-----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, R4MkIQIeOn1nwRDLUO+TCBq+fRBcbLla/oy9hiaIYMvpG8krENEcQp4X6PIN3Bzm p59GyxJBzGIG1OKkZDMDVg== 0000950152-00-002592.txt : 20000403 0000950152-00-002592.hdr.sgml : 20000403 ACCESSION NUMBER: 0000950152-00-002592 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCHANTS GROUP INC CENTRAL INDEX KEY: 0000803027 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 161280763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-09640 FILM NUMBER: 589753 BUSINESS ADDRESS: STREET 1: 250 MAIN ST CITY: BUFFALO STATE: NY ZIP: 14202 BUSINESS PHONE: 7168493333 MAIL ADDRESS: STREET 1: 250 MAIN ST CITY: BUFFALO STATE: NY ZIP: 14202 10-K405/A 1 MERCHANT'S GROUP, INC. 10-K405/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-9640 MERCHANTS GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 16-1280763 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 250 MAIN STREET, BUFFALO, NEW YORK 14202 (Address of principal executive offices) (Zip Code) 716-849-3333 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class - COMMON STOCK, $.01 PAR VALUE PER SHARE Name of each exchange on which registered - AMERICAN STOCK EXCHANGE, INC. Securities registered pursuant to Section 12 (g) of the Act: NONE 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] As of February 29, 2000, 2,543,452 shares of common stock were outstanding. The aggregate market value of the common shares held by non-affiliates of Merchants Group, Inc. on February 29, 2000 was $47,054,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the 2000 Annual Meeting of stockholders are incorporated by reference into Part III. 2 MERCHANTS GROUP, INC. ANNUAL REPORT ON FORM 10-K DECEMBER 31, 2000
PART I PAGE # ------ ------ ITEM 1. BUSINESS. 3 ITEM 2. PROPERTIES. 19 ITEM 3. LEGAL PROCEEDINGS. 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 20 STOCKHOLDER MATTERS. ITEM 6. SELECTED FINANCIAL DATA. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 23 CONDITION AND RESULTS OF OPERATIONS. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 29 ABOUT MARKET RISK. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 31 ACCOUNTING AND FINANCIAL DISCLOSURE. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 32 ITEM 11. EXECUTIVE COMPENSATION. 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 32 AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 32 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 33 REPORTS ON FORM 8-K.
2 3 PART I Item 1. BUSINESS. General - ------- Merchants Group, Inc. (the "Company") was incorporated in August 1986 as a Delaware holding company which, through its wholly owned subsidiary Merchants Insurance Company of New Hampshire, Inc. ("MNH"), offers property and casualty insurance to preferred risk individuals and small to medium sized businesses in the northeastern United States. Administration - -------------- The Company and MNH operate and manage their business in conjunction with Merchants Mutual Insurance Company ("Mutual"), a New York domiciled mutual property and casualty insurance company, under a management agreement (the "Management Agreement"). Mutual owns 10.0% of the Company's issued and outstanding common stock. The Company and MNH do not have any operating assets and have no employees. Under the Management Agreement, Mutual provides the Company and MNH with the facilities, management and personnel required to operate their day-to-day business. All costs incurred by Mutual with respect to underwriting expenses are shared pro rata between Mutual and MNH based upon their annual direct premiums written, and unallocated loss adjustment expenses are allocated on the basis of the number of claims outstanding each month that are attributable to each company. All of Mutual's and MNH's investment expenses are shared pro rata based upon the average book value of the invested assets of each company. MNH also pays Mutual an annual management fee of $50,000. The Management Agreement requires that the Company and MNH pay Mutual 110% of Mutual's costs of providing them with non-insurance related services, and that the Company pay Mutual an annual fee of one half of one percent (.5%) of the average book value of the Company's invested assets exclusive of the Company's shares of MNH. Since the inception of the Management Agreement, Mutual has not provided the Company or MNH with any non-insurance related services. The Management Agreement has certain features that are intended to prevent conflicts of interest or to deal with them on an equitable basis should they occur. Generally, business opportunities which are presented to the common officers or employees of the companies must be presented to each company's Board of Directors and approved and determined to be fair to each company in the transaction by a majority of the directors of each company who are not affiliated with any other company in the transaction. Any amendment to or modification of the Management Agreement must be approved by the New York Insurance Department (the "Department"). The Management Agreement provides that it may be terminated by any party to the agreement upon five years written notice. On July 23, 1998, the Company gave notice of its intention to terminate the Management Agreement to Mutual. Mutual and MNH have jointly developed and paid for all accounting, computer and insurance marketing systems used in their businesses. Upon termination of the Management Agreement, each company will have the right, at no cost, to obtain copies of all these systems, together with the right to use these systems in perpetuity. 3 4 Marketing - --------- The Company markets its products through approximately 684 independent agents, which also represent Mutual. The Company's primary marketing efforts are directed to those independent agents that are dedicated to providing superior service to their customers. The Company believes the opportunity for growth exists through further penetration of agencies that are strategically aligned with the Company's commitment to growth in its targeted markets. The Company believes that as a regional insurance company it has certain advantages, including a closer relationship with its agents and a better knowledge of its operating territories, that enable it to compete effectively against larger regional and national carriers. The Company believes it distinguishes itself from its competitors by providing its agents and policyholders with superior service and ease of doing business, products that target certain segments of the commercial and personal insurance markets, and an agents' compensation program which, in addition to standard commission rates, provides agents with a profit sharing plan. The Company services its agents from five Strategic Business Centers and from its home office in Buffalo, New York. The Strategic Business Centers are located in the Company's operating territories and focus primarily on policy sales and underwriting. The manager of a Strategic Business Center appoints new agents, agrees upon annual unit sales and premium objectives with the principal of the agency, and ensures that the principal of the agency communicates these objectives to the agency's sales staff. Strategic Business Center managers and Territorial Managers, or "TM's," develop customized business plans for each agent, which identify the opportunities to increase business and the actions required to achieve the objectives agreed to by the agent and the Company. TM's meet with targeted agents' sales staff on a frequent basis to underwrite the Company's renewal policies, as well as to solicit policies new to the agent and/or to the Company. TM's are equipped with electronic technology to provide prompt and efficient pricing and communication and can provide quotes for all lines of business at the agents' offices. The Company believes personal contact between TM's, who have underwriting authority, and an agent's sales staff provides the Company with a competitive advantage compared to many other property and casualty insurers, whose field representatives have limited or no underwriting authority. By placing an underwriting decision maker in the agent's office, and thereby simplifying the underwriting process, the Company believes it can maintain and improve the retention rate on its renewal policies, as well as attract new policies. Each Strategic Business Center has an Agents' Advisory Council that meets at least twice a year. The Advisory Councils provide a forum for the Company and its agents to discuss issues of mutual interest, and to assure that the agents' business needs are being met. Additionally, the Chairpersons of the Advisory Councils from each Strategic Business Center meet twice each year with senior officers of MNH. In addition to standard commissions paid as a percentage of premiums written, the Company's agents are eligible to participate in the Agents' Profit Sharing Plan. This plan rewards agents based on premiums written and the loss and allocated loss adjustment expense ("LAE") ratio on business placed by the agent with the Company. Payments under the Agents' Profit Sharing Plan for 1999 totaled $2,375,000, or 2.4% of total direct premiums written. The Company believes the terms of its 4 5 Agents' Profit Sharing Plan encourage its agents to increase the volume of profitable business they place with the Company. Unlike many of its competitors, the Company pays the same commission rate on policies billed directly to the insured by the Company and on policies billed to the agent and, in turn, re-billed to the insured by the agent. By offering to bill the insured directly for both personal and commercial policies, the Company helps its agents minimize their administrative costs without a reduction in commission income. Approximately 90% of the voluntary premiums written by the Company in 1999 were billed directly to policyholders. In order to assist its independent agents to compete more effectively with insurance companies that have direct sales forces, and to strengthen its relationship with those agents, the Company provides advanced automation services. In 1999, the Company introduced the Merchants MerLink(TM) system. MerLink(TM) enables independent agents to submit policies to Merchants over the Internet using their existing business computer and software, and to have these submissions automatically update the Company's insurance policy processing system. The benefits to agents are simplified client management, more time available for sales activities, and fewer errors. Currently, the Company is using MerLink(TM) for policy transactions with approximately 82 agents for private passenger automobile and homeowners' policies. The Company plans to offer MerLink(TM) capability for commercial lines insurance policies during the first half of 2000. The Company believes that developing automation capabilities to facilitate the sharing of information with its agents will improve its competitive position compared to other property and casualty insurers that do not have such capabilities. Insurance Underwriting - ---------------------- The Company is licensed to issue insurance policies in 13 states, primarily in the northeastern United States. In 1999, net premiums written totaled $94,470,000, with 58% of the net premiums written derived from commercial lines of insurance and 42% from personal lines of insurance. The following table sets forth the distribution of the Company's direct premiums written by state for the years indicated:
Years Ended December 31, ------------------------ 1997 1998 1999 ---- ---- ---- New York 66% 65% 64% New Jersey 15 18 19 New Hampshire 10 9 8 Rhode Island 3 3 4 Pennsylvania 2 2 2 Massachusetts 2 2 2 Other 2 1 1 --- --- --- Total 100% 100% 100% === === ===
5 6 The Company is licensed to underwrite most major lines of property and casualty insurance. It issues policies primarily to preferred risk individuals and small to medium sized commercial risks. In general, the Company does not insure risks that involve a high potential of loss or have a long-tail reporting period. The types of risks insured in the Company's lines of business include: o Personal automobile - full coverage of family-owned standard performance automobiles, generally requiring drivers with good driving records during the past three years. o Homeowners' - properties generally with no losses in the last three years that are less than 30 years old and valued between $125,000 and $500,000. o Commercial automobile - primarily light and medium use vehicles operating in a limited radius, with complete background information required of all drivers. o Commercial multi-peril - properties with medium to high construction quality and low to moderate fire exposure, and occupancies with low to moderate exposure to hazardous materials and processes. o General liability - low hazard service, mercantile and light processing businesses, generally with three years of business experience and with no losses in the last three years. o Workers' compensation - risks with low loss frequency and severity, low to moderate exposure to hazardous materials and processes, and favorable experience modification factors. Generally, workers' compensation insurance is written in conjunction with other commercial insurance. The Company's underwriting strategy is to offer its insurance at rates which are designed to cover its costs, including the costs of any involuntary business associated with a particular line of insurance or a particular territory. This pricing strategy makes the Company's rates non-competitive with respect to certain lines of insurance or certain geographic regions. For example, the Company's published rates for personal automobile insurance in the densely populated areas within its region of operations are significantly higher than those of some of its competitors. The Company believes that its pricing strategy allows the Company to write the types of insurance for which the price charged reflects the cost of providing coverage. Agents of the Company are also agents of Mutual, which generally sells the same lines of insurance as the Company to standard risk individuals and businesses. Applicants that meet the Company's preferred risk criteria are issued policies by the Company. Applicants that do not meet the Company's underwriting criteria, but which meet the less restrictive criteria of Mutual, are issued policies by Mutual, generally at higher premium rates. From 1993 through 1995, under a quota share reinsurance agreement with Mutual, MNH assumed 10% of the standard risks insured by Mutual, which would not generally meet MNH's more stringent underwriting guidelines. The terms of that agreement allow Mutual to reduce its cessions to MNH to 0% of Mutual's direct voluntary premiums written for any calendar year prior to the beginning of that calendar year. Mutual has not ceded any of its voluntary direct written premiums to MNH under this agreement since 1995 and has informed the Company that it will not cede any of its voluntary direct written premiums to MNH in 2000. 6 7 The Company establishes premium rates for most of its policies based on its loss experience, in some cases after considering prospective loss costs suggested by the Insurance Services Office, Inc., an industry advisory group, for the preferred individual and commercial classes of business that it insures. The Company establishes rates independently for its personal automobile and homeowners insurance policies and its specialty products, such as its Contractors Coverall Plus and businessowners' policies. The following table shows, for each of the years in the three year period ended December 31, 1999 (i) the amount of the Company's net premiums written attributable to various personal lines and commercial lines and (ii) underwriting results attributable to each such line as measured by the calendar year loss ratio for such line. The loss ratio is the ratio of incurred losses to net premiums earned for a given period.
Year ended December 31, ------------------------------------------------------------------------------------------------ 1997 1998 1999 ------------------------------------------------------------------------------------------------ Premiums Premiums Premiums Written Written Written ------------------------------------------------------------------------------------------------ Loss Loss Loss Amount % Ratio Amount % Ratio Amount % Ratio ------------------------------------------------------------------------------------------------ (dollars in thousands) Personal Auto Liability $26,187 27.0% 69.7% $21,394 23.1% 79.3% $18,915 20.0% 77.1% Auto Physical Damage 13,570 14.0 45.8 13,199 14.2 45.8 12,328 13.1 49.0 Homeowners' Multi-Peril 7,789 8.0 35.7 8,066 8.7 36.5 8,630 9.1 56.2 ------- ----- ------- ----- ------- ----- Total 47,546 49.0 57.5 42,659 46.0 61.8 39,873 42.2 64.1 Commercial Auto Liability 12,377 12.8 100.7 12,986 14.0 41.5 14,816 15.7 50.9 Auto Physical Damage 2,948 3.1 45.8 3,025 3.3 49.8 3,819 4.1 54.7 Commercial Multi-Peril 21,287 22.0 44.6 21,878 23.6 49.5 22,854 24.2 69.5 Workers' Compensation 7,070 7.3 169.0 7,159 7.7 87.8 7,692 8.1 22.0 Other Lines 5,583 5.8 6.0 5,051 5.4 39.1 5,416 5.7 37.6 ------- ----- ------- ----- ------- ----- Total 49,265 51.0 73.6 50,099 54.0 50.6 54,597 57.8 53.7 ------- ----- ------- ----- ------- ----- Total Personal & Commercial $96,811 100.0% 65.7 $92,758 100.0% 56.5 $94,470 100.0% 58.2 ======= ===== ======= ===== ======= =====
Calendar year loss ratios set forth in the table above include an estimate of losses for that accident year, as well as increases or decreases in estimates made in that year for prior accident year losses. Depending on the size of the increase or decrease in prior accident year losses, calendar year loss ratios may not be as indicative of the profitability of policies in force in a particular year as accident year loss ratios, which do not take into account increases or decreases in reserves for prior accident year losses. 7 8 The following table sets forth the composition of voluntary direct premiums written for 1995 through 1999:
Year Ended December 31, ----------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Commercial 62% 60% 57% 58% 61% Personal 38 40 43 42 39 --- --- --- --- --- Total 100% 100% 100% 100% 100% === === === === ===
Commercial Lines - ---------------- The Company's commercial business is primarily retail and mercantile in nature and generally consists of small to medium sized, low hazard commercial risks which as a group have relatively stable loss ratios. The Company's underwriting criteria exclude lines of business and classes of risks that are considered by the Company to be high hazard or volatile, or which involve latent injury potential or other long-tail liability exposures. Although the commercial underwriting objectives of the Company and Mutual are similar, the Company has refined its selection criteria to include specific classes of businesses, occupancies, and operations with lower hazard ratings, which present a relatively lower exposure to loss and are charged a correspondingly lower premium. The Company offers specialized products within the commercial multi-peril line such as the Contractors Coverall Plus for artisan and trade contractors, and BusinessElite for specified retail, service and office risks. Despite the lack of significant premium rate increases in recent years in most of its commercial lines and the significant level of competition in the lines of business that the Company targets, the Company believes it can insure commercial business profitably by selecting those classes of risks that offer better than average profit potential. The Company competes for commercial business based upon the service it provides to agents and policyholders, the compensation it pays to its agents, and in certain instances, the price of its products. The Company establishes prices after considering its costs, the exposures inherent in a particular class of risk, estimated investment income, projected future trends in loss frequency and severity, and the degree of competition within a specific territory. Accordingly, the relative prices of the Company's commercial products may vary considerably in relation to competitors' prices. Personal Lines - -------------- The Company offers personal automobile and homeowners' insurance to preferred risk individuals, generally requiring experienced drivers with no accidents or moving violations in the last three years for personal automobile insurance, and medium to high value homes with systems that are less than thirty years old in fire protected areas for homeowners' insurance. Personal automobile premium rates attempt to cover costs associated with required participation in involuntary personal automobile programs, in addition to the costs directly associated with the policies written voluntarily. The Company and Mutual have developed automated underwriting procedures for personal automobile, homeowners and certain commercial lines of business, which perform an initial review of policy applications based upon established underwriting guidelines. Applications that do not meet the guidelines for automated acceptance are either referred to underwriters who review the 8 9 applications and assess exposure, or rejected if the risk characteristics are such that neither the Company nor Mutual would accept the applicant. As a condition to writing voluntary business in most states in which it operates, the Company must participate in state-mandated programs which provide insurance for individuals and businesses unable to obtain insurance voluntarily, primarily for personal automobile insurance. The legislation creating these programs usually allocates a pro rata portion of the risks attributable to such insureds to each company writing voluntary business in the state on the basis of its voluntary premiums written or the number of automobiles which it insures voluntarily. The Company's gross (direct and assumed) premiums written attributable to involuntary policies were $12,719,000, $6,036,000 and $3,726,000 in 1997, 1998 and 1999, respectively, mostly in New York. The Company is unable to predict the level of its annual involuntary business for 2000 or future years. Claims - ------ Insurance claims on policies written by the Company are investigated and settled by claims adjusters employed by Mutual pursuant to the Management Agreement. The Company and Mutual maintain several claims offices within their operating territories. In areas where there is insufficient claim volume to justify the cost of internal claims staff, the Company and Mutual use independent appraisers and adjusters to investigate claims. The Company's claims policy emphasizes timely investigation of claims, settlement of valid claims for equitable amounts, maintenance of adequate reserves for claims and control of external claims adjustment expenses. In order to support its claims policy, the Company has implemented a program designed to ensure that as soon as practical, claims are assigned an accurate value based on available information. The program includes the centralization of certain branch claims operations and an emphasis on the training of claims adjusters and supervisors by senior claims staff. This claims policy is designed to support the Company's marketing policy and provide agents and policyholders with prompt service and support. Claims settlement authority levels are established for each adjuster, supervisor and manager based on their expertise and experience. When the Company receives notice of a claim, it is assigned to an adjuster based upon its type, severity and line of business. The claims staff then reviews the claim, obtains appropriate information and establishes a loss reserve. Claims that exceed certain dollar amounts or that cannot be readily settled are assigned to more senior claims staff. Loss and LAE Reserves - --------------------- The Company, like other insurance companies, establishes reserves for losses and LAE. These reserves are estimates intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those losses not yet reported to the Company. An insurer's ultimate liability is likely to differ from its interim estimates because during the life of a claim, which may be many years, additional facts affecting an insurer's liability may become known. The reserves of an insurer are frequently adjusted based on monitoring by the insurer and periodic review by state insurance departments. The Company retains an independent actuarial firm to satisfy state insurance departments' requirements with respect to the certification of reserves for losses and LAE. 9 10 Loss reserves are established for known claims based on the type and circumstance of the loss and the results of similar losses. For claims not yet reported to the Company, loss reserves are based on statistical information from previous experience periods adjusted for inflation, trends in court decisions and economic conditions. LAE reserves are intended to cover the ultimate cost of investigating all losses that have occurred and defending lawsuits, if any, arising from these losses. LAE reserves are evaluated periodically using statistical techniques which compare current costs with historical data. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results. With the exception of workers' compensation claims, loss reserves are not discounted for financial statement purposes. The Company's reserving process is based on the assumption that past experiences, adjusted for the effect of current developments and trends, are relevant in predicting future events. In the absence of specific developments, the process also assumes that the legal climate regarding the claims process and underlying liabilities remains constant. Other assumptions employed by the Company or its actuarial firm change from time to time as circumstances change. In estimating loss and LAE reserves, the Company employs a number of actuarial methods, depending on their applicability to each line of business, in order to balance the advantages and disadvantages of each method. No single method is used to estimate loss and LAE reserves. Although different actuarial methods may give rise to different reserve estimates, which may be higher or lower than the reserves actually established by the Company, the Company believes that those differences are not material. The Company has recorded changes in reserves for prior accident year losses in most years. In 1997, the Company increased its reserves for prior years by $4,508,000 primarily due to higher than anticipated severity of claims on workers' compensation policies. In 1998 and 1999, the Company decreased its reserves for prior years by $2,145,000 and $3,749,000, respectively, primarily due to favorable loss experience related to automobile liability policies in 1998 and workers compensation policies in 1999. 10 11 The following table sets forth the changes in the reserve for losses and LAE for 1997, 1998 and 1999.
Year Ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- (in thousands) Reserve for losses and LAE at beginning of year $133,479 $141,205 $136,685 Less reinsurance recoverables 7,219 10,372 9,816 -------- -------- -------- Net balance at beginning of year 126,260 130,833 126,869 -------- -------- -------- Provision for losses and LAE for claims occurring in: Current year 67,119 67,379 69,835 Prior years 4,508 (2,145) (3,749) -------- -------- -------- 71,627 65,234 66,086 -------- -------- -------- Losses and LAE payments for claims occurring in: Current year 26,100 26,765 28,330 Prior years 40,954 42,433 37,125 -------- -------- -------- 67,054 69,198 65,455 -------- -------- -------- Reserve for losses and LAE at end of year, net 130,833 126,869 127,500 Plus reinsurance recoverables 10,372 9,816 6,026 -------- -------- -------- Balance at end of year $141,205 $136,685 $133,526 ======== ======== ========
The first line of the following table presents, as of the end of the year at the top of each column, the estimated amount of unpaid losses and LAE for claims arising in that year and in all prior years, including claims that had occurred but were not yet reported to the Company. For each column, the rows of the table present, for the same group of claims, the amount of unpaid losses and LAE as re-estimated as of the end of each succeeding year. The estimate is modified as more information becomes known about the number and severity of claims for each year. The "cumulative redundancy (deficiency)" represents the change in the estimated amount of unpaid losses and LAE from the end of the year at the top of each column through the end of 1999. For each column in the table, the change from the liability for losses and LAE shown on the first line to the liability as re-estimated as of the end of the following year was included in operating results for the following year. That change includes the change in the previous year's column from the liability as re-estimated one year later to the liability as re-estimated two years later which, in turn, includes the change in the second preceding column from the liability as re-estimated two years later to the liability as re-estimated three years later, and so forth. The rows of the lower portion of the table present, as of the end of each succeeding year, the amount of paid losses and LAE for claims unpaid at the end of the year at the top of each column. 11 12
Year Ended December 31, ----------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (in thousands) Liability for losses and LAE: $66,892 $71,222 $77,274 $ 86,159 $ 89,939 $ 97,614 $113,718 $126,260 $130,781 $126,820 Liability re-estimated as of: One year later 75,614 77,548 80,841 88,284 94,921 108,659 120,550 130,768 128,636 123,071 Two years later 76,310 75,987 81,743 91,224 100,607 113,091 128,192 133,029 130,498 Three years later 73,578 78,106 83,693 95,396 106,382 121,051 129,724 132,948 Four years later 75,672 79,563 87,105 99,779 112,983 121,791 131,647 Five years later 76,746 81,308 90,428 104,699 112,963 122,886 Six years later 77,026 84,530 92,370 104,808 112,963 Seven years later 79,690 85,219 93,046 105,183 Eight years later 79,890 84,765 93,346 Nine years later 79,415 84,896 Ten years later 80,020 Cumulative Redundancy (Deficiency): $ (13,128) (13,674) (16,072) (19,024) (23,024) (25,272) (17,929) (6,688) 283 3,749 % (19.6) (19.2) (20.8) (22.1) (25.6) (25.9) (15.8) (5.3) .2 3.0 Paid (Cumulative) as of: One year later 32,538 32,666 30,082 35,724 34,551 36,916 38,549 40,954 42,433 37,125 Two years later 47,816 47,339 50,490 56,003 56,965 60,074 64,323 69,035 66,477 Three years later 58,489 61,585 63,925 69,863 72,963 77,982 84,638 86,364 Four years later 66,466 70,219 72,917 80,156 83,998 91,948 96,491 Five years later 71,322 75,018 79,374 86,808 93,295 99,171 Six years later 73,558 78,398 82,602 91,919 96,949 Seven years later 75,822 79,884 84,707 94,022 Eight years later 76,683 80,706 85,920 Nine years later 76,996 81,320 Ten years later 77,351
The loss and LAE reserves reported in the Company's consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP") differ from those reported in the statements filed by MNH with the New Hampshire Insurance Department in accordance with statutory accounting principles ("STAT") as follows:
As of December 31, --------------------- 1997 1998 1999 ---- ---- ---- (in thousands) Loss and LAE reserves on a STAT basis $130,781 $126,820 $127,458 Adjustments: Ceded reinsurance balances recoverable 10,372 9,816 6,026 Write-down of reinsurance recoverable 52 49 42 -------- -------- -------- Loss and LAE reserves on a GAAP basis $141,205 $136,685 $133,526 ======== ======== ========
12 13 Reinsurance - ----------- The Company follows the customary industry practice of reinsuring a portion of the exposure under its policies and as consideration pays to its reinsurers a portion of the premium received on its policies. Insurance is ceded principally to reduce an insurer's liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of coverage provided by its policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company is a party to reinsurance contracts under which certain types of policies are automatically reinsured without the need for approval by the reinsurer with respect to the individual risks that are covered ("treaty" reinsurance). The Company also is a party to reinsurance contracts which are handled on an individual policy or per risk basis and require the specific agreement of the reinsurer as to each risk insured ("facultative" reinsurance). Occasionally, the Company may secure facultative reinsurance to supplement its coverage under treaty reinsurance. Effective January 1, 1998, the Company changed its primary reinsurer and coverage. Prior to that time, the Company's excess of loss arrangements for automobile liability, general liability and workers' compensation insurance provided for recovery of losses over $500,000 up to a maximum of $5,000,000 per occurrence. For claims occurring prior to 1993, the $500,000 threshold was indexed for inflation for casualty lines other than workers' compensation and New York State no-fault, and applied retroactively to all occurrences until they are settled. There was no index provision for casualty claims occurring after 1992. This coverage was supplemented by additional treaty reinsurance covering losses up to $5,000,000 in excess of the first $5,000,000. Prior to January 1, 1998, property reinsurance agreements provided for recovery of property losses over $500,000 up to $2,000,000 per occurrence without any index provision. Property catastrophe coverage placed with many reinsurers worldwide provided for recovery of 95% of $40,000,000, subject to aggregate retained losses of $5,000,000 for each natural disaster. The reinsurance premium rate paid varied for each line of business. Effective January 1, 1998, the new property and casualty excess of loss reinsurance agreements provide for recovery of casualty losses over $500,000 up to $10,000,000 per occurrence and property losses over $500,000 up to $10,000,000 per occurrence. This coverage is supplemented by a contingent casualty layer of reinsurance for workers' compensation claims of $5,000,000 in excess of the first $10,000,000 subject to a calendar year limit of $20,000,000. Property catastrophe coverage provides for recovery of 95% of $50,000,000, subject to aggregate retained losses of $5,000,000 per occurrence. The property catastrophe reinsurance coverage is shared by the Company and Mutual on a pro rata basis based upon the gross reported losses of the Company and Mutual for a covered event. In 1987, the Company and its primary reinsurer agreed to limit the losses which could be recovered by the Company under its excess of loss treaties for the 1980 through 1986 accident years in exchange for a cap on retrospective premiums due to the reinsurer. At December 31, 1999, recoverable losses exceeded the cap and the excess losses have been retained by the Company. Effective January 1, 1993, Mutual and MNH entered into a quota share reinsurance agreement under which MNH may assume up to 10% of Mutual's direct voluntary written premiums and related 13 14 losses and allocated LAE in exchange for a reinsurance commission of 35%. The agreement also provides for MNH to pay a contingent commission to Mutual equal to any underwriting profit on the premiums assumed. Mutual pays the ceded premiums, net of commissions and paid losses, to MNH on a monthly basis and MNH invests these funds and earns investment income. To the extent commissions and paid losses exceed premiums, MNH is required to pay the net monthly balance to Mutual. The agreement may be terminated by either party effective as of any January 1 with the prior approval of the New York Superintendent of Insurance and upon six months' notice to the other party. In addition, the agreement may be terminated by MNH at any time if any amount payable to MNH by Mutual becomes more than 90 days overdue or if there is a change in control of Mutual approved by the New York Superintendent of Insurance. Further, the agreement allows Mutual to reduce its cessions to MNH from a maximum of 10% to a minimum of 0% of Mutual's direct voluntary premiums written for any calendar year prior to the beginning of that calendar year. Mutual has not ceded any portion of its direct voluntary written premiums to MNH since 1995 and has informed the Company that it will not cede any voluntary direct written premiums to MNH in 2000. Investments - ----------- The primary source of funds for investment by the Company is premiums collected. Although premiums, net of commissions and other underwriting costs, are taken into income ratably over the terms of the policies, they provide funds for investment from the date they are received. Similarly, although establishment of and changes in reserves for losses and LAE are included in results of operations immediately, the amounts so set aside are available to be invested until the Company pays those claims. The investments of the Company are regulated by New Hampshire insurance law and are reviewed by the Board of Directors of the Company. Other than certain short-term investments held to maintain liquidity, the Company primarily invests in medium-term bonds, mortgage-backed and other asset-backed securities including collateralized mortgage obligations, and tax-exempt securities. The mortgage-backed securities held by the Company are typically purchased at expected yields which are greater than comparable maturity Treasury securities and are AAA or AA rated. The Company had $15,982,000 of tax-exempt bonds in its investment portfolio at December 31, 1999. The Company believes these tax-exempt bonds are of high quality (rated A or better) and, at the time of purchase, offered an after-tax total return greater than comparable taxable securities. At December 31, 1999, the Company had $2,544,000 of short-term investments with maturities less than 30 days, and $11,082,000 of non-investment grade securities. These non-investment grade securities represented 5% of the investment portfolio as compared to $6,706,000, or 3%, of the investment portfolio at December 31, 1998. 14 15 The table below gives information regarding the Company's investments as of the dates indicated.
As of December 31, ------------------------------------------------------------------ 1997 1998 1999 ------------------------------------------------------------------ Amount % Amount % Amount % ------ - ------ - ------ - (dollars in thousands) Fixed Maturities (1): U.S. Government and Agencies $ 48,734 23.2% $ 30,392 14.1% $ 27,663 13.0% Corporate Bonds 117,060 55.7 140,326 65.2 152,984 71.9 Tax-Exempt Bonds 28,764 13.7 27,066 12.6 15,982 7.5 -------- ----- -------- ----- -------- ----- Total Bonds 194,558 92.6 197,784 91.9 196,629 92.4 Preferred stocks (2) 10,582 5.0 10,373 4.9 12,941 6.1 Short-Term Investments (3) 4,470 2.1 6,280 2.9 2,544 1.2 Other (4) 634 .3 735 .3 797 .3 -------- ----- -------- ----- -------- ----- Total Invested Assets $210,244 100.0% $215,172 100.0% $212,911 100.0% ======== ===== ======== ===== ======== =====
(1) Fixed Maturities are shown at their carrying amounts in the respective balance sheet. Held to Maturity fixed maturities are included at amortized cost. Available for Sale fixed maturities are included at fair value. (2) Shown at fair value. (3) Shown at cost, which approximates fair value. (4) Shown at estimated fair value or unpaid principal balance, which approximates estimated fair value. The table below sets forth the Company's net investment income and net realized gains and losses, excluding the effect of income taxes, for the periods shown:
Year Ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- (dollars in thousands) Average investments (1) $202,041 $ 211,272 $211,596 Net investment income 12,770 13,277 13,147 Net investment income as a percentage of average investments (2) 6.3% 6.3% 6.2% Net realized gains (losses) on investments $ 112 $ (2) $ 60
(1) At amortized cost. (2) The taxable equivalent yield for the years ended December 31, 1997, 1998 and 1999 was 6.9%, 6.8%, and 7.0%, respectively, assuming an effective tax rate of 34%. 15 16 The table below sets forth the carrying value of bonds and percentage distribution of various maturities at the dates indicated. Fixed Maturities are shown at their carrying amounts in the respective balance sheet. Held to Maturity fixed maturities are included at amortized cost. Available for Sale fixed maturities are included at fair value. The estimated repayment date is used instead of the ultimate repayment date for mortgage backed and other asset backed securities.
As of December 31, ------------------------------------------------------------------ 1997 1998 1999 ------------------------------------------------------------------ Amount % Amount % Amount % ------ - ------ - ------ - (dollars in thousands) 1 year or less $ 47,499 24.4% $ 51,892 26.2% $ 49,742 25.3% 1 year through 5 years 116,508 59.9 126,631 64.0 132,421 67.4 5 years through 10 years 27,877 14.3 17,721 9.0 12,619 6.4 More than 10 years 2,674 1.4 1,540 .8 1,847 .9 -------- ----- -------- ----- -------- ----- Total $194,558 100.0% $197,784 100.0% $196,629 100.0% ======== ===== ======== ===== ======== =====
Competition - ----------- The property and casualty insurance business is highly competitive. The Company is in direct competition with many national and regional multiple-line insurers, many of which are substantially larger than the Company and have considerably greater financial resources. Competition is further intensified by the independent agency system because each of the independent agents who sells the Company's policies also represents one or more other insurers. Also, the Company's agents compete with direct writing insurers and this indirectly affects the Company. Historically, the property and casualty industry has tended to be cyclical in nature. During the "up" cycle, or "hard market," the industry is characterized by price increases, strengthening of loss and LAE reserves, surplus growth and improved underwriting results. Near the end of the "up" cycle, an increase in capacity causes insurance companies to begin to compete for market share on the basis of price. This price competition causes the emergence of the "down" cycle, or "soft market," characterized by a reduction in the premium growth rate and a general decline in profitability. Generally, the down cycle is eventually accompanied by a decline in the adequacy of loss and LAE reserves and a decrease in premium writing capacity. The property and casualty insurance industry has experienced a cyclical downturn for the past several years due primarily to intense premium rate competition and an excess capacity to write premiums. Many of the circumstances which led to the current cyclical downturn in the property and casualty insurance industry continue to exist, and the Company cannot predict when or if market conditions for the industry will improve. Regulation - ---------- General - ------- MNH is subject to regulation under applicable insurance statutes, including insurance holding company statutes, of the various states in which it writes insurance. Insurance regulation is intended to provide safeguards for policyholders rather than to protect stockholders of insurance companies or their holding companies. Insurance laws of the various states establish regulatory agencies with broad administrative powers including, but not limited to, the power to grant or revoke licenses to transact 16 17 insurance business and to regulate trade practices, investments, premium rates, the deposit of securities, the form and content of financial statements and insurance policies, accounting practices and the maintenance of specified reserves and capital. 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. Under insolvency or guaranty laws in the states in which MNH operates, insurers doing business in those states can be assessed up to prescribed limits for policyholder losses caused by other insurance companies that become insolvent. The extent of any requirement for MNH to make any further payment under these laws is not determinable. Most laws do provide, however, that an assessment may be excused or deferred if it would threaten a solvent insurer's financial strength. In addition, MNH is required to participate in various mandatory pools or underwriting associations in certain states in which it operates. The property and casualty insurance industry has been the subject of new regulations and legislative activity in various states attempting to address the affordability and availability of different lines of insurance. The regulations and legislation generally restrict the discretion an insurance company has in operating its business. It is not possible to predict the effect, if any, that new regulations and legislation would have on the Company and MNH. The Company depends on cash dividends from MNH to pay cash dividends to its stockholders and to meet its expenses. MNH is subject to New Hampshire state insurance laws which restrict its ability to pay dividends without the prior approval of state regulatory authorities. These restrictions limit dividends to those that, when added to all other dividends paid within the preceding twelve months, would not exceed 10% of the insurer's policyholders' surplus as of the preceding December 31st. The maximum amount of dividends that MNH could pay during any twelve month period ending in 2000 without the prior approval of the New Hampshire Insurance Commissioner is $5,328,000. MNH paid the maximum allowable dividend to the Company in 1999. Dividends were paid in January 1999, May 1999 and September 1999, of $2,100,000, $1,400,000 and $1,600,000, respectively. MNH paid a dividend of $2,200,000 to the Company on February 14, 2000 and as such is restricted from paying another dividend to the Company until May, 2000. In certain states in which it operates, MNH is required to maintain deposits with the appropriate regulatory authority to secure its obligations under certain insurance policies written in the jurisdiction. At December 31, 1999, investments of MNH having a par value of $1,900,000 were on deposit with regulatory authorities. MNH and Mutual are required to file detailed annual reports with the appropriate regulatory agency in each of the states in which they do business. Their business and accounts are subject to examination by such agencies at any time, and the laws of many states require periodic examination. The State of New Hampshire Insurance Department most recently examined the accounts of MNH as of December 31, 1997. MNH's annual report as of that date was accepted as submitted, without adjustment. In 1993 the National Association of Insurance Commissioners ("NAIC") adopted a risk-based capital measurement formula to be applied to all property and casualty insurance companies. The 17 18 formula calculates a minimum required statutory net worth, based on the underwriting, investment, credit, loss reserve and other business risks inherent in an individual company's operations. Any insurance company that does not meet threshold risk-based capital measurement standards could be forced to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. MNH's capital substantially exceeds the statutory minimum as determined by the risk-based capital measurement formula as of December 31, 1999. The NAIC has established eleven financial ratios (the Insurance Regulatory Information System, or "IRIS") to assist state insurance departments in their oversight of the financial condition of insurance companies operating in their respective states. The NAIC calculates these ratios based on information submitted by insurers on an annual basis and shares the information with the applicable state insurance departments. The ratios relate to leverage, profitability, liquidity and loss reserve development. Each of the Company's ratios for 1999 falls within the usual or acceptable range as published by the NAIC. Rates - ----- Premium rate regulations vary greatly among states and lines of insurance, and frequently require approval of the regulatory authority or limited review by the authority prior to changes in rates. However, in New York and certain other states, insurers writing private passenger automobile policies and in designated commercial risk, professional liability and public entity insurance markets may periodically revise rates within the limits of applicable flexibility bands ("flex-bands") on a file and use basis, but must obtain the Department's prior approval in order to implement rate increases or decreases beyond these flex-bands. Insurance Holding Companies - --------------------------- The Company is subject to statutes governing insurance holding company systems. Typically, such statutes require the Company to file information periodically concerning its capital structure, ownership, financial condition and general business operations and material inter-company transactions not in the ordinary course of business. Under the terms of applicable New Hampshire statutes, any person or entity desiring to purchase shares which would result in such person beneficially owning 10% or more of the Company's outstanding voting securities would be required to obtain regulatory approval prior to the purchase. Involuntary Insurance - --------------------- As a condition to writing voluntary insurance in most of the states in which it operates, the Company must participate in programs that provide insurance for persons or businesses unable to obtain insurance voluntarily. Uncertainties as to the size of the involuntary market population make it difficult to predict the amount of involuntary business in a given year. Employees - --------- The Company has no employees. At December 31, 1999, Mutual had 346 full-time equivalent employees. The Company believes that Mutual's relationship with its employees is satisfactory. 18 19 Item 2. PROPERTIES. Although the Company has no facilities, it benefits from the facilities of Mutual pursuant to the Management Agreement, under which the Company is charged a proportionate share of the costs of such facilities. The Company's corporate headquarters are located in Buffalo, New York in a building owned by Mutual that contains approximately 113,000 square feet of office space. Mutual also has regional underwriting and/or claims office facilities in Buffalo, Albany and Hauppauge, New York; Manchester, New Hampshire; and Moorestown, New Jersey. All of the offices except the Buffalo office are leased. Item 3. LEGAL PROCEEDINGS. MNH, like many other property and casualty insurance companies, is subject to environmental damage claims asserted by or against its insureds. Management of the Company is of the opinion that based on various court decisions throughout the country such claims should not be recoverable under the terms of MNH's insurance policies because of either specific or general coverage exclusions contained in the policies. However, there is no assurance that the courts will agree with MNH's position in every case, nor can there be assurance that material claims will not be asserted under policies which a court will find do not explicitly or implicitly exclude claims for environmental damages. Management, however, is not aware of any pending claim or group of claims which would result in a liability that would have a material adverse effect on the financial condition of the Company or MNH. In addition to the foregoing matters, MNH is a defendant in a number of other legal proceedings in the ordinary course of its business. Management of the Company is of the opinion that the ultimate aggregate liability, if any, resulting from such proceedings will not materially affect the financial condition of the Company or MNH. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 19 20 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded on the American Stock Exchange (AMEX symbol: MGP). The following table sets forth the high and low closing prices of the common stock for the periods indicated as reported on the American Stock Exchange.
1999: High Low - ----- ---- --- Fourth Quarter $20.13 $19.50 Third Quarter 24.38 22.38 Second Quarter 22.38 21.25 First Quarter 22.50 21.00 1998: High Low - ----- ---- --- Fourth Quarter $21.75 $18.50 Third Quarter 24.38 19.25 Second Quarter 26.25 23.63 First Quarter 22.75 19.75
The number of stockholders of record of the Company's Common Stock as of February 29, 2000 was 104. Securities held by nominees are counted as one stockholder of record. The Company has paid a quarterly cash dividend to its common stockholders since the third quarter of 1993. Continued payment of this dividend and its amount will depend upon the Company's operating results, financial condition, capital requirements and other relevant factors, including legal restrictions applicable to the payment of dividends by its insurance subsidiary, MNH. As a holding company, the Company depends on dividends from its subsidiary, MNH, to pay cash dividends to its stockholders. MNH is subject to New Hampshire state insurance laws which restrict its ability to pay dividends without the prior approval of state regulatory authorities. These restrictions limit dividends to those that, when added to all other dividends paid within the preceding twelve months, would not exceed 10% of the insurer's policyholders' surplus as of the preceding December 31. The maximum amount of dividends that MNH could pay during any twelve month period ending in 2000 without prior approval of the New Hampshire Insurance Commissioner is $5,328,000. 20 21 Item 6. SELECTED FINANCIAL DATA. The selected financial data set forth in the following table for each of the five years in the period ended December 31, 1999 have been derived from the audited consolidated financial statements of the Company.
Year Ended December 31, ------------------------------------------------------------------ 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (in thousands, except per share amounts) Net premiums written $ 97,577 $ 96,622 $ 96,811 $ 92,758 $ 94,470 ======== ======== ======== ======== ======== Net premiums earned $ 94,749 $ 95,752 $ 96,054 $ 93,540 $ 94,775 Net investment income 10,368 11,724 12,770 13,277 13,147 Net realized investment gains (losses) (832) 996 112 (2) 60 Other revenues 259 172 214 153 434 -------- -------- -------- -------- -------- Total revenues 104,544 108,644 109,150 106,968 108,416 -------- -------- -------- -------- -------- Net losses and loss adjustment expenses 78,195 79,603 71,627 65,234 66,086 Amortization of deferred policy acquisition costs 25,458 25,374 25,454 24,788 25,115 Other underwriting expenses 7,709 6,700 6,647 8,689 7,552 -------- -------- -------- -------- -------- Total expenses 111,362 111,677 103,728 98,711 98,753 -------- -------- -------- -------- -------- Income (loss) before income taxes (6,818) (3,033) 5,422 8,257 9,663 Provision (benefit) for income taxes (2,999) (1,885) 1,224 2,334 2,870 -------- -------- -------- -------- -------- Net income (loss) $ (3,819) $ (1,148) $ 4,198 $ 5,923 $ 6,793 ======== ======== ======== ======== ======== Earnings (loss) per share: Basic $ (1.19) $ (.36) $ 1.41 $ 2.05 $ 2.48 ======== ======== ======== ======== ======== Diluted $ (1.19) $ (.36) $ 1.41 $ 2.04 $ 2.48 ======== ======== ======== ======== ======== Weighted average number of shares outstanding: Basic 3,214 3,174 2,973 2,895 2,738 Diluted 3,219 3,182 2,980 2,904 2,743 Balance Sheet Data: (at year end) - ------------------- ------------- Total investments $192,218 $201,597 $210,244 $215,172 $212,911 Total assets 252,808 262,123 273,974 274,523 269,523 Reserve for losses and loss adjustment expenses 119,722 133,479 141,205 136,685 133,526 Unearned premiums 48,773 49,710 50,406 49,382 49,616 Stockholders' equity 69,970 65,029 67,462 71,783 69,387 Dividend Data: - -------------- Cash dividend per common share $ .20 $ .20 $ .20 $ .20 $ .35
21 22 "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Certain statements made in this Annual Report on Form 10-K constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve certain assumptions, risks and uncertainties that could cause actual results to differ materially from those included in or contemplated by those statements. These assumptions, risks and uncertainties include, but are not limited to, those associated with factors affecting the property and casualty insurance industry generally, including price competition, size and frequency of claims, increasing crime rates, escalating damage awards, natural disasters, fluctuations in interest rates and general business conditions; the Company's dependence on investment income; the geographic concentration of the Company's business in the northeastern United States and in particular in New York, New Hampshire, New Jersey, Rhode Island, Pennsylvania and Massachusetts; the adequacy of the Company's loss reserves; government regulation of the insurance industry; exposure to environmental claims; dependence of the Company on its relationship with Mutual; and the other risks and uncertainties discussed or indicated in all documents filed by the Company with the Commission. The Company expressly disclaims any obligation to update any forward-looking statements as a result of developments occurring after the filing of this report. 22 23 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1999 Compared to 1998. - ---------------------- Total revenues for 1999 were $108,416,000, an increase of $1,448,000, or 1%, from $106,968,000 in 1998. Direct premiums written for 1999 were $100,227,000, an increase of $1,271,000, or 1%, from $98,956,000 in 1998. Net written premiums for 1999 were $94,470,000, an increase of $1,712,000, or 2%, from $92,758,000 in 1998. Voluntary personal lines direct premiums written for 1999 were $38,493,000, a decrease of 3% from $39,518,000 in 1998. Private passenger automobile direct premiums written, which comprised 76% and 78% of total voluntary personal lines direct premiums written in 1999 and 1998, respectively, decreased 5% in 1999 compared to 1998 primarily due to fewer new policies and renewal policies retained resulting from price-based market competition. Voluntary private passenger automobile policies in force at December 31, 1999, decreased 7% compared to December 31, 1998. Homeowners direct premiums written increased 6% in 1999 compared to 1998 due to a 9% increase in policies in force resulting from an increase in new business units in 1999 as compared to 1998. Voluntary commercial lines direct premiums written for 1999 were $59,621,000, an increase of 10% from $54,246,000 in 1998. This increase resulted primarily from a $3,173,000, or 21%, increase in commercial auto direct premiums written, a $573,000, or 8%, increase in workers' compensation direct premiums written and a $1,406,000, or 22%, increase in contractors coverall direct premiums written. The increase in commercial auto direct premiums written was primarily due to a 25% increase in policies in force at December 31, 1999 compared to December 31, 1998, partially offset by a 3% decrease in average premium per commercial auto policy at December 31, 1999 compared to December 31, 1998. The commercial auto market continues to respond favorably to the Company's commercial auto product enhancements and premium rate decreases enacted in early 1998. The increase in workers' compensation direct premiums written was due to a 9% increase in new business units in 1999 as compared to 1998. The increase in contractors coverall direct premiums written was primarily due to a 14% increase in average policies in force in 1999 compared to 1998 which in turn was due to rate decreases in this line of business effective in the first quarter of 1999. Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 2% and 5% of total direct premiums written during 1999 and 1998, respectively, were $2,113,000 for 1999 compared to $5,192,000 in 1998. This 59% decrease resulted primarily from decreased mandatory assignments from the New York Automobile Insurance Plan ("NYAIP"), which provides coverage for individuals who are unable to obtain auto insurance in the voluntary market. During 1999 the NYAIP continued to adjust its assignments as a result of having over assigned policies to the Company in 1997 and an overall decrease in the NYAIP's pool of business. Assignments from the NYAIP vary depending upon a company's private passenger automobile market share and the size of the NYAIP. 23 24 Net premiums earned for 1999 were $94,775,000, an increase of $1,235,000, or 1%, from $93,540,000 in 1998. Net premiums earned increased primarily due to the 1% increase in direct premiums written. Net investment income was $13,147,000 in 1999, a decrease of 1% from $13,277,000 in 1998, due to a decrease in average portfolio yield. Average invested assets in 1999 were substantially unchanged from 1998. Other revenues were $434,000 for 1999, an increase of $281,000 or 184% from $153,000 in 1998, primarily due to increased income from residual market facilities. Net losses and LAE were $66,086,000 for 1999, an increase of 1% from $65,234,000 in 1998. The increase in net losses and LAE was primarily attributable to a non-recurring charge related to insurance related assessments, which was offset by a non-recurring reduction in other underwriting expenses. Absent this non-recurring charge, net losses and LAE were relatively unchanged compared to 1998. The Company recorded decreases to its reserves for losses related to prior accident years of $3,749,000 and $2,145,000 in 1999 and 1998, respectively. These decreases in reserves for prior accident years reduced the loss and LAE ratio in 1999 and 1998 by 3.9 and 2.3 percentage points, respectively, and were primarily the result of favorable loss experience related to auto liability policies in 1998 and workers' compensation policies in 1999. The decrease in reserves for prior accident years was somewhat offset by an increase in the loss and LAE ratio for losses and LAE occurring in the current accident year. Involuntary automobile insurance business increased the Company's calendar year loss and LAE ratio by approximately 1.1 and 3.5 percentage points for the years ended December 31, 1999 and 1998, respectively. The combined ratio on involuntary automobile business was greater than the combined ratio on voluntary automobile business. The ratio of policy acquisition costs and other underwriting expenses to net premiums earned decreased to 34.5% in 1999 from 35.8% in 1998, primarily due to the aforementioned non-recurring reduction in insurance related assessments. Expenses that vary directly with the Company's premium volume, primarily commissions, premium taxes and state assessments, represented 20.6% and 21.7% of net premiums earned in 1999 and 1998, respectively. Certain other underwriting expenses, such as salaries, employee benefits and other operating expenses vary indirectly with volume and comprise the remainder of the Company's underwriting expenses. The amounts recorded by the Company for income taxes in 1999 and 1998 differed from those calculated using the statutory federal income tax rate primarily due to tax exempt bond income. 1998 Compared to 1997. - ---------------------- Total revenues for 1998 were $106,968,000, a decrease of $2,182,000, or 2%, from $109,150,000 in 1997. Direct premiums written for 1998 were $98,956,000, a decrease of $2,108,000, or 2%, from $101,064,000 in 1997. Net premiums written for 1998 were $92,758,000, a decrease of $4,053,000, or 4%, from $96,811,000 in 1997. 24 25 Voluntary personal lines direct premiums written for 1998 were $39,518,000, substantially unchanged from $39,415,000 in 1997. Private passenger automobile direct premiums written, which comprised 78% and 79% of total voluntary personal lines direct premiums written in 1998 and 1997, respectively, decreased 1% in 1998 compared to 1997 primarily due to intensified price-based market competition. Homeowners direct premiums written increased 5% in 1998 compared to 1997 due to a 5% increase in average premium per policy. Voluntary commercial lines direct premiums written for 1998 were $54,246,000, an increase of 5% from $51,572,000 in 1997. This increase resulted primarily from a $1,260,000, or 9%, increase in commercial auto direct premiums written, a $1,014,000, or 17%, increase in workers' compensation direct premiums written and a $530,000, or 6%, increase in commercial package policies direct premiums written. The increase in commercial auto direct premiums written was primarily due to an 8% increase in average premium per policy at December 31, 1998 compared to December 31, 1997. The increase in workers' compensation direct premiums written was due to a 36% increase in new business units in 1998 as compared to 1997. The increase in commercial package policy direct premiums written was due to an 11% increase in policies in force at December 31, 1998 compared to 1997, partially offset by a 3% decrease in average premium size. Involuntary direct premiums written, primarily involuntary private passenger automobile insurance, which comprised 5% and 10% of total direct premiums written during 1998 and 1997, respectively, were $5,192,000 for 1998 compared to $10,077,000 in 1997. This 48% decrease resulted primarily from decreased mandatory assignments from the NYAIP, which provides coverage for individuals who are unable to obtain auto insurance in the voluntary market. During 1998 the NYAIP adjusted its assignments as a result of having over assigned policies to the Company in 1997 and an overall decrease in the NYAIP's pool of business. Net premiums earned for 1998 were $93,540,000, a decrease of $2,514,000, or 3%, from $96,054,000 in 1997. Net premiums earned decreased primarily due to a $2,503,000 (22%) decrease in involuntary earned premiums. Net investment income was $13,277,000 in 1998, an increase of 4% from $12,770,000 in 1997, due to a 5% increase in average invested assets. Realized investment losses were $2,000 in 1998 compared to $112,000 of realized gains in 1997. Net losses and LAE were $65,234,000 for 1998, a decrease of 9% from $71,627,000 in 1997. The loss and LAE ratio decreased to 69.7% in 1998 from 74.6% in 1997. The decrease in net losses and LAE resulted from the fact that there was a net decrease of $2,145,000 recorded during 1998 for losses occurring in prior accident years. The Company recorded an increase to its reserves for losses related to prior accident years of $4,508,000 in 1997. Involuntary automobile insurance business increased the Company's calendar year loss and LAE ratio by approximately 3.5 and 3.4 percentage points for the years ended December 31, 1998 and 1997, respectively. 25 26 The ratio of policy acquisition costs and other underwriting expenses to net premiums earned increased to 35.8% in 1998 from 33.4% in 1997 primarily due to increased agency incentive commissions related to the Company's improved underwriting results. Commissions, premium taxes and other state assessments that vary directly with the Company's premium volume represented 21.7% and 20.8% of net premiums earned in 1998 and 1997, respectively. The increase was due primarily to the increase in agency incentive commissions. Certain other underwriting expenses, such as salaries, employee benefits, and other operating expenses vary indirectly with volume and comprise the remainder of the Company's underwriting expenses. The amounts recorded by the Company for income taxes in 1998 and 1997 differed from those calculated using the statutory federal income tax rate primarily due to tax exempt bond income. Liquidity and Capital Resources - ------------------------------- In developing its investment strategy, the Company determines a level of cash and short-term investments which, when combined with expected cash flow, is estimated to be adequate to meet expected cash obligations. Historically, the excess of premiums collected over payments on claims, combined with cash income from investments, has provided the Company with short-term funds in excess of normal operating demands for cash. The Company's objectives with respect to its investment portfolio include maximizing total return while protecting policyholders' surplus and maintaining flexibility. Like other property and casualty insurers, the Company relies on premiums as a major source of cash, and therefore liquidity. Cash flows from the Company's investment portfolio, either in the form of interest or principal payments, are an additional source of liquidity. Because the duration of the Company's investment portfolio relative to the duration of its liabilities is closely managed, increases or decreases in market interest rates are not expected to have a material effect on the Company's liquidity, or its results of operations. The Company generally designates newly acquired fixed maturity investments as available for sale and carries these investments at fair value. Unrealized gains and losses related to these investments are recorded as accumulated other comprehensive income within stockholders' equity. At December 31, 1999, the Company had recorded $1,188,000 of unrealized losses, net of tax, associated with its fixed maturity investments as accumulated other comprehensive loss. During 1999 the Company recorded $2,361,000 of unrealized losses, net of tax, related to its investment portfolio as a component of other comprehensive income. At December 31, 1999, the Company's portfolio of fixed maturity investments represented 92.4% of invested assets. Management believes that this level of bond holdings is consistent with the Company's liquidity needs because it anticipates that cash receipts from net premiums written and investment income will enable the Company to satisfy its cash obligations. Furthermore, a portion of the Company's bond portfolio is invested in mortgage-backed and other asset-backed securities which, in addition to interest income, provide monthly paydowns of bond principal. At December 31, 1999, $106,752,000, or 54.3%, of the Company's fixed maturity portfolio was invested in mortgage-backed and other asset-backed securities. The Company invests in a 26 27 variety of collateralized mortgage obligation ("CMO") products but has not invested in the derivative type of CMO products such as interest only, principal only or inverse floating rate securities. All of the Company's CMO investments have an active secondary market and their effect on the Company's liquidity does not differ from that of other fixed maturity investments. The Company does not own any other derivative financial instruments. At December 31, 1999, $11,082,000, or 5%, of the Company's investment portfolio was invested in non-investment grade securities compared to $6,706,000, or 3%, at December 31, 1998. All of the Company's non-investment grade securities are currently performing to the Company's purchase expectations. During 1999 the Company repurchased 267,600 shares of its common stock at an average price of $22.58 and was holding 646,000 shares in treasury as of December 31, 1999. In August 1999, the Company arranged for a $2,000,000 unsecured credit facility from a bank in the form of a master grid note. Any borrowings under this facility are payable on demand and carry an interest rate which can be fixed or variable and is negotiated at the time of each advance. This facility is available for general working capital purposes and for repurchases of the Company's common stock. At December 31, 1999, $1,025,000 was outstanding on this loan. As a holding company, the Company is dependent upon cash dividends from MNH to meet its obligations and to pay any cash dividends. MNH is subject to New Hampshire insurance laws which place certain restrictions on its ability to pay dividends without the prior approval of state regulatory authorities. These restrictions limit dividends to those that, when added to all other dividends paid within the preceding twelve months, would not exceed 10% of the insurer's policyholders' surplus as of the preceding December 31st. The maximum amount of dividends that MNH could pay during any twelve month period ending in 2000 without the prior approval of the New Hampshire Insurance Commissioner is $5,329,000. MNH paid the maximum allowable dividend to the Company in 1999. Dividends were paid in January 1999, May 1999 and September 1999, of $2,100,000, $1,400,000 and $1,600,000, respectively. MNH paid a dividend of $2,200,000 to the Company on February 14, 2000 and as such is restricted from paying another dividend to the Company until May, 2000. The Company paid a cash dividend to its common stockholders of $.05 per share in the first quarter of 1999 and $.10 per share in the second, third and fourth quarters of 1999. Total dividends paid amounted to $955,000 in 1999. Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to its statutory surplus should not exceed 3 to 1. The Company has consistently followed a business strategy that would allow MNH to meet this 3 to 1 regulatory guideline. MNH's ratio of net premiums written to statutory surplus for 1999 was 1.8 to 1. Year 2000 - --------- The Year 2000 issue relates to the way in which information systems distinguish date data between the twentieth and twenty-first centuries. Also, many systems and equipment that are not typically thought of as relating to computers contain embedded hardware or software that may have a time element. The Company has not encountered any Year 2000 related problems as of the date of this report. 27 28 The Company estimates that its share of the total expenses associated with becoming Year 2000 compliant approximated $300,000. Approximately $150,000 of the expenses were for external costs, which included $112,000 in outside consultant expenses and $38,000 for specific upgrades of software to address Year 2000 compliance, and $150,000 of the expenses have been for internal resources dedicated to achieving Year 2000 compliance. The Company estimates its share of costs incurred in 1999 to be $10,000, which has been expensed. There has not been a material impact on the Company's results of operations or financial condition as a result of information technology projects being deferred due to resource constraints caused by the Year 2000 project. MNH continues to evaluate the complex issues related to insurance coverage for losses arising from the various possible situations involving Year 2000 problems and its potential liability to its insureds. The Company believes that the coverages MNH provides do not extend to the types of losses which are most likely to occur as a result of Year 2000 problems. For certain classes of commercial risks, MNH adopted endorsements to its policies that exclude coverage for losses resulting from Year 2000 problems based on forms provided and filed for approval with various regulatory authorities by the Insurance Services Office, Inc. Use of these special endorsements is governed by the law and regulatory policies of states in which MNH is authorized to do business. It is possible, however, that future court interpretations of policy language based on specific facts, or legislation mandating coverage, could result in coverage for losses attributable to Year 2000 problems. Such decisions or legislation could have a material adverse impact on MNH's results of operations and financial condition. It is also possible that MNH may incur expenses defending claims for which it is ultimately determined there is no insurance coverage. MNH has made no provision for reserves for losses or LAE on claims based on potential Year 2000 problems. Environmental Claims - -------------------- MNH, like many other property and casualty insurance companies, is subject to environmental damage claims asserted by or against its insureds. Management of the Company is of the opinion that based on various court decisions throughout the country, such claims should not be recoverable under the terms of MNH's insurance policies because of either specific or general coverage exclusions contained in the policies. However, there is no assurance that the courts will agree with MNH's position in every case, nor can there be assurance that material claims will not be asserted under policies which a court will find do not explicitly or implicitly exclude claims for environmental damages. Management, however, is not aware of any pending claim or group of claims which would result in a liability that would have a material adverse effect on the financial condition of the Company or MNH. Inflation - --------- Inflation affects the Company, like other companies in the property and casualty insurance industry, by contributing to higher losses, LAE and operating costs, as well as greater investment income resulting from the higher interest rates which can prevail in an inflationary period. Premium rates, however, may not keep pace with inflation since competitive forces generally limit the Company's ability to increase premium rates. The Company considers inflationary trends in estimating its reserves for claims reported and for incurred but not reported claims. 28 29 Relationship with Mutual - ------------------------ The Company's and MNH's business and day-to-day operations are closely aligned with those of Mutual. This is the result of a combination of factors. Mutual has had a historical ownership interest in the Company and MNH. Prior to November 1986 MNH was a wholly-owned subsidiary of Mutual. Following the Company's initial public offering in November 1986 and until a secondary stock offering in July 1993 the Company was a majority-owned subsidiary of Mutual. Mutual currently owns 10.0% of the Company's common stock. Under the Management Agreement, Mutual provides the Company and MNH with all facilities and personnel to operate their business. The only officers of the Company or MNH who are paid full time employees are employees of Mutual whose services are purchased under the Management Agreement. Also, the operation of MNH's insurance business, which offers substantially the same lines of insurance as Mutual through the same independent insurance agents, creates a very close relationship among the companies. During 1998, Mutual initiated discussions with the Company concerning proposals for the acquisition of the Company by Mutual. The Company determined that the terms proposed by Mutual were inadequate. The Company also determined that the Management Agreement prevents the Company's shareholders from realizing the Company's fair value in a sale or merger, and on July 23, 1998 the Company gave notice to Mutual of its intention to terminate the Management Agreement. The provisions of the Management Agreement require five years' prior written notice for its termination. The Company does not expect the notice of termination to have any material, short-term effect on the Company's operations. However, the Company believes that the Management Agreement, as currently written, creates a conflict of interest between the Company and Mutual in their joint operations and prevents the Company's shareholders from realizing the fair market value of their shares. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk - ----------- Market risk represents the potential for loss due to changes in the fair value of financial instruments. The market risk related to the Company's financial instruments primarily relates to its investment portfolio. The value of the Company's investment portfolio of $212,911,000 at December 31, 1999 is subject to changes in interest rates and to a lesser extent on credit quality. Further, certain mortgage-backed and asset-backed securities are exposed to accelerated prepayment risk generally caused by interest rate movements. If interest rates were to decline, mortgage holders would be more likely to refinance existing mortgages at lower rates. Acceleration of future repayments could adversely affect future investment income, if reinvestment of the accelerated receipts was made in lower yielding securities. The table below provides information related to the Company's fixed maturity investments at December 31, 1999. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates. The cash flows are based upon the maturity date or, in the case of mortgage-backed and asset-backed securities, expected payment patterns. Actual cash flows could differ from those shown in the table. 29 30 Expected Cash Flows of Principal Amounts ($ in 000's):
TOTAL -------------------- Esti- Amor- mated There- tized Market 2000 2001 2002 2003 2004 after Cost Value ---- ---- ---- ---- ---- ----- ---- ----- Held to Maturity - ---------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 1,647 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,647 $ 1,602 Average interest rate 5.4% 0.0% 0.0% 0.0% 0.0% 0.0% -- -- Mortgage & asset backed securities 0 183 1,698 1,601 1,795 7,623 12,900 13,103 Average interest rate 0.0% 7.2% 7.2% 7.1% 7.1% 7.3% -- -- ------- ------- ------- ------- ------ ------ -------- -------- Total $ 1,647 $ 183 $ 1,698 $ 1,601 $1,795 $7,623 $ 14,547 $ 14,705 ======= ======= ======= ======= ====== ====== ======== ======== Available for Sale - ------------------ U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 7,400 $18,622 $ 350 $ 0 $ 0 $ 0 $ 26,732 $ 26,016 Average interest rate 5.3% 5.4% 6.3% 0.0% 0.0% 0.0% -- -- Obligations of states and political subdivisions 4,595 8,720 1,710 700 0 215 15,940 15,982 Average interest rate 4.9% 4.9% 5.6% 5.4% 0.0% 7.3% -- -- Corporate securities 7,887 15,423 14,568 7,415 849 317 46,459 46,233 Average interest rate 5.5% 6.6% 7.1% 8.0% 8.6% 9.5% -- -- Mortgage & asset backed securities 28,488 36,458 16,929 4,306 1,887 6,370 94,438 93,851 Average interest rate 6.8% 6.9% 6.9% 7.0% 7.1% 7.2% -- -- ------- ------- ------- ------- ------ ------ -------- -------- Total $48,370 $79,223 $33,557 $12,421 $2,736 $6,902 $183,209 $182,082 ======= ======= ======= ======= ====== ====== ======== ========
The discussion and the estimated amounts referred to above include forward-looking statements of market risk which involve certain assumptions as to market interest rates and the credit quality of the fixed maturity investments. Actual future market conditions may differ materially from such assumptions. Accordingly, the forward-looking statements should not be considered projections of future events by the Company. 30 31 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements required in response to this Item are submitted as part of Item 14 (a) of this report, and are incorporated in this item by reference. Quarterly data for the two most recent fiscal years is set forth below:
Three months ended ------------------ 3/31 6/30 9/30 12/31 ---- ---- ---- ----- (in thousands, except per share amounts) 1999 - ---- Net premiums earned $23,662 $23,524 $24,040 $23,549 Net investment income 3,271 3,208 3,280 3,388 Net realized investment gains 1 6 53 -- Other revenues 142 124 95 73 ------- ------- ------- ------- Total revenues $27,076 $26,862 $27,468 $27,010 ======= ======= ======= ======= Income before income taxes $ 2,325 $ 2,613 $ 2,367 $ 2,358 Net income $ 1,649 $ 1,850 $ 1,650 $ 1,644 Net income per diluted share $ .58 $ .67 $ .61 $ .63 1998 - ---- Net premiums earned $23,740 $23,875 $23,448 $22,477 Net investment income 3,290 3,331 3,317 3,339 Net realized investment losses -- -- (2) -- Other revenues 42 42 51 18 ------- ------- ------- ------- Total revenues $27,072 $27,248 $26,814 $25,834 ======= ======= ======= ======= Income before income taxes $ 1,846 $ 2,098 $ 2,041 $ 2,272 Net income $ 1,346 $ 1,520 $ 1,483 $ 1,574 Net income per diluted share $ .46 $ .52 $ .51 $ .55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 31 32 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information in response to this item is incorporated by reference herein to the information under the caption "Election of Directors" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A and used in connection with the Company's 2000 Annual Meeting of Shareholders to be held on or about May 3, 2000. Item 11. EXECUTIVE COMPENSATION. The information in response to this item is incorporated by reference herein to the information under the caption "Executive Compensation" and "Compensation of Directors" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A and used in connection with the Company's 2000 Annual Meeting of Shareholders to be held on or about May 3, 2000, provided, however that information appearing under the captions "Compensation Committee Report on Executive Compensation" and "Performance Comparison" is not incorporated herein and should not be deemed to be included in this document for any purpose. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information in response to this item is incorporated by reference herein to the information under the caption "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A and used in connection with the Company's 2000 Annual Meeting of Stockholders to be held on or about May 3, 2000. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information in response to this item is incorporated herein by reference to the information under the caption "Management Agreement" and "Certain Transactions" presented in the Company's definitive proxy statement filed or to be filed pursuant to Regulation 14A and used in connection with the Company's 2000 Annual Meeting of Shareholders to be held on or about May 3, 2000. 32 33 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) The following financial statements of Merchants Group, Inc. are included on pages F-1 to F-23: Report of Independent Accountants Consolidated Balance Sheet - December 31, 1998 and 1999. Consolidated Statement of Operations - Years ended December 31, 1997, 1998 and 1999. Consolidated Statement of Changes in Stockholders' Equity - Years ended December 31, 1997, 1998 and 1999. Consolidated Statement of Cash Flows - Years ended December 31, 1997, 1998 and 1999. Notes to Consolidated Financial Statements. (2) The following financial statement schedules of Merchants Group, Inc. are filed herewith pursuant to Item 8: Schedule I - Summary of Investments - Other Than Investments in Related Parties. Schedule II - Amounts Receivable From/Payable to Related Parties, and Underwriters, Promoters and Employees Other Than Related Parties. Schedule III - Condensed Financial Information of Registrant. Schedule V - Supplemental Insurance Information (see Schedule X). Schedule VI - Reinsurance Schedule X - Supplemental Insurance Information Concerning Property - Casualty Subsidiaries (b) Reports on Form 8-K. There were no reports on Form 8-K filed for the quarter ended December 31, 1999. (c) Exhibits required by Item 601 of Regulation S-K: (3) (a) Restated Certificate of Incorporation (incorporated by reference to Exhibit No. 3C to Amendment No. 1 to the Company's Registration Statement (No. 33-9188) on Form S-1 filed on November 7, 1986). (b) Restated By-laws (incorporated by reference to Exhibit No. 3D to Amendment No. 1 to the Company's Registration Statement (No. 33-9188) on Form S-1 filed on November 7, 1986). 33 34 (10) (a) Management Agreement dated as of September 29, 1986 by and among Merchants Mutual Insurance Company, Registrant and Merchants Insurance Company of New Hampshire, Inc. (incorporated by reference to Exhibit No. 10A to the Company's Registration Statement (No. 33-9188) on Form S-1 filed on September 30, 1986). (b) Agreement of Reinsurance No. 6922 between Merchants Mutual Insurance Company, Merchants Insurance Company of New Hampshire, Inc. and General Reinsurance Corporation (incorporated by reference to Exhibit No. 10E to the Company's Registration Statement (No. 33-9188) on Form S-1 filed on September 30, 1986). (c) Agreement of Reinsurance No. 7299 between Merchants Mutual Insurance Company, Merchants Insurance Company of New Hampshire, Inc. and General Reinsurance Corporation, (incorporated by reference to Exhibit No. 10o to the Company's 1987 Annual Report on Form 10-K (File No. 1-9640) filed on March 19, 1988). (d) Agreement of Reinsurance dated January 27, 1993, between Merchants Mutual Insurance Company and Merchants Insurance Company of New Hampshire, Inc. (incorporated by reference to Exhibit (3) in the Company's Current Report on Form 8-K (File No. 1-9640) filed on January 29, 1993). (e) Agreement of Reinsurance No. 8009 between Merchants Mutual Insurance Company, Merchants Insurance Company of New Hampshire, Inc. and General Reinsurance Corporation, (incorporated by reference to Exhibit 10e to the Company's 1995 Annual Report on Form 10-K filed on March 28, 1996). (f) Property Catastrophe Reinsurance Agreement (HCI Agreement No. 439) between Merchants Mutual Insurance Company, Merchants Insurance Company of New Hampshire, Inc. and General Reinsurance Corporation, et. al., dated January 1, 1997, (incorporated by reference to Exhibit No. 10f to the Company's 1996 Annual Report on Form 10-K filed on March 28, 1997). (g) Property and Casualty Excess of Loss Reinsurance Agreement between Merchants Mutual Insurance Company, Merchants Insurance Company of New Hampshire, Inc. and American Reinsurance Company, including endorsement, (incorporated by reference to Exhibit 10g to the Company's 1998 Annual Report on Form 10-K filed on March 29, 1999). (h) Property Catastrophe Excess of Loss Reinsurance Agreement between Merchants Mutual Insurance Company, Merchants Insurance Company of New Hampshire, Inc. and the Subscribing Reinsurers Executing the Interest and Liabilities Contracts attached to this agreement, effective January 1, 1998 (incorporated by reference to Exhibit 10h to the Company's 1998 Annual Report on Form 10-K filed on March 29, 1999). 34 35 * (i) Merchants Mutual Capital Accumulation Plan (incorporated by reference to Exhibit No. 10G to the Company's Registration Statement (No. 33-9188) on Form S-1 filed on September 30, 1986). * (j) Merchants Mutual Capital Accumulation Plan, fourth amendment, effective January 1, 1996 (incorporated by referenced to Exhibit 10(h) to the Company's 1996 Annual Report on Form 10-K (File No. 1-9640) filed on March 28, 1997). * (k) Merchants Mutual Capital Accumulation Plan Trust Agreement (restated as of January 1, 1996 (incorporated by reference to Exhibit 10(i) to the Company's 1996 Annual Report on Form 10-K (File No. 1-9640) filed on March 28, 1997). * (l) Merchants Mutual Supplemental Executive Retirement Plan dated as of December 29, 1989 and Agreement of Trust dated as of December 29, 1989 (incorporated by reference to Exhibit No. 10K to the Company's 1989 Annual Report on Form 10-K (File No. 1-9640) filed on March 21, 1990). * (m) Amendment dated June 10, 1992 to Agreement of Trust under Merchants Mutual Supplemental Executive Retirement Plan dated as of December 29, 1989 (incorporated by reference to Exhibit No. 10R to the Company's 1992 Annual Report on Form 10-K (File No. 1-9640) filed on March 31, 1993). * (n) Merchants Group, Inc. 1986 Stock Option Plan As Amended Through February 16, 1993 (incorporated by reference to Exhibit No. 10E to the Company's 1992 Annual Report on Form 10-K (File No. 1-9640) filed on March 31, 1993). * (o) Form of Amended Indemnification Agreement entered into by Registrant with each director and executive office of Registrant (incorporated by reference to Exhibit No. 10N to Amendment No. 1 to the Company's Registration Statement on (No. 33-9188) Form S-1 filed on November 7, 1986). * (p) Merchants Mutual Insurance Company Incentive Compensation Plan, as amended January 24, 1996 (incorporated by reference to Exhibit No. 10(n) to the Company's 1996 Annual Report on Form 10-K (File No. 1-9640) filed on March 28, 1997). * (q) Employee Retention Agreement between Robert M. Zak and Merchants Mutual Insurance Company dated as of March 1, 1999 (incorporated by reference to Exhibit No. 10-A to the Company's June 30, 1999 Quarterly Report on Form 10-Q filed on August 12, 1999). * (r) Employee Retention Agreement between Edward M. Murphy and Merchants Mutual Insurance Company dated as of March 1, 1999 (incorporated by reference to Exhibit 10r to the Company's 1998 Annual Report on Form 10-K filed on March 29, 1999). 35 36 * (s) Employee Retention Agreement between Kenneth J. Wilson and Merchants Mutual Insurance Company dated as of March 1, 1999 (incorporated by reference to Exhibit 10s to the Company's 1998 Annual Report on Form 10-K filed on March 29, 1999). (11) (a) Statement re computation of per share earnings (incorporated herein by reference to Note 9 to the Consolidated Financial Statements included in Item 8). (21) List of Subsidiaries of Registrant (incorporated by reference to Exhibit No. 22 to the Company's Registration Statement ( No. 33-9188) on Form S-1 filed on September 30, 1986). (23) Consent of Independent Accountants (filed herewith). (27) Financial Data Schedule (filed herewith). * Indicates a management contract or compensation plan or arrangement. 36 37 MERCHANTS GROUP, INC. SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1999 (in thousands)
Amount at which shown Amortized Cost/ Market in the balance Type of Investment Cost value sheet - ------------------ ---- ----- ----- Fixed maturities: United States Government and government agencies and authorities $ 28,019 $ 27,618 $ 27,663 Corporate bonds 46,459 46,233 46,233 Mortgage and asset backed securities 107,338 106,954 106,751 Tax exempt bonds 15,940 15,982 15,982 -------- -------- -------- Total fixed maturities 197,756 196,787 196,629 Preferred stocks 13,082 12,941 12,941 Short-term investments 2,544 2,544 2,544 Other 797 797 797 -------- -------- -------- $214,179 $213,069 $212,911 ======== ======== ========
37 38 MERCHANTS GROUP, INC. SCHEDULE II - AMOUNTS RECEIVABLE FROM/PAYABLE TO RELATED PARTIES, AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES Years ended December 31, 1997, 1998 and 1999 (in thousands)
1997 1998 1999 ---- ---- ---- Receivable from (payable to) Merchants Mutual Insurance Company(1): Balance at beginning of period $327 $ 527 $(1,321) Change during the period 200 (1,848) 703 ---- ------- ------- Balance at end of period $527 $(1,321) $ (618) ==== ======= =======
(1) Under a Management Agreement, Merchants Mutual Insurance Company ("Mutual") provides employees, services and facilities for Merchants Insurance Company of New Hampshire, Inc. ("MNH") to carry on its insurance business on a cost reimbursed basis. The balance in the intercompany receivable (payable) account indicates the amount due from (to) Mutual for the excess (deficiency) of premiums collected over (from) payments for losses, employees, services and facilities provided to MNH. 38 39 MERCHANTS GROUP, INC. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in thousands except per share and share amounts)
BALANCE SHEET - ------------- December 31, --------------------- 1998 1999 ---- ---- Assets ------ Investment in subsidiary $70,788 $70,362 Other assets 1,043 98 ------- ------- Total assets $71,831 $70,460 ======= ======= Liabilities and Stockholders' Equity ------------------------------------ Other liabilities $ 48 $ 48 Demand loan -- 1,025 ------- ------- Total liabilities 48 1,073 ------- ------- Stockholders' equity: Preferred stock, $.01 par value, authorized and unissued 3,000,000 shares -- -- Preferred stock, no par value, $424.30 stated value, no shares issued or outstanding at December 31, 1998 or 1999 -- -- Common stock, $.01 par value, authorized 10,000,000 shares; issued and outstanding of 2,851,452 shares at December 31, 1998 and 2,595,852 shares at December 31, 1999 32 32 Additional paid in capital 35,511 35,680 Treasury stock, 378,400 shares at December 31, 1998 and 646,000 shares at December 31, 1999 (7,097) (13,139) Accumulated other comprehensive income (loss) 1,173 (1,188) Accumulated earnings 42,164 48,002 ------- ------- Total stockholders' equity 71,783 69,387 ------- ------- Total liabilities and stockholers' equity $71,831 $70,460 ======= =======
39 40 MERCHANTS GROUP, INC. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT Continued (in thousands)
INCOME STATEMENT - ---------------- Year ended December 31, ------------------------------ 1997 1998 1999 ---- ---- ---- Revenues: Equity in net income of subsidiary $4,485 6,161 $6,937 Investment income 21 61 39 Net realized investment gains 2 -- -- ------ ------ ------ Total revenues 4,508 6,222 6,976 Expenses: General and administrative expenses 230 337 237 ------ ------ ------ Operating income before income taxes 4,278 5,885 6,739 Income tax expense (benefit) 80 (38) (54) ------ ------ ------ Net income $4,198 $5,923 $6,793 ====== ====== ======
40 41 MERCHANTS GROUP, INC. SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (in thousands)
STATEMENT OF CASH FLOWS - ----------------------- Increase (Decrease) in Cash and Cash Equivalents: Year ended December 31, --------------------------------- 1997 1998 1999 ---- ---- ---- (in thousands) Cash flows from operating activities: $ (227) $ (251) $ (142) ------- ------- ------- Cash flows from investing activities: Receipt of subsidiary common stock dividend 2,800 2,600 5,000 Sale (purchase) of other investments, net 853 (630) 936 ------- ------- ------- Cash flows from investing activities 3,653 1,970 5,936 ------- ------- ------- Cash flows from financing activities: Purchase of treasury stock (2,923) (1,191) (6,042) Proceeds of demand loan -- -- 1,025 Cash dividends (589) (579) (955) Exercise of common stock options 83 56 169 ------- ------- ------- Cash flows from financing activities (3,429) (1,714) (5,803) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (3) 5 (9) Cash and cash equivalents, beginning of year 8 5 10 ------- ------- ------- Cash and cash equivalents, end of year $ 5 $ 10 $ 1 ======= ======= ======= Reconciliation of net income to net cash provided by operations: Net income $ 4,198 $ 5,923 $ 6,793 Adjustments to reconcile net income to net cash provided by operations: Equity in income of subsidiary (4,485) (6,161) (6,937) Net realized investment gains (2) -- -- Decrease in other liabilities (20) (13) -- (Increase) decrease in other (non-investment) assets 93 (6) -- Other, net (11) 6 2 ------- ------- ------- Net cash used in operating activities $ (227) $ (251) $ (142) ======= ======= =======
41 42 MERCHANTS GROUP, INC. SCHEDULE III - CONDENSED FINANCIAL INFORMATION NOTES TO CONDENSED FINANCIAL STATEMENTS - --------------------------------------- Cash dividends of $2,800,000, $2,600,000 and $5,000,000 were paid to the Registrant by its consolidated subsidiary in the years ended December 31, 1997, 1998 and 1999 respectively. 42 43 MERCHANTS GROUP, INC. SCHEDULE VI - REINSURANCE YEARS ENDED DECEMBER 31, 1997, 1998, 1999 (in thousands except percentages)
Percentage Ceded Assumed of amount Gross to other from other Net assumed amount companies companies amount to net ------ --------- --------- ------ ------ Year Ended December 31, 1997 Property and Casualty Premiums $101,064 $6,895 $2,642 $96,811 2.7% Year ended December 31, 1998 Property and Casualty Premiums $ 98,956 $7,042 $ 844 $92,758 .9% Year ended December 31, 1999 Property and Casualty Premiums $100,227 $7,369 $1,612 $94,470 1.7%
43 44 MERCHANTS GROUP, INC. SCHEDULE X - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING PROPERTY - CASUALTY SUBSIDIARIES Years ended December 31, 1997, 1998 and 1999 (in thousands)
Reserves Losses & loss Deferred for Discount adjustment expenses Amoritiza- policy losses & if any, Net incurred related to tion of Paid losses acquis- loss ad- deducted Net invest- (1) (2) deferred & loss ad- Direct ition justment from Unearned earned ment Current Prior acquisition justment premium costs expenses reserves premiums premiums income years years costs expenses written ----- -------- -------- -------- -------- ------ ----- ----- ----- -------- ------- Year ended: December 31, 1997 $12,597 $141,205 $6,394 $50,406 $96,054 $12,770 $67,119 $ 4,508 $25,454 $67,054 $101,064 December 31, 1998 $12,390 $136,685 $9,256 $49,382 $93,540 $13,277 $67,379 $(2,145) $24,788 $69,198 $ 98,956 December 31, 1999 $12,309 $133,526 $8,492 $49,616 $94,775 $13,147 $69,835 $(3,749) $25,115 $65,455 $100,227
44 45 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. Merchants Group, Inc. Date: March 30, 2000 BY: /s/Robert M. Zak, Senior Vice President Robert M. Zak, Senior Vice President and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/Richard E. Garman Director, Chairman March 30, 2000 - ---------------------- of the Board Richard E. Garman /s/Brent D. Baird Director, President March 30, 2000 - ---------------------- Brent D. Baird /s/Robert M. Zak Director, Sr. VP & March 30, 2000 - ---------------------- Chief Operating Robert M. Zak Officer /s/Kenneth J. Wilson Vice President & CFO March 30, 2000 - ---------------------- (principal financial Kenneth J. Wilson and accounting officer) /s/Andrew A. Alberti Director March 30, 2000 - ---------------------- Andrew A. Alberti /s/Frank J. Colantuono Director March 30, 2000 - ---------------------- Frank J. Colantuono /s/Henry P. Semmelhack Director March 30, 2000 - ---------------------- Henry P. Semmelhack
45 46 Report of Independent Accountants --------------------------------- To the Board of Directors and Stockholders of Merchants Group, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) present fairly, in all material respects, the financial position of Merchants Group, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States 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. /s/ PricewaterhouseCoopers Buffalo, New York February 14, 2000 F-1 47 MERCHANTS GROUP, INC. --------------------- CONSOLIDATED BALANCE SHEET -------------------------- (in thousands) --------------
December 31, ------------ Assets 1998 1999 ------ ---- ---- Investments: Fixed maturities: Held to maturity at amortized cost $ 17,000 $ 14,547 Available for sale at fair value 180,784 182,082 Preferred stock at fair value 10,373 12,941 Other long-term investments at fair value 735 797 Short-term investments 6,280 2,544 -------- -------- Total investments 215,172 212,911 Cash 16 2 Interest due and accrued 1,923 2,117 Premiums receivable, net of allowance for doubtful accounts of $454 in 1998 and $431 in 1999 20,629 19,964 Deferred policy acquisition costs 12,390 12,309 Ceded reinsurance balances receivable 9,741 5,396 Prepaid reinsurance premiums 2,629 3,168 Deferred income taxes 5,055 6,002 Other assets 6,968 7,654 -------- -------- Total assets $274,523 $269,523 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 48 MERCHANTS GROUP, INC. --------------------- CONSOLIDATED BALANCE SHEET -------------------------- (in thousands except share and per share amounts)
December 31, ------------ 1998 1999 ---- ---- Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Reserve for losses and loss adjustment expenses $136,685 $133,526 Unearned premiums 49,382 49,616 Demand loan -- 1,025 Payable to affiliate 1,321 618 Other liabilities 15,352 15,351 -------- -------- Total liabilities 202,740 200,136 -------- -------- Stockholders' equity: Common stock, $.01 par value, authorized 10,000,000 32 32 shares, issued and outstanding 2,851,452 shares at December 31, 1998 and 2,595,852 shares at December 31, 1999 Additional paid in capital 35,511 35,680 Treasury stock, 378,400 shares at December 31, 1998 (7,097) (13,139) and 646,000 shares at December 31, 1999 Accumulated other comprehensive income (loss) 1,173 (1,188) Accumulated earnings 42,164 48,002 -------- -------- Total stockholders' equity 71,783 69,387 -------- -------- Commitments and contingent liabilities (Note 11) -- -- Total liabilities and stockholders' equity $274,523 $269,523 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 49 MERCHANTS GROUP, INC. --------------------- CONSOLIDATED STATEMENT OF OPERATIONS ------------------------------------ (in thousands except per share amounts)
Year ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- Revenues: Net premiums earned $ 96,054 $ 93,540 $ 94,775 Net investment income 12,770 13,277 13,147 Net realized investment gains (losses) 112 (2) 60 Other revenues 214 153 434 -------- -------- -------- Total revenues 109,150 106,968 108,416 -------- -------- -------- Expenses: Net losses and loss adjustment expenses 71,627 65,234 66,086 Amortization of deferred policy acquisition costs 25,454 24,788 25,115 Other underwriting expenses 6,647 8,689 7,552 -------- -------- -------- Total expenses 103,728 98,711 98,753 -------- -------- -------- Income before income taxes 5,422 8,257 9,663 Income tax provision 1,224 2,334 2,870 -------- -------- -------- Net income $ 4,198 $ 5,923 $ 6,793 ======== ======== ======== Earnings per share: Basic $ 1.41 $ 2.05 $ 2.48 ======== ======== ======== Diluted $ 1.41 $ 2.04 $ 2.48 ======== ======== ======== Weighted average number of shares outstanding: Basic 2,973 2,895 2,738 Diluted 2,980 2,904 2,743
The accompanying notes are an integral part of these consolidated financial statements. F-4 50 MERCHANTS GROUP, INC. --------------------- CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ---------------------------------------------- (in thousands)
Year ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- Net income $4,198 $5,923 $ 6,793 ------ ------ ------- Other comprehensive income (loss) before tax: Unrealized gains (losses) on securities 2,595 185 (3,540) Reclassification adjustment for gains and losses included in net income (74) (15) (37) ------ ------ ------- Other comprehensive income (loss) before tax 2,521 170 (3,577) Income tax provision (benefit) related to items of other comprehensive income 857 58 (1,216) ------ ------ ------- Other comprehensive income (loss) 1,664 112 (2,361) ------ ------ ------- Comprehensive income $5,862 $6,035 $ 4,432 ====== ====== =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 51 MERCHANTS GROUP, INC. --------------------- CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY --------------------------------------------------------- (in thousands)
Year ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- Common stock: Beginning and end of year $ 32 $ 32 $ 32 ------- ------- -------- Additional paid in capital: Beginning of year 35,372 35,455 35,511 Exercise of common stock options 83 56 169 ------- ------- -------- End of year 35,455 35,511 35,680 ------- ------- -------- Treasury stock: Beginning of year (2,983) (5,906) (7,097) Purchase of treasury shares (2,923) (1,191) (6,042) ------- ------- -------- End of year (5,906) (7,097) (13,139) ------- ------- -------- Accumulated other comprehensive income (loss) Beginning of year (603) 1,061 1,173 Other comprehensive income (loss) 1,664 112 (2,361) ------- ------- -------- End of year 1,061 1,173 (1,188) ------- ------- -------- Accumulated earnings: Beginning of year 33,211 36,820 42,164 Net income 4,198 5,923 6,793 Cash dividends ($.20/share in 1997 and 1998, $.35/share in 1999) (589) (579) (955) ------- ------- -------- End of year 36,820 42,164 48,002 ------- ------- -------- Total stockholders' equity $67,462 $71,783 $ 69,387 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 52 MERCHANTS GROUP, INC. --------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (in thousands)
Year ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- Cash flows from operations: Collection of premiums $ 96,102 $ 94,121 $ 95,612 Payment of losses and loss adjustment expenses (67,054) (69,198) (65,455) Payment of underwriting expenses (32,019) (32,159) (33,381) Investment income received 12,763 13,220 13,141 Investment expenses paid (309) (341) (381) Income taxes paid (164) (1,501) (3,064) Other cash receipts 214 157 388 -------- -------- --------- Net cash provided by operations 9,533 4,299 6,860 -------- -------- --------- Cash flows from investing activities: Proceeds from fixed maturities sold or matured 81,035 95,217 98,624 Purchase of fixed maturities (90,176) (97,733) (100,385) Net increase in preferred stock (2,067) -- (2,977) Net (increase) decrease in other long-term investments 1,671 (101) (62) Net (increase) decrease in short-term investments 3,778 (1,810) 3,736 (Purchase) disposition of equipment, net (146) -- 696 -------- -------- --------- Net cash used in investing activities (5,905) (4,427) (368) -------- -------- --------- Cash flows from financing activities: Settlement of affiliate balances (200) 1,848 (703) Proceeds of demand loan -- -- 1,025 Purchase of treasury stock (2,923) (1,191) (6,042) Proceeds from exercise of common stock options 83 56 169 Cash dividends (589) (579) (955) -------- -------- --------- Net cash provided by (used in) financing activities (3,629) 134 (6,506) -------- -------- --------- Increase (decrease) in cash (1) 6 (14) Cash, beginning of year 11 10 16 -------- -------- --------- Cash, end of year $ 10 $ 16 $ 2 ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. F-7 53 MERCHANTS GROUP, INC. --------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS --------------------------------------------------------------- (in thousands)
Year ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- Net income $ 4,198 $ 5,923 $ 6,793 Adjustments: Depreciation and amortization (19) (123) (143) Net realized investment (gains) losses (112) 2 (60) (Increase) decrease in assets: Interest due and accrued (65) (65) (194) Premiums receivable (583) 455 665 Deferred policy acquisition costs (201) 207 81 Ceded reinsurance balances receivable (3,297) 1,391 4,345 Prepaid reinsurance premiums 61 242 (539) Deferred income taxes (532) 1,206 270 Other assets 1,274 154 (1,432) Increase (decrease) in liabilities: Reserve for losses and loss adjustment expenses 7,726 (4,520) (3,159) Unearned premiums 696 (1,024) 234 Other liabilities 387 451 (1) ------- ------- ------- Net cash provided by operations $ 9,533 $ 4,299 $ 6,860 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-8 54 MERCHANTS GROUP, INC. --------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. Significant Accounting Policies ------------------------------- Principles of consolidation and basis of presentation ----------------------------------------------------- The consolidated financial statements of Merchants Group, Inc. (the "Company") include the accounts of the Company, its wholly owned subsidiary, Merchants Insurance Company of New Hampshire, Inc. ("MNH"), and M.F.C. of New York, Inc., an inactive premium finance company which is a wholly owned subsidiary of MNH. MNH is a stock property and casualty insurance company domiciled in the state of New Hampshire. MNH offers property and casualty insurance to preferred risk individuals and small to medium sized businesses in the northeast United States, primarily in New York, New Hampshire and New Jersey where a majority of its policies are written. As a holding company, the Company has had no operations. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ in some respects from those followed in reports to insurance regulatory authorities. In its Annual Statement filed with regulatory authorities, MNH reported policyholders' surplus of $50,576,000 and $53,278,000 at December 31, 1998 and 1999, respectively. MNH's net income as reported in its Annual Statement was $3,481,000 in 1997, $7,367,000 in 1998 and $7,141,000 in 1999. All significant intercompany balances and transactions have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Investments ----------- The Company has classified its investments in fixed maturities as either held to maturity or available for sale. Fixed maturities classified as held to maturity are presented at amortized cost and consist of debt securities that management intends and has the ability to hold until maturity. Fixed maturities classified as available for sale are presented at fair value and consist of debt securities that management may not hold until maturity. All preferred stocks are classified as available for sale and are presented at fair value. The net aggregate unrealized gain or loss, net of applicable income taxes, related to fixed maturities and preferred stock classified as available for sale is included as a component of accumulated other comprehensive income (loss) in stockholders' equity. F-9 55 Fixed maturities include mortgage backed and asset backed securities which are valued using the interest method. The Company estimates prepayments utilizing published data when applying the interest method. Periodic adjustments to prepayment assumptions are credited or charged to investment income. Other long-term investments include collateralized mortgage obligation residuals, carried at unpaid principal balances which do not vary significantly from fair value. Short-term investments, consisting primarily of money market mutual funds, have original maturities of three months or less and are carried at cost, which approximates fair value. Realized gains and losses on the sale of investments are based on the cost of the specific investment sold. Net premiums earned ------------------- Premiums are recorded as revenue ratably over the terms of the policies written (principally one year). Unearned premiums are calculated using a monthly pro rata method. Deferred policy acquisition costs --------------------------------- Policy acquisition costs, such as commissions (net of reinsurance commissions), premium taxes and certain other underwriting expenses which vary directly with premium volume, are deferred and amortized over the terms of the related insurance policies. Deferred policy acquisition costs do not exceed estimated recoverable amounts after allowing for anticipated investment income. Reinsurance ----------- Reinsurance assumed from business written through state reinsurance facilities has been reflected in unearned premiums, loss reserves, premiums earned and losses incurred based on reports received from such facilities. Ceded reinsurance premiums, losses and ceding commissions are netted against earned premiums, losses and commission expense, respectively. Reserve for losses and loss adjustment expenses ----------------------------------------------- Liabilities for unpaid losses and loss adjustment expenses ("LAE") are estimates of future payments to be made to settle all insurance claims for reported losses and estimates of incurred but not reported losses based upon past experience modified for current trends. With the exception of workers' compensation losses, loss reserves are not discounted. Estimated amounts of salvage and subrogation on paid and unpaid losses are deducted from the liability for unpaid claims. The estimated liabilities may be more or less than the amount ultimately paid when the claims are settled. Management and the Company's independent consulting actuary regularly review the estimates of reserves needed and any changes are reflected in current operating results. F-10 56 The Company discounts its liability for workers' compensation case reserves on a tabular basis, using the National Council on Compensation Insurance Workers' Compensation Statistical Plan Table III A at a rate of 3.5%. The amount of discount at December 31, 1998 and 1999 is $9,256,000 and $8,492,000, respectively. Reserves for losses incurred but not reported and for LAE are not discounted. Structured settlements have been negotiated for claims on certain insurance policies. Structured settlements are agreements to provide periodic payments to claimants, and are funded by annuities purchased from various life insurance companies. The Company remains primarily liable for payment of these claims. Accordingly, a liability and a corresponding deposit in the amount $5,764,000 and $6,456,000 at December 31, 1998 and 1999, respectively, are recorded in the Company's consolidated balance sheet. Income taxes ------------ The Company and its wholly owned subsidiary file a consolidated federal income tax return. The Company follows the asset and liability approach to account for income taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Other financial instruments --------------------------- The fair values of the Company's other financial instruments, principally premiums receivable and certain non-insurance related liabilities, do not vary significantly from the amounts assigned in these financial statements. Insurance-related assessments ----------------------------- In 1997, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments". The accounting guidance of this SOP focuses on the timing of recognition and measurement of liabilities for insurance-related assessments. The Company adopted SOP 97-3 in the first quarter of 1999. The impact of this adoption was not material to the Company's financial position or results of operations. 2. Related Party Transactions -------------------------- The Company and MNH have no paid employees. Under a management agreement Merchants Mutual Insurance Company ("Mutual"), which owns 9.8% of the Company's outstanding common stock at December 31, 1999, provides the Company and MNH with the facilities, management and personnel required to manage their day-to-day business. All underwriting, administrative, claims and investment expenses incurred on behalf of Mutual and MNH are shared on an allocated cost basis, determined as follows: for underwriting and administrative expenses, the respective share of total direct premiums written for Mutual and F-11 57 MNH serves as the basis of allocation; for claims expenses, the average number of outstanding claims is used; investment expenses are shared based on each company's share of total invested assets. MNH also pays an annual management fee of $50,000 to Mutual. On July 23, 1998, the Company gave notice to Mutual of its intent to terminate the management agreement under its terms, which termination is effective five years after the date of notice. MNH's agents are also licensed to sell Mutual's products. The agents are informed of the underwriting criteria of each company as well as the classes of business that are acceptable to each company. Underwriters review each application submitted by an agent to determine which company's underwriting criteria the risk meets and then issue a policy in the appropriate company. The payable to or receivable from Mutual is non-interest bearing and represents the net of premiums collected and loss and operating expense payments made by Mutual on behalf of MNH. This balance is settled in cash on a monthly basis. F-12 58 ================================================================================ 3. Investments ----------- Investments in fixed maturities and preferred stocks ---------------------------------------------------- The amortized cost and estimated fair values of investments in fixed maturities held to maturity and available for sale and the cost and estimated fair value of preferred stocks are as follows:
Amortized Gross Gross Cost/ Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- (in thousands) December 31, 1998 - ----------------- Fixed maturities: Held to maturity - ---------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 1,647 $ -- $ 12 $ 1,635 Mortgage and asset backed securities 15,353 768 -- 16,121 -------- ------ ---- -------- Total $ 17,000 $ 768 $ 12 $ 17,756 ======== ====== ==== ======== Available for sale - ------------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 12,755 $ 21 $-- $ 12,776 Obligations of states and political subdivisions 26,534 532 -- 27,066 Corporate securities 29,386 693 34 30,045 Mortgage and asset backed securities 109,966 976 45 110,897 -------- ------ ---- -------- Total $178,641 $2,222 $ 79 $180,784 ======== ====== ==== ======== Preferred stocks $ 10,099 $ 408 $134 $ 10,373 ======== ====== ==== ========
F-13 59
Amortized Gross Gross Cost/ Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- (in thousands) December 31, 1999 - ----------------- Fixed maturities: Held to maturity - ---------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 1,647 $-- $ 45 $ 1,602 Mortgage and asset backed securities 12,900 213 10 13,103 -------- ---- ------ -------- Total $ 14,547 $213 $ 55 $ 14,705 ======== ==== ====== ======== Available for sale - ------------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 26,372 $-- $ 356 $ 26,016 Obligations of states and political subdivisions 15,940 79 37 15,982 Corporate securities 46,459 30 256 46,233 Mortgage and asset backed securities 94,438 134 721 93,851 -------- ---- ------ -------- Total $183,209 $243 $1,370 $182,082 ======== ==== ====== ======== Preferred stocks $ 13,082 $ 73 $ 214 $ 12,941 ======== ==== ====== ========
The amortized cost and fair value of fixed maturities by expected maturity at December 31, 1999 are shown below. Mortgage and asset backed securities are distributed in the table based upon management's estimate of repayment periods. 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. F-14 60
Estimated Fair Amortized Cost Value -------------- -------------- (in thousands) Held to maturity ---------------- Due in one year or less $ 1,647 $ 1,602 Due after one year through five years 5,277 5,360 Due after five years through ten years 7,623 7,743 Due after ten years -- -- -------- -------- Total $ 14,547 $ 14,705 ======== ======== Available for sale ------------------ Due in one year or less $ 48,370 $ 48,096 Due after one year through five years 127,937 127,143 Due after five years through ten years 5,044 4,996 Due after ten years 1,858 1,847 -------- -------- Total $183,209 $182,082 ======== ========
Discount and premium pertaining to collateralized mortgage obligations are amortized over the securities' estimated redemption periods using the effective interest method. Yields used to calculate premium or discount are adjusted for prepayments quarterly. Fixed maturities with a par value of $1,900,000 were on deposit at December 31, 1999 with various state insurance departments in compliance with applicable insurance laws. Proceeds from sales of available for sale fixed maturity securities and preferred stocks and gross realized gains and losses related to such sales are as follows:
Year ended December 31, ------------------------------ 1997 1998 1999 ---- ---- ---- (in thousands) Proceeds from sales $26,652 $9,955 $16,968 Gross realized gains 138 1 76 Gross realized losses 26 3 16
F-15 61 Net investment income --------------------- Net investment income consists of:
Year ended December 31, ----------------------- 1997 1998 1999 ---- ---- ---- (in thousands) Fixed maturities $11,472 $12,236 $12,118 Short-term investments 686 513 464 Other 921 869 946 ------- ------- ------- Total investment income 13,079 13,618 13,528 Investment expenses 309 341 381 ------- ------- ------- Net investment income $12,770 $13,277 $13,147 ======= ======= =======
4. Reinsurance ----------- MNH follows the customary practice of reinsuring a portion of the exposure under its policies. Insurance is ceded principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of coverage provided by its policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The effect of reinsurance on premiums written and earned for the years ended December 31, 1998 and 1999 is as follows:
1998 1999 -------------------- --------------------- Premiums Premiums Premiums Premiums Written Earned Written Earned ------- ------ ------- ------ (in thousands) Direct $98,956 $99,556 $100,227 $99,943 Assumed 844 1,267 1,612 1,663 Ceded (7,042) (7,283) (7,369) (6,831) ------- ------- -------- ------- Net premiums $92,758 $93,540 $ 94,470 $94,775 ======= ======= ======== =======
As a result of the reinsurance agreements maintained by MNH, MNH is exposed to certain credit risk if one or more of its primary reinsurers were to become financially unstable. As of December 31, 1999, MNH has recognized amounts to be recovered from its primary reinsurers related to ceded losses and ceded unearned premiums totaling $7,725,000. MNH generally does not require collateral for reinsurance recoverable. F-16 62 5. Reserve for Losses and Loss Adjustment Expenses ----------------------------------------------- Activity in the reserve for losses and LAE is summarized as follows:
1998 1999 ---- ---- (in thousands) Reserve for losses and LAE at beginning of year $141,205 $136,685 Less reinsurance recoverables 10,372 9,816 -------- -------- Net balance at beginning of year 130,833 126,869 -------- -------- Provision for losses and LAE for claims occurring in: Current year 67,379 69,835 Prior years (2,145) (3,749) -------- -------- 65,234 66,086 -------- -------- Loss and LAE payments for claims occurring in: Current year 26,765 28,330 Prior years 42,433 37,125 -------- -------- 69,198 65,455 -------- -------- Reserve for losses and LAE at end of year, net 126,869 127,500 Plus reinsurance recoverables 9,816 6,026 -------- -------- Balance at end of year $136,685 $133,526 ======== ========
In 1998, the Company decreased its reserves for prior years by $2,145,000, primarily due to favorable loss experience related to automobile liability policies. In 1999, the Company decreased its reserves for prior years by $3,749,000 primarily due to favorable loss experience related to workers' compensation policies. 6. Demand Loan ----------- During 1999, the Company arranged for a $2,000,000 unsecured credit facility from a bank. Any borrowings under this facility are payable on demand and carry an interest rate which can be fixed or variable and is negotiated at the time of each advance. This facility is available for general working capital purposes and for repurchases of the Company's common stock. As of December 31, 1999, $1,025,000 was outstanding under this facility and carried a weighted average interest rate of 8.12%. F-17 63 7. Income Taxes ------------ The provision (benefit) for income taxes consists of:
Year ended December 31, --------------------------- 1997 1998 1999 ---- ---- ---- (in thousands) Current $1,756 $1,127 $2,600 Deferred (532) 1,207 270 ------ ------ ------ Total income tax provision $1,224 $2,334 $2,870 ====== ====== ======
A reconciliation of the difference between the Company's total income tax provision and that calculated using statutory income tax rates is as follows:
Year ended December 31, ---------------------------- 1997 1998 1999 ---- ---- ---- (in thousands) Computed provision at statutory rate $1,843 $2,807 $3,285 Adjustments: Tax-exempt investment income (491) (393) (298) Dividend exclusion (147) (128) (150) Other items 19 48 33 ------ ------ ------ Total income tax provision $1,224 $2,334 $2,870 ====== ====== ======
F-18 64 Deferred tax liabilities (assets) are comprised of the following:
December 31, ------------------ 1998 1999 ---- ---- (in thousands) Deferred policy acquisition costs $ 4,213 $ 4,185 Unrealized investment gains 604 -- Accretion of bond discount 349 146 Other 204 131 -------- -------- Total deferred tax liabilities 5,370 4,462 -------- -------- Discounting of reserve for losses and loss adjustment expenses (6,826) (6,425) Unearned premiums (3,179) (3,159) Unrealized investment losses -- (612) Other (279) (268) Minimum tax credit carryforward (141) -- -------- -------- Total deferred tax assets (10,425) (10,464) -------- -------- Net deferred income taxes $ (5,055) $ (6,002) ======== ========
Although realization is not assured, based upon the evidence available the Company believes that it is more likely than not that the net deferred income tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are not achieved. 8. Stockholders' Equity -------------------- Dividends --------- The Company depends on dividends from its subsidiary, MNH, to pay cash dividends to its stockholders and to meet its expenses. MNH is subject to New Hampshire state insurance laws which restrict its ability to pay dividends without the prior approval of state regulatory authorities. These restrictions limit dividends to those that, when added to all other dividends paid within the preceding twelve months, would not exceed 10% of an insurer's policyholders' surplus as of the preceding December 31. The maximum amount of dividends that MNH could pay during any twelve month period ending in 2000, without the prior approval of the New Hampshire Insurance Commissioner, is $5,328,000. Stock option plans ------------------ The Company's stock option plan (the "Plan"), which reserved 200,000 shares of common stock for issuance to the Company's and MNH's officers and key employees of the Company's affiliate, Mutual, expired in 1996. Under the Plan, qualified and non-qualified stock options were granted at amounts not less than the fair market value of the Company's stock on the F-19 65 date of grant. Options granted under the Plan have a 10 year life and may be exercised in cumulative annual increments of 25% commencing one year from the date of grant. In accounting for its stock option plans, the Company remains under the expense recognition provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" but follows the disclosure provisions of SFAS No. 123 "Accounting for Stock Based Compensation". No compensation expense was recognized in 1997, 1998 or 1999 for options granted under these plans. Had compensation expense for stock options granted under the Company's stock option plans been determined based on the fair value at the grant date consistent with the method required by SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 1998 and 1999 would have been as follows:
1998 1999 ---- ---- Net income: As reported $5,923,000 $6,793,000 Pro forma $5,884,000 $6,777,000 Diluted earnings per share: As reported $2.04 $2.48 Pro forma $2.03 $2.47
The fair value of each option granted in 1996 was estimated using a binomial option pricing model which is a modification of the Black-Scholes option pricing model, with the following assumptions for 1996: risk free interest rate of 6.25%, volatility of 18.0%, expected dividend yield of 1.1% and expected life of 10 years. A summary of the status of the Company's outstanding options as of December 31, 1997, 1998 and 1999, and changes during the years ending on those dates is presented below:
1997 1998 1999 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise Outstanding Price Outstanding Price Outstanding Price ----------- -------- ----------- -------- ----------- -------- Beginning of year 90,750 $18.28 79,250 $18.39 71,500 $18.38 Granted -- -- -- -- -- -- Exercised (5,750) 14.64 (3,750) 15.04 (12,000) 14.05 Forfeited (5,750) 20.40 (4,000) 21.00 (12,500) 17.12 ------ ------ ------- End of year 79,250 18.39 71,500 18.38 47,000 19.87 ====== ====== ======= Options exer- cisable at year-end 45,500 16.45 51,000 17.37 37,250 19.58 ====== ====== =======
F-20 66 The following table summarizes information about the Company's outstanding stock options at December 31, 1999:
Number Remaining Average Number Outstanding Contractual Exercise Exercisable at 12/31/99 Life in Years Price at 12/31/99 ----------- ------------- -------- ----------- 8,000 2.1 14.38 8,000 39,000 6.1 21.00 29,250 ------ ------ 47,000 37,250 ====== ======
Common stock repurchases ------------------------ During 1997, 1998 and 1999, the Company repurchased 158,900, 58,800 and 267,600 shares of its common stock, respectively. The Company was holding 378,400 and 646,000 of these shares in treasury as of December 31, 1998 and 1999 respectively. Preferred stock --------------- Preferred stock, no par value, $424.30 stated value, 10,000 shares authorized; no shares issued or outstanding at December 31, 1998 or December 31, 1999. The Company also has 3,000,000 shares of $.01 par value preferred stock which is authorized and unissued. 9. Earnings Per Share ------------------ The computations for basic and diluted earnings per share are as follows:
Year Ended December 31, ----------------------- 1997 1998 1999 --------------------------------------- (in thousands except per share amounts) Basic: Net income $4,198 $5,923 $6,793 Weighted average shares outstanding 2,973 2,895 2,738 Basic earnings per share $ 1.41 $ 2.05 $ 2.48 Diluted: Net income $4,198 $5,923 $6,793 Weighted average shares outstanding 2,973 2,895 2,738 Plus incremental shares from assumed conversion of stock options 7 9 5 ------ ------ ------ Weighted average shares outstanding-adjusted 2,980 2,904 2,743 ====== ====== ====== Diluted earnings per share $ 1.41 $ 2.04 $ 2.48
F-21 67 10. Benefit Programs ---------------- Mutual maintains a capital accumulation plan which is a profit sharing plan under Section 401(a) of the Internal Revenue Code that covers all employees who have completed six months of service. Mutual matches at least 15% and up to 100% of employee contributions, based on the combined net operating profits of Mutual and MNH. Additional contributions may be made at the discretion of the Board of Directors of Mutual. Under the terms of the management agreement, the Company's portion of the total contribution was $457,000, $554,000 and $580,000 for the years ended December 31, 1997, 1998 and 1999, respectively. 11. Commitments and Contingencies ----------------------------- MNH, like many other property and casualty insurance companies, is subject to environmental damage claims asserted by or against its insureds. Management is of the opinion that based on various court decisions throughout the country, such claims should not be recoverable under the terms of MNH's insurance policies because of either specific or general coverage exclusions contained in the policies. However, there is no assurance that the courts will agree with MNH's position in every case, nor can there be assurance that material claims will not be asserted under policies which a court will find do not explicitly or implicitly exclude claims for environmental damages. Management, however, is not aware of any pending claim or group of claims which would result in a liability that would have a material adverse effect on the financial condition of MNH. In addition to the foregoing, MNH is a defendant in a number of other legal proceedings in the ordinary course of its business. Management of the Company is of the opinion that the ultimate aggregate liability, if any, resulting from such proceedings will not materially affect the financial condition of MNH or the Company. F-22 EX-23 2 EXHIBIT 23 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-47014) and in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-08951) of Merchants Group, Inc. of our report dated February 14, 2000 appearing on page F-1 of this Form 10-K. Buffalo, New York March 29, 2000 EX-27 3 EXHIBIT 27
7 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 182,082,000 14,547,000 14,705,000 0 0 0 212,911,000 2,000 5,396,000 12,309,000 269,523,000 133,526,000 49,616,000 0 0 0 0 0 32,000 69,355,000 269,523,000 94,775,000 13,147,000 60,000 434,000 66,086,000 25,115,000 7,552,000 9,663,000 2,870,000 6,793,000 0 0 0 6,793,000 2.48 2.48 126,869,000 69,835,000 3,749,000 28,330,000 37,125,000 127,500,000 0
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