the personal lines automated underwriting system, is expected to add efficiency. Operational consolidation is also expected to result in cost savings. During the 1998 fourth quarter, the Company consolidated its two regional claim centers into its Indianapolis claims operation. Additionally, the information systems of the Meridian Citizens companies (formerly Citizens Security Group companies) were centralized into the Company's Indianapolis location. It is expected that the consolidation of the regional claims offices and the Meridian Citizens information systems into the Company's headquarters will lower operating expenses, while maintaining a high level of service to agents and policyholders. The Company estimates annualized cost savings of at least $1,000,000, or $0.09 per share after tax, to result from these consolidation efforts. Year 2000 disclosures As we near the end of the century, many information technology products will not recognize the year 2000. As a result, businesses are at risk for possible calculation errors or system failures which could cause a disruption in their operations. This is known as the Year 2000 ("Y2K") issue. In 1995, Meridian began the initial planning phase to ensure that all systems were Y2K compliant. As a result of this planning, it was determined that Meridian would utilize internal resources to complete the necessary remediation. This would allow Meridian to contain costs and maintain control as well as provide consistency in system applications. As a result of this decision, a team of programmers was hired under the direction of experienced internal management to address the issue. It was also determined that the Meridian Citizens project team would operate independently utilizing contracted personnel to complete the project. Such personnel, our contracted outside automation services providers, were under contract to complete and test the Y2K programming efforts. This process was supervised by internal Meridian staff to maintain consistency. The next stage of the process was to identify those systems and programs that contained date sensitive fields throughout the operating systems. The Meridian approach taken to address the issue was field expansion. This expansion would allow the date fields to be expanded and allow programs to distinguish dates based upon an eight digit code as opposed to a six digit code. The Meridian Citizens approach implemented by the outside automation services provider, had to take into account the various operating platforms used to process data. It was decided that a combination of methods would be the best approach to solving the Y2K dilemma. A combination of field expansion and "windowing" was utilized to address the issue. The "windowing" approach utilizes a two digit year currently in the date fields. For example, any result over 50 signifies the 20th century and any under fifty, the 21st century. Three years into the project, Meridian has made significant progress. Prioritizing the effort was done by reviewing those systems and programs which would require the effective date change prior to January 1, 2000 such as policy processing systems which required renewal processing as early as November of 1998. Extensive reprogramming now allows these internal policy processing systems to recognize the difference between the 20th and the 21st century. Meridians' remediated policy processing systems have been in production and compliant since November 1997. In July 1998, Meridian also completed code remediation for the management reporting systems and front- end client server systems. The Meridian Citizens companies which again operate on a different platform, achieved Y2K compliance in August 1998 and have been in production since that time. 1998 mainframe impact, front-end client server, and critical network programming have also been completed. Critical operating systems for the Company have been tested by our Quality of Assurance Unit and were found to be compliant. There are a few internal non-critical programming efforts which are still in the process of remediation. The majority of these are expected to be completed and tested by the end of 1998. A few are targeted for completion during the first and second quarters of 1999. It is anticipated that these systems will be remediated, tested, and moved into production by July 1999. As the Company has already processed policies encompassing Y2K dates, the Company does not feel at risk for Y2K difficulties and as such no contingency plans are currently in place for the operating systems. Meridian anticipates that the costs associated with Y2K remediation will approximate $1.3 million upon completion. Such incremental costs have been estimated at approximately $200,000 in 1996 and approximately $400,000 per year for 1997-1998. It is also anticipated that approximately $300,000 will be spent in 1999. Approximately 50 percent of the total costs relate to personnel such as custom programmers. The remainder relates to costs for replacing certain software applications and equipment. Such costs have been funded through operating revenues and represent less than 10 percent of the information systems annual budgets. Costs associated with the Meridian Citizens remediation were included under the automation programming charges incurred by the Company on a monthly basis and were therefore not distinguishable from normal programming fees. Due to the complexity and impact of the Y2K project, the Company engaged independent consultants to review the planning and remediation methods utilized within the project for all subsidiaries. The written report received from the independent consultants contained comments and suggestions which were implemented and incorporated into the final Y2K action plans. At this time the Company's policy processing and management reporting systems have been corrected, thoroughly tested by our Quality Assurance team and moved into full production. Actual policies have been processed which are affected by the Y2K issue. Throughout 1999, the Company will double check the systems to verify that the infrastructure will respond correctly to the actual century date change. The Company has also addressed the facilities Y2K issues by evaluating HVAC, security systems, elevators, the automobile fleet, etc., to ascertain compliance. As part of the readiness program, the Company also recognized the impact that significant outside vendors, agents, and other business associates could have on the ability to transact business. As a result, the Company has reviewed vendor associated software and hardware products utilized within the organization to determine the Y2K effort that would be necessary to achieve readiness. The Company also identified specific hardware and software that needed to be replaced as a result of the Y2K issue. It is anticipated that the replacement process will be completed in early 1999. Most are currently in compliance, scheduled for upgrade, or in the process of being eliminated. In addition, the Company also established contact with agents and certain vendors to highlight this issue. This contact was established with the purpose of reasonably ascertaining the Y2K impact. Where possible, the Company has reviewed plans received by outside providers for their Y2K compliance effort. In some cases, these entities have a lower level of readiness and preparation and as a result are not able to provide this type of information. Should an agent be non-compliant for Y2K, the Company's contingency plan is the current ability to process or underwrite policies on a manual basis. While this may have a direct impact on the timeliness of policy processing, the operating systems do have the ability to process such data. Third party vendors which have critical impact on the ability to process are currently anticipated to be Y2K compliant. However, there can be no guarantee that the systems of agents or other third parties will be converted on a timely basis, or that a widespread failure to convert by others would not adversely affect the Company. It is not anticipated that non-critical third party vendors who fail to be Y2K compliant will impact the ability to complete necessary work processes. No contingency plan is in place for these non-critical business vendors at this time. The Company does not issue insurance policies covering risks related to the Year 2000 issue. However, there can be no certainty regarding future judicial or legislative interpretations of coverage. While the Company has utilized significant resources to secure its critical operating systems, there are no contingency plans for things which effect the general public such as electrical power, water, and etc. Failure for these providers to perform Y2K compliance could be detrimental to company operations. No significant information technology projects having a material effect on the Company's financial position or results of operations have been deferred as a direct result of Year 2000 efforts. Statements in this 10-K document that are not strictly historical may be "forward looking" statements which involve risks and uncertainties. Risk factors include the ability of the Company, suppliers, and agency representatives to handle the Y2K computer issue; variation in catastrophe losses due to changes in weather patterns or other natural causes; changes in insurance regulations or legislation that may affect the Company; and economic conditions or market changes affecting pricing or demand for insurance products or the ability to generate investment income. Growth and profitability have been and may be affected by these and other factors. Results of Operations: 1998 Compared to 1997 Net income for 1998 grew 76 percent to $12.2 million, or $1.65 diluted earnings per share, up from $6.9 million, or $0.93 per diluted share for 1997. This improvement was achieved in spite of more than double the amount of weather-related catastrophe losses in 1998, compared with 1997. Net catastrophe losses were approximately $14.7 million in 1998 versus approximately $7.3 million for 1997. The Company's combined ratio improved to 102.9 percent for 1998 from 107.1 percent in 1997. Realized investment gains for 1998 increased to $7.3 million, or $0.65 per share after tax, from $4.5 million, or $0.40 per share after tax, for 1997. The Company's total revenues for 1998 decreased 1.3 percent to $213.7 million from $216.5 million in 1997. Premiums earned decreased 2.8 percent to $189.2 million for 1998 in comparison to $194.6 million for the previous year. Net written premiums for the Company's personal lines of business decreased by approximately 1.0 percent. This was the combination of a 3.8 percent increase in personal automobile premiums and a 13.5 decrease in written premium for the homeowners line of business. The personal automobile growth was favorably affected by the introduction of the new non- standard automobile product. Net written premiums for the farmowners line of business increased approximately 1.0 percent. Commercial lines net written premium decreased approximately 7.0 percent. Underwriting actions were taken in 1997 and early 1998 to improve profitability, negatively affecting premium revenue growth in the short-term. Additionally, intense competition and a soft pricing environment continued to affect market conditions in the Company's operating territory, particularly for commercial lines of business. Net investment income of approximately $17.2 million for 1998 increased 5.3 percent in comparison to $16.4 million for 1997. This increase was due in part to a larger invested asset base for much of the year. The Company's pre-tax net investment yield was enhanced by a reduction in the tax- advantaged portfolio allocation and a reduced allocation to investment expense. For the years ended December 31, 1998 and 1997, the Company realized net investment gains of approximately $7.3 and $4.5 million, respectively. The current year's realized gains resulted largely from the sale of certain equity securities, as well as from certain municipal bond sales motivated by tax planning strategies. Loss and loss adjustment expenses decreased from the $149.2 million reported at year-end 1997 to $136.6 million in 1998. The improvement was achieved despite the high level of weather-related catastrophe losses which hit the midwest. Many of the Company's operating states reported significant weather-related damage. Most significantly, industry statistics indicated Minnesota, the largest state of operation for the Meridian Citizens companies, incurred more such losses in 1998 than in the last 49 years combined. This caused the Meridian Citizens companies to incur approximately half of the Company's consolidated catastrophe losses, while generating less than 20 percent of the Company's premium volume. The Company estimated weather-related losses to approximate $14.7 million in 1998 compared to $7.3 million in 1997. Despite the record level of catastrophe weather-related claims, the statutory loss and loss adjustment expense ratio improved for nearly all lines of business when compared to 1997. The personal lines loss ratio of 75.8 percent improved 7.6 percentage points from 1997. Personal automobile, the Company's largest line of business, had a 1998 loss ratio of 69.2 percent, compared to 78.7 percent for 1997. The 1998 commercial lines loss ratio of 66.3 percent is also an improvement over the 1997 result of 68.8 percent. Worker's compensation continues to be very profitable for the Company reporting a 49.5 percent loss ratio in 1998 versus 52.5 percent for 1997. Much of the improvement in the Company's core book of business is attributed to underwriting actions implemented in late 1997 and early 1998. The Company generally experienced favorable trends during 1998 in both the frequency and severity of claims incurred. General operating and amortization expenses of $59.6 million in 1998 slightly increased from the $59.4 million recorded during 1997. Relative to earned premium volume, the Company's 1998 expense ratio increased to 31.5 percent compared to 30.5 percent for 1997. The reduction in premium volume over which to spread fixed costs was a factor behind this increase, as were costs to initiate new growth strategies. During the fourth quarter of 1998, the Company consolidated two regional claims centers and the Meridian Citizens information systems into the Company's Indianapolis location. While expected to produce cost savings beginning in 1999, incremental costs to implement these changes were estimated at approximately $0.04 per share after tax in 1998. For the year ended December 31, 1998, the Company recorded income tax expense of $4.7 million compared to $0.2 million for the same 1997 period. The higher level of pre-tax income and a reduction in the tax-advantaged portfolio allocation to municipal bonds and sinking fund preferred stocks were the primary factors in the increase. 1997 Compared to 1996 For the year ended December 31, 1997, the Company recorded net income of $6.9 million, or $.94 basic earnings per common share ($.93 diluted earnings per share). This compares to 1996 net income of $5.8 million, or $0.78 basic earnings per share ($0.77 diluted earnings per share). Included in the 1997 results was an entire year of operations from the 1996 acquisition of the Citizens Security companies, compared to five months of Citizens Security operations for the prior period. Earnings for both periods were negatively impacted by a large volume of property damage claims associated with severe weather that occurred throughout the Company's operating territory. Weather-related catastrophe losses were estimated to be approximately $7.2 million, or $0.65 per share, in 1997 and $10.6 million, or $.94 per share, in 1996. The Company's 1997 statutory combined ratio was 107.1 percent versus 108.0 percent for 1996. The Company's total revenues for 1997 increased 16.0 percent to $216.5 million from $186.6 million for 1996. Premiums earned increased 16.3 percent to $194.6 million for 1997 in comparison to $167.3 million for the previous year. The acquisition of the Citizens Security Group accounted for approximately $25.0 million of the increase. Aside from the acquisition, net premiums earned from the Meridian book of business increased approximately 3.3 percent, excluding its participation in the National Workers' Compensation Pool ("NWCP"). Personal and farm lines of business were the primary contributors to the increase with 6.1 percent growth, offset partially by a 1.7 percent decline in commercial lines. Commercial lines of business continue to be affected by highly competitive market conditions in the Company's operating territory. The earned premium volume in the Company's workers' compensation line was reduced by an approximately $2.6 million decline in assumed earned premiums from its involuntary participation in the NWCP. This was principally due to reduced participation in the assigned risk pools for the states of Kentucky and Tennessee. Partially offsetting the NWCP reduction was a refund of premiums previously ceded to the Minnesota Workers' Compensation Reinsurance Association of approximately $863,000. Direct written premiums for the Meridian and Citizens Security insurance companies during 1997 experienced growth of 3.1 percent and 1.8 percent, respectively, when compared to 1996 volume. Net investment income for 1997 increased 9.8 percent to $16.4 million in comparison to $14.9 million for 1996. This was attributed to a larger asset base resulting primarily from the acquisition of Citizens Security Group. The Company's pre-tax net investment yield for 1997 improved slightly to 6.0 percent from 5.9 percent one year ago. The average yield of the Company's fixed maturity portfolio at December 31, 1997 was 6.7 percent compared to 6.8 percent at year end 1996. During 1997, the Company realized net gains on the sale of investments of $4.5 million, or approximately $0.44 per common share, versus $3.8 million, or $0.37 per share in 1996. Nearly all of the realized gains recognized over these two years were generated from the sale of equity securities and have an insignificant effect on future investment yields. Losses and loss adjustment expenses incurred of $149.2 million for 1997 were 14.7 percent higher than the previous year's $130.1 million. Approximately $33.8 million of the 1997 incurred amount relates to the operations of Citizens Security Group, versus approximately $9.1 million for the five months of operations in the 1996 total. The statutory loss and loss adjustment expense ratio of the Citizens Security companies for the 1997 period was 85.1 percent compared to 70.9 percent for the five months of operations in 1996. Deteriorations in the Citizens Security homeowners, private passenger automobile and commercial multi-peril lines of business were the primary factors in the loss and loss adjustment expense increase. Partially offsetting these increases were improved experience in the commercial automobile and workers' compensation lines. Exclusive of Citizens Security's operations, incurred losses and loss adjustment expenses for the Meridian book of business reflected a 4.6 percent reduction from approximately $121.0 million in 1996 to $115.4 million in 1997. The Meridian lines of business for 1997 produced a statutory loss and loss adjustment expense ratio of 74.7 percent, a 4.0 percentage point improvement from 78.7 percent for 1996. Meridian's farmowners, homeowners and commercial multi-peril lines of business were the major contributors to the reduced loss and loss adjustment expense ratio, due largely to a reduction in weather-related catastrophe losses. The impact of such catastrophes on the Company's loss ratio in 1997 and 1996 was estimated to be 3.7 and 6.4 percentage points, respectively. General operating and amortization expenses of $59.4 million for the year ended December 31, 1997 increased 18.3 percent over the comparable 1996 total of $50.2 million. Substantially contributing to the increase was an additional seven months of operating expenses in 1997 related to the Citizens Security companies. Also contributing to the increased expenses were higher costs related to the Company's employee medical plan, and programming and other system costs associated with Year 2000 compliance. Relative to net earned premiums, the Company's expense ratio for 1997 was approximately 30.5 percent compared to 30.0 percent for 1996. The Company also incurred approximately $732,000 of interest expense in 1997 on the bank loan used to finance the Citizens Security Group acquisition. For the year ended December 31, 1997, the Company recorded income tax expense of $207,000 compared to $150,000 for 1996. The low effective tax rate resulted primarily from the amount of tax-exempt investment income in relation to pre-tax income. 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. During 1998, Meridian Security declared and paid dividends to the Company of $5.0 million. In 1997 and 1996, dividends paid to the Company were $5.0 million and $3.9 million, respectively. The principal need of the Company's insurance subsidiaries for liquid funds is the payment of claims and general operating expenses in the ordinary course of business. The funds of the Company's insurance subsidiaries are generally invested in securities with maturities intended to provide adequate cash to pay such claims and expenses without forced sales of investments. The average duration of the fixed maturity portfolio is approximately 4.4 years. Over the next year, a relatively small portion of the Company's bond portfolio is scheduled to mature. Given the current interest rate environment, reinvestment of the matured proceeds is likely to be at somewhat lower yields. Approximately 77 percent of the Company's investment assets are held in fixed maturities, substantially all of which are believed to be readily marketable. Within the fixed maturity portfolio, the Company holds approximately 19 percent in mortgage-backed pass-through securities and collateralized mortgage obligations. The Company has attempted to reduce the prepayment risks associated with mortgage- backed securities by investing a majority of the collateralized mortgage obligations in planned amortization and very accurately defined tranches. These investments are designed to alleviate the risk of prepayment by providing predictable principal prepayment schedules within a designated range of prepayments. The Company'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 carried at market value. The Company at December 31, 1998 recorded unrealized gains in the bond portfolio of approximately $4.8 million, net of deferred income taxes. At year-end 1997, the Company recorded unrealized gains on the bond portfolio of approximately $5.7 million, net of deferred income taxes. The Company's equity security portfolio, which accounts for approximately 20.4 percent of invested assets, produced unrealized gains, net of deferred income taxes, of approximately $10.2 million in 1998, compared to approximately $8.4 million in 1997. Net unrealized appreciation of investments added $2.10 to the Company's $19.60 book value per share at December 31, 1998. Net unrealized appreciation added $1.97 per share to the $18.09 book value at December 31, 1997. The Company does have exposure to market rates and prices. The Company's primary market risk exposures are changes in price for equity securities and changes in interest rates and credit ratings for fixed maturity securities. The Company, with the Board of Directors, administers and oversees investment risk through the Investment Committee, which provides executive oversight of investment activities. The Company has specific investment guidelines and policies that define the overall framework used daily by investment portfolio managers to limit the Company's exposure to market risk. The Company does not own or currently utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its bank debt. Meridian, through its outside professional portfolio managers, employs traditional investment management tools and techniques to address the yield and valuation exposures of its invested assets. The long term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through adequate diversification and the purchase of investment grade securities. Reinvestment rate risk is controlled through asset- liability matching practices and by addressing call characteristics in security selection. Market value risk is addressed through maturity selection. The market value of the Company's long term fixed maturity investment portfolio is sensitive to fluctuations in the level of interest rates. The impact of interest rate movements on the long term fixed maturity investment portfolio generally affects net realized gains or losses when securities are sold. The Company estimates that a 100 basis point increase in interest rates from current levels would result in a possible decline in the $242.0 million market value of the long term fixed maturity investment portfolio of approximately 4.0 percent, or $9.7 million. With regard to its $64.0 million equity security portfolio, the Company does not own nor engage in any type of option writing. A 10% decrease in the U.S. equity market prices could result in a decrease of $6.4 million in the market value of the Company's common equities. These possible declines in values for the bond and stock portfolios would, net of deferred income taxes, negatively affect the common shareholders' equity at any point in time, but would not necessarily result in the recognition of realized investment losses as long as operating cash flow and the ongoing emergence of bond maturities continued to provide sufficient funds to meet obligations to policyholders and claimants, as well as debt service and cash dividend requirements at the holding company level. On May 6, 1997, the Company announced that its Board of Directors had authorized the repurchase of up to 350,000 common shares, or approximately five percent of the Company's outstanding common stock. As of December 31, 1998, the Company had repurchased 212,800 shares, or approximately 61 percent of the authorized total, at a cost of $3.3 million. In July 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 Inc. and its wholly-owned property and casualty insurance subsidiaries, Meridian Citizens Security Insurance Company and Insurance Company of Ohio, for approximately $30.3 million in cash, including capitalized acquisition costs, and became affiliated with Meridian Citizens 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 $14.5 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. 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 available may partially offset potentially higher claims and expenses. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Report of Independent Accountants 26 Financial Statements: Consolidated Statement of Income 27 Consolidated Balance Sheet 28 Consolidated Statement of Shareholders' Equity 29 Consolidated Statement of Cash Flows 30 Notes to Consolidated Financial Statements 31 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Meridian Insurance Group, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Meridian Insurance Group, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statement schedules based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Indianapolis, Indiana February 24, 1999 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME for the Years Ended December 31, 1998, 1997 and 1996 December 31, 1998 1997 1996 Premiums earned $189,188,422 $194,586,632 $167,304,414 Net investment income 17,245,684 16,371,711 14,908,285 Net realized investment gains 7,342,074 4,477,580 3,793,778 Other income (expense) (59,017) 1,042,350 562,198 Total revenues 213,717,163 216,478,273 186,568,675 Losses and loss adjustment expenses 136,619,991 149,218,731 130,101,192 General operating expenses 16,686,387 16,505,515 13,766,868 Interest expense 672,630 732,047 307,887 Amortization expenses 42,917,642 42,893,857 36,442,635 Total expenses 196,896,650 209,350,150 180,618,582 Income before taxes 16,820,513 7,128,123 5,950,093 Income taxes (benefit) Current 2,514,968 1,067,000 702,141 Deferred 2,155,000 (860,000) (552,000) Total income taxes 4,669,968 207,000 150,141 Net income $ 12,150,545 $ 6,921,123 $ 5,799,952 Weighted average shares outstanding 7,292,077 7,351,890 7,457,212 Per share data: Basic earnings per share $ 1.67 $ 0.94 $ 0.78 Diluted earnings per share $ 1.65 $ 0.93 $ 0.77 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, 1998 and 1997 December 31, 1998 1997 ASSETS Investments: Fixed maturities--available for sale, at market value (cost $234,632,000 and $239,662,000) $241,993,962 $248,404,304 Equity securities, at market (cost $48,338,000 and $41,430,000) 64,020,661 54,378,947 Short-term investments, at cost, which approximates market 6,431,482 3,996,232 Other invested assets 1,375,463 1,647,102 Total investments 313,821,568 308,426,585 Cash 854,522 1,188,423 Premium receivable, net of allowance for bad debts 5,625,470 4,343,157 Accrued investment income 2,950,290 3,130,712 Deferred policy acquisition costs 17,671,856 17,651,544 Goodwill 14,775,426 15,479,456 Reinsurance receivables 41,803,624 48,850,066 Prepaid reinsurance premiums 3,362,441 3,861,507 Due from Meridian Mutual Insurance Company 7,528,333 7,723,277 Other assets 463,990 2,931,077 Total assets $408,857,520 $413,585,804 LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses $154,252,671 $169,801,326 Unearned premiums 81,223,095 82,839,333 Other post-employment benefits 1,935,616 1,933,181 Bank loan payable 10,125,000 11,375,000 Payable for securities 3,061,898 --- Reinsurance payables 9,811,976 9,078,076 Other liabilities 6,478,431 6,664,653 Total liabilities 266,888,687 281,691,569 Shareholders' equity: Common shares, no par value, Authorized- 20,000,000 Issued-7,456,512 and 7,444,050, Outstanding-7,243,712 and 7,289,550 at December 31, 1998 and 1997, respectively (including 10% stock dividend issued on January 6, 1999, 658,493 shares) 44,336,679 44,110,416 Treasury shares, at cost; 212,800 and 154,500 shares at December 31, 1998 and 1997, respectively (3,277,781) (2,308,188) Contributed capital 25,923,462 15,058,327 Retained earnings 59,796,235 60,684,448 Accumulated other comprehensive income 15,190,238 14,349,232 Total shareholders' equity 141,968,833 131,894,235 Total liabilities and shareholders' equity $408,857,520 $413,585,804 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, 1998, 1997 and 1996
Accumulated Other Common Treasury Contributed Retained Comprehensive Comprehensive Shares Shares Capital Earnings Income Income Balance at January 1, 1996 $44,076,685 $ 0 $15,058,327 $52,265,410 $6,842,245 Comprehensive income: Net income -- -- -- 5,799,952 -- $ 5,799,952 Other Comprehensive income, net of tax: Unrealized gain on securities, net of reclassification adjustment -- -- -- -- 299,601 299,601 Comprehensive income -- -- -- -- -- $ 6,099,553 Dividends ($0.29 per share) -- -- -- (2,169,400) -- Exercise of stock options 4,402 shares 23,241 Repurchase and retirement of 1,472 common shares (22,080) -- -- -- -- Balance at December 31, 1996 44,077,846 0 15,058,327 55,895,962 7,141,846 Comprehensive income: Net income -- -- -- 6,921,123 -- $ 6,921,123 Other Comprehensive income, net of tax: Unrealized gain on securities, net of reclassification adjustment -- -- -- -- 7,207,386 7,207,386 Comprehensive income -- -- -- -- -- $14,128,509 Dividends ($0.29 per share) -- -- -- (2,132,637) -- Issuance of 1,989 common shares 32,570 Repurchase of 154,000 common shares -- (2,308,188) -- -- -- Balance at December 31, 1997 44,110,416 (2,308,188) 15,058,327 60,684,448 14,349,232 Comprehensive income: Net income -- -- -- 12,150,545 -- $12,150,545 Other comprehensive income, net of tax: Unrealized gain on securities, net of reclassification adjustment -- -- -- -- 841,006 841,006 Comprehensive income -- -- -- -- -- $12,991,551 Stock dividend (shares issued 658,493) 10,865,135 (10,865,135) Dividends ($0.30 per share) -- -- -- (2,173,623) -- Repurchase of 58,300 common shares (969,593) Issuance of 16,655 common shares 226,263 -- -- -- -- Balance at December 31, 1998 $ 44,336,679 $(3,277,781) $25,923,462 $59,796,235 $15,190,238
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, 1998, 1997 and 1996 December 31, 1998 1997 1996 Cash flows from operating activities: Net income $12,150,545 $ 6,921,123 $ 5,799,952 Reconciliation of net income to net cash provided by operating activities: Realized investment gains (7,342,074) (4,477,580) (3,793,778) Amortization 42,917,642 42,893,857 36,442,635 Deferred policy acquisition costs (42,686,105) (43,475,066) (39,321,446) Deferred income taxes 2,155,000 (860,000) (552,000) Increase (decrease) in unearned premiums (1,616,238) (1,226,418) 2,034,199 Increase (decrease) in loss and loss adjustment expenses (15,548,655) 8,492,087 11,054,147 Decrease in amount due from Meridian Mutual 194,944 1,250,395 385,131 Decrease (increase) in reinsurance receivables 7,046,442 (2,999,236) (7,352,448) Decrease (increase) in prepaid reinsurance premiums 499,066 1,159,098 (349,547) Decrease in other assets 1,143,489 5,549,960 2,064,651 Increase in other post-employment benefits 2,435 515,367 119,436 Increase in reinsurance payables 733,900 413,718 1,800,732 Decrease in other liabilities (1,794,478) (1,839,705) (1,866,664) Other, net (1,905,950) 1,629,010 490,268 Net cash provided by (used in) operating activities (4,050,037) 13,946,610 6,955,268 Cash flows from investing activities: Purchase of fixed maturities (99,643,783) (54,141,776) (47,518,736) Proceeds from sale of fixed maturities 78,138,240 26,135,592 38,131,207 Proceeds from calls, prepayments and maturity of fixed maturities 29,141,214 22,393,353 24,843,739 Purchase of equity securities (21,960,794) (33,956,533) (19,794,358) Proceeds from sale of equity securities 21,316,297 31,160,867 18,633,656 Net (increase) decrease in short-term investments (2,435,250) (2,669,598) 3,300,088 Decrease (increase) in other invested assets 271,640 (256,926) (336,271) Acquisition of subsidiary --- --- (30,262,442) Increase (decrease) in securities payable 3,071,384 401,707 (1,533,830) Net cash provided by (used in) investing activities 7,898,948 (10,933,314) (14,536,947) Cash flows from financing activities: Repurchase of common stock (969,593) (2,308,188) (22,080) Exercise of stock options 161,055 --- 23,241 Proceeds from bank loan --- --- 12,000,000 Repayment of bank loan (1,250,000) (500,000) (125,000) Dividends paid (2,124,274) (2,144,839) (2,101,426) Net cash provided by (used in) financing activities (4,182,812) (4,953,027) 9,774,735 Increase (decrease) in cash (333,901) (1,939,731) 2,193,056 Cash at beginning of year 1,188,423 3,128,154 935,098 Cash at end of year $ 854,522 $ 1,188,423 $ 3,128,154 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 47.8 percent of the outstanding common shares of the Company. The Company is a holding company principally engaged in the business of underwriting property and casualty insurance through its wholly-owned subsidiaries, Meridian Security Insurance Company ("Meridian Security"), Meridian Citizens Security Insurance Company ("Meridian Citizens Security", formerly Citizens Fund Insurance Company) and Insurance Company of Ohio ("ICO"). Both Meridian Citizens Security and ICO, along with their holding company, Citizens Security Group Inc. ("CSGI"), were acquired by the Company on July 31, 1996. CSGI was subsequently dissolved on February 7, 1997. Effective August 1, 1996, Meridian Citizens Security, ICO and Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual", formerly Citizens Security Mutual Insurance Company), the former majority shareholder of CSGI, became participants in a reinsurance pooling arrangement with Meridian Mutual and Meridian Security, in which the underwriting income and expenses of each entity are shared. The participation percentages of the Company's insurance subsidiaries total 74 percent. Prior to the change, Meridian Security and Meridian Mutual were the only participants in the reinsurance pooling arrangement, of which Meridian Security assumed 74 percent of the combined underwriting income and expenses of the two companies. (See Note 7-Related Party Transactions.) Collectively, the insurance companies participating in this reinsurance pooling arrangement write a broad line of property and casualty insurance, including personal and commercial automobile; homeowners, farmowners and commercial multi-peril; and workers' compensation. Business is written through approximately 1,370 independent insurance agencies in the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee, Virginia, Washington and Wisconsin. 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 significant intercompany balances and 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 limited partnerships 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 as a component of other comprehensive income, 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 Meridian Citizens Security 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 was amortized in 1996 and 1997 as the related premium revenue was recognized. 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. The Company continually monitors the value of its goodwill based on estimates of future earnings of the subsidiaries that were acquired. If it is determined that changes in such projected earnings no longer supports the recoverability of goodwill over the remaining amortization period, the carrying value would be reduced with a corresponding charge to expense or the amortization period would be shortened. As of December 31, 1998, no material changes have occurred. 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. Earnings Per Share: The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This Statement requires dual presentation of basic and diluted earnings per share on the face of the income statement for all companies with complex capital structures. SFAS No. 128 also replaces the presentation of primary earnings per share with a basic earnings per share computation and eliminates the modified treasury stock method and the three percent materiality provision as was required under the Accounting Principles Board Opinion No. 15. This Statement became effective for financial statements with fiscal years ending after December 15, 1997. All prior period information presented has been restated. Stock Dividend: On December 9, 1998 a ten percent stock dividend was declared that was effective for shareholders of record as of December 21, 1998. The financial statements, notes, and other references to share and per share data have been retroactively restated to reflect the stock dividend for all periods presented. Impact of New Accounting Pronouncements: In June 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards for derivative instruments (including derivative instruments that are embedded in other contracts) and hedging activities. All items that are required to be recognized must be displayed according to accounting standards in the statement of financial position at fair value. The Company does not hold any derivative instruments and does not participate in hedging activities. The Company does not anticipate a material impact upon adoption of this statement. SOP 97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" is effective for financial statements with fiscal years beginning after December 15, 1998. This statement requires that a liability for insurance-related assessments be recognized when the assessments have been imposed or it is probable that an assessment will be imposed, the event obligating the Company has occurred, and the amount can be reasonably estimated. SOP 97-3 requires that a liability for the current calendar year experience be recognized and that the initial application be treated as a cumulative effect type accounting change. The Company anticipates that an additional liability and a charge to the statement of income of approximately $300,000 net of income tax will be recognized upon implementation in the first quarter of 1999. 2.Investments: The Company's net investment income for the periods ended December 31, 1998, 1997 and 1996 are summarized as follows: 1998 1997 1996 Interest on fixed maturities: Tax-exempt securities $ 2,531,304 $ 3,909,985 $ 3,875,822 Taxable securities 11,883,195 9,905,146 8,686,144 Dividends on redeemable preferred stock 1,769,286 2,078,536 2,489,104 Dividends on equity securities 1,011,335 879,579 773,238 Interest on short-term investments 229,347 156,128 243,837 Other investment income 149,589 187,159 93,861 Total investment income 17,574,056 17,116,533 16,162,006 Investment expenses 328,372 744,822 1,253,721 Net investment income $17,245,684 $16,371,711 $14,908,285 Net realized and unrealized gains on investments are summarized as follows: 1998 1997 1996 Realized gains (losses): Fixed maturities $ 2,628,256 $ 14,108 $ (456,602) Equity securities 6,263,104 5,052,295 4,559,381 Other investments (701,038) --- --- Total realized investment gains 8,190,322 5,066,403 4,102,778 Investment expenses 848,248 588,823 309,000 Net realized investment gains $ 7,342,074 $ 4,477,580 $ 3,793,778 Net change in unrealized appreciation (depreciation): Fixed maturities, available for sale $(1,379,804) $ 4,755,339 $(2,234,493) Equity securities 2,734,114 6,098,280 2,692,197 Limited partnerships (61,304) 235,767 83,897 Deferred income tax expense (452,000) (3,882,000) (242,000) Net change in unrealized appreciation $ 841,006 $7,207,386 $ 299,601 The amortized cost and estimated market values of investments in fixed maturity securities at December 31, 1998 and 1997, are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value December 31, 1998 Available for sale: Government and agency domestic bonds $ 3,681,320 $ 107,949 $ 9,855 $ 3,779,414 Municipal bonds 42,585,763 1,669,262 143,068 44,111,957 Corporate bonds 123,432,824 3,797,535 334,305 126,896,053 Mortgage-backed securities 44,234,647 789,650 95,072 44,929,225 Sinking fund preferred stocks 20,697,205 1,622,315 42,207 22,277,313 Total fixed maturity securities $234,631,759 $7,986,711 $624,507 $241,993,962 December 31, 1997 Available for sale: Government and agency domestic bonds $ 9,992,300 $ 494,746 $ 13,916 $10,473,130 Municipal bonds 71,000,487 3,345,436 118,097 74,227,826 Corporate bonds 82,661,920 2,381,660 7,448 85,036,132 Mortgage-backed securities 42,479,390 972,915 99,833 43,352,472 Sinking fund preferred stocks 33,528,199 1,822,517 35,972 35,314,744 Total fixed maturity securities $239,662,296 $9,017,274 $275,266 $248,404,304 The amortized cost and estimated market value of fixed maturity securities available for sale at December 31, 1998, 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 $ 3,956,944 $ 3,986,769 Due after one year through five years 43,008,654 44,235,400 Due after five years through ten years 44,173,456 46,753,160 Due after ten years through fifteen years 40,673,916 41,386,618 Due after fifteen years through twenty years 8,996,874 9,167,923 Due after twenty years 50,024,177 51,995,112 Subtotal 190,834,021 197,524,982 Mortgage-backed securities 43,797,738 44,468,980 Total fixed maturity securities $234,631,759 $241,993,962 Proceeds from sales of investments in fixed maturity securities during 1998, 1997 and 1996, respectively, were $78,138,240, $26,135,592 and $38,131,207. During 1998, 1997 and 1996, respectively, gross gains of $2,672,721, $338,920 and $197,320 and gross losses of $44,464, $324,812 and $653,922 were realized on those sales. Unrealized appreciation of equity securities at December 31, 1998 totaled $15,682,983 representing $19,023,288 of gains on certain securities and $3,340,305 of losses on other securities. 3. Other Comprehensive Income: The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and displaying of comprehensive income and its components. SFAS No. 130. became effective for financial statements with fiscal years beginning after December 15, 1997. All prior period information presented has been restated to conform with this pronouncement. The Company's other comprehensive income consists solely of net unrealized gains (losses) on securities. The total net unrealized gain (losses) on securities for the periods ending December 31, 1998 and 1997 consist of the following: Twelve Months Ended December 31, 1998 1997 1996 Unrealized holding gains before deferred income taxes $10,797,051 $16,155,789 $ 4,254,590 Deferred income tax expense (3,778,000) (5,655,000) (1,489,000) Less: Reclassification adjustment for realized gains 9,504,045 5,066,403 3,793,988 Income tax expense related to realized gains (3,326,000) (1,773,000) (1,328,000) Other Comprehensive Income 841,006 7,207,386 299,601 4. Segment Reporting: The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information":, which establishes standards for the reporting and displaying of business segments. SFAS No. 131. became effective for financial statements with fiscal years beginning after December 15, 1997. All prior period information presented has been restated to conform with this pronouncement. The following tables display the Company's reportable segments, a reconciliation of segment data to total consolidated financial data, and related disclosure information concerning revenues as required by SFAS No. 131. Segments were defined based upon the Company's structure and decision making processes. Personal, commercial and farm lines are segmented within all internal reporting mechanisms to aid chief decision makers in achieving profitable results within each business segment. Amortization was allocated by segment based upon a ratio of premium. Investment income was determined consistent with the statutory modeling requirements for the Insurance Expense Exhibit. These guidelines rely on historical reserve patterns by line of business. Asset information by reportable segment is not reported, since the Company does not internally produce such information. 1998
Segment Non-segment Personal Farmowners Commercial Total Total Total Premiums earned $107,806,522 $10,878,882 $70,503,018 $189,188,422 $ --- $189,188,422 Net investment income 9,554,172 936,329 6,755,183 17,245,684 --- 17,245,684 Net realized gains --- --- --- --- 7,342,074 7,342,074 Other income (expense) --- --- --- --- (59,017) (59,017) Total revenues $117,360,694 $11,815,211 $77,258,201 $206,434,106 $ 7,283,057 $213,717,163 Loss and LAE expense $ 82,258,735 $ 7,976,382 $46,384,874 $136,619,991 $ --- $136,619,991 General operating expense 8,694,496 1,013,191 6,978,700 16,686,387 --- 16,686,387 Interest expense --- --- --- --- 672,630 672,630 Amortization expenses 22,362,375 2,605,943 17,949,324 42,917,642 --- 42,917,642 Total expenses $113,315,606 $11,595,516 $71,312,898 $196,224,020 $ 672,630 $196,896,650 Income before taxes $ 4,045,088 $ 219,695 $ 5,945,303 $ 10,210,086 $6,610,427 $ 16,820,513 Income taxes 1,123,059 60,995 1,650,626 2,834,680 1,835,288 4,669,968 Net income $ 2,922,029 $ 158,700 $ 4,294,677 $ 7,375,406 $4,775,138 $ 12,150,545 1997 Segment Non-segment Personal Farmowners Commercial Total Total Total Premiums earned $107,801,599 $10,564,810 $76,220,223 $194,586,632 $ --- $194,586,632 Net investment income 9,069,988 888,878 6,412,845 16,371,711 --- 16,371,711 Net realized gains --- --- --- --- 4,477,580 4,477,580 Other income --- --- --- --- 1,042,350 1,042,350 Total revenues $116,871,587 $11,453,688 $82,633,068 $210,958,343 $5,519,930 $216,478,273 Loss and LAE expense $ 90,861,513 $ 6,269,043 $52,088,175 $149,218,731 $ --- $149,218,731 General operating expense 8,680,147 954,436 6,870,932 16,505,515 --- 16,505,515 Interest expense --- --- --- --- 732,047 732,047 Amortization expenses 22,557,610 2,480,349 17,855,898 42,893,857 --- 42,893,857 Total expenses $122,099,270 $ 9,703,828 $76,815,005 $208,618,103 $ 732,047 $209,350,150 Income (loss) before taxes $ (5,227,683) $ 1,749,859 $ 5,818,063 $ 2,340,240 $4,487,883 $ 7,128,123 Income taxes (benefit) (151,811) 50,816 168,956 67,960 139,040 207,000 Net income (loss) $ (5,075,872) $ 1,699,044 $ 5,649,107 $ 2,272,280 $4,648,843 $ 6,921,123 1996 Segment Non-segment Personal Farmowners Commercial Total Total Total Premiums earned $ 90,868,003 $ 9,998,705 $66,437,706 $167,304,414 $ --- $167,304,414 Net investment income 8,097,133 890,972 5,920,180 14,908,285 --- 14,908,285 Net realized gains --- --- --- --- 3,793,778 3,793,778 Other income --- --- --- --- 562,198 562,198 Total revenues $ 98,965,136 $10,889,677 $72,357,886 $182,212,699 $4,355,976 $186,568,675 Loss and LAE expense $ 74,980,181 $ 9,501,666 $45,619,345 $130,101,192 $ --- $130,101,192 General operating expense 7,477,195 822,757 5,466,916 13,766,868 --- 13,766,868 Interest expense --- --- --- --- 307,887 307,887 Amortization expenses 19,793,079 2,177,941 14,471,615 36,442,635 --- 36,442,635 Total expenses $102,250,455 $12,502,364 $65,557,876 $180,310,695 $ 307,887 $180,618,582 Income (loss) before taxes $ (3,285,319) $(1,612,687) $ 6,800,010 $ 1,902,004 $ 4,048,089 $ 5,590,093 Income taxes (benefit) (82,900) (40,693) 171,587 47,994 102,147 150,141 Net income (loss) $ (3,202,419) $(1,571,994) $ 6,628,423 $ 1,854,010 $ 3,945,942 $ 5,799,952
As required by SFAS No. 131, the following table delineates the Company's products and revenues in a manner which is consistent with segment reporting: 1998 1997 1996 Personal Lines: Automobile $ 79,438,864 $ 78,609,066 $ 67,326,591 Homeowners 25,649,226 26,262,790 21,072,110 Other 2,718,432 2,929,743 2,469,302 Total Personal Lines $ 107,806,522 $ 107,801,599 $ 90,868,003 Commercial Lines: Automobile $ 17,666,781 $ 17,826,255 $ 14,215,305 Worker's Compensation 22,442,522 25,586,297 24,437,027 Commercial Multi-Peril 25,983,425 28,041,002 22,879,659 Other 4,410,290 4,766,669 4,881,296 Total Commercial Lines $ 70,503,018 $ 76,220,223 $ 66,413,286 Farm Lines: Farmowners 10,878,882 10,564,810 9,998,705 Total Farm Lines $ 10,878,882 $ 10,564,810 $ 9,998,705 Total All Lines Combined $ 189,188,422 $ 194,586,632 $ 167,304,414 5. Acquisition: On July 31, 1996, the Company acquired Citizens Security Group Inc. and its property and casualty insurance subsidiaries, Meridian Citizens Security Insurance Company and Insurance Company of Ohio, for a cash purchase price of $30,262,442, including capitalized acquisition costs. Approximately 60 percent of the purchase price was generated from the sale of a portion of the Company's investment portfolio and the remainder was financed through bank debt. The acquisition was accounted for as a purchase with the assets acquired and liabilities assumed being recorded at their estimated fair value at the date of acquisition. The excess cost over the fair value of the net assets resulted in goodwill of approximately $14,501,000, which is being amortized over a 25 year period on the straight-line basis. The 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 January 1, 1996: 1996 Premiums earned $185,808,000 Total revenues $206,201,000 Net income $ 4,138,000 Basic and diluted earnings per share $ 0.56 These unaudited pro-forma results are not necessarily indicative of the results of operations that would have occurred had the acquisition taken place at January 1, 1996. 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 6. 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, which was 5.7388 percent and 6.375 percent at December 31, 1998 and 1997, respectively. The bank loan will mature on August 1, 2003. The Company is required to make principal payments in accordance with the following schedule: 1999 1,625,000 2000 2,000,000 2001 2,125,000 Thereafter 4,375,000 Total payments outstanding $10,125,000 The principal balance of the bank loan as of December 31, 1998 approximates its market value. Interest paid on the loan during 1998 and 1997 amounted to $672,000 and $732,000, respectively. The bank debt includes certain financial covenants, the most significant of which concern the amounts of risk based capital, statutory policyholders' surplus, total debt, debt to capitalization and debt service coverage (the relationship of dividends available from the Company's insurance subsidiaries to required principal and interest payments). 7. Related Party Transactions: Meridian Security, Meridian Citizens Security, ICO, Meridian Mutual and Meridian Citizens Mutual are parties to a reinsurance pooling agreement ("pooling agreement") under which essentially 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 Meridian Citizens 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. Since the acquisition of Citizens Security Group on August 1, 1996, the reinsurance pool participation percentages of the Company's insurance subsidiaries totaled 74 percent. Prior to August 1, Meridian Security and Meridian Mutual were the only participants in the aforementioned pooling arrangement, of which Meridian Security assumed 74 percent of the combined underwriting income and expenses of the two companies. For the year ended December 31, 1998, approximately 86 percent of the Company's total premium volume was derived from its participation in the pooling agreement. In 1997 and 1996, approximately 88 percent was derived from the pooling arrangement. Effective January 1, 1997, the Company became the employer of all employees that were formerly employed by Meridian Mutual and Meridian Citizens Mutual. This transfer of employees allowed for the integration of benefit plans, thus increasing management efficiencies and allowing for enhanced benefit options, such as the use of the Company's common stock as compensation. Also as a result of the employee transfer, the Company assumed the operations of the previously established benefit plans of Meridian Mutual. Included in these benefit plans was a non-contributory pension plan that covers substantially all employees, a non-tax qualified supplemental retirement plan for certain key employees, and a multi-employer plan for other post-retirement benefits. (See Note 11-Pension and Other Post-Retirement Benefit Plans) The Company also assumed a 401(k) plan whereby employees can contribute up to 16 percent of their compensation, with the Company contributing 50 percent of the employee contribution on the first 6 percent. Costs related to these benefit plans are allocated to each company in accordance with their percentage participation under the pooling agreement. 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. 8. Liability for Losses and Loss Adjustment Expenses: Activity in the liability for losses and loss adjustment expenses is summarized as follows: 1998 1997 1996 Balance at beginning of period $169,801,326 $161,309,239 $ 123,577,240 Less reinsurance recoverables 48,872,464 41,819,308 31,204,462 Net balance at beginning of period 120,928,862 119,489,931 92,372,778 Net reserves acquired --- --- 20,685,369 Incurred related to: Current year 145,328,331 165,576,734 137,817,367 Prior years (8,708,340) (16,358,003) (7,716,175) Total incurred 136,619,991 149,218,731 130,101,192 Paid related to: Current year 93,790,286 97,447,542 93,199,000 Prior years 51,307,350 50,332,258 30,470,408 Total paid 145,097,636 147,779,800 123,669,408 Net balance at end of period 112,451,217 120,928,862 119,489,931 Plus reinsurance recoverables 41,801,454 48,872,464 41,819,308 Balance at end of period $ 154,252,671 $169,801,326 $161,309,239 The reconciliations for 1998 and 1997 show approximately $8.7 million and $16.4 million reductions, respectively, in previously established loss reserves. Favorable loss developments resulting from decreases in the frequency and severity of claims in prior accident years for the Company's personal automobile liability, workers' compensation and commercial multi-peril lines of business were the primary factors in the reductions. 9. Reinsurance: The companies that participate in the reinsurance pooling agreement reduce the maximum net loss that 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. The reinsurance purchased 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 which require a specific agreement of the reinsurer as to limits of coverage provided ("facultative reinsurance"). Meridian Mutual, Meridian Security, Meridian Citizens Mutual, Meridian Citizens Security, and ICO were each named as insured parties under the treaty reinsurance contracts, and the coverage under those contracts applied to all risks written by each of the companies. Treaty coverage was purchased to cover property and liability exposures in excess of $200,000 and $350,000, respectively, up to the limits set forth in the individual treaty. (In 1997, the retention was $200,000 for property and $250,000 for liability.) Facultative reinsurance was purchased to cover exposures on both property and liability coverages from losses over and above the limits provided by the treaty reinsurance. Catastrophe reinsurance provided 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 contractual limits for windstorms of $65,000,000 and for earthquakes of $115,000,000. Two other catastrophe reinsurance treaties provided coverage for 95% of losses sustained from multiple catastrophic events which aggregated beyond specified retentions and per event deductibles up to the contractual limits. Approximately 90 percent of the Company's ceded reserves for losses and loss adjustment expenses were with Employers Reinsurance Corporation, Michigan Catastrophic Claims Association and Dorinco Reinsurance America Corporation. The effect of reinsurance on premiums written, premiums earned and losses and loss adjustment expenses for the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 Premiums written: Direct $204,046,222 $210,393,552 $181,680,624 Assumed 486,305 718,004 3,730,504 Cede (16,461,276) (16,592,247) (16,216,479) Net $188,071,251 $194,519,309 $169,194,649 Premiums earned: Direct $205,534,750 $211,105,812 $176,718,644 Assumed 614,042 1,232,165 6,425,316 Ceded (16,960,370) (17,751,345) (15,839,546) Net $189,188,422 $194,586,632 $167,304,414 Losses and loss adjustment expenses incurred: Direct $151,184,461 $168,173,120 $154,237,419 Assumed 624,892 1,355,214 2,857,470 Ceded (15,189,362) (20,309,603) (26,993,697) Net $136,619,991 $149,218,731 $130,101,192 10.Deferred Policy Acquisition Costs: Changes in deferred policy acquisition costs are summarized as follows: 1998 1997 1996 Deferred, beginning of period $17,651,544 $16,690,275 $13,354,600 Additions: Commissions 31,845,030 32,391,959 30,593,227 Equity in acquired unearned premium reserve --- --- 2,312,841 Premium taxes 2,416,582 2,375,996 2,458,670 Other 7,972,312 8,357,111 4,222,123 Total additions 42,233,924 43,125,066 39,586,861 Amortization expense 42,213,612 42,163,797 36,251,186 Deferred, end of period $17,671,856 $17,651,544 $16,690,275 11.Pension Plan and Other Post-Retirement Benefits: Effective January 1, 1997, the Company became the employer of all employees who were formerly employed by Meridian Mutual and Meridian Citizens Mutual. As a result of this transfer, all employee benefit plans that were previously under Meridian Mutual and Meridian Citizens Mutual were merged into the Company plans. The Company maintains a defined benefit pension plan for the benefit of eligible employees. Under the plan, all employees of the Company completing more than 1,000 hours of employment in a 12-month period become eligible to participate. The plan provides for a pension annuity beginning at age 65 based on the employee's average monthly base pay during the five highest consecutive salary years out of the last ten. Provisions for delayed retirement benefits, early retirements benefits after age 55, disability and death benefits, optional methods for benefit payment, payments to an employee who leaves after a certain number of years of service, and payments to an employee's surviving spouse are also covered under the plan. The Company also maintains a non-tax qualified supplemental retirement income plan for certain key employees who participate in the defined benefit pension plan. The plan provides additional benefits in excess of the limitations imposed by Section 401(a)(17) and Section 415 of the Internal Revenue Code on plans to which those sections apply. The benefit is in the form of a straight life annuity over the lifetime of the participant and commences on the participant's normal retirement date. The following table presents a reconciliation of the funded status for the Company's defined benefit pension plan and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1998 and 1997 per FASB 132 requirements: 1998 1997 Reconciliation of benefit obligation: Obligation at January 1 $23,432,716 $20,402,465 Service cost 1,067,292 953,881 Interest cost 1,608,088 1,484,846 Plan amendments 1,131,954 --- Actuarial loss 1,165,040 1,783,756 Benefit payments (1,287,468) (1,192,232) Obligation at December 31 $27,117,622 $23,432,716 Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $31,582,957 $28,482,573 Actual return on plan assets 4,105,537 4,292,616 Benefit payments (1,287,468) (1,192,232) Fair value of plan assets at December 31 $34,401,026 $31,582,957 Funded Status Funded status at December 31 $7,283,404 $8,150,241 Unrecognized asset obligation (7,015,956) (7,548,032) Unrecognized prior service cost 1,058,321 --- Unrecognized gain (603,345) (208,920) Accrued asset at December 31 $ 722,424 $ 393,289 The following table presents a reconciliation of the funded status for the Company's supplemental retirement income plan and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1998 and 1997: 1998 1997 Reconciliation of benefit obligation: Obligation at January 1 $ 760,102 $ 612,911 Service cost 37,193 28,919 Interest cost 59,987 45,968 Actuarial loss 193,341 72,304 Obligation at December 31 $ 1,050,623 $ 760,102 Funded Status Funded status at December 31 $(1,050,623) $(760,102) Unrecognized prior service cost 216,599 239,676 Unrecognized loss 260,908 74,012 Accrued liability at December 31 $ (573,116) $(446,414) A 6.5 and 7.0 percent weighted average discount rate was assumed for 1998 and 1997, respectively, in determining the accumulated benefit obligation and a 5.0 percent average salary increase was used to project the additional pay increase on all plans. The expected return on assets for the defined pension plan was assumed to be 8.25 percent. Net periodic pension costs for the defined benefit pension plan for the year ended December 31, 1998 and 1997 included the following components: 1998 1997 Service costs $ 789,796 $ 705,872 Interest costs 1,189,985 1,098,786 Expected return on assets (1,884,093) (1,701,956) Amortization of asset obligation (393,736) (393,736) Amortization of prior-service cost 54,488 --- Net periodic benefit cost/(income) $ (243,560) $ (291,034) Net periodic pension costs for the supplemental retirement income plan for the years ended December 31, 1998 and 1997 were approximately $94,000 and $72,000 respectively. In addition to pension benefits, the Company provides certain health care and life insurance benefits ("post-retirement benefits") for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. The Company also provides medical benefits for early retirees (eligible upon attainment of age 55 and five years service up to age 65) and group term life insurance that phases out over a five year period from the retirement date. The following table presents a reconciliation of the funded status for the Company's post retirement benefit obligation and the amounts recognized in the Company's consolidated balance sheet as of December 31, 1998 and 1997: 1998 1997 Reconciliation of benefit obligation: Obligation at January 1 $ 1,952,474 $ 1,451,197 Service cost 211,586 145,017 Interest cost 133,691 102,484 Actuarial (gain) loss (324,893) 346,098 Benefit payments (63,580) (92,322) Obligation at December 31 $ 1,909,278 $ 1,952,474 Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $ --- $ --- Employer contributions 63,580 92,322 Benefit payments (63,580) (92,322) Fair value of plan assets at December 31 $ --- $ --- Funded Status Funded status at December 31 $(1,909,278) $(1,952,474) Unrecognized gain (loss) (26,338) 72,418 Accrued liability at December 31 $(1,935,616) $(1,880,856) A 6.5 and 7.0 percent weighted average discount rate was used for 1998 and 1997, respectively, to determine the accumulated post- retirement benefit obligation at December 31, 1998. Net periodic pension costs for the post-retirement plan for the year ended December 31, 1998 and 1997 included the following components: 1998 1997 Service costs $ 156,574 $ 107,313 Interest costs 98,931 75,838 Amortization of net loss (11,864) (29,704) Net periodic benefit cost $ 243,641 $ 153,447 The assumed rate of future increases in per capita cost of health care benefits was 7.0 percent for the first year and 4.0 percent for all years thereafter in 1998, and 8.0 percent for the first year and 6.0 percent for all years thereafter in 1997. The health care cost trend rate assumption has an effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point would increase the accumulated post-retirement benefit obligation by approximately $184,000 and the aggregate of the service and interest cost components of net periodic post- retirement benefit cost by approximately $48,000. A decrease in the assumed health care cost trend rates by one percentage point would decrease the accumulated post-retirement benefit obligation by approximately $160,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost by approximately $39,000. Prior to January 1, 1997, Meridian Citizens Security and ICO had no employees and were dependent on the business and operations of Meridian Mutual and Meridian Citizens Mutual. Meridian Mutual had a defined pension plan covering substantially all employees and a non- tax qualified retirement plan for certain key employees. Related pension costs allocated to the Company were immaterial to the results of operations for the year ended December 31,1996. The Company also participated in the multi-employer plan of other post- retirement benefits offered by Meridian Mutual to employees, including medical benefits for early retirees and group term life insurance. Related costs allocated to the Company were approximately $ 53,000 for 1996. 12.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: 1998 1997 1996 Tax at statutory rate $ 5,719,000 $ 2,381,000 $ 2,023,000 Tax-exempt interest (757,000) (1,131,000) (1,134,000) Dividends received deduction (370,000) (613,000) (619,000) Loss, LAE and salvage and subrogation fresh start --- (137,000) (17,000) Nondeductible expenses 277,000 277,000 168,000 Other (199,032) (570,000) (270,859) Total income taxes $ 4,669,968 $ 207,000 $ 150,141 The 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, which was to be amortized over the life of the reserves. The impact of this provision resulted in an aggregate tax benefit of approximately $923,000. The Tax Reform Act of 1986 allowed for a fresh start deduction for reserve discounting requirements, which was to be amortized over the life of the reserve. This produced an aggregate tax benefit of approximately $900,000. The remainder of the unamortized fresh start was fully recognized in 1997, resulting in a tax reduction of approximately $137,000. In 1996, the tax effect on the recognized amortization amounted to approximately $17,000. Under SFAS No. 109, "Accounting For Income Taxes", the Company recorded net deferred tax liabilities in 1997 and a deferred tax asset in 1996. The net deferred tax asset/liability at December 31, 1998, 1997 and 1996, is comprised of the following: 1998 1997 1996 Deferred tax assets: Unearned premium reserves $ 5,450,000 $ 5,528,000 $ 5,533,000 Loss and loss adjustment expense reserves and salvage and subrogation 5,414,000 6,248,000 6,336,000 Other post-employment benefits 677,000 677,000 496,000 Other 258,000 1,431,000 875,000 Total deferred tax assets 11,799,000 13,884,000 13,240,000 Deferred tax liabilities: Deferred policy acquisition costs 6,185,000 6,178,000 5,842,000 Investments 209,000 144,000 327,000 Unrealized appreciation on investment securities 8,183,000 7,731,000 3,849,000 Other 54,000 56,000 425,000 Total deferred tax liabilities 14,631,000 14,109,000 10,443,000 Net deferred tax asset (liability) $(2,832,000) $ (225,000) $ 2,797,000 The Company has paid income taxes during the last three preceding years of $3,215,000 in 1998, $1,110,000 in 1997, and $1,678,000 in 1996. 13.Earnings Per Share: The following table reflects the reconciliation of the numerators and denominators of the Company's basic earnings per share and diluted earnings per share computations reported on the Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996. Income Shares Per Share (Numerator) (Denominator) Amount December 31, 1998 Basic earnings per share Income available to common stockholders $12,150,545 7,292,077 $ 1.67 Effect of dilutive securities Stock options --- 82,675 Diluted earnings per share Income available to common stockholders $12,150,545 7,374,752 $ 1.65 December 31, 1997 Basic earnings per share Income available to common stockholders $ 6,921,123 7,351,890 $ 0.94 Effect of dilutive securities Stock options --- 50,515 Diluted earnings per share Income available to common stockholders $ 6,921,123 7,402,405 $ 0.93 December 31, 1996 Basic earnings per share Income available to common stockholders $ 5,799,952 7,457,212 $ 0.78 Effect of dilutive securities Stock options --- 30,982 Diluted earnings per share Income available to common stockholders $ 5,799,952 7,488,194 $ 0.77 14.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 $5,000,000 in 1998, $5,000,000 in 1997 and $3,900,000 in 1996. As of December 31, 1998, approximately $13,300,000 was available for distribution to the Company without prior approval of insurance regulatory authorities. Meridian Security's subsidiaries, Meridian Citizens Security and ICO, also pay dividends to their parent. Each company's retained earnings available for distribution as dividends are limited by laws in their states of domicile, Minnesota and Ohio, respectively. Meridian Citizens Security declared and paid dividends to Meridian Security of $600,000 in 1998 and $ 300,000 in 1997. ICO declared and paid dividends to Meridian Security of $ 300,000 in 1998. Dividends were not paid by either company in 1996, nor by ICO in 1997. 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: 1998 1997 1996 Statutory capital and surplus $ 133,322,000 $ 115,280,000 $ 105,506,000 Statutory net investment income $ 16,156,000 $ 15,212,000 $ 15,809,000 Statutory net income $ 15,716,000 $ 6,140,000 $ 3,307,000 15. Shareholders' Equity: In May 1997, the Shareholders of Meridian Insurance Group, Inc. approved an amendment to the Company's Articles of Incorporation to increase the number of authorized shares from 20,000,000 to 20,500,000, with the additional shares being preferred stock. The amendment provides that the preferred shares may be issued from time to time in one or more series. The Board of Directors, without further approval of the holders of common shares, would be authorized to fix the dividend rights and terms, liquidation preferences, sinking funds and any other rights, preferences, privileges, and restrictions applicable to each such series of preferred shares. On September 8, 1998, the Board of Directors of Meridian Insurance Group Inc., adopted a Shareholders Rights Plan. Under the Plan, a dividend of one preferred share purchase right was paid to shareholders of record on September 28, 1998 for each outstanding common share. Each Right entitles the holder to purchase one-thousandth of a share Series A Junior Participating Preferred Stock of the Company at a price of $75.00 per one- thousandth of a Preferred Share. If a person or group acquires 20% or more of the outstanding Common Shares (thereby becoming an Acquiring Person), each holder of a Right (except those held by the Acquiring Person and its affiliates and associates) will generally have the right to purchase Common Shares having equal to two times the purchase price of the Right. In other words, the Right's holders, other than the Acquiring Person, may purchase common shares or their equivalent at a 50 percent discount. The Rights will expire on September 18, 2008, unless the expiration date is extended by amendment or unless the Rights are earlier redeemed or exchanged by the Company. On December 9, 1998, the Board of Directors of Meridian Insurance Group, Inc. declared a ten percent stock dividend. Each shareholder of record as of December 21, 1998 received one additional share of the company's common stock for every ten shares held on that date. The ten percent stock dividend was distributed on January 6, 1999 with the Company issuing 658,493 shares. Fractional shares were paid by the Company in cash. All share and prior per share amounts have been retroactively restated to give effect for the stock dividend. In 1987, the Company's Board of Directors and Shareholders approved an Incentive Stock Plan ("Plan") for the purpose of attracting and retaining key employees. The maximum number of common shares to be authorized for issuance was limited to 750,000 shares over a 10 year term. 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. Under the 1987 Plan, which expired on January 21, 1997, total options with respect to 477,144 shares were granted and 272,856 options had expired. In early 1996, the Board of Directors and Shareholders approved the 1996 Employee Incentive Stock Plan, which would eventually replace the 1987 Plan. Under the 1996 Plan, which became effective on May 8, 1996, the maximum number of shares authorized for issuance is 750,000 shares over the next ten years. During 1998 and 1997, options with respect to 13,200 and 271,994 shares, respectively, were granted under the 1996 Plan. The Company also has a Director's Stock Plan that provides for an aggregate maximum of up to 150,000 common shares to be issued upon the exercise of stock options granted to outside directors, who are defined as non-employee directors of the Company or Meridian Mutual. Each outside director will automatically be granted an option to purchase 1,000 common shares on the date of each annual meeting of shareholders up until termination of the plan. The exercise price per share for each option will be equal to the fair market value of a common share on the date of grant. Each option will be exercisable commencing one year after the date of the grant and will expire no later than 10 years after the date of the grant. As of December 31, 1998, total options with respect to 64,000 shares have been granted. In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on the fair value method of accounting. The Company continues to account for stock options in accordance with Accounting Principles Board Opinion No. 25. Had compensation cost been determined using the fair value of the options at the grant dates in accordance with SFAS No. 123, the Company's net income and earnings per share for the periods ended December 31, 1998, 1997 and 1996 would have been reduced by the following pro-forma amounts: $186,000, $640,000 and $143,000 and $0.03, $0.09 and $0.02, respectively. The weighted average grant date fair value of options granted during the year was estimated to be $18.78, $18.99 and $16.58 using the Black-Scholes model with the following assumptions for 1998, 1997 and 1996, respectively: risk free interest rates of 5.31 percent, 6.29 percent and 6.55 percent; dividend yield of 1.80 percent, 2.29 percent and 2.15 percent; and volatility of 38.10 percent, 26.38 percent and 31.38 percent. As of December 31, 1998, options outstanding under these plans had an exercise price that ranged from $9.09 to $17.05 and a remaining weighted average contractual life of 6 years. Stock options granted by the Company for the periods ended December 31, 1998, 1997 and 1996 are summarized in the following table:
1998 1997 1996 Weighted Weighted Weighted Price Shares Price Shares Price Shares Outstanding at January 1 $12.74 554,502 $11.16 333,976 $10.63 345,479 Granted 17.04 13,200 14.59 285,194 12.76 34,100 Exercised during the year 12.40 (14,288) --- --- 5.23 (4,446) Canceled during the year --- --- 12.80 (64,668) 8.65 (41,157) Outstanding at December 31 12.46 553,414 12.74 554,502 11.16 333,976 Portion thereof exercisable at December 31 $17.04 526,414 $12.44 507,982 $11.18 299,556 Available for future grants 634,406 647,606 1,232,942
16. Unaudited Selected Quarterly Financial Data: (Amounts in thousands except per-share data) Quarter Ended March 31 June 30 September 30 December 31 1998 Revenues $ 52,633 $ 54,345 $ 53,833 $ 52,906 Net income $ 2,517 $ 2,494 $ 2,940 $ 4,199 Basic earnings per share $ 0.35 $ 0.34 $ 0.40 $ 0.58 Diluted earnings per share $ 0.34 $ 0.34 $ 0.40 $ 0.57 1997 Revenues $ 52,908 $ 54,527 $ 54,592 $ 54,451 Net income $ 310 $ 1,802 $ 3,019 $ 1,790 Basic earnings per share $ 0.04 $ 0.24 $ 0.41 $ 0.25 Diluted earnings per share $ 0.04 $ 0.24 $ 0.41 $ 0.24 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 5, 1999. 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 5, 1999. 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 5, 1999. 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 5, 1999. 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, 1998, 1997 and 1996 Consolidated Balance Sheet as of December 31, 1998 and 1997 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996 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 under Item 5 dated September 18, 1998, was filed. 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 17, 1999, 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 Director Officer and Director /s/ Timothy J. Hanrahan /s/ James D. Price Timothy J. Hanrahan James D. Price Senior Vice President Director /s/ Carl W. Buedel /s/ Sarah W. Rowland Carl W. Buedel Sarah W. Rowland Senior Vice President Director /s/ J. Mark McKinzie /s/ Thomas H. Sams J. Mark McKinzie Thomas H. Sams Senior Vice President, Director Secretary and General Counsel /s/ Harold C. McCarthy Harold C. McCarthy Director /s/ Joseph D. Barnette, Jr. Joseph D. Barnette, Jr. Director MERIDIAN INSURANCE GROUP, INC. FORM 10-K for the fiscal year ended December 31, 1998 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. (Incorporated by reference to Exhibit 2.01 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) (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 Amendment to Restated Articles of Incorporation of Meridian Insurance Group, Inc. effective May 14, 1997 (Incorporated by reference to Exhibit 3.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 3.03 Articles of Amendment to Meridian Insurance Group, Inc. Articles of Incorporation regarding Series A Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 3.01 to the registrant's Form 10-Q for quarter ended September 30, 1998; Commission File No. 0-11413.) 3.04 Bylaws of Meridian Insurance Group, Inc. as amended through December 4, 1996. (Incorporated by reference to Exhibit 3.02 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 3.05 Amendment to Bylaws of Meridian Insurance Group, Inc. effective December 9, 1998. *Page 67 (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.) 4.02 Additional text of newly issued Certificates for Common Shares of Meridian Insurance Group, Inc *Page 68 4.03 Rights Agreement, dated as of September 18, 1998, between Meridian Insurance Group, Inc. and Harris Trust and Savings Bank, as Rights Agent. The Rights Agreement includes the form of Articles of Amendment setting forth terms of Series A Junior Participating Preferred Stock as Exhibit A, the form Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (Incorporated herein by reference to Exhibit 1 to the Company's report on Form 8-K dated September 18, 1998.) (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 Form of Addendum to Supplemental Pension Agreement between Meridian Mutual Insurance Company and Harold C. McCarthy. (Incorporated by reference to Exhibit 19.07 to the registrant's Form 10-K for the fiscal year ended December 31, 1991; Commission File No. 0-11413.) ** 10.03 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.) ** 10.04 Meridian Insurance Group, Inc., Incentive Stock Plan. (Incorporated by reference to Exhibit 10.07 to Amendment No. 1 to the registrant's Form S-1 Registration Statement No. 33-11413.) ** 10.05 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.) ** 10.06 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.) ** 10.07 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.) ** 10.08 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.) ** 10.09 First and Second Amendments to Meridian Insurance Group, Inc. 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.09 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.10 Form of March 3, 1997 Non-Qualified Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.50 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) ** 10.11 Form of Amendment No. 1 to the March 3, 1997 Non- Qualified Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.11 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.12 Form of March 3, 1997 Incentive Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.51 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) ** 10.13 Form of Amendment No. 1 to the March 3, 1997 Incentive Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.13 to the registrant's Form 10- K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.14 Form of December 1, 1997 Non- Qualified Stock Option Agreement under Meridian Insurance Group, Inc., 1996 Employee Incentive Stock Plan. (Incorporated by reference to Exhibit 10.14 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.15 Written Description of 1998 Meridian Insurance Group, Inc., Executive Incentive Plan. (Incorporated by reference to Exhibit 10.16 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.16 Written Description of 1999 Meridian Insurance Group, Inc., Executive Incentive Plan.** *Page 69 10.17 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.) ** 10.18 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.) ** 10.19 Form of Directors' Non-qualified Stock Option Agreement. (Incorporated by reference to Exhibit 10.53 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) ** 10.20 Meridian Insurance Group, Inc. 401(k) Plan effective January 1, 1997. (Incorporated by reference to Exhibit 10.21 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.21 Form of Termination Benefits Agreement executed between Meridian Insurance Group, Inc. and Norma J. Oman, Steven R. Hazelbaker, J. Mark McKinzie, Timothy J. Hanrahan, and Carl W. Buedel. (Incorporated by reference to Exhibit 10.23 to the registrant's Form 10- K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.22 Form of Termination Benefits Agreement executed between Meridian Insurance Group, Inc. and all other Executive Officers of Meridian Mutual Insurance Company not mentioned in Exhibit 10.20 above. (Incorporated by reference to Exhibit 10.24 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.)** 10.23 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.) 10.24 Reinsurance Pooling Agreement Amended and Restated as of October 1, 1997, by and among Meridian Mutual Insurance Company, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, Meridian Citizens Security Insurance Company, and Insurance Company of Ohio. (Incorporated by reference to Exhibit 10.27 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.25 Reinsurance Pooling Agreement Amended and Restated as of July 1, 1998, by and among Meridian Mutual Insurance Company, Meridian Security Insurance Company, Meridian Citizens Mutual Insurance Company, Meridian Citizens Security Insurance Company, and Insurance Company of Ohio *Page 71 10.26 Management Services Agreement among Meridian Insurance Group, Inc., Meridian Mutual Insurance Company and their Affiliates effective January 1, 1997. (Incorporated by reference to Exhibit 10.32 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.) 10.27 Term Loan Agreement and Business Credit Note between NBD Bank, N.A., and Meridian Insurance Group, Inc., dated July 29, 1996. (Incorporated by reference to Exhibit 10.49 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.28 Form of Modification of Term Loan Agreement between NBD Bank, N.A., and Meridian Insurance Group, Inc., effective December 31, 1997. (Incorporated by reference to Exhibit 10.31 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.29 Form of Meridian Insurance Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 10.37 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.30 Form of Meridian Insurance Agency Profit-Sharing Agreement. (Incorporated by reference to Exhibit 10.33 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.31 Form of Meridian Insurance Agency Agreement *Page 77 10.32 Form of Meridian Insurance New Agent's Incentive Compensation Agreement *Page 81 10.33 Form of Meridian Insurance Non-Standard Automobile Contingent Commission Agreement *Page 84 10.34 Form of Meridian Insurance Farm Lines Contingent Commission Agreement. *Page 87 10.35 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.) 10.36 Form of Amendment No. 2 to Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company and Vernon Fire & Casualty Insurance Company effective January 1, 1997. (Incorporated by reference to Exhibit 10.37 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.37 Form of Amendment No. 3 to Property Per Risk Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company, Vernon Fire & Casualty Insurance Company, and the Citizens Security Group effective January 1, 1998. (Incorporated by reference to Exhibit 10.38 to the registrant's Form 10- K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.38 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.) Amendment No. 5 to the Multiple Layer Reinsurance Agreement effective January 1, 1997. (Incorporated by reference to Exhibit 10.40 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.39 Commercial and Personal Umbrella Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company. (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.) Amendment No. 9 to the Commercial and Personal Umbrella Reinsurance Agreement effective January 1, 1997. (Incorporated by reference to Exhibit 10.41 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.40 Personal Excess Liability Reinsurance Agreement between Employers Reinsurance Corporation and Meridian Mutual Insurance Company. (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.) Amendment No. 7 to the Personal Excess Liability Reinsurance Agreement effective January 1, 1997. (Incorporated by reference to Exhibit 10.39 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.41 Basket Reinsurance Agreement effective January 1, 1997, among Employers Reinsurance Corporation, Meridian Mutual Insurance Company, Meridian Security Insurance Company and Citizens Security Group. (Incorporated by reference to Exhibit 10.42 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.42 Excess Catastrophe Reinsurance Contract effective January 1, 1998, issued to Meridian Mutual Group by the Subscribing Reinsurers Executing the Interests and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.45 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.43 Sixth Excess Catastrophe Reinsurance Program effective January 1, 1997, issued to Meridian Mutual Group by the Subscribing Reinsurers Executing the Interests and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.47 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.44 Form of Addendum No. 1 to the Sixth Excess Catastrophe Reinsurance Contract effective January 1, 1997, issued to the Meridian Mutual Group. (Incorporated by reference to Exhibit 10.47 to the registrant's Form 10- K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.45 Seventh Excess Catastrophe Reinsurance Program effective January 1, 1998, issued to Meridian Mutual Group by the Subscribing Reinsurers Executing the Interests and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.49 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.46 Underlying Aggregate Excess Catastrophe Reinsurance Contract effective January 1, 1998, issued to Meridian Mutual Group by the Subscribing Reinsurers Executing the Interests and Liabilities Agreements identified therein. (Incorporated by reference to Exhibit 10.51 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.47 Second Underlying Aggregate Excess Catastrophe Reinsurance Contract issued to Meridian Mutual Group effective May, 1996, and Addendum No. 1 effective January 1,1997. (Incorporated by reference to Exhibit 10.46 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.48 Form of Addendum No. 2 to the Second Underlying Aggregate Excess Catastrophe Reinsurance Contract effective May 10, 1996 (Incorporated by reference to Exhibit 10.55 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.49 Property Excess of Loss Reinsurance Binding Agreement between Meridian Mutual Group and NAC Reinsurance Corporation effective June 15, 1995 and Endorsement No.1 effective January 1, 1996. (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.) 10.50 Form of Endorsement No. 2, which became effective January 1, 1997, and Form of Endorsement No. 3, which became effective June 15, 1996, to the Property Excess of Loss Reinsurance Binding Agreement. (Incorporated by reference to Exhibit 10.55 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.51 Endorsement No. 4, Property Excess of Loss Reinsurance Binding Agreement, effective June 1, 1998 *Page 90 10.52 Seventh Excess Catastrophe Reinsurance Contract effective January 1, 1999, issued to Meridian Mutual Insurance Company by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein. *Page 93 10.53 Underlying Aggregate Excess Catastrophe Reinsurance Contract, effective January 1, 1999, issued to Meridian Mutual Insurance Company by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein. *Page 120 10.54 Form of Addendum No. 2 to the Sixth Excess Catastrophe Reinsurance Contract effective January 1, 1999, issued to Meridian Mutual Group *Page 147 10.55 Excess Catastrophe Reinsurance Contract effective January 1, 1999, issued to Meridian Mutual Insurance Company by the Subscribing Reinsurers Executing the Interest and Liabilities Agreements identified therein *Page 153 10.56 Software and Hardware Support Agreement by and among Meridian Citizens Mutual Insurance Company, Meridian Citizens Security Insurance Company, Insurance Company of Ohio, and VIS'N, Inc. (Incorporated by reference to Exhibit 10.36 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.) 10.57 Form of Agreement for the Transfer of Claim Processing Services effective December 1, 1997 between the Citizens Security Companies and VIS'N, Inc. (Incorporated by reference to Exhibit 10.58 to the registrant's Form 10-K for the fiscal year ended December 31, 1997; Commission File No. 0-11413.) 10.58 Form of Citizens Security Group Agency Agreement. (Incorporated by reference to Exhibit 10.55 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.59 Form of Citizens Security Mutual Insurance Company Agency Agreement. (Incorporated by reference to Exhibit 10.56 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.) 10.60 Form of Citizens Security Group Limited Agency Agreement. (Incorporated by reference to Exhibit 10.58 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.61 Form of Citizens Security Mutual Insurance Company Personal Partner Agency Agreement. (Incorporated by reference to Exhibit 10.59 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.62 Form of Citizens Security Group Personal Partner Contingency Plan. (Incorporated by reference to Exhibit 10.60 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0-11413.) 10.63 Form of Citizens Security Group Network Agencies Profit Sharing Plan. (Incorporated by reference to Exhibit 10.61 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.) 10.64 Form of Citizens Security Group Individual Agency Profit Sharing Plan. (Incorporated by reference to Exhibit 10.62 to the registrant's Form 10-K for the fiscal year ended December 31, 1996; Commission File No. 0- 11413.) 10.65 Form of Meridian Citizens Agency Profit-Sharing Agreement *Page 210 (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 215 (22) No exhibit. (23) 23.01 Consent of Independent Accountants dated March 26, 1998 *Page 216 (24) No exhibit. (27) 27.01 Financial Data Schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1998 *Page 217 27.02 Restated Financial Data Schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1997 *Page 218 27.03 Restated Financial Data Schedule for Meridian Insurance Group, Inc., for the year ended December 31, 1996. *Page 219 27.04 Restated Financial Data Schedule for Meridian Insurance Group, Inc., for the period ended September 30, 1998. *Page 220 (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, 1998 *Page 221 * 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. 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 58 Schedule II Condensed Financial Information of Registrant 59 Schedule IV Reinsurance 61 Schedule VI Supplemental Information Concerning Property- Casualty Insurance Operations 62 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1998 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 $ 14,569,208 $ 14,854,647 $ 14,854,647 States, municipalities, and political subdivisions 67,150,826 68,207,690 68,207,690 Public utilities 5,521,956 6,659,950 6,659,950 All other corporate bonds 126,692,564 129,994,362 129,994,362 Redeemable preferred stocks 20,697,205 22,277,313 22,277,313 Total fixed maturities 234,631,759 241,993,962 241,993,962 Equity securities Common stocks Public utilities 6,425,049 8,881,034 8,881,034 Banks, trust, and insurance companies 4,759,792 7,498,762 7,498,762 Industrial, miscellaneous, and all other 37,152,836 47,640,865 47,640,865 Total equity securities 48,337,677 64,020,661 64,020,661 Other long-term investments 1,040,309 1,375,463 1,375,463 Short-term investments 6,431,482 6,431,482 6,431,482 Total other investments 7,471,791 7,806,945 7,806,945 Total investments $290,441,227 $ 313,821,568 $ 313,821,568 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEET as of December 31, 1998 and 1997 ASSETS 1998 1997 Cash and short-term investments $ 2,271,945 $ 2,247,120 Investment in subsidiaries (eliminated in consolidation) 153,261,543 144,339,653 Other assets 265,973 85,749 Total assets $155,799,461 $146,672,522 LIABILITIES AND SHAREHOLDERS' EQUITY Due to Meridian Mutual Insurance Company $ 1,045,989 $ 807,194 Post-employment benefits 1,935,616 1,933,181 Bank loan payable 10,125,000 11,375,000 Dividends payable 579,497 530,149 Other liabilities 144,526 132,763 Total liabilities 13,830,628 14,778,287 Shareholders' equity: Common shares 44,336,679 44,110,416 Treasury Shares, at cost; 212,800 shares (3,277,781) (2,308,188) Contributed capital 25,923,462 15,058,327 Accumulated other comprehensive income 15,190,238 14,349,232 Retained earnings 59,796,235 60,684,448 Total shareholders' equity 141,968,833 131,894,235 Total liabilities and shareholders' equity $155,799,461 $146,672,522 STATEMENT OF INCOME For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Dividend income from subsidiaries $ 5,000,000 $ 5,000,000 $ 3,900,000 Other income 23,115 24,537 24,656 Less: General operating expenses 619,405 773,888 727,648 Interest expense 672,630 732,047 307,887 Current federal income tax benefit (338,581) (191,110) (265,508) Income before equity in net income of subsidiaries 4,069,661 3,709,712 3,154,629 Equity in undistributed net income of subsidiaries 8,080,884 3,211,411 2,645,323 Net income $12,150,545 $ 6,921,123 $ 5,799,952 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT, Continued STATEMENT OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Cash flows from operation: Net income $12,150,545 $ 6,921,123 $ 5,799,952 Reconciliation of net income to net cash provided by operations: Equity in undistributed net income of subsidiaries (8,080,884) (3,211,411) (2,645,323) (Increase) decrease in other assets (180,224) (66,859) 5,521 Increase in due to Meridian Mutual Insurance Company 238,795 779,677 20,966 Increase in post-employment benefits 2,435 515,367 119,436 Increase (decrease) in other liabilities 11,763 (524) 132,425 Other, net --- 35,579 (21,848) Net cash provided by operation 4,142,430 4,972,952 3,411,129 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 226,263 --- 23,241 Repurchase of common stock (969,593) (2,308,188) (22,080) Proceeds from bank loan --- --- 12,000,000 Repayment of bank loan (1,250,000) (500,000) (125,000) Dividends paid (2,124,275) (2,144,839) (2,101,426) Net cash provided (used) by financing activities (4,117,605) (4,953,027) 9,774,735 Net increase in cash 24,825 19,925 1,185,864 Cash at beginning of year 2,247,120 2,227,195 1,041,331 Cash at end of $ 2,271,945 $ 2,247,120 $ 2,227,195 MERIDIAN INSURANCE GROUP, INC., AND SUBSIDIARIES SCHEDULE IV--REINSURANCE For the Years Ended December 31, 1998, 1997 and 1996
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, 1998 $ 205,534,750 $ 16,960,370 $ 614,042 $ 189,188,422 0.3% Year ended December 31, 1997 $ 211,105,812 $ 17,751,345 $ 1,232,165 $ 194,586,632 0.6% Year ended December 31, 1996 $ 176,718,644 $ 15,839,546 $ 6,425,316 $ 167,304,414 3.8%
_____________ (1) The amounts for the years ended December 31, 1998, 1997 and 1996 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, 1998, 1997 and 1996 1998 1997 1996 Deferred policy acquisition costs $ 17,671,856 $ 17,651,544 $ 16,690,275 Reserves for losses and loss adjustment expenses $154,252,671 $169,801,326 $161,309,239 Unearned premiums $ 81,223,095 $ 82,839,333 $ 84,065,751 Earned premiums $189,188,422 $194,586,632 $167,304,414 Investment income $ 17,245,684 $ 16,371,711 $ 14,908,285 Losses and loss adjustment expenses incurred related to: Current years $145,328,331 $165,576,734 $137,817,367 Prior years $ (8,708,340) $(16,358,003) $ (7,716,175) Amortization of deferred policy acquisition costs $ 42,213,612 $ 42,163,797 $ 36,251,186 Paid losses and loss adjustment expenses $145,097,636 $147,779,800 $123,669,408 Premiums written $188,071,251 $194,519,309 $169,194,649 EX-3 2 EXHIBIT 3-05 MERIDIAN INSURANCE GROUP, INC. AMENDMENT TO BYLAWS Article III, Section 2, has been amended to read as follows effective December 9, 1998: Section 2. Number and Terms of Office. There shall be at least eight (8) 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. EX-4 3 EXHIBIT 4-02 MERIDIAN INSURANCE GROUP, INC. Text of Certificate for Common Shares The following legends will be added to the reverse side of the Meridian Insurance Group, Inc., Common Share Certificates issued on or after September 28, 1998: A SUMMARY OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS APPLICABLE TO EACH CLASS OF SHARES AND THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH SERIES (AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES) OF SHARES THAT THE CORPORATION IS AUTHORIZED TO ISSUE WILL BE FURNISHED WITHOUT CHARGE TO ANY SHAREHOLDERS UPON WRITTEN REQUEST. THE CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO CERTAIN RIGHTS AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN MERIDIAN INSURANCE GROUP, INC., (THE "COMPANY") AND THE RIGHTS AGENT THEREUNDER (THE "RIGHTS AGREEMENT"), THE TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND WILL NO LONGER BE EVIDENCED BY THIS CERTIFICATE. THE COMPANY WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO ANY PERSON WHO BECOMES AN ACQUIRING PERSON (AS DEFINED IN THE RIGHTS AGREEMENT), INCLUDING SUCH RIGHTS HELD BY A SUBSEQUENT HOLDER, MAY BECOME NULL AND VOID. EX-10 4 EXHIBIT 10-16 MERIDIAN INSURANCE PARTICIPANT DESCRIPTION FISCAL YEAR 1999 ANNUAL INCENTIVE PLAN Participant Name: Title: PURPOSE Meridian's 1999 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. 1999 ANNUAL PLAN CONCEPTS The Plan is structured to pay an award based on meeting or exceeding the 1999 consolidated 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 award may vary from X percent to X percent of your annual base salary as of December 31, 1999, and is based on meeting at least the threshold goal. PLAN DETAILS The target award amount is calculated as a percent of your 1999 year-end salary. For example, your target bonus is X percent. Using your salary as of December 1, 1998, your target award would be $X. The award is payable in cash, in stock of Meridian Insurance Group, Inc., or a combination of both payment methods. Upon confirmation of a bonus earned, you will be given the opportunity to choose the payment method. 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 1999, no incentives shall be paid if the consolidated pre- tax income is less than $X. 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 (% of goal) $X X% of base salary Target (% of goal) $X X% of base salary Threshold (% 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 purchases(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 awards will be finalized after the close of the fiscal year for payment in March. 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 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 bonus payment with the approval of the President. The Joint Compensation Committee reserves the right to modify or terminate this incentive plan as necessary. EXHIBIT 10-25 REINSURANCE POOLING AGREEMENT AMENDED AND RESTATED AS OF JULY 1, 1998 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 amended and restated effective 12:01 a.m. on the first day of July, 1998, (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 Citizens, Fund, and ICO became parties to this Agreement effective August 1, 1996, when Meridian Insurance Group, Inc., acquired Fund and ICO and became affiliated with Citizens; and WHEREAS the parties to this Agreement desire to include under this Agreement all types of insurance written by the parties; NOW, THEREFORE, do Mutual, Security, Citizens, Fund, and ICO agree to amend and restate this Agreement as follows 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 EXHIBIT 10-31 AGENCY AGREEMENT I. AUTHORITY OF AGENT: Whereas it is the intent of the Company to engage profitably in the business of insurance through independent agents, the following section of this Agreement is intended to establish the nature of the relationship between the Company and the Agent and to specify conditions thereof. The Agent is an independent contractor, not an employee of the Company and, subject to rquirements imposed by law, the terms of this Agreement, and the underwriting rules and regulations of the Company, is authorized to: A. Solicit, receive and transmit to the Company proposals for such insurance contracts as the Compay is licensed to write and to bind the Company only on such classes of risks and to such limits as the Company may from time to time authorize by letter of instructions, underwriting guide, manual or other written instruction; B. Collect and issue receipts for all premiums, except as hereinafter provided, on insurance written by the Agent or tendered by the Agent to the Company and, as full compensation, to retain out of premiums so collected commissions at the rates or terms set forth on the then current Schedule of Commissions or as may be authorized in writing hereafter from time to time; C. Exercise exclusive and independent control of working hours and conduct of the Agency; D. Exercise the authority granted under this Agreement, personally or through authorized employees or representatives and is responsible for the acts of such employees and representatives; E. Represent other companies. II. AGENCY BILL POLICIES: Whereas, the orderly transfer of premiums from the policyholder to the Company through the Agent as a fiduciary is the responsibility of the Agent, the following section of this Agreement is intended to protect the interests of the policyholder, Agent and Company in such transactions and to provide proper procedures therefor. On business placed by the Agent with the Company and while handled as Agency Bill, the following provisions apply: A. The Agent agrees to accept in a fiduciary capacity all premiums collected and that the privilege of retaining commissions in accord with the then current Schedule of Commissions shall not be construed as changing such fiduciary capacity; B. With respect to premiums collected by the Agent for or on behalf of the Company and other insurance carriers: 1. A trust account will be maintained in a bank under the name of the Agent as an Agency Premium Trust Account in which the Agent agrees to deposit all premiums hereafter received, each such premium to be held and deposited in trust for the respective insurance carrier with whom such business is placed. 2. Checks may be drawn from said trust account only for the following purposes: a. to pay net balances due insurance companies on business written by or through the Agent; b. to pay to policyholders return premiums due; c. to pay the Agent the amount of Agent's commission in accord with the then current Schedule of Commissions on premiums deposited in said trust account. C. If any final additional premiums developed by audit or under reporting form policies cannot be collected by the Agent, the Company shall undertake direct collection; and the Agent shall not be responsible for such premiums provided the Agent notifies the Company of his inability to collect such premium within 60 days of the Company's initial notification to the Agent of such additional premiums due. No commission shall be paid to the Agent on such premiums collected by the Company. D. An itemized statement of premiums due shall be rendered to the Agent monthly by the Company or, when mutually agreed, the Agent may on or before the 10th day of each month, render to the Company a statement of all business transacted the previous month. E. The balance, shown in the statement due the Company or due the Agent, shall be paid not later than 45 days after the end of the account month for which such statement was prepared. The omission of any item(s) shall not affect the responsibility of either party to account for an pay all accounts due the other, nor shall it prejudice the rights of either party to collect all such amounts due from the other. III. COMPANY BILL POLICIES: Whereas, the collection of premiums from the policyholder by the Company may be agreed upon by the Agent and the Company, the following section of this Agreement is intended to evidence the continuing responsibility of the Agent as part of the Company Bill system, to guarantee that the Agent receives all commissions due him in accord with the then current Schedule of commissions, and to assure that the Agent is identified as a party to each such transaction. On business placed by the Agent with the Company and designated as Company Bill, the following provisions apply: A. Submission of applications, binding of coverage and Agent's involvement in payment of premiums shall be in accordance with the provisions of the Company Bill Program. B. Commissions on premiums shall be paid to the Agent within 30 days after the end of the month in which such premiums are received and recorded by the Company. C. Commissions payable to the Agent may be offset by any amounts due any Company of the Meridian Insurance Group. D. The Company shall clearly and prominently identify the Agent by name when transmitting policies, premium notices, cancellation notices, and such other documents as practicable to policyholders. E. The Company will not knowingly communicate to the policyholder in any way so as to obviate or violate the agent-policyholder relationship. IV. Whereas, the Agent, being an independent contractor, is in complete control of the conduct of the Insurance agency, the following section of this Agreement is intended to identify those aspects of agency operation in which the Company is vitally concerned and to provide needed procedures and guidelines, for the protection of the Company. THE AGENT FURTHER AGREES: A. To forward promptly to the Company copies of all evidence of insurance effected by the Agent or modifications thereof, and to maintain a complete record of transactions with the Company and with policyholders, which shall be open to the company's inspection at any reasonable time; B. The Company shall not be responsible for the Agent's expenses; C. The Agent shall sponsor no advertisement in which the Company name is mentioned nor otherwise cause to be circulated any printed information identifying the Company without prior written approval of the Company; D. The Company has the right to reject, cancel, refuse to renew or decline to continue any policy of insurance, subject to policy provisions, with notification to the Agent at the same time as the policyholder. E. Supplies and equipment furnished by the Company shall remain the property of the Company and shall be returned upon request; F. To prepare annually and make available to the Company on request a financial statement of the Agent, prepared in accordance with generally accepted accounting principles; G. If the Agent is a corporation, to provide the Company with notice of any change in the schedule of shareholders of record and any actual or beneficial owners of shares of the corporation. H. To assist and cooperate with the Company in its continuing underwriting evaluation and in any effort deemed necessary by the Company, including but not limited to, inspecting, modifying, or re- rating individually and/or collectively any insurance placed by the Agent with the Company. I. To waive any statutory right to advance notice of the Company's obligation to mail or deliver notice of cancellation for nonpayment of premium to the named insured on any policy placed by the Agent with the Company; J. The Schedule of Commissions may be revised from time to time by the Company and such a revision shall not be considered as termination of this agreement. Any change in the Schedule of Commissions shall be effected by the mailing by the Company to the Agent of a revised Schedule of Commissions not less than ninety days prior to the effective date of the revised Schedule. Such revisions shall apply to a class or category of the Company's Agent as such a class or category may now exist or hereafter be established by the Company but no revision of the Schedule of Commissions shall be applicable solely to the Agent. This agreement shall not prohibit the negotiation of special commission rates on indivdiual policies; K. To refund return commissions to the Company on policy cancellations or return premiums in each case at the same rate at which such commissions were originally retained or paid, and to refund return commissions on policies on wihch the Agent has filed an Agent of Record letter as if the original commission had been retained by or paid to the Agent. L. To provide all usual and customary services of an insurance agent on insurance contracts placed by the Agent with the Company. V. Whereas, it is the intent of this section to reaffirm the Agent's ownership of the sole right to use and control of the records and expirations of the business written by the Agent and to protect the Agent from legal obligations incurred solely as a result of Company error. THE COMPANY FURTHER AGREES: A. That unless authorized by the Agent, the Company shall not use, or permit the use of, its records of business placed by the Agent with the Company to solicit individual policyholders for the sale of other lines of insurance or other products or services. When the Agent grants such authorization, he shall be allowed such commission or fee as may be agreed upon for such sales resulting from the use of such records; B. To hold the Agent harmless against all claims or damages which the Agent may become legally obligated to pay to or on behalf of any policyholder caused solely by error of the Company in the processing or handling of Company Bill policies, including failure to send to any insured before due date a notice of premium due; C. To indemnity and hold the Agent harmless from and against all sums, including costs and expenses of defense and settlement, which the Agent shall become legally obligated to pay by reason of civil liability based on the Company's failure to comply with the requirements of the Fair Credit Reporting Act in the procurement or use of consumer reports, as defined in the Act, ordered by the Company or upon its express authorization; provided that this Agreement does not apply to civil liability the Agent may incur as the result of his wilfull non-compliance with the requirements of the Act. VI. SALE OR TRANSFER: Whereas, it is vital to the strength and growth of the Company that the high quality of its agency representation be maintained, this section of this Agreement is intended to assert the sole right of the Company to select the Agents who represent it. The Agent agrees to give 60 days' advance notice to the Company of any sale or other transfer in any manner whatsoever of any ownership interest in the Agency, or its consolidation with a successor firm, or transfer of any interest whatsoever in the shares of corporate stock of the Agent in order that the Company may at its election: A. Permit this Agreement to terminate as provided in Section VII; or B. Enter into a new Agency Agreement with the Agent or its successor; or C. Place in effect a Limited Agency Agreement with the successor in order to provide continued servicing of existing policyholders. VII. TERMINATION: Whereas, both parties recognize the right of the other to terminate this agreement, and in such cases the necessity of providing for the orderly and unprejudicial transfer of business to another company, it is the intent of the following section of this Agreement to support the Agent's need for a stable and dependable market, under specified conditions as stated below; ensure the right of the Company to select the insurance risks written by it; and set forth procedures and conditions which will apply if termination of this Agreement does occur. A. This Agreement shall terminate: 1. At the Agent's request giving at least 60 days' advance written notice to the Company; 2. At the Company's request, giving at least 60 days' advance written notice to the Agent; 3. Automatically, if any public authority cancels or declines to renew the Agent's license or certificate of authority or if the Company ceases to do business in the state in which the Agent is licensed; 4. At the Company's discretion, if any public authority suspends or otherwise limits the Agent's license or certificate of authority; 5. Automatically on the effective date of the sale or transfer of the Agent's business or its consolidation with a successor unless this Agreement is assigned as provided in Section VI; 6. Automatically in the event of transfer of the actual or beneficial ownership of any shares of the stock of an incorporated agency, unless this Agreement is assigned as provided in Section VI; 7. Immediately upon either party's giving written notice to the other in the event of abandonment, bankruptcy, receivership, fraud, insolvency or gross and willful misconduct on the part of such other party or of any partner or actual or beneficial owner of any shares of such other party; 8. At the Company's request, upon written notice to the Agent that the Agent is delinquent in either accounting for or payment of fiduciary funds or other monies due the Company, provided that minor differences between the Agent's and Company's records shall not constitute failure to pay under the foregoing provision; 9. At the option of the Company in the event of death, retirement, disability or other termination from active employment by, or cessation of active participation in, the regular operation of the Agency by any person signatory as a party or in a representative capacity to this contract. B. The Company's refusal to accept or renew insurance written by any Agent owner, principal, employee, solicitor, or anyone acting on behalf of the Agent, shall not be construed as termination of this Agreement. C. In the event of termination of this Agreement: 1. The Agent's records, use and control of expirations, including Company Bill business and continuous term policies, shall remain the property of the Agent and left in his undisputed possession, provided the Agent has then rendered, and continues to render, timely accounts and payments of all amounts due the Company as provided in paragraph II. E. or provides security therefor acceptable to the Company; otherwise the records, use and control of expirations shall become vested in the Company, and Agent shall hold all such records and lists of expirations for the use and benefit of the Company; and upon demand by the Company, all such records, use and control of expirations will be surrendered to the Company or its representative. If in disposing of such records and expirations the Company does not realize sufficient money to discharge in full the Agent's indebtedness to the Company, the Agent shall remain liable for the balance of such indebtedness. Any amount realized in excess of such indebtedness, less expense incurred in disposing of such records and expirations, shall be returned to the Agent. 2. The Agent not being in default, the Company shall furnish to the Agent basic information on Company Bill policies, if such information has not been regularly provided, and shall notify all Company Bill insureds of an intent not to renew. 3. After the termination date of this Agreement, the Agent shall have no authority to solicit insurance on behalf of the Company, to bind the Company on any insurance, or identify with the Company in any form of advertising except; a. With respect to insurance contracts of the Company which were issued through the Agent, the Agent has full authority after the effective date of termination to: (1) renew policies (I) which will be renewed within 60 days from the termination date of this Agreement and which meet the Company's then current underwriting standards, but only for one policy term and in no event for a policy term in excess of one year or, (ii) as is required by law; (2) issue and countersign endorsements which do not increase the Company's liability or risk of loss and any other endorsement with prior approval of the Company; and (3) collect, receive and receipt for premiums on any such policies or endorsements. b. The limited authority provided under this subparagraph (3) shall terminate automatically upon the cancellation, expiration or other termination of all insurance contracts issued by the Company through the Agent, or if the Agent breaches any of the terms or provisions of this section, provided that this subparagraph VII. C., 3. a. shall not apply in any case where this Agency Agreement has been terminated pursuant to subparagraphs A. 3. through A. 8. of this section. VIII. CONDITIONS Whereas, it is the intent of the Company and the Agent to operate according to the terms of this Agreement, the Company recognizes the possibility that the parties may fail to follow the Agreement completely at all times, and sets forth conditions intended to guide the parties to the Agreement in that event. A. The failure of the Company to enforce at any time any of the provisions of this Agreement or to require at any time performance by the Agent of any of the provisions shall not be construed to be a waiver of such provisions, nor in any way affect the right of the Company to thereafter enforce each and every such provision. B. All matters arising under this Agreement will be goverened by the laws of the state in which the Company is domiciled. C. This agreement and the attachments hereto contain the entire Agreement of the parties, and supersede all previous Agency Contracts, whether written or oral, between the Company and the Agent, and shall be effective on the date indicated on the first page of this Agreement and shall remain in force until terminated. In witness whereof, Agent and Company have executed this Agreement on __________________________________ to be effective_____________________, 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 _______________________________ EXHIBIT 10-32 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 2--Five 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 3--Five 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 4--Five 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 to be effective and thereafter until terminated as provided herein. THIS AGREEMENT WILL TERMINATE on_______________________ ___________________________ 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 ____Meridian Citizens Mutual Insurance Company ____Meridian Citizens Security Insurance Company ____Meridian Citizens Mutual Insurance Company and Meridian Citizens Security Insurance Company jointly Herein referred to as "Company" by _____________________________ Title __________________________ EXHIBIT 10-33 NON-STANDARD AUTOMOBILE CONTINGENT COMMISSION 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 agrees to pay Agent a Contingent Commission based on the following schedules and formula: A. Schedule: 1. WRITTEN PREMIUM $50,000--$149,999 Percent of Calendar Loss Ratio Year Earned Premium Payable 50.1% to 55% 1.0% 45.1% to 50% 1.5% 40.1% to 45% 2.0% 35.1% to 40% 2.5% 35% and less 3.0% 2. WRITTEN PREMIUM $150,000 and Greater Percent of Calendar Loss Ratio Year Earned Premium Payable 50.1% to 55% 1.5% 45.1% to 50% 2.0% 40.1% to 45% 2.5% 35.1% to 40% 3.0% 35% and less 4.0% B. Formula The Contingent Commission payable under this Agreement will be determined by multiplying the amount of the Agent's Earned Premium times the applicable percent based upon the Agent's Loss Ratio. II. DEFINITIONS A. "Written Premium" means the total of all non-standard automobile written premium less return premium during a calendar year. B. "Loss Ratio" will be determined from the Company's records by dividing Incurred Losses by Earned Premium. C. "Incurred Losses" means 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. D. "Earned Premiums" shall be computed by the Company from its records. III. CONDITIONS A. This Agreement applies only to non-standard automobile as shown on Company records. B. Any Contingent Commission payment shall be made by the Company within ninety (90) days after the close of the year. No charge or deduction for Contingent Commission shall be made or claimed by the Agent in his accounts. C. No Contingent 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 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. E. 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. F. This Agreement may be terminated by either party following ninety (90) days' prior written notice, or will terminate automatically concurrent with the effective date of termination of the Agency Agreement or Agent's Contract with the Company. Upon termination, only Contingent Commission accrued and unpaid at the end of the year prior to the year of termination shall be payable to Agent. G. This Agreement shall be construed according to the laws of the State of Indiana. IN WITNESS WHEREOF, Agent and Company have executed this Agreement on __________________________________ to be effective___________________________, and thereafter until terminated as provided herein. herein referred to as "Agent" by _____________________________ Title __________________________ MERIDIAN MUTUAL INSURANCE COMPANY Herein referred to as "Company" by _____________________________ Title __________________________ EXHIBIT 10-34 FARM LINES CONTINGENT COMMISSION 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 agrees to pay Agent a Contingent Commission based on the following schedules and formula: A. Schedule: 1. WRITTEN PREMIUM $50,000--$99,999 Percent of Calendar Year Loss Ratio Earned Premium Payable 50.1% to 55% 1.0% 45.1% to 50% 1.5% 40.1% to 45% 2.0% 35.1% to 40% 2.5% 35% and less 3.0% 2. WRITTEN PREMIUM $100,000 and Greater Percent of Calendar Year Loss Ratio Earned Premium Payable 50.1% to 55% 1.5% 45.1% to 50% 2.0% 40.1% to 45% 2.5% 35.1% to 40% 3.0% 35% and less 4.0% B. Formula The Contingent Commission payable under this Agreement will be determined by multiplying the amount of the Agent's Earned Premium times the applicable percent based upon the Agent's Loss Ratio. II. DEFINITIONS A. "Written Premium" means the total of all farm lines of written premium less return premium during a calendar year. B. "Loss Ratio" will be determined from the Company's records by dividing Incurred Losses by Earned Premium. C. "Incurred Losses" means 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. D. "Earned Premiums" shall be computed by the Company from its records. III. CONDITIONS A. This Agreement applies only to farm lines as shown on Company records. B. Any Contingent Commission payment shall be made by the Company within ninety (90) days after the close of the year. No charge or deduction for Contingent Commission shall be made or claimed by the Agent in his accounts. C. No Contingent 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 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. E. 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. F. This Agreement may be terminated by either party following ninety (90) days' prior written notice, or will terminate automatically concurrent with the effective date of termination of the Agency Agreement or Agent's Contract with the Company. Upon termination, only Contingent Commission accrued and unpaid at the end of the year prior to the year of termination shall be payable to Agent. G. This Agreement shall be construed according to the laws of the State of Indiana. IN WITNESS WHEREOF, Agent and Company have executed this Agreement on __________________________________ to be effective __________________________, and thereafter until terminated as provided herein. herein referred to as "Agent" by ____________________________ Title _________________________ MERIDIAN SECURITY INSURANCE COMPANY MERIDIAN MUTUAL INSURANCE COMPANY Herein referred to as "Company" by ____________________________ Title _________________________ EXHIBIT 10-51 Endorsement No. 4 to the Property Excess of Loss Reinsurance Binding Agreement between Meridian Insurance CITIZENS SECURITY GROUP of Indianapolis, Indiana (both hereinafter referred to as the "COMPANY") and NAC Reinsurance Corporation New York, NY (hereinafter referred to as the "REINSURER") IT IS MUTUALLY AGREED that effective 12:01 a.m. Central Standard Time, June 1, 1998, the following changes are made a part of this Agreement: Article 5 - Territory is deleted in its entirety and replaced by the following: ARTICLE 5 TERRITORY This agreement shall apply to policies covering risks located in Illinois, Indiana, Kentucky, Michigan, Ohio, Wisconsin, Tennessee, Iowa, Pennsylvania, South Dakota, North Dakota, Missouri, Minnesota, Virginia and Maryland in accordance with the Company's regulatory filing. The Company shall notify the Reinsurer in advance of any regulatory filing to insure risks in additional states, and subject to the Reinsurer's approval, the territory clause of this Agreement will be amended. Article 7 - Binding Authority is deleted in its entirety and replaced by the following: ARTICLE 7 BINDING AUTHORITY Authority to bind the Reinsurer is granted to all Meridian underwriters above the Level Two underwriting designation. Specific authority is granted to Jenny Pagano and John Newman for an additional 10% overline of the limit for Total Insurable Values and for NAC maximum limit. Article 12 - Profit Commission, is deleted in its entirety and replaced by the following: ARTICLE 12 SLIDING SCALE COMMISSION Subject to a minimum reinsurance premium of $400,000 for the period of June 1, 1998 to June 1, 2000, the Reinsurer shall allow the Company a 28.5% provisional commission on all premiums ceded to the Reinsurer hereunder. The Company shall allow the Reinsurer return commission on return premiums at the same rate. The provisional commission allowed the Company shall be adjusted periodically in accordance with the provisions set forth herein. The first adjustment period shall be from June 1, 1998 to June 1, 2000, and each subsequent 24 month period shall be a separate adjustment period. However, if this Contract is terminated, the final adjustment period shall be from the beginning of the then current adjustment period through the effective date of termination. The adjusted commission rate shall be calculated as follows and be applied to premiums earned for the period under consideration: A. If the ratio of losses incurred to premiums earned is 75% or greater, the adjusted commission rate for the period under consideration shall be 0%; B. If the ratio of losses incurred to premiums earned is less than 75%, but not less than 66%, the adjusted commission rate for the period under consideration shall be 25.0%; C. If the ratio of losses incurred to premiums earned is less than 66%, but not less than 41%, the adjusted commission rate for the period under consideration shall be 28.5%; D. If the ratio of losses incurred to premiums earned is less than 41%, the adjusted commission rate for the period under consideration shall be 35.0%. If the ratio of losses incurred to premiums earned for any period is greater than 75%, the difference in percentage points between the actual ratio of losses incurred to premiums earned and 75% shall be multiplied by premiums earned for the period and the product shall be carried forward to the next adjustment period as a debit to losses incurred. The Company shall calculate and report the adjusted commission on premiums earned within 45 following six months after the end of each adjustment period, and within 45 days after the end of each 12 month period thereafter until all losses subject hereto have been finally settled. Each such calculation shall be based on cumulative transactions hereunder from the beginning of the adjustment period under consideration through the date of adjustment, including, as respects losses incurred, any debit from the preceding adjustment period. If the adjusted commission on premiums earned for the adjustment period as of the date of adjustment is less than commissions previously allowed by the Reinsurer on premiums earned for the same period, the Company shall remit the difference to the Reinsurer with its report. If the adjusted commission on premiums earned for the adjustment period as of the date of adjustment is greater than commissions previously allowed by the Reinsurer on premiums earned for the same period, the Reinsurer shall remit the difference to the Company as promptly as possible after receipt and verification of the Company's report. If this Agreement is canceled at any time prior to the expiration of the adjustment period, no sliding scale commission will be due the Company. "Losses incurred" as used herein shall mean ceded losses and loss adjustment expense paid as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expense outstanding as of the same date, plus the debit from the preceding adjustment period, it being understood and agreed that all losses and related loss adjustment expense under policies with effective or renewal dates during an adjustment period shall be charged to that adjustment period, regardless of the date said losses actually occur. "Premiums earned" as used herein shall mean ceded net written premiums for policies with effective or renewal dates during the adjustment period, less the unearned portion thereof as of the effective date of calculation, it being understood and agreed that all premiums for policies and with effective or renewal dates during an adjustment period shall be credited to that adjustment period. It is understood that premiums earned will include all premiums ceded to the Reinsurer under all individual property facultative certificates which are written by the Reinsurer to indemnify the Company and which certificates have effective or renewal dates during the adjustment period. It is expressly agreed that the ceding commission allowed the Company includes provision for all dividends, commissions, taxes, assessments, and all other expenses of whatever nature, except loss adjustment expense. The following Exclusion is added to the Exhibit entitled EXCLUSIONS of this Agreement: The peril of wind for any risk on any island, located in first tier counties from the State of Texas to and including the state of Virginia or located within one mile from any tidal waters from the state of New Jersey to and including Maine. All other terms and conditions remain unchanged. The parties hereto have caused this Endorsement No. 4 to the Property Excess of Loss Reinsurance Binding Agreement to be executed in duplicate in Indianapolis, Indiana, this _____ day of _____________, 1998. MERIDIAN INSURANCE COMPANY CITIZENS SECURITY GROUP By:_______________________________ and in Greenwich, Connecticut, Illinois, this _____ day of _____________, 1998. NAC REINSURANCE CORPORATION By:________________________________ EXHIBIT 10-52 Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Insurance Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Preamble The "Meridian Mutual Insurance Group" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Meridian Citizens Security Insurance Company, Red Wing, Minnesota, Meridian Citizens Mutual 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 Insurance 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, 1999, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until December 31, 2001, 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. C. "Contract year" as used in this Contract shall mean the period from January 1, 1999 to December 31, 1999, both days inclusive, and each respective twelve-month period thereafter that this Contract continues in force. 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 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); 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. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: a. "Loss in excess of policy limits" shall mean any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. b. "Extra contractual obligations" shall mean any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, 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. Article V - Retention and Limit A. Coverage A: As respects losses arising from the perils of earthquake and fire following earthquake subject to this Contract, 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 $18,000,000 as respects any one loss occurrence. B. Coverage B: As respects all other losses subject to this Contract, the Company shall retain and be liable for the first $10,000,000 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 $8,000,000 as respects any one loss occurrence, nor shall it exceed 95% of $8,000,000 in all during any one contract year. However, no claim shall be made under this Coverage B, for loss occurrences commencing during any one contract year, until the amount of ultimate net loss for which the Reinsurer would otherwise be liable under this Coverage exceeds 95.0% of $16,000,000 for that contract year. C. In no event shall the Reinsurer's liability for ultimate net loss, under Coverages A and B combined, exceed $18,000,000, as respects all loss occurrences commencing during any one contract year. D. As respects each coverage section provided under this Contract, the Company shall retain, in addition to its initial retention each loss occurrence, 5% of the excess ultimate net loss to which the coverage section applies. E. No claim shall be made under any coverage section provided 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 - Definitions A. "Ultimate net loss" as used herein is defined as the sum or sums (including any loss adjustment expense, as hereinafter defined) 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. "Loss adjustment expense" as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory reporting purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, legal expenses incurred in connection with coverage questions and legal actions related thereto, a pro rata share of salaries and expenses of the Company's field employees according to the time occupied in adjusting a subject loss and expenses of the Company's officials incurred in connection with the loss, but shall not include office expenses or salaries of the Company's officials. For purposes of this Contract, legal expenses incurred in connection with coverage questions and legal actions related thereto arising out of any one loss occurrence shall not exceed 25.0% of the contractual loss under all policies involved in the loss occurrence. Legal expenses incurred in connection with coverage questions and legal actions related thereto shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Article VII - 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 aggregate excess catastrophe reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article VIII - 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. The change in date to the year 2000, or any other date change, including leap year calculations, shall not in and of itself be regarded as an event. 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 above) 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. E. Losses arising from the date change to the year 2000, or any other date change, including leap year calculations, shall not in and of themselves be regarded as a "loss occurrence" for purposes of this Contract. Such losses shall include any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to: 1. The calculation, comparison, differentiation, sequencing or processing of data involving the date change to the year 2000, or any other date change, including leap year calculations, by any computer system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non- computer equipment, whether the property of the insured or not; or 2. Any change, alteration or modification involving the date change to the year 2000 or any other date change, including leap year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not. This paragraph applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost claim or expense. However, this paragraph shall not apply in respect of physical damage occurring at the insured's premises arising out of the perils covered under this Contract. None of the circumstances described in subparagraphs 1 and 2 above shall, in and of themselves, constitute an event for purposes of this Contract. Notwithstanding the foregoing, the costs and expenses whether preventative, remedial or otherwise, arising out of or relating to change, alteration or modification of any computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer or non-computer equipment, whether the property of the insured or not shall not be included in the definition of loss occurrence hereunder. Article IX - 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 X - 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 XI - Premium A. As premium for the reinsurance provided hereunder during each contract year, the Company shall pay the Reinsurer 0.66% of its net earned premium for the contract year. B. The Company shall pay the Reinsurer an annual minimum and deposit premium of $1,800,000 in four equal installments of $450,000 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 for the contract year, computed in accordance with paragraph A, and if the premium so computed is greater than the previously paid minimum and deposit premium, the balance shall be remitted by the Company with its report. 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. Article XII - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXV (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the 12-month United States Treasury Bill Rate, as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 business days after the proof of loss or demand for payment is transmitted to the Reinsurer or received by the Reinsurer, whichever is soonest. If such loss or claim payment is not received within the 10 days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment, in accordance with the provisions of Article X, was transmitted to the Reinsurer. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 business days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting a subscribing reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVI - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XVII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XVIII - Taxes (BRMA 50C) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America, the District of Columbia or Canada. Article XIX - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XX - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded United States outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for C(1) or C(3), or in the case of C(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXI - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (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 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, the two Arbiters shall request the American Arbitration Association to appoint the Umpire. If the American Arbitration Association fails to appoint the Umpire within 30 days after it has been requested to do so, either party may request a justice of a Court of general jurisdiction of the state in which the arbitration is to be held to appoint the Umpire. 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 a 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 Insurance Group Table of Contents Article Page Preamble 1 I Classes of Business Reinsured 1 II Term 2 III Territory 2 IV Exclusions 2 V Retention and Limit 5 VI Definitions 6 VII Other Reinsurance 6 VIII Loss Occurrence 6 IX Loss Notices and Settlements 8 X Salvage and Subrogation 9 XI Premium 9 XII Late Payments 10 XIII Offset (BRMA 36C) 11 XIV Access to Records (BRMA 1D) 11 XV Net Retained Lines (BRMA 32E) 11 XVI Errors and Omissions (BRMA 14F) 12 XVII Currency (BRMA 12A) 12 XVIII Taxes (BRMA 50C) 12 XIX Federal Excise Tax (BRMA 17A) 12 XX Unauthorized Reinsurers 13 XXI Insolvency 14 XXII Arbitration 15 XXIII Service of Suit (BRMA 49C) 16 XXIV Agency Agreement 16 XXV Intermediary (BRMA 23A) 17 Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Insurance Group Indianapolis, Indiana Reinsurers Participations Dorinco Reinsurance Company 5.0% Erie Insurance Exchange 2.0 The Nissan Fire & Marine Insurance Co., Ltd. 2.5 Odyssey Reinsurance Corporation 4.0 Renaissance Reinsurance, Ltd. 70.5 Shelter Reinsurance Company 10.0 SOREMA North America Reinsurance Company 6.0 Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Interests and Liabilities Agreement of Dorinco Reinsurance Company Midland, Michigan (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 5.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 2001, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Midland, Michigan,this _______ day of ___________________________ ___________199___. _____________________________________________________ Dorinco Reinsurance Company Interests and Liabilities Agreement of Erie Insurance Exchange Erie, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 2.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 2001, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Erie, Pennsylvania,this _______ day of __________________________ ____________ 199___. _____________________________________________________ Erie Insurance Exchange By: Erie Indemnity Company (Attorney-In-Fact) 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 Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 2.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 2001, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Tokyo, Japan,this _______ day of __________________________________________ 199___. _____________________________________________________ The Nissan Fire & Marine Insurance Co., Ltd. Interests and Liabilities Agreement of Odyssey Reinsurance Corporation Wilmington, Delaware (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 4.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 2001, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ Odyssey Reinsurance Corporation Interests and Liabilities Agreement of Renaissance Reinsurance, Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 70.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 2001, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of ___________________________ 199___. _____________________________________________________ Renaissance Reinsurance, Ltd. Interests and Liabilities Agreement of Shelter Reinsurance Company Columbia, Missouri (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 10.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 2001, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Columbia, Missouri,this _______ day of __________________________ ___________199___. _____________________________________________________ Shelter Reinsurance Company Interests and Liabilities Agreement of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Seventh Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 6.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 2001, both days inclusive. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ SOREMA North America Reinsurance Company EXHIBIT 10-53 Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Insurance Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Preamble The "Meridian Mutual Insurance Group" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Meridian Citizens Security Insurance Company, Red Wing, Minnesota, Meridian Citizens Mutual 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 Insurance 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, 1999, 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. 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. C. In the event this Contract is under termination notice and renewal negotiations for this Contract are not completed by January 1, 2000, the expiration date of this Contract may, at the Company's option, be extended to March 31, 2000. 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). 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. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: a. "Loss in excess of policy limits" shall mean any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. b. "Extra contractual obligations" shall mean any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, 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. 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 3.75% of net earned premium for the term of this Contract, subject to a minimum retention of $10,275,000. 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 the Company's ultimate net loss in excess of $1,000,000 arising out of any one loss occurrence, not to exceed $3,000,000 in any one loss occurrence. No loss occurrence shall be included in subject ultimate net loss unless said loss occurrence involves at least two risks. The Company shall be the sole judge of what constitutes "one risk." C. The Company shall maintain in force excess per risk reinsurance, recoveries under which shall inure to the benefit of this Contract. Article VI - Definitions A. "Ultimate net loss" as used herein is defined as the sum or sums (including any loss adjustment expense, as hereinafter defined) 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. "Loss adjustment expense" as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory reporting purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, legal expenses incurred in connection with coverage questions and legal actions related thereto, a pro rata share of salaries and expenses of the Company's field employees according to the time occupied in adjusting a subject loss and expenses of the Company's officials incurred in connection with the loss, but shall not include office expenses or salaries of the Company's officials. For purposes of this Contract, legal expenses incurred in connection with coverage questions and legal actions related thereto arising out of any one loss occurrence shall not exceed 25.0% of the contractual loss under all policies involved in the loss occurrence. Legal expenses incurred in connection with coverage questions and legal actions related thereto shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Article VII - 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. The change in date to the year 2000, or any other date change, including leap year calculations, shall not in and of itself be regarded as an event. 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 above) 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. E. Losses arising from the date change to the year 2000, or any other date change, including leap year calculations, shall not in and of themselves be regarded as a "loss occurrence" for purposes of this Contract. Such losses shall include any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to: 1. The calculation, comparison, differentiation, sequencing or processing of data involving the date change to the year 2000, or any other date change, including leap year calculations, by any computer system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non- computer equipment, whether the property of the insured or not; or 2. Any change, alteration or modification involving the date change to the year 2000 or any other date change, including leap year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not. This paragraph applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost claim or expense. However, this paragraph shall not apply in respect of physical damage occurring at the insured's premises arising out of the perils covered under this Contract. None of the circumstances described in subparagraphs 1 and 2 above shall, in and of themselves, constitute an event for purposes of this Contract. Notwithstanding the foregoing, the costs and expenses whether preventative, remedial or otherwise, arising out of or relating to change, alteration or modification of any computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer or non-computer equipment, whether the property of the insured or not shall not be included in the definition of loss occurrence hereunder. 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 3.75% 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 1.2% of its net earned premium for the term of this Contract, subject to a minimum premium of $3,300,000 (or $4,125,000 if this Contract is extended to 15 months as provided in paragraph C of Article II). B. The Company shall pay the Reinsurer a deposit premium of $3,300,000 in four equal installments of $825,000 on January 1, April 1, July 1 and October 1 of 1999. In the event this Contract is extended to 15 months as provided in paragraph C of Article II, the deposit premium shall be increased to $4,125,000, and the Company will pay an additional installment of $825,000 on January 1, 2000. 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 all classes of business issued by the Company, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. Article XI - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXIV (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the 12-month United States Treasury Bill Rate, as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 business days after the proof of loss or demand for payment is transmitted to the Reinsurer or received by the Reinsurer, whichever is soonest. If such loss or claim payment is not received with the 10 days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment, in accordance with the provisions of Article VIII, was transmitted to the Reinsurer. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 business days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting a subscribing reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article XII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIII - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XIV - Net Retained Lines (BRMA 32B) A. This Contract applies only to that portion of any policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XV - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XVI - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences), 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 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, the two Arbiters shall request the American Arbitration Association to appoint the Umpire. If the American Arbitration Association fails to appoint the Umpire within 30 days after it has been requested to do so, either party may request a justice of a Court of general jurisdiction of the state in which the arbitration is to be held to appoint the Umpire. 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 a 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 Insurance Group Table of Contents Article Page Preamble 1 I Classes of Business Reinsured 1 II Term 2 III Territory 2 IV Exclusions 2 V Retention and Limit 5 VI Definitions 5 VII Loss Occurrence 6 VIII Loss Notices and Settlements 8 IX Salvage and Subrogation 8 X Premium 9 XI Late Payments 9 XII Offset (BRMA 36C) 11 XIII Access to Records (BRMA 1D) 11 XIV Net Retained Lines (BRMA 32B) 11 XV Errors and Omissions (BRMA 14F) 11 XVI Currency (BRMA 12A) 11 XVII Taxes (BRMA 50C) 12 XVIII Federal Excise Tax (BRMA 17A) 12 XIX Unauthorized Reinsurers 12 XX Insolvency 14 XXI Arbitration 14 XXII Service of Suit (BRMA 49C) 15 XXIII Agency Agreement 16 XXIV Intermediary (BRMA 23A) 16 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, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 19.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Midland, Michigan,this _______ day of ___________________________ 199___. _____________________________________________________ Dorinco Reinsurance Company Interests and Liabilities Agreement of Erie Insurance Exchange Erie, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 2.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Erie, Pennsylvania,this _______ day of __________________________ ____________ 199___. _____________________________________________________ Erie Insurance Exchange By: Erie Indemnity Company (Attorney-In-Fact) Interests and Liabilities Agreement of Gerling Global Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 3.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ Gerling Global Reinsurance Corporation of America Interests and Liabilities Agreement of Odyssey Reinsurance Corporation Wilmington, Delaware (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 4.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ Odyssey Reinsurance Corporation 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, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 67.5% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of ___________________________ 199___. _____________________________________________________ Renaissance Reinsurance, Ltd. Interests and Liabilities Agreement of 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, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 2.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Tokyo, Japan,this _______ day of __________________________________________ 199___. _____________________________________________________ The Nissan Fire & Marine Insurance Co., Ltd. Interests and Liabilities Agreement of USF RE Insurance Company Boston, Massachusetts (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts a 2.0% share in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above. This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Costa Mesa, California,this _______ day of ______________________ 199___. _____________________________________________________ USF RE Insurance Company Underlying Aggregate Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Insurance Group Indianapolis, Indiana Reinsurers Participations Dorinco Reinsurance Company 19.0% Erie Insurance Exchange 2.0 Gerling Global Reinsurance Corporation of America 3.5 The Nissan Fire & Marine Insurance Co., Ltd. 2.0 Odyssey Reinsurance Corporation 4.0 Renaissance Reinsurance, Ltd. 67.5 USF RE Insurance Company 2.0 Total 100.0% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 EXHIBIT 10-54 Addendum No. 2 to the Sixth Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Group Indianapolis, Indiana It Is Hereby Agreed, effective January 1, 1999, that this Contract shall be amended as follows: 1. The name of the "Company" hereunder shall be amended to read "Meridian Mutual Insurance Group, Indianapolis, Indiana." 2. The Preamble shall be deleted and the following substituted therefor: "Preamble The `Meridian Mutual Insurance Group'" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Meridian Citizens Security Insurance Company, Red Wing, Minnesota, Meridian Citizens Mutual 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." 3. The following paragraph shall be added to and made part of Article II - Term: "D. In the event this Contract is under termination notice and renewal negotiations for this Contract are not completed by January 1, 2000, the expiration date of this Contract may, at the Company's option, be extended to March 31, 2000." It Is Further Agreed, effective January 1, 1999, with respect to losses arising out of loss occurrences commencing on or after that date, that this Contract shall be amended as follows: 1. Subparagraph 2(c) of Article V - Exclusions - shall be deleted from this Contract. 2. Paragraph C of Article VIII - Definitions (as added by Addendum No. 1) - shall be deleted and the following substituted therefor: "C. `Loss adjustment expense' as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory reporting purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, legal expenses incurred in connection with coverage questions and legal actions related thereto, a pro rata share of salaries and expenses of the Company's field employees according to the time occupied in adjusting a subject loss and expenses of the Company's officials incurred in connection with the loss, but shall not include office expenses or salaries of the Company's officials. For purposes of this Contract, legal expenses incurred in connection with coverage questions and legal actions related thereto arising out of any one loss occurrence shall not exceed 25.0% of the contractual loss under all policies involved in the loss occurrence. Legal expenses incurred in connection with coverage questions and legal actions related thereto shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy." 3. Article X - Loss Occurrence - shall be deleted and the following substituted therefor: "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. The change in date to the year 2000, or any other date change, including leap year calculations, shall not in and of itself be regarded as an event. 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 above) 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. C. Losses arising from the date change to the year 2000, or any other date change, including leap year calculations, shall not in and of themselves be regarded as a `loss occurrence' for purposes of this Contract. Such losses shall include any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to: 1. The calculation, comparison, differentiation, sequencing or processing of data involving the date change to the year 2000, or any other date change, including leap year calculations, by any computer system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not; or 2. Any change, alteration or modification involving the date change to the year 2000 or any other date change, including leap year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not. This paragraph applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost claim or expense. However, this paragraph shall not apply in respect of physical damage occurring at the insured's premises arising out of the perils covered under this Contract. None of the circumstances described in subparagraphs 1 and 2 above shall, in and of themselves, constitute an event for purposes of this Contract. Notwithstanding the foregoing, the costs and expenses whether preventative, remedial or otherwise, arising out of or relating to change, alteration or modification of any computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer or non-computer equipment, whether the property of the insured or not shall not be included in the definition of loss occurrence hereunder." It Is Also Agreed, effective January 1, 1999, that this Contract shall be amended as follows: 1. Paragraphs A and B of Article XIII - Premium (as amended by Addendum No. 1) - shall be deleted and the following substituted therefor: "A. As premium for the reinsurance provided hereunder for each contract year, the Company shall pay the Reinsurer .00782% of its Insurance In Force calculated on June 30 of each respective contract year, subject to an annual minimum premium of $432,000 (or $540,000 if the expiration date of this Contract is extended to March 31, 2000, as provided in paragraph D of Article II). B. The Company shall pay the Reinsurer a deposit premium of $540,000 for each contract year, payable in four equal installments of $135,000 on January 1, April 1, July 1 and October 1, of each contract year. In the event the term of this Contract is extended to March 31, 2000, as provided in paragraph D of Article II, the deposit premium shall be increased to $675,000, and the Company shall pay an additional installment of $135,000 on January 1, 2000." 2. The heading and paragraph A of Article XXIII - Arbitration - shall be deleted and the following substituted therefor: "Article XXIII - Arbitration 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, the two Arbiters shall request the American Arbitration Association to appoint the Umpire. If the American Arbitration Association fails to appoint the Umpire within 30 days after it has been requested to do so, either party may request a justice of a Court of general jurisdiction of the state in which the arbitration is to be held to appoint the Umpire." The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the Company by its duly authorized representative has executed this Addendum as of the date undermentioned at: Indianapolis, Indiana,this _______ day of _______________________ _____________ 199___. _____________________________________________________ Meridian Mutual Insurance Group Addendum No. 2 to the Interests and Liabilities Agreement of Munchener Ruckversicherungs-Gesellschaft Munich, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Sixth Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 2, as duly executed by the Company, as part of the Contract, effective January 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Munich, Germany,this ________ day of ____________________________ 199___. _____________________________________________________ Munchener Ruckversicherungs-Gesellschaft EXHIBIT 10-55 Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Insurance Group Indianapolis, Indiana (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Preamble The "Meridian Mutual Insurance Group" for purposes of this Contract shall consist of Meridian Mutual Insurance Company, Indianapolis, Indiana, Meridian Security Insurance Company, Indianapolis, Indiana, Meridian Citizens Security Insurance Company, Red Wing, Minnesota, Meridian Citizens Mutual 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 Insurance 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, 1999, 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. 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. C. In the event this Contract is under termination notice and renewal negotiations for this Contract are not completed by January 1, 2000, the expiration date of this Contract may, at the Company's option, be extended to March 31, 2000. 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). 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. 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, in addition to its initial retention for each loss occurrence, 5.0% of the excess ultimate net loss to which the excess layer applies. 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 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 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 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 A. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations and any loss adjustment expense, as hereinafter defined) 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. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 80% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. A loss in excess of policy limits shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. However, for purposes of this Contract, a loss in excess of policy limits arising out of any one loss occurrence shall not exceed 25% of the contractual loss under all policies involved in the loss occurrence. 2. "Extra contractual obligations" shall mean 80% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, 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. 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. However, for 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. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or 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. C. "Loss adjustment expense" as used herein shall mean expenses assignable to the investigation, appraisal, adjustment, settlement, litigation, defense and/or appeal of specific claims, regardless of how such expenses are classified for statutory reporting purposes. Loss adjustment expense shall include, but not be limited to, interest on judgments, expenses of outside adjusters, legal expenses incurred in connection with coverage questions and legal actions related thereto, a pro rata share of salaries and expenses of the Company's field employees according to the time occupied in adjusting a subject loss and expenses of the Company's officials incurred in connection with the loss, but shall not include office expenses or salaries of the Company's officials. For purposes of this Contract, legal expenses incurred in connection with coverage questions and legal actions related thereto arising out of any one loss occurrence shall not exceed 25.0% of the contractual loss under all policies involved in the loss occurrence. Legal expenses incurred in connection with coverage questions and legal actions related thereto shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. 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 aggregate excess catastrophe reinsurance, recoveries under which shall inure solely to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article 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. The change in date to the year 2000, or any other date change, including leap year calculations, shall not in and of itself be regarded as an event. 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 above) 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. E. Losses arising from the date change to the year 2000, or any other date change, including leap year calculations, shall not in and of themselves be regarded as a "loss occurrence" for purposes of this Contract. Such losses shall include any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to: 1. The calculation, comparison, differentiation, sequencing or processing of data involving the date change to the year 2000, or any other date change, including leap year calculations, by any computer system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non- computer equipment, whether the property of the insured or not; or 2. Any change, alteration or modification involving the date change to the year 2000 or any other date change, including leap year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not. This paragraph applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost claim or expense. However, this paragraph shall not apply in respect of physical damage occurring at the insured's premises arising out of the perils covered under this Contract. None of the circumstances described in subparagraphs 1 and 2 above shall, in and of themselves, constitute an event for purposes of this Contract. Notwithstanding the foregoing, the costs and expenses whether preventative, remedial or otherwise, arising out of or relating to change, alteration or modification of any computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer or non-computer equipment, whether the property of the insured or not shall not be included in the definition of loss occurrence hereunder. 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, unless the term of this Contract is extended to 15 months in accordance with paragraph C of Article II, in which event the "15-Month Minimum Premium" for that excess layer shall apply; or 2. The percentage, shown as "Premium Rate" for that excess layer in Schedule A attached hereto, of the Company's net earned premium for the term of this Contract. B. The Company shall pay the Reinsurer an annual deposit premium for each excess layer of an amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto, in four equal installments of an amount, shown as "Quarterly Deposit Premium" for that excess layer in Schedule A attached hereto, on January 1, April 1, July 1 and October 1 of 1999. C. Notwithstanding the provisions of paragraph B above, if the term of this Contract is extended to 15 months in accordance with paragraph C of Article II, the Company shall pay the Reinsurer a 15-month deposit premium for each excess layer of the amount, shown as "15-Month Deposit Premium" for that excess layer in Schedule A attached hereto, in five equal installments of the amount, shown as "Quarterly Deposit Premium" for that excess layer in Schedule A attached hereto, on January 1, April 1, July 1 and October 1 of 1999 and December 1, 2000. D. 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. E. "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 - Late Payments A. The provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXVI (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365ths of the 12-month United States Treasury Bill Rate, as quoted in The Wall Street Journal on the first business day of the month for which the calculation is made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 30 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. Any claim or loss payment due the Company hereunder shall be deemed due 10 business days after the proof of loss or demand for payment is transmitted to the Reinsurer or received by the Reinsurer, whichever is soonest. If such loss or claim payment is not received within the 10 days, interest will accrue on the payment or amount overdue in accordance with paragraph B above, from the date the proof of loss or demand for payment, in accordance with the provisions of Article X, was transmitted to the Reinsurer. 3. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraphs 1 and 2 of paragraph C above, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 10 business days following transmittal of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting a subscribing reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit, or prohibiting either party from contesting the validity of any payment or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. 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 United States outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) 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 (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences), 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 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 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, the two Arbiters shall request the American Arbitration Association to appoint the Umpire. If the American Arbitration Association fails to appoint the Umpire within 30 days after it has been requested to do so, either party may request a justice of a Court of general jurisdiction of the state in which the arbitration is to be held to appoint the Umpire. 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 a 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 Insurance Group Schedule A Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Insurance 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 Occurrence Limit (95.0% of) $4,000,000 $8,000,000 $12,000,000 $35,000,000 Reinsurer's Annual Limit (95.0% of)$8,000,000 $16,000,000 $24,000,000 $70,000,000 Annual Minimum Premium $638,400 $364,000 $328,000 $599,200 15-Month Minimum Premium $798,000 $455,000 $410,000 $749,000 Premium Rate 0.7740% 0.4422% 0.3976% 0.7264% Annual Deposit Premium $798,000 $455,000 $410,000 $749,000 Quarterly Deposit Premium $199,500 $113,750 $102,500 $187,250 15-Month Deposit Premium $997,500 $568,750 $512,500 $936,250 The figures listed above for each excess layer shall apply to each Subscribing Reinsurer in the percentage share for that excess layer as expressed in its Interests and Liabilities Agreement attached hereto. Table of Contents Article Page Preamble 1 I Classes of Business Reinsured 1 II Term 2 III Territory 2 IV Exclusions 2 V Retention and Limit 4 VI Reinstatement 5 VII Definitions 6 VIII Other Reinsurance 7 IX Loss Occurrence 7 X Loss Notices and Settlements 9 XI Salvage and Subrogation 10 XII Premium 10 XIII Late Payments 11 XIV Offset (BRMA 36C) 12 XV Access to Records (BRMA 1D) 13 XVI Net Retained Lines (BRMA 32E) 13 XVII Errors and Omissions (BRMA 14F) 13 XVIII Currency (BRMA 12A) 13 XIX Taxes (BRMA 50C) 13 XX Federal Excise Tax (BRMA 17A) 14 XXI Unauthorized Reinsurers 14 XXII Insolvency 16 XXIII Arbitration 16 XXIV Service of Suit (BRMA 49C) 17 XXV Agency Agreement 18 XXVI Intermediary (BRMA 23A) 18 Schedule A Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to Meridian Mutual Insurance Group Indianapolis, Indiana Second Excess Catastrophe Reinsurance Reinsurers Participations Dorinco Reinsurance Company 10.00% Erie Insurance Exchange 2.00 Farm Family Casualty Insurance Company 1.50 Gerling Global Reinsurance Corporation of America 1.00 Insurance Corporation of Hannover, An Illinois Corporation 3.50 Nationwide Mutual Insurance Company 2.50 Odyssey Reinsurance Corporation 5.00 Renaissance Reinsurance, Ltd. 10.00 Shelter Reinsurance Company 1.00 Sumitomo Marine Re Management, Ltd. (for The Sumitomo Marine & Fire Insurance Co., Ltd., U.S. Branch) 2.00 USF RE Insurance Company 3.00 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 7.50 Reinsurance Australia Corporation Limited 5.00 Through Swire Blanch Europe Bayerische Ruckversicherung A.G. 6.00 La Mutuelle Du Mans Assurances I.A.R.D. 2.50 Mapfre Re Compania de Reaseguros, S.A. 2.00 R & V Versicherung A.G. 1.00 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 7.00 Through Swire Blanch Ltd. Lloyd's Underwriters Per Signing Schedule 27.50 Total 100.00% Third Excess Catastrophe Reinsurance Reinsurers Participations AXA Reinsurance Company 5.00% Employers Mutual Casualty Company 2.00 Erie Insurance Exchange 2.00 F&G Re, Inc. (for St. Paul Fire and Marine Insurance Company) 10.00 Farm Family Casualty Insurance Company 2.50 Farmers Mutual Hail Insurance Company of Iowa 1.50 Gerling Global Reinsurance Corporation of America 4.00 Insurance Corporation of Hannover, An Illinois Corporation 2.50 LaSalle Re Limited 17.50 Nationwide Mutual Insurance Company 4.00 Odyssey Reinsurance Corporation 4.00 Republic Western Insurance Company 1.00 Shelter Reinsurance Company 1.00 USF RE Insurance Company 2.00 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 7.50 Through Swire Blanch Europe Helvetia Swiss Insurance Company, Ltd. 1.00 La Mutuelle Du Mans Assurances I.A.R.D. 4.00 Mapfre Re Compania de Reaseguros, S.A. 3.00 R & V Versicherung A.G. 2.00 SPS Reassurance 2.50 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 7.00 Through Swire Blanch Ltd. Lloyd's Underwriters Per Signing Schedule 14.00 Total 100.00% Fourth Excess Catastrophe Reinsurance Reinsurers Participations AXA Reinsurance Company 3.00% Continental Casualty Company 2.00 Dorinco Reinsurance Company 6.00 Employers Mutual Casualty Company .60 Erie Insurance Exchange 1.50 F&G Re, Inc. (for St. Paul Fire and Marine Insurance Company) 10.00 Gerling Global Reinsurance Corporation of America 5.00 LaSalle Re Limited 11.00 Nationwide Mutual Insurance Company 3.00 Odyssey Reinsurance Corporation 3.00 Shelter Reinsurance Company 1.00 SOREMA North America Reinsurance Company 16.00 Sumitomo Marine Re Management, Ltd. (for The Sumitomo Marine & Fire Insurance Co., Ltd., U.S. Branch) 1.00 United Fire & Casualty Company .75 Through Swire Blanch - Australia GIO Insurance Ltd. (trading as GIO Reinsurance) 4.25 Reinsurance Australia Corporation Limited 5.00 Through Swire Blanch Europe La Mutuelle Du Mans Assurances I.A.R.D. 2.50 Mapfre Re Compania de Reaseguros, S.A. 2.00 R & V Versicherung A.G. .50 SPS Reassurance 1.50 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 5.00 Through Swire Blanch Ltd. Lloyd's Underwriters Per Signing Schedule 15.40 Total 100.00% Fifth Excess Catastrophe Reinsurance Reinsurers Participations AXA Reinsurance Company 3.00% Continental Casualty Company 4.00 Employers Mutual Casualty Company 1.00 Erie Insurance Exchange 2.00 F&G Re, Inc. (for St. Paul Fire and Marine Insurance Company) 10.00 Farm Family Casualty Insurance Company 1.00 Farmers Mutual Hail Insurance Company of Iowa .35 Gerling Global Reinsurance Corporation of America 3.00 LaSalle Re Limited 4.50 Lehman Re Ltd. 3.00 Nationwide Mutual Insurance Company 2.50 Odyssey Reinsurance Corporation 3.15 Shelter Reinsurance Company 1.00 SOREMA North America Reinsurance Company 7.50 United Fire & Casualty Company .50 USF RE Insurance Company 1.00 Through Swire Blanch - Australia Reinsurance Australia Corporation Limited 2.00 Through Swire Blanch Europe Albingia Versicherungs AG 1.50 Bayerische Ruckversicherung A.G. 2.25 La Mutuelle Du Mans Assurances I.A.R.D. 5.00 Mapfre Re Compania de Reaseguros, S.A. 3.00 R & V Versicherung A.G. 1.00 Sirius International Insurance Corporation .50 Walbaum International for SOREMA North America Reinsurance Company (as the fronting company for P.R.A.M. subscriptions) 4.00 Through Swire Blanch Ltd. Lloyd's Underwriters Per Signing Schedule 33.25 Total 100.00% E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 Interests and Liabilities Agreement of AXA Reinsurance Company Wilmington, Delaware (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 5.00% of the Third Excess Catastrophe Reinsurance 3.00% of the Fourth Excess Catastrophe Reinsurance 3.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ AXA Reinsurance Company Interests and Liabilities Agreement of Continental Casualty Company Chicago, Illinois (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 2.00% of the Fourth Excess Catastrophe Reinsurance 4.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Chicago, Illinois,this _______ day of ___________________________ 199___. _____________________________________________________ Continental Casualty Company Interests and Liabilities Agreement of Dorinco Reinsurance Company Midland, Michigan (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 10.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 6.00% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Midland, Michigan,this _______ day of ___________________________ 199___. _____________________________________________________ Dorinco Reinsurance Company Interests and Liabilities Agreement of Employers Mutual Casualty Company Des Moines, Iowa (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 0.60% of the Fourth Excess Catastrophe Reinsurance 1.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Des Moines, Iowa,this _______ day of ______________________________________ 199___. _____________________________________________________ Employers Mutual Casualty Company Interests and Liabilities Agreement of Erie Insurance Exchange Erie, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 2.00% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance 2.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Erie, Pennsylvania,this _______ day of __________________________ ____________ 199___. _____________________________________________________ Erie Insurance Exchange By: Erie Indemnity Company (Attorney-In-Fact) Interests and Liabilities Agreement of St. Paul Fire and Marine Insurance Company St. Paul, Minnesota (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 10.00% of the Third Excess Catastrophe Reinsurance 10.00% of the Fourth Excess Catastrophe Reinsurance 10.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Morristown, New Jersey,this __________ day of ___________________ ___________ 199___. _____________________________________________________ St. Paul Fire and Marine Insurance Company By F&G Re, Inc. Interests and Liabilities Agreement of Farm Family Casualty Insurance Company Glenmont, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.50% of the Second Excess Catastrophe Reinsurance 2.50% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 1.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Glenmont, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ Farm Family Casualty Insurance Company Interests and Liabilities Agreement of Farmers Mutual Hail Insurance Company of Iowa Des Moines, Iowa (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 1.50% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0.35% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Des Moines, Iowa,this _______ day of ______________________________________ 199___. _____________________________________________________ Farmers Mutual Hail Insurance Company of Iowa Interests and Liabilities Agreement of Gerling Global Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.00% of the Second Excess Catastrophe Reinsurance 4.00% of the Third Excess Catastrophe Reinsurance 5.00% of the Fourth Excess Catastrophe Reinsurance 3.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ Gerling Global Reinsurance Corporation of America Interests and Liabilities Agreement of Insurance Corporation of Hannover An Illinois Corporation (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 3.50% of the Second Excess Catastrophe Reinsurance 2.50% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Los Angeles, California,this _______ day of _____________________ 199___. _____________________________________________________ Insurance Corporation of Hannover, An Illinois Corporation Interests and Liabilities Agreement of LaSalle Re Limited Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 17.50% of the Third Excess Catastrophe Reinsurance 11.00% of the Fourth Excess Catastrophe Reinsurance 4.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of ___________________________ 199___. _____________________________________________________ LaSalle Re Limited Interests and Liabilities Agreement of Lehman Re Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 3.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of ___________________________ 199___. _____________________________________________________ Lehman Re Ltd. Interests and Liabilities Agreement of Nationwide Mutual Insurance Company Columbus, Ohio (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 2.50% of the Second Excess Catastrophe Reinsurance 4.00% of the Third Excess Catastrophe Reinsurance 3.00% of the Fourth Excess Catastrophe Reinsurance 2.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Columbus, Ohio,this _______ day of ______________________________ 199___. _____________________________________________________ Nationwide Mutual Insurance Company Interests and Liabilities Agreement of Odyssey Reinsurance Corporation Wilmington, Delaware (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 5.00% of the Second Excess Catastrophe Reinsurance 4.00% of the Third Excess Catastrophe Reinsurance 3.00% of the Fourth Excess Catastrophe Reinsurance 3.15% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ Odyssey Reinsurance Corporation Interests and Liabilities Agreement of Renaissance Reinsurance, Ltd. Hamilton, Bermuda (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 10.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamilton, Bermuda,this _______ day of ___________________________ 199___. _____________________________________________________ Renaissance Reinsurance, Ltd. Interests and Liabilities Agreement of Republic Western Insurance Company Phoenix, Arizona (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 1.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Phoenix, Arizona,this _______ day of ____________________________ 199___. _____________________________________________________ Republic Western Insurance Company Interests and Liabilities Agreement of Shelter Reinsurance Company Columbia, Missouri (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.00% of the Second Excess Catastrophe Reinsurance 1.00% of the Third Excess Catastrophe Reinsurance 1.00% of the Fourth Excess Catastrophe Reinsurance 1.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Columbia, Missouri,this _______ day of __________________________ 199___. _____________________________________________________ Shelter Reinsurance Company Interests and Liabilities Agreement of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 16.00% of the Fourth Excess Catastrophe Reinsurance 7.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ SOREMA North America Reinsurance Company Interests and Liabilities Agreement of The Sumitomo Marine & Fire Insurance Co., Ltd. (U.S. Branch) New York, New York through Sumitomo Marine Re Management, Inc. New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 2.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 1.00% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Warren, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ The Sumitomo Marine & Fire Insurance Co., Ltd. (U.S. Branch) By: Sumitomo Marine Re Management, Inc. Interests and Liabilities Agreement of United Fire & Casualty Company Cedar Rapids, Iowa (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0.75% of the Fourth Excess Catastrophe Reinsurance 0.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Cedar Rapids, Iowa,this _______ day of __________________________ 199___. _____________________________________________________ United Fire & Casualty Company Interests and Liabilities Agreement of USF RE Insurance Company Boston, Massachusetts (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 3.00% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 1.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Costa Mesa, California,this _______ day of ______________________ 199___. _____________________________________________________ USF RE Insurance Company Interests and Liabilities Agreement of GIO Insurance Ltd. trading as GIO Reinsurance Sydney, Australia (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 7.50% of the Second Excess Catastrophe Reinsurance 7.50% of the Third Excess Catastrophe Reinsurance 4.25% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Sydney, Australia,this _______ day of ___________________________ 199___. _____________________________________________________ GIO Insurance Ltd. trading as GIO Reinsurance Interests and Liabilities Agreement of Reinsurance Australia Corporation Limited Sydney, Australia (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 5.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 5.00% of the Fourth Excess Catastrophe Reinsurance 2.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Sydney, Australia,this _______ day of ___________________________ 199___. _____________________________________________________ Reinsurance Australia Corporation Limited Interests and Liabilities Agreement of Albingia Versicherungs AG Hamburg, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 1.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Hamburg, Germany,this _______ day of _____________________________________ 199___. _____________________________________________________ Albingia Versicherungs AG Interests and Liabilities Agreement of Bayerische Ruckversicherung A.G. Munich, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 6.00% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 2.25% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Munich, Germany,this _______ day of ______________________________________ 199___. _____________________________________________________ Bayerische Ruckversicherung A.G. Interests and Liabilities Agreement of Helvetia Swiss Insurance Company, Ltd. St. Gallen, Switzerland (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 1.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: St. Gallen, Switzerland,this _______ day of _____________________ 199___. _____________________________________________________ Helvetia Swiss Insurance Company, Ltd. Interests and Liabilities Agreement of La Mutuelle Du Mans Assurances I.A.R.D. LeMans, France (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 2.50% of the Second Excess Catastrophe Reinsurance 4.00% of the Third Excess Catastrophe Reinsurance 2.50% of the Fourth Excess Catastrophe Reinsurance 5.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: LeMans, France,this _______ day of ______________________________ 199___. _____________________________________________________ La Mutuelle Du Mans Assurances I.A.R.D. Interests and Liabilities Agreement of Mapfre Re Compania de Reaseguros, S.A Madrid, Spain (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 2.00% of the Second Excess Catastrophe Reinsurance 3.00% of the Third Excess Catastrophe Reinsurance 2.00% of the Fourth Excess Catastrophe Reinsurance 3.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Madrid, Spain,this _______ day of _________________________________________ 199___. _____________________________________________________ Mapfre Re Compania de Reaseguros, S.A. Interests and Liabilities Agreement of R & V Versicherung A.G. Wiesbaden, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 1.00% of the Second Excess Catastrophe Reinsurance 2.00% of the Third Excess Catastrophe Reinsurance 0.50% of the Fourth Excess Catastrophe Reinsurance 1.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Wiesbaden, Germany,this _______ day of ___________________________________ 199___. _____________________________________________________ R & V Versicherung AG Interests and Liabilities Agreement of Sirius International Insurance Corporation Stockholm, Sweden (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 0% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance 0.50% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Stockholm, Sweden,this _______ day of ___________________________ 199___. _____________________________________________________ Sirius International Insurance Corporation Interests and Liabilities Agreement of SPS Reassurance Paris, France (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 0% of the Second Excess Catastrophe Reinsurance 2.50% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance 0% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: Paris, France,this _______ day of _______________________________ 199___. _____________________________________________________ SPS Reassurance Interests and Liabilities Agreement of SOREMA North America Reinsurance Company New York, New York as the fronting company for P.R.A.M. subscriptions (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 7.00% of the Second Excess Catastrophe Reinsurance 7.00% of the Third Excess Catastrophe Reinsurance 5.00% of the Fourth Excess Catastrophe Reinsurance 4.00% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at: New York, New York,this _______ day of ___________________________________ 199___. _____________________________________________________ SOREMA North America Reinsurance Company for and on behalf of P.R.A.M. ____________________________________ Interests and Liabilities Agreement of Certain Underwriting Members of Lloyd's shown in the Signing Schedule attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: January 1, 1999 issued to and duly executed by Meridian Mutual Insurance Group Indianapolis, Indiana The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above: 27.50% of the Second Excess Catastrophe Reinsurance 14.00% of the Third Excess Catastrophe Reinsurance 15.40% of the Fourth Excess Catastrophe Reinsurance 33.25% of the Fifth Excess Catastrophe Reinsurance This Agreement shall become effective on January 1, 1999, and shall continue in force until December 31, 1999, both days inclusive, unless this Agreement is extended to March 31, 2000, upon notice from the Company, in accordance with the provisions of the attached Contract. The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers. In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes & Mount, 750 Seventh Avenue, New York, New York 10019. Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto. EXHIBIT 10-65 MERIDIAN CITIZENS MUTUAL MERIDIAN CITIZENS SECURITY AGENCY PROFIT-SHARING AGREEMENT The Company 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 Company 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 the current Profit Sharing Year unless the Agency's annually written premiums are a minimum of: $75,000 as of the end of the current calendar year otherwise this plan will be inoperative if this minimum is not met based on Company production statements. The provisions of this plan do not pertain to premium production written through Meridian Mutual Insurance Company and/or Meridian Security Insurance Company. 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 Agency 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 * 100) % D. Gross Profit Percentage (50% - C) % E. Gross Profit (D * A) $ F. Base Profit Share Due Agency (___% E)$ G. Profit Share Due Agency $ II. FORMULA DEFINITIONS A. "Annual Written Premiums" are defined as gross premiums less credits for premiums on cancellations and returns written by Agency 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 the 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 percent, no further calculation will be made. D. Gross Profit Percentage is calculated by subtracting the Incurred Loss Percentage from 50 percent. 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 - 74,999 0% 75,000 - 125,000 10.0% 125,001 - 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 Agency 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 $75,000 to $250,000 A. Growth Bonus 1. The Company agrees to pay 1.25 times the dollar amount shown in Section I. F when the policy count as of December 31 is in excess of 1.149 percent of the policy count as of January 1 of the current year as shown in the Company's Agency Statement. 2. The Company agrees to pay .75 times the dollar amount shown in Section I. F when the policy count as of December 31 is less than .949 percent of the policy count as of January 1 of the current year as shown in the Company's 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. The Company 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 December 31 to the policy count of January 1 of the current year as shown in the Company's 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. The Company 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 December 31 divided by the same policies in force as of January 1 of the current year are: Retention Current Retention Bonus Points Percentage 80.0% - 90.99% +2% 91.0% - 100.00% +3% C. Loss Ratio Bonus 1. The Company 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 Company 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 the Company's 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 Company's check. B. The Company's 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 percent. 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 Company to the Agency owner shown on the Company's 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. Except as provided in this Section E, neither this plan nor any rights hereunder shall be assignable. F. This Plan supersedes all additional commission, bonus commission, growth opportunity bonus, contingent or profit sharing agreements of any kind, and any such previous agreements are terminated. G. 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. H. 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 Agency'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 Agency. In witness whereof, Agency 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 Citizens Mutual Insurance Company _____Meridian Citizens Security Insurance Company Meridian Citizens Mutual Insurance Company and Meridian Citizens Security Insurance Company _____Jointly Herein referred to as "Company." By_______________________ Title____________________ EX-21 5 EXHIBIT 21-01 MERIDIAN INSURANCE GROUP, INC. Listing of Subsidiaries As of December 31, 1998 State of Incorporation Name of Subsidiary or Organization Meridian Security Insurance Company Indiana Meridian Citizens Security Insurance Company Minnesota Insurance Company of Ohio Ohio Meridian Service Corporation Indiana EX-23 6 EXHIBIT 23-01 CONSENT OF INDEPENDENT ACCOUNTANTS March 26, 1999 We consent to the incorporation by reference in Registration No. 33-69313 on Form S-8 effective December 18, 1998; in Registration No. 33-10943 on Form S-8 effective August 28, 1996; in Registration Statement No. 33-31003 on Form S-8 as amended by Post-Effective Amendment No. 1 effective July 31, 1997; in Registration Statement No. 33-42771 on Form S-8 effective December 18, 1997; in Registration Statement No. 33-11413 on Form S-1 as amended by Post-Effective Amendment No. 1 effective March 19, 1987; and in Registration Statement No. 33-58406 on Form S-2 effective April 27, 1993 of Meridian Insurance Group, Inc. of our report, dated February 24, 1999, on our audits of the consolidated financial statements and financial statement schedules of Meridian Insurance Group, Inc. as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in the Annual Report on Form 10-K. PricewaterhouseCoopers LLP EX-27 7
7 1,000 YEAR DEC-31-1998 DEC-31-1998 241,994 0 6,431 64,021 0 0 313,822 855 41,804 17,672 408,858 154,253 81,223 0 0 10,125 0 0 41,059 100,910 408,858 189,188 17,246 7,342 (59) 136,620 42,918 17,359 16,821 4,670 12,151 0 0 0 12,151 1.67 1.65 169,801 145,328 (8,708) 93,790 51,307 154,253 (8,708)
EX-27 8
7 1,000 YEAR DEC-31-1997 DEC-31-1997 248,404 0 3,996 54,379 700 0 308,427 1,188 48,850 17,652 413,586 169,801 82,839 0 0 11,375 0 0 41,802 90,092 413,586 194,587 16,372 4,478 1,042 149,219 42,894 17,238 7,128 207 6,921 0 0 0 6,921 .94 .93 161,309 165,577 (16,358) 97,448 50,332 169,801 (16,358)
EX-27 9
7 1,000 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 .78 .77 123,577 137,817 (7,716) 93,199 30,470 163,309 (7,716)
EX-27 10
7 1,000 9-MOS DEC-31-1998 SEP-30-1998 240,952 0 5,121 54,344 0 0 301,815 3,605 50,441 17,999 410,082 165,908 83,111 0 0 10,500 0 0 42,028 94,288 410,082 142,408 12,834 5,501 68 104,811 32,148 13,208 10,644 2,692 7,952 0 0 0 7,952 1.09 1.08 169,801 106,251 (1,440) 68,122 41,883 165,908 (1,440)
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