<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1998
REGISTRATION NO. 333-41497
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MERCER INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 6331 23-2934601
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10 NORTH HIGHWAY 31
PENNINGTON, NEW JERSEY 08534
(609) 737-0426
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM C. HART
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MERCER INSURANCE GROUP, INC.
10 NORTH HIGHWAY 31
P.O. BOX 278
PENNINGTON, NEW JERSEY 08534
(609) 737-0426
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JEFFREY P. WALDRON, ESQUIRE JOHN S. CHAPMAN, ESQUIRE
EDWARD C. HOGAN, ESQUIRE RICHARD A. HEMMINGS, ESQUIRE
STEVENS & LEE LORD, BISSELL & BROOK
ONE GLENHARDIE CORPORATE CENTER 115 SOUTH LASALLE STREET
1275 DRUMMERS LANE CHICAGO, ILLINOIS 60603
P.O. BOX 236 (312) 443-0700
WAYNE, PENNSYLVANIA 19087
(610) 478-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) REGISTRATION FEES
- ------------------------------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Common Stock, no par value per share....... 3,769,444 shares(2) $10.00 $37,694,440 $11,120
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(d) and based on the maximum of the appraisal
valuation range of Mercer Mutual Insurance Company (to be acquired by the
registrant in connection with this offering), as determined by an
independent appraiser, plus 10% of the shares sold in the offering,
reflecting a possible purchase of shares of the Common Stock by the
registrant's employee stock ownership plan.
(2) Represents maximum number of shares to be issued in the transactions
contemplated by this Registration Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
[TO BE USED IN CONNECTION WITH THE SYNDICATED COMMUNITY OFFERING ONLY]
SYNDICATED PROSPECTUS SUPPLEMENT
MERCER INSURANCE GROUP, INC.
SHARES OF COMMON STOCK
Mercer Insurance Group, Inc. (the "Company"), a Pennsylvania corporation,
is offering for sale in a syndicated community offering (the "Syndicated
Community Offering") shares, at a per share price of $10.00, of
its common stock, no par value per share (the "Common Stock"), to be issued upon
the conversion (the "Conversion") of Mercer Mutual Insurance Company ("Mercer
Mutual") from a Pennsylvania mutual insurance company to a Pennsylvania stock
insurance company and the issuance of all of the authorized capital stock of
Mercer Mutual to the Company pursuant to a Plan of Conversion from Mutual to
Stock Organization (the "Plan"). shares of the Common Stock have
been subscribed for in subscription and community offerings (the "Conversion
Offerings") by (i) named insureds under policies of insurance issued by Mercer
Mutual and in force as of the close of business on October 17, 1997, (ii) the
Company's tax-qualified employee stock ownership plan (the "ESOP"), (iii)
directors, officers and employees of Mercer Mutual, and then by (iv) certain
members of the general public. Contained herein is the Prospectus in the form
used in the Conversion Offerings (the "Prospectus"). For a description of the
Conversion Offerings, see "The Conversion -- The Conversion Offerings" in the
Prospectus. The purchase price for all shares purchased in the Syndicated
Community Offering will be $10.00 per share, which is the same purchase price
paid by subscribers in the Conversion Offerings (the "Purchase Price"). The
Purchase Price must be paid for each share at the time a purchase order is
submitted. See the cover page of the Prospectus for information regarding the
method of subscribing for shares of the Common Stock.
The Syndicated Community Offering will expire no later than ,
1998. If the Syndicated Community Offering is not completed by ,
1998, the Syndicated Community Offering will be terminated and all funds held
will be returned promptly to subscribers without interest. The minimum number of
shares which may be purchased is 25 shares. Except for the ESOP, which may
purchase up to 10% of the total number of shares of Common Stock issued in the
Conversion, no person, together with associates of, and persons acting in
concert with, such person, may purchase more than 100,000 shares of Common
Stock. See "The Conversion -- Stock Pricing and Number of Shares to Be Issued"
and "-- Limitations on Purchases of Common Stock" in the Prospectus. The Company
reserves the right, in its absolute discretion, to accept or reject, in whole or
in part, any or all subscriptions received in the Syndicated Community Offering.
The Company and Mercer Mutual have engaged Sandler, O'Neill & Partners,
L.P. ("Sandler O'Neill") as financial advisors to assist them with the sale of
the Common Stock in the Syndicated Community Offering. It is anticipated that
Sandler O'Neill will use the services of other registered broker-dealers
("Selected Dealers") and that fees to Sandler O'Neill and such Selected Dealers
will not exceed 7% of the aggregate Purchase Price of the shares sold in the
Syndicated Community Offering. Neither Sandler O'Neill nor any Selected Dealer
shall have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering. See "The Conversion -- Marketing and Underwriting
Arrangements" and "-- Syndicated Community Offering" in the Prospectus.
The Company has received approval to have its Common Stock listed on the
Nasdaq National Market under the symbol "MRCR," subject to completion of the
Conversion. Sandler O'Neill has advised the Company that, following completion
of the Conversion, it intends to make a market in the Common Stock, but it is
under no obligation to do so. Prior to the Conversion, there was no market for
the Common Stock, and there can be no assurance that an active and liquid
trading market for the Common Stock will develop, or if developed, will be
maintained. The absence or discontinuance of a market may have an adverse impact
on both the price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE PENNSYLVANIA DEPARTMENT OF INSURANCE, OR ANY OTHER
FEDERAL OR STATE AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION OR DEPARTMENT, OR ANY SUCH OTHER
<PAGE> 3
AGENCY OR SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ESTIMATED NET
ESTIMATED PROCEEDS OF
UNDERWRITING ESTIMATED NET SUBSCRIPTION,
SYNDICATED COMMISSION PROCEEDS OF COMMUNITY
COMMUNITY AND OTHER SYNDICATED AND SYNDICATED
OFFERING FEES AND COMMUNITY COMMUNITY
PRICE(1) EXPENSES(2) OFFERING OFFERINGS(3)(4)
---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Per Share............................... $10.00 $ $ $
Total................................... $ $ $ $
</TABLE>
- ---------------
(1) Based on the sale of shares of Common Stock at the Purchase
Price of $10.00 per share. In addition, the Company has received
subscriptions for shares of Common Stock in the Conversion
Offerings. Alex Sheshunoff & Company has advised the Company that, as of
August 19, 1998, the estimated consolidated pro forma market value of Mercer
Mutual as a subsidiary of the Company is between $25.1 million and $33.9
million.
(2) Consists of the Syndicated Community Offering's pro rata allocation of the
estimated expenses of the Company and Mercer Mutual in connection with the
Conversion (other than estimated fees to be paid to Sandler O'Neill for
services in connection with the Conversion Offerings) and estimated
compensation of Sandler O'Neill and Selected Dealers in connection with the
sale of shares in the Syndicated Community Offering, which fees are
estimated to be $ and may be deemed to be underwriting fees. The
information under "Pro Forma Data" in the Prospectus was based on the
assumptions stated therein, which may differ from the estimates used for
this table. See "The Conversion -- Marketing and Underwriting Agreements"
for a more detailed discussion of fee arrangements.
(3) The Company intends to contribute $5 million of the net proceeds to Mercer
Mutual in exchange for all of the capital stock of Mercer Mutual to be
issued in connection with the Conversion. The Company intends to retain the
balance of the net proceeds. See "Use of Proceeds."
(4) The net proceeds of the Conversion Offerings (based upon the sale of the
shares subscribed for at a price of $10.00 per share and
after the allocation to the Conversion Offerings of their pro rata portion
of the estimated expenses related to the Conversion) are estimated to be
$ .
SANDLER O'NEILL & PARTNERS, L.P.
------------------------
The date of this Prospectus Supplement is , 1998.
<PAGE> 4
PROSPECTUS
[LOGO]
MERCER INSURANCE GROUP, INC.
UP TO 3,392,500 SHARES OF COMMON STOCK
Mercer Insurance Group, Inc. (the "Company"), a Pennsylvania corporation
and the proposed holding company for Mercer Mutual Insurance Company ("Mercer
Mutual"), is offering up to 3,392,500 shares of its common stock, no par value
per share (the "Common Stock"), in a subscription offering (the "Subscription
Offering") pursuant to nontransferable subscription rights in the following
order of priority: (i) named insureds under policies of insurance issued by
Mercer Mutual and in force as of the close of business on October 17, 1997
("Eligible Policyholders"), (ii) the Company's tax-qualified employee stock
ownership plan (the "ESOP"), and (iii) directors, officers and employees of
Mercer Mutual. Subscription rights received in any of the foregoing categories
will be subordinated to the subscription rights received by those in a prior
category. Subscription rights are not transferable. Except for the ESOP, which
may purchase a maximum of between 250,750 and 376,944 shares of Common Stock, no
purchaser, together with associates of or persons acting in concert with such
person, may purchase, in the aggregate, more than 100,000 shares of Common Stock
in the Subscription Offering. The maximum number of shares that may be purchased
in the Subscription Offering by all Eligible Policyholders in the aggregate is
3,392,500 shares. The total numbers of shares of Common Stock offered in the
Subscription Offering may be increased to up to 3,769,444 shares if necessary to
satisfy the subscription rights of the ESOP.
Concurrently with the Subscription Offering, the Company is offering the
Common Stock for sale to the general public in a community offering (the
"Community Offering"). Preference in the Community Offering will be given to:
(i) natural persons and trusts of natural persons (including individual
retirement and Keogh retirement accounts) who reside in the states of New Jersey
and Pennsylvania, (ii) principals of Eligible Policyholders in the case of an
Eligible Policyholder that is not a natural person, (iii) licensed insurance
agencies that have been appointed by Mercer Mutual to market and distribute
policies of insurance, and their owners, (iv) holders of policies of insurance
originally issued after October 17, 1997, and (v) providers of goods or services
to, and identified by, Mercer Mutual. Sales of Common Stock in the Community
Offering will be subject to the prior rights of holders of subscription rights
and the right of the Company, in its absolute discretion, to reject orders in
the Community Offering in whole or in part.
In the sole discretion of the Company, shares not subscribed for in the
Subscription Offering and Community Offering (collectively, the "Conversion
Offerings"), if any, may be offered to the general public in a syndicated
community offering (the "Syndicated Community Offering") to be managed by
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill").
The Conversion Offerings and Syndicated Community Offering shall be
collectively referred to herein as the "Offerings." The Offerings are being made
in connection with the conversion of Mercer Mutual from mutual to stock form and
the simultaneous acquisition of the capital stock of Mercer Mutual by the
Company pursuant to a Plan of Conversion from Mutual to Stock Organization
adopted by the Board of Directors of Mercer Mutual on October 17, 1997, as
amended (the "Plan"). The Conversion of Mercer Mutual to stock form, the
issuance of the capital stock of Mercer Mutual to the Company and the offer and
sale of the Common Stock by the Company are collectively referred to herein as
the "Conversion." The completion of the Conversion is contingent upon the sale
of a minimum of 2,507,500 shares of Common Stock in the Offerings.
No person may purchase fewer than 25 shares of Common Stock in the
Offerings.
For more information, please call the Stock Information Center (the
"Conversion Center") toll-free at 1-888-303-9085.
PROSPECTIVE INVESTORS SHOULD REVIEW AND CONSIDER THE DISCUSSION UNDER "RISK
FACTORS" BEGINNING ON PAGE 19.
SANDLER O'NEILL & PARTNERS, L.P.
The date of this Prospectus is , 1998
<PAGE> 5
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR THE PENNSYLVANIA
DEPARTMENT OF INSURANCE (THE "PENNSYLVANIA DEPARTMENT"), NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR THE PENNSYLVANIA
DEPARTMENT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PURCHASE FEES AND ESTIMATED NET
PRICE(1) EXPENSES(2) PROCEEDS(3)
-------------- ------------- --------------
<S> <C> <C> <C>
Per Share(4)................................. $ 10.00 $ .66 $ 9.34
Total Minimum................................ $25,075,000.00 $1,866,050.00 $23,208,950.00
Total Midpoint............................... $29,500,000.00 $1,945,700.00 $27,554,300.00
Total Maximum................................ $33,925,000.00 $2,025,350.00 $31,899,650.00
</TABLE>
- ---------------
(1) Determined in accordance with an independent appraisal (the "Appraisal")
prepared by Alex Sheshunoff & Company ("Sheshunoff") and updated as of
August 19, 1998, which states that the consolidated pro forma market value
of Mercer Mutual as a subsidiary of the Company ranged from $25,075,000 (the
"Total Minimum") to $33,925,000 (the "Total Maximum") with a midpoint of
$29,500,000 (the "Total Midpoint"). Collectively, the range from the Total
Minimum to the Total Maximum is referred to herein as the "Estimated
Valuation Range." Based on the Estimated Valuation Range, the Board of
Directors of the Company and Mercer Mutual have determined to offer up to
3,392,500 shares at a Purchase Price of $10.00 per share (the "Purchase
Price"). The Company, however, may issue up to 3,769,444 shares in the event
the ESOP purchases shares in excess of the Total Maximum, in order to
satisfy the ESOP's 10% subscription. The final appraised value will be
determined at the time of the closing of the Offerings and is subject to
change. The valuation set forth in the Appraisal must not be construed as a
recommendation by the Company, Mercer Mutual, Sandler O'Neill or Sheshunoff
as to the advisability of purchasing such shares or that a purchaser
subsequently will be able to sell such shares at or above the Purchase
Price. If the final valuation is outside the Estimated Valuation Range, then
the Company will promptly notify all subscribers by mail of the final
valuation. Subscribers will be given the opportunity to confirm or modify
their orders. The funds of all subscribers who do not confirm or modify
their orders will be returned promptly without interest. See "Use of
Proceeds," "Capitalization" and "Pro Forma Data."
(2) Consists of the estimated costs to the Company and Mercer Mutual arising in
the Conversion, including estimated marketing fees and fixed expenses to be
paid to Sandler O'Neill in connection with the Offerings, which fees and
expenses are estimated to be $489,050 and $648,350 at the Total Minimum and
the Total Maximum, respectively. See "Use of Proceeds" and "Pro Forma Data"
for the assumptions used to arrive at these estimates. The actual fees and
expenses may vary from these estimates. See "The Conversion -- Marketing and
Underwriting Arrangements" and "-- Syndicated Community Offering."
(3) Represents net proceeds to the Company before the loan which the Company
intends to make to the ESOP, which will be used by the ESOP to purchase 10%
of the shares of Common Stock sold in the Subscription Offering. The amount
of this loan will be $2.5 million at the Total Minimum, $3.0 million at the
Total Midpoint, and $3.4 million at the Total Maximum. See "Use of
Proceeds," "Capitalization," and "Pro Forma Data."
(4) Based on the Total Midpoint. The estimated net proceeds per share at the
Total Minimum and Total Maximum are expected to be $9.26 and $9.40,
respectively.
All shares of Common Stock will be sold in the Offerings for $10.00 per
share (the "Purchase Price"). The Appraisal is intended to be an estimate of the
consolidated pro forma market value of Mercer Mutual as a subsidiary of the
Company and is based on a review of internal projections and a comparison of the
consolidated financial condition and results of operations of Mercer Mutual to
property and casualty insurance industry averages and a peer group of
representative publicly-owned property and casualty insurance companies. The
Appraisal is not intended, and must not be construed, as a recommendation of any
kind as to
2
<PAGE> 6
the advisability of purchasing Common Stock. In preparing the valuation,
Sheshunoff has relied upon and assumed the accuracy and completeness of
financial and statistical information provided by the Company and Mercer Mutual.
Sheshunoff did not independently verify the financial statements, projections
and other information provided by the Company and Mercer Mutual, perform an
independent analysis of the assumptions underlying the financial statements or
projections or value independently the assets and liabilities of the Company and
Mercer Mutual. The valuation considers the Company and Mercer Mutual as a going
concern only and should not be considered as an indication of the liquidation
value of the Company and Mercer Mutual. Upon completion of the Offering,
Sheshunoff will submit to the Company and to the Pennsylvania Department its
updated consolidated pro forma fair market value of Mercer Mutual as a
subsidiary of the Company. If the updated estimated valuation is within the
Estimated Valuation Range, the Conversion can be completed and the number of
shares of Common Stock sold in the Conversion will be determined as follows:
(i) If participants in the Subscription Offering subscribe for
3,392,500 shares or more, the Company, as required by the Plan, will sell
all 3,392,500 shares offered hereby to participants in the Subscription
Offering and will sell up to an additional 376,944 shares to the ESOP to
satisfy its subscription in full. Shares will be allocated among
participants in the Subscription Offering in accordance with the terms of
the Plan and excess funds will be promptly returned to subscribers without
interest. For a description of the allocation method and procedure, see
"The Conversion -- The Conversion Offerings -- Subscription Offering."
(ii) If participants in the Subscription Offering subscribe for at
least 2,507,500 shares but less than 3,392,500 shares, then, as required by
the Plan, the Company will sell to participants in the Subscription
Offering the number of shares of Common Stock sufficient to satisfy their
subscriptions in full. The Company, in its sole discretion, may accept
subscriptions in the Community Offering and/or sell shares in the
Syndicated Community Offering provided the total number of shares of Common
Stock sold in the Conversion does not exceed 3,392,500 shares (excluding
shares sold to the ESOP). Any excess funds received in the Community
Offering and/or the Syndicated Community Offering will be promptly returned
to subscribers without interest.
(iii) If participants in the Subscription Offering subscribe for fewer
than 2,507,500 shares, then the Company will sell to participants in the
Subscription Offering the number of shares of Common Stock sufficient to
satisfy their subscriptions in full and will accept subscriptions in the
Community Offering and/or sell shares in the Syndicated Community Offering
in an amount sufficient to sell at least 2,507,500 shares in the aggregate.
The Company, in its sole discretion, may accept additional subscriptions in
the Community Offering and sell additional shares in the Syndicated
Community Offering provided the total number of shares sold in the
Conversion does not exceed 3,392,500 (excluding shares sold to the ESOP).
Any excess funds received in the Community Offering and/or the Syndicated
Community Offering will be promptly returned to subscribers without
interest.
(iv) If the number of shares subscribed for in the Offerings is less
than 2,507,500, then the Company will cancel the Offerings and all
subscription funds will be returned promptly to subscribers without
interest.
There is a difference of approximately $8.9 million between the Total
Minimum and the Total Maximum of the Estimated Valuation Range. As a result of
this broad range, the final updated Appraisal may estimate a consolidated pro
forma market value for Mercer Mutual as a subsidiary of the Company that is
materially less than the aggregate dollar amount of subscriptions received by
the Company. Therefore, subscribers, in the aggregate and on a per share basis,
may pay materially more for the Common Stock than such estimated consolidated
pro forma market value. See "Risk Factors -- Possible Adverse Impact of Broad
Valuation Range and its Use to Determine the Number of Shares of Common Stock
Sold."
Except for the ESOP, which intends to purchase 10% of the total number of
shares of Common Stock issued in the Conversion, no purchaser, together with
associates or persons acting in concert with such person, may purchase, in the
aggregate, more than 100,000 shares of Common Stock in the Conversion (4.0%,
3.4% and 3.0% of the number of shares issued at the Total Minimum, Total
Midpoint and Total Maximum). No
3
<PAGE> 7
person may purchase fewer than 25 shares. There are 42,178 Eligible
Policyholders. In the event that subscriptions by Eligible Policyholders for
Common Stock exceed the maximum of the Estimated Valuation Range, the Company
will be obligated under the Plan to sell to Eligible Policyholders 3,392,500
shares, which is the maximum number of shares offered hereby (excluding shares
expected to be purchased by the ESOP), and shares of Common Stock would be
allocated among Eligible Policyholders first, so as to permit each subscriber to
purchase up to 1,000 shares (unless the magnitude of subscriptions does not
permit such an allocation), and then in proportion to the respective amounts of
shares for which they subscribed. If all 42,178 Eligible Policyholders were to
subscribe for 100,000 shares of Common Stock, then each Eligible Policyholder
would receive only 80 shares. The Company is unable to predict the number of
Eligible Policyholders that may participate in the Subscription Offering.
Directors and executive officers of the Company and Mercer Mutual as a
group (11 persons), including their associates, are expected to purchase
approximately 186,500 shares of the Common Stock to be issued in the Conversion
(7.4%, 6.3%, 5.5% and 5.0% at the Total Minimum, Total Midpoint, Total Maximum
and Total Maximum plus ESOP Shares, respectively), not including 10% of such
Common Stock expected to be purchased by the ESOP (250,750, 295,000, 339,250 and
376,944 shares at the Total Minimum, Total Midpoint, Total Maximum and Total
Maximum plus ESOP shares, respectively) and excluding additional shares that are
expected to be issued (or issuable) following the Conversion, subject to
shareholder approval, in connection with the implementation of the Company's
Stock Compensation Plan. See "Management of the Company -- Certain Benefit Plans
and Agreements."
The Subscription Offering and the Community Offering will terminate at 1:00
p.m., Eastern Standard Time, on , 1998, unless extended by the
Company in its sole discretion for up to an additional 45 days (such date and
time, including any extensions, shall be hereinafter referred to as the
"Termination Date"). If the Company extends the Offerings, it will give written
notice of such extension to all subscribers on or before , 1998, and
each subscriber may withdraw or confirm his or her subscription by the extended
Termination Date. If a subscriber withdraws a subscription, or does not confirm
a subscription by the extended Termination Date, the subscriber's funds will be
returned promptly without interest. No action to extend the Offerings will be
taken by the Company after , 1998. Subscribers may purchase shares
in the Offerings by completing and returning to the Company a stock order form
(the "Stock Order Form") and a certification form (the "Certification Form"),
together with full payment for all Common Stock subscribed for at the Purchase
Price. An executed Stock Order Form, once received by the Company, may not be
modified, amended or rescinded without the consent of the Company. Subscriptions
will be held in a separate escrow account at State Street Bank and Trust
Company, N.A. established specifically for this purpose. If the Conversion is
not completed within 45 days after the extended Termination Date, the Offerings
will be terminated and all funds held will be returned promptly without
interest. See "The Conversion -- The Conversion Offerings" and "-- Purchases in
the Conversion Offerings."
The Company and Mercer Mutual have engaged Sandler O'Neill to consult with
and advise the Company and Mercer Mutual with respect to the Offerings, and
Sandler O'Neill has agreed to use its best efforts to assist the Company with
its solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Sandler O'Neill is not obligated to purchase any shares of
Common Stock in the Offerings. The Company and Mercer Mutual will pay a fee to
Sandler O'Neill which will be based on the aggregate Purchase Price of Common
Stock sold in the Offerings. The Company and Mercer Mutual have agreed to
indemnify Sandler O'Neill against certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act"). See
"The Conversion -- Marketing and Underwriting Arrangements."
The Common Stock has been approved for inclusion in the Nasdaq National
Market under the symbol "MRCR," subject to completion of the Conversion. Prior
to the Conversion, there was no market for the Common Stock. Sandler O'Neill has
advised the Company that, following the completion of the Conversion, it intends
to make a market in the Common Stock, but it is under no obligation to do so.
One of the requirements for continued quotation of the Common Stock on the
Nasdaq National Market is that there be at least two market makers for the
Common Stock. There can be no assurance there will be two or more market makers
for the Common Stock. Additionally, the development of an active and liquid
public market
4
<PAGE> 8
depends on the existence of willing buyers and sellers, the presence of which is
not within the control of the Company, Mercer Mutual or any market maker. There
can be no assurance that an active and liquid trading market for the Common
Stock will develop or that, if developed, it will continue. The absence or
discontinuance of a market may have an adverse impact on both the price and
liquidity of the Common Stock. There is no assurance that persons purchasing
shares will be able to sell them at or above the Purchase Price or that
quotations will be available on the Nasdaq National Market as contemplated.
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE PLAN BY ELIGIBLE
POLICYHOLDERS OF MERCER MUTUAL AT THE SPECIAL MEETING OF ELIGIBLE POLICYHOLDERS
CALLED FOR THAT PURPOSE TO BE HELD ON (THE "SPECIAL MEETING") AND
THE SALE OF THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN.
PENNSYLVANIA INSURANCE LAWS AND REGULATIONS PROVIDE THAT NO PERSON MAY
ACQUIRE CONTROL OF THE COMPANY, AND THUS INDIRECT CONTROL OF MERCER MUTUAL,
UNLESS SUCH PERSON HAS OBTAINED THE PRIOR APPROVAL OF THE PENNSYLVANIA INSURANCE
COMMISSIONER. UNDER PENNSYLVANIA LAW, ANY PURCHASER OF 10% OR MORE OF THE VOTING
STOCK OF AN INSURANCE HOLDING COMPANY IS PRESUMED TO HAVE ACQUIRED CONTROL OF
AFFILIATED OR SUBSIDIARY INSURERS.
NEW JERSEY INSURANCE LAWS AND REGULATIONS PROVIDE THAT NO PERSON MAY
ACQUIRE CONTROL OF THE COMPANY, AND THUS INDIRECT CONTROL OF MERCER INSURANCE
COMPANY OF NEW JERSEY, INC., A WHOLLY-OWNED INDIRECT SUBSIDIARY OF MERCER
MUTUAL, UNLESS SUCH PERSON HAS OBTAINED THE PRIOR APPROVAL OF THE NEW JERSEY
INSURANCE COMMISSIONER. UNDER NEW JERSEY LAW, ANY PURCHASER OF 10% OR MORE OF
THE VOTING STOCK OF AN INSURANCE HOLDING COMPANY IS PRESUMED TO HAVE ACQUIRED
CONTROL OF AFFILIATED OR SUBSIDIARY INSURERS.
------------------------
ORGANIZATIONAL STRUCTURE BEFORE THE CONVERSION
MERCER MUTUAL INSURANCE COMPANY
100%
QUEENSTOWN HOLDING COMPANY, INC.
100%
MERCER INSURANCE COMPANY OF NEW JERSEY, INC.
------------------------
ORGANIZATIONAL STRUCTURE AFTER THE CONVERSION
[GRAPHIC OF SHAREHOLDERS]
SHAREHOLDERS
100%
MERCER INSURANCE GROUP, INC.
100%
MERCER MUTUAL INSURANCE COMPANY
100%
QUEENSTOWN HOLDING COMPANY, INC.
100%
MERCER INSURANCE COMPANY OF NEW JERSEY, INC.
5
<PAGE> 9
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and the Consolidated Financial
Statements and Notes thereto of Mercer Mutual appearing elsewhere in this
Prospectus. For an explanation of certain terms used in this Prospectus that are
commonly used in the insurance industry, see "Glossary of Selected Insurance
Terms."
This Prospectus contains certain forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Reference is made in particular to the descriptions of the
Company's and its subsidiaries' plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
statements included in this Prospectus under "Use of Proceeds," "Business" and
"Risk Factors." Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties which could cause
actual results to differ materially from those described in such forward-looking
statements. Factors which could cause such results to differ materially from
those described in the forward-looking statements include those set forth under
"RISK FACTORS" below.
MERCER INSURANCE GROUP,
INC........................... The Company was formed under Pennsylvania law
in November 1997 for the purpose of becoming
the holding company for Mercer Mutual upon
completion of the Conversion. Prior to the
Conversion, the Company will not engage in any
significant operations. After the Conversion,
the Company's primary assets will be the
outstanding capital stock of Mercer Mutual and
a portion of the net proceeds of the
Conversion.
The Company's executive offices are located at
10 North Highway 31, Pennington, New Jersey
08534, and the Company's main telephone number
is (609) 737-0426.
THE INSURANCE COMPANIES....... Mercer Mutual is a Pennsylvania mutual
insurance company that began operations in
1844. Mercer Mutual was organized under the
laws of the State of New Jersey and operated as
a New Jersey mutual insurance company until
October 16, 1997, when it filed Articles of
Domestication with the Pennsylvania Department
of State, which changed its state of domicile
from New Jersey to Pennsylvania (the
"Redomestication"). On the effective date of
the Redomestication, the Pennsylvania
Department replaced the New Jersey Department
of Banking and Insurance (the "New Jersey
Department") as Mercer Mutual's primary
insurance regulator.
Mercer Mutual owns all of the outstanding
capital stock of Queenstown Holding Company,
Inc. ("QHC"), the holding company for Mercer
Insurance Company of New Jersey, Inc. ("MIC,"
and collectively with Mercer Mutual, the
"Insurance Companies"). Mercer Mutual is a
property and casualty insurer of small and
medium-sized businesses and property owners
located in New Jersey and Pennsylvania. Mercer
Mutual markets homeowners and commercial
multi-peril policies, as well as other
liability, workers' compensation, fire, allied,
inland marine and commercial automobile
coverages through approximately 160 independent
agencies. MIC exclusively offers workers'
compensation insurance to businesses located in
New Jersey.
For the years ended December 31, 1997 and 1996,
Mercer Mutual and its subsidiaries had
consolidated revenues of $21.0 million and
6
<PAGE> 10
$23.7 million respectively, and net income of
$2.2 million and $640,000, respectively. For
the six months ended June 30, 1998, Mercer
Mutual and its subsidiaries had consolidated
revenue of $12.5 million and net income of $1.3
million. At June 30, 1998, Mercer Mutual and
its subsidiaries had consolidated assets of
$75.7 million, total equity of $25.6 million
and over 42,000 property and casualty policies
in force.
The principal strategies of the Company for the
future are to:
- Improve the mix of business by increasing
commercial and casualty writings in order to
enhance profitability and lessen the impact
of property losses on overall results;
- Geographically diversify its risk through
acquisitions of other insurance companies in
Pennsylvania and other jurisdictions, in
order to reduce its overall exposure to
weather-related property losses in its
primary coverage area;
- Attract and retain high-quality agencies
having diverse customer bases in the
Company's targeted growth markets within
Pennsylvania and New Jersey, through
increased marketing activities and the
development and tailoring of commercial
programs meeting the needs of their
customers; and
- Reduce its reliance on reinsurance by
increasing the maximum exposure retained by
the Insurance Companies on individual
property and casualty risks, and thereby
increase net premium volume.
Management views the Conversion as a critical
component of its strategic plan. The additional
capital generated by the Conversion will permit
the Insurance Companies to accelerate
implementation of these strategies. The
resulting holding company structure will also
provide needed flexibility to achieve the
Company's goals by permitting the Company to
use its Common Stock or preferred stock to
effect future acquisitions or raise additional
capital. See "The Conversion -- Business
Purposes."
THE CONVERSION................ Pursuant to the Plan, Mercer Mutual will (i)
convert from a Pennsylvania-chartered mutual
insurance company to a Pennsylvania-chartered
stock insurance company, and (ii)
simultaneously issue shares of its capital
stock to the Company in exchange for a portion
of the net proceeds from the sale of Common
Stock in the Conversion. The Conversion will be
accounted for as a simultaneous reorganization,
recapitalization and share offering which will
not change the historical accounting basis of
Mercer Mutual's financial statements.
BACKGROUND AND REASONS FOR THE
CONVERSION.................. Mercer Mutual's exposure to severe weather
conditions has been a major factor affecting
its underwriting results since 1991. Operating
results in 1994 and 1996 were adversely
affected by severe winter storms in such years
that were largely responsible for Mercer
Mutual's $1.4 million net operating loss in
1994 and that reduced net income by $665,000 in
1996. In order to reduce the risk caused by
this exposure, Mercer Mutual's strategic plan
is
7
<PAGE> 11
expressly predicated upon geographically
diversifying its business and improving capital
strength. Increased capital would facilitate
diversification of risk through acquisitions
and would provide additional policyholder
protection by increasing policyholder surplus.
Since 1996, Mercer Mutual has considered
various capital formation alternatives and has
elected to proceed with the Conversion in
accordance with the provisions of the
Pennsylvania Insurance Company Mutual to Stock
Conversion Act (the "Act"). On October 17,
1997, the Board of Directors of Mercer Mutual
unanimously adopted the Plan. An application
with respect to the Conversion was filed by
Mercer Mutual with the Pennsylvania Department
on November 26, 1997 and notice of the filing
and the opportunity to comment on and to
request and receive a copy of the Plan was
simultaneously mailed to all Eligible
Policyholders as required by law. On June 5,
1998, the Pennsylvania Department held a public
informational hearing regarding the Conversion.
The Plan was approved by the Pennsylvania
Department on August , 1998 and is subject to
the approval of the Eligible Policyholders at
the Special Meeting.
ORGANIZATION BEFORE AND AFTER
THE CONVERSION................ Set forth on page 5 of the Prospectus is an
illustration of the organizational structure of
the Insurance Companies before the Conversion
and of the Company and the Insurance Companies
after the Conversion.
STOCK PRICING AND NUMBER OF
SHARES TO BE ISSUED........... Pennsylvania law requires that the aggregate
purchase price of the Common to be issued in
the Conversion be consistent with an
independent appraisal (the "Appraisal") of the
estimated consolidated pro forma market value
of Mercer Mutual as a subsidiary of the Company
following the Conversion. Alex Sheshunoff &
Company ("Sheshunoff"), a firm experienced in
corporate valuations, has performed the
Appraisal and has determined that, as of August
19, 1998, the estimated pro forma market value
of Mercer Mutual as a subsidiary of the Company
ranged from $25.1 million to $33.9 million,
with a midpoint of $29.5 million. The Company,
in consultation with its advisors, has
determined to offer the shares in the
Conversion at the Purchase Price.
The Appraisal is intended to be an estimate of
the consolidated pro forma market value of
Mercer Mutual as a subsidiary of the Company,
and is based on a review of internal
projections, and a comparison of the
consolidated financial condition and results of
operations of Mercer Mutual to property and
casualty insurance company averages and a peer
group of representative publicly owned property
and casualty insurance companies. The Appraisal
is not intended, and must not be construed, as
a recommendation of any kind by the Company,
Mercer Mutual, Sandler O'Neill or Sheshunoff as
to the advisability of purchasing Common Stock.
In preparing the Appraisal, Sheshunoff has
relied upon and assumed the accuracy and
completeness of financial and statistical
information provided by the Company, and
Sheshunoff did not independently verify the
financial statements, projections and other
information provided by the Company and Mercer
Mutual, per-
8
<PAGE> 12
form an independent analysis of the assumptions
underlying the financial statements or
projections or value independently the assets
and liabilities of the Company and Mercer
Mutual. The Appraisal considers the Company and
Mercer Mutual as a going concern only and
should not be considered as an indication of
the liquidation value of the Company and Mercer
Mutual.
The Appraisal will be updated immediately prior
to completion of the Offerings, and such
updated Appraisal will be filed with the
Securities and Exchange Commission pursuant to
a post-effective amendment to the registration
statement of which this prospectus is a part.
If the value reflected in the updated Appraisal
is within the Estimated Valuation Range, the
Company will not notify subscribers of the
updated Appraisal and the Conversion will be
consummated.
If participants in the Subscription Offering
subscribe for 3,392,500 shares or more, the
Company, as required by the Plan, will sell all
3,392,500 shares offered hereby to participants
in the Subscription Offering and will sell up
to an additional 376,944 shares to the ESOP to
satisfy its subscription in full. Shares will
be allocated among participants in the
Subscription Offering in accordance with the
terms of the Plan and excess funds will be
promptly returned to subscribers without
interest. If participants in the Subscription
Offering subscribe for at least 2,507,500
shares but less than 3,392,500 shares, then, as
required by the Plan, the Company will sell to
participants in the Subscription Offering the
number of shares of Common Stock sufficient to
satisfy their subscriptions in full. The
Company, in its sole discretion, may accept
subscriptions in the Community Offering and
sell shares in the Syndicated Community
Offering provided the total number of shares of
Common Stock sold in the Conversion does not
exceed 3,392,500 shares (excluding the shares
sold to the ESOP). Any excess funds received in
the Community Offering or the Syndicated
Community Offering will be promptly returned to
subscribers without interest. If participants
in the Subscription Offering subscribe for
fewer than 2,507,500 shares, then the Company
will sell to participants in the Subscription
Offering the number of shares of Common Stock
sufficient to satisfy their subscriptions in
full and will accept subscriptions in the
Community Offering and/or sell shares in the
Syndicated Community Offering in an amount
sufficient to sell at least 2,507,500 shares in
the aggregate. The Company, in its sole
discretion, may accept additional subscriptions
in the Community Offering and sell additional
shares in the Syndicated Community Offering
provided the total number of shares sold in the
Conversion does not exceed 3,392,500 (excluding
the shares sold to the ESOP). Any excess funds
received in the Community Offering or the
Syndicated Community Offering will be promptly
returned to subscribers without interest. If
the number of shares subscribed for in the
Offerings is less than 2,507,500, then the
Company will cancel the Offerings and all
subscription funds will be returned promptly to
subscribers without interest.
9
<PAGE> 13
If the value reflected in the updated Appraisal
is not within the Estimated Valuation Range,
the Company may terminate the Offerings. If in
such event the Company proceeds with the
Offerings, then the Company will deliver
promptly to the subscribers an updated
prospectus containing a description of the
updated Appraisal. The Conversion Valuation
Report containing the updated Appraisal will
not be delivered to subscribers, but will be an
exhibit to a post-effective amendment to the
registration statement of which this prospectus
is a part, and may be obtained through the
Securities and Exchange Commission directly or
accessed through its Internet website at
http://www.sec.gov. See "Available
Information." Subscribers will be given the
opportunity to confirm or modify their orders.
The funds of all subscribers who do not confirm
or modify their orders will be returned
promptly without interest. Subscription orders
may not be withdrawn for any reason if the
updated Appraisal is within the Estimated
Valuation Range.
There is a difference of approximately $8.9
million between the minimum and the maximum of
the Estimated Valuation Range. Therefore,
subscribers, in the aggregate and on a per
share basis, may pay more for the Common Stock
than the consolidated pro forma market value of
Mercer Mutual as a subsidiary of the Company.
See "Risk Factors -- Adverse Impact of Broad
Valuation Range and Its Use to Determine the
Number of Shares of Common Stock Sold."
THE SUBSCRIPTION AND COMMUNITY
OFFERINGS................... The shares of Common Stock to be issued in the
Conversion are being offered at a purchase
price of $10.00 per share (the "Purchase
Price") in the Subscription Offering pursuant
to nontransferable subscription rights in the
following order of priority: (i) Eligible
Policyholders, (ii) the ESOP, and (iii)
directors, officers and employees of Mercer
Mutual. Subscription rights of directors,
officers and employees of Mercer Mutual will be
subordinated to subscription rights of Eligible
Policyholders. Concurrently, and subject to the
prior rights of holders of subscription rights,
any shares of Common Stock not subscribed for
in the Subscription Offering are being offered
at the Purchase Price in the Community Offering
to members of the general public. Preference
will be given in the Community Offering to (i)
natural persons and trusts of natural persons
who are permanent residents of New Jersey and
Pennsylvania (the "Local Community"), (ii)
principals of Eligible Policyholders in the
case of an Eligible Policyholder that is not a
natural person, (iii) licensed insurance
agencies that have been appointed by Mercer
Mutual to market and distribute policies of
insurance, and their owners, (iv) named
insureds under policies of insurance issued by
Mercer Mutual after October 17, 1997, and (v)
providers of goods and services to, and
identified by, Mercer Mutual. The Company
reserves the absolute right to accept or reject
any orders in the Community Offering, in whole
or in part.
Subscription rights will expire if not
exercised by, and the Conversion Offerings will
terminate at, 1:00 p.m., Eastern Standard Time
on , 1998, unless extended by the
Company for up to
10
<PAGE> 14
an additional 45 days (such date and time,
including any extensions, shall be hereinafter
referred to as the "Termination Date"). If the
Company extends the Termination Date, it will
given written notice of such extension to all
subscribers on or before , 1998, at
which time each subscriber may withdraw or
confirm his or her subscription by the extended
Termination Date. If a Subscriber withdraws a
subscription, or does not confirm a
subscription by the extended Termination Date,
the subscriber's funds will be returned
promptly without interest. In no event shall
the extended Termination Date be later than
, 1998.
THE SYNDICATED COMMUNITY
OFFERING...................... If participants in the Conversion Offerings
(excluding the ESOP) subscribe for fewer than
3,392,500 shares in the aggregate, the Company,
in its sole discretion, may sell additional
shares in the Syndicated Community Offering.
All shares of Common Stock offered in the
Syndicated Community Offering will be offered
for sale at the Purchase Price to the general
public on a best efforts basis through a
syndicate of registered broker-dealers to be
formed and managed by Sandler O'Neill, acting
as agent of the Company to assist the Company
in the sale of Common Stock. The Syndicated
Community Offering would be commenced as soon
as practicable following the Termination Date,
and must be completed within 45 days
thereafter. The Company reserves the absolute
right to reject orders, in whole or in part, in
its sole discretion, in the Syndicated
Community Offering. See "The Conversion --
Marketing and Underwriting Arrangements" and
"-- Syndicated Community Offering."
PROSPECTUS DELIVERY AND
PROCEDURE FOR PURCHASING
SHARES...................... To ensure that each purchaser receives a
prospectus at least 48 hours prior to the
Termination Date in accordance with Rule 15c2-8
of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus
will be mailed later than five days prior to
the Termination Date or hand delivered later
than two days prior to such date. Stock Order
Forms and Certification Forms will be
distributed only with a prospectus. The Company
is not obligated to accept for processing
orders not submitted on Stock Order Forms and
not accompanied by a Certification Form. Any
person who desires to subscribe for shares of
Common Stock in the Offerings must do so prior
to the Termination Date by delivering to the
Conversion Center by mail at P.O. Box 15,
Pennington, New Jersey 08534-0015, or in person
at the Company's principal executive offices
located at 10 North Highway 31, Pennington, New
Jersey 08534, a properly executed and completed
Stock Order Form and Certification Form,
together with full payment for all shares for
which the subscription is made. A Stock Order
Form and Certification Form will be included
with each prospectus delivered to a prospective
purchaser of Common Stock and no Stock Order
Form or Certification Form will be delivered to
a prospective purchaser unless accompanied by a
prospectus or prior delivery of a prospectus
can be verified. Payment for shares of Common
Stock may be made by check or money order. All
checks or money orders must be made payable to
"Mercer Insurance Group, Inc." Subscriptions
will be held in a separate escrow
11
<PAGE> 15
account at State Street Bank and Trust Company,
N.A.. Such funds will not be released until the
Conversion is completed or terminated. The
Conversion will be completed no later than
, 1998. If the number of shares
subscribed for in the Offerings at the Purchase
Price through , 1998 is less than
2,507,500 shares, then the Company will cancel
the Offerings on such date and all subscription
funds will be returned promptly to subscribers
without interest.
All subscription rights under the Plan will
expire on the Termination Date, whether or not
the Company has been able to locate each person
entitled to such subscription rights. ONCE
TENDERED, ORDERS TO PURCHASE COMMON STOCK IN
THE OFFERING CANNOT BE REVOKED. In the event of
an oversubscription in the Subscription
Offering, shares of Common Stock will be
allocated among subscribing Eligible
Policyholders, as follows. First, shares of
Common Stock will be allocated among
subscribing Eligible Policyholders so as to
permit each such Eligible Policyholder, to the
extent possible, to purchase the lesser of (i)
1,000 shares, or (ii) the number of shares for
which such Eligible Policyholder has
subscribed. Second, any shares of Common Stock
remaining after such initial allocation will be
allocated among the subscribing Eligible
Policyholders whose subscriptions remain
unsatisfied in the proportion in which the
aggregate number of shares as to which each
such Eligible Policyholder's subscription
remains unsatisfied bears to the aggregate
number of shares as to which all such Eligible
Policyholders' subscriptions remain
unsatisfied, provided, however, that no
fractional shares of Common Stock will be
issued. If, because of the magnitude of the
oversubscription, shares of Common Stock cannot
be allocated among subscribing Eligible
Policyholders so as to permit each such
Eligible Policyholder to purchase the lesser of
1,000 shares or the number of shares subscribed
for, then shares of Common Stock will be
allocated among the subscribing Eligible
Policyholders in the proportion in which: (i)
the aggregate number of shares subscribed for
by each such Eligible Policyholder bears to
(ii) the aggregate number of shares subscribed
for by all Eligible Policyholders; provided,
however, that no fractional shares of Common
Stock shall be issued. For more information,
please call the Conversion Center toll-free at
1-888-303-9085. See "The Conversion -- The
Conversion Offerings," "-- Purchases in the
Conversion Offerings" and "-- Marketing and
Underwriting Arrangements."
PURCHASE LIMITATIONS.......... No person may purchase fewer than 25 shares in
the Offerings. The ESOP may purchase up to an
aggregate of 10% of the shares of Common Stock
to be issued in the Conversion and is expected
to do so. With the exception of the ESOP, no
person (including Eligible Policyholders who
elect to purchase stock in the Conversion),
together with his or her associates or persons
acting in concert with him or her, may purchase
in the aggregate, more than 100,000 shares of
Common Stock (4.0% of the shares to be issued
in the Conversion at the Total Minimum of the
Estimated Valuation Range). There are 42,178
Eligible Policyholders. In the event that
subscriptions by Eligible Policyholders for
Common Stock
12
<PAGE> 16
exceed the maximum of the Estimated Valuation
Range, the Company will be obligated under the
Plan to sell to Eligible Policyholders
3,392,500 shares, which is the maximum number
of shares offered hereby (excluding shares
expected to be purchased by the ESOP), and
shares of Common Stock would be allocated among
Eligible Policyholders first, so as to permit
each subscriber to purchase up to 1,000 shares
(unless the magnitude of subscriptions does not
permit such an allocation), and then in
proportion to the respective amounts of shares
for which they subscribed. If all Eligible
Policyholders were to subscribe for 100,000
shares of Common Stock offered, then each
Eligible Policyholder would receive only
approximately 80 shares. The Company is unable
to predict the number of Eligible Policyholders
that may participate in the Subscription
Offering.
PURCHASE OF COMMON STOCK BY
MANAGEMENT.................. The directors and executive officers of the
Company and Mercer Mutual, each of whom is an
Eligible Policyholder, together with their
associates, propose to purchase, in the
aggregate, approximately 186,500 shares of
Common Stock in the Conversion, which equals
6.3% of the shares of Common Stock to be issued
in the Conversion assuming an offering at the
Total Midpoint of the Estimated Valuation Range
(but excluding shares purchased by the ESOP).
All such shares will be purchased by the
directors and executive officers and their
associates, if any, in the Subscription
Offering and in their capacities as Eligible
Policyholders. See "The Conversion -- Proposed
Management Purchases."
BENEFITS TO MANAGEMENT........ Up to 10.8% of the net proceeds of the Offering
is expected to be used to fund the purchase by
the ESOP of 10% of the shares of Common Stock
sold in the Conversion. These shares will be
awarded to substantially all of Mercer Mutual's
employees without payment by such employees of
cash consideration. See "Use of Proceeds." In
addition, the Board of Directors of the Company
intends to adopt, subject to shareholder
approval, a Management Recognition Plan (the
"MRP") pursuant to which the Company intends to
award to employees and directors of the Company
up to 4% of the number of shares of Common
Stock sold in the Conversion without payment by
such persons of cash consideration, and a Stock
Compensation Plan (the "Compensation Plan")
pursuant to which the Company intends to grant
options to acquire Common Stock to employees
and directors of the Company, in an amount up
to 10% of the number of shares of Common Stock
sold in the Conversion. The Company intends to
award shares under the MRP and to grant stock
options under the Compensation Plan as soon as
practicable after the approval of the MRP and
the Compensation Plan by the Company's
shareholders. The MRP and the Stock
Compensation Plan are subject to approval by
the Company's shareholders at the first annual
meeting of shareholders to be held no sooner
than six months after the consummation of the
Conversion. No decisions concerning the number
of shares to be awarded or options to be
granted to any director or officer have been
made at this time. See "Management of the
Company -- Certain Benefit Plans and
Agreements."
13
<PAGE> 17
USE OF PROCEEDS............... The amount of the net proceeds from the
Offerings will depend upon the total number of
shares sold and the expenses of the Conversion.
As a result, the net proceeds from the
Offerings cannot be determined until the
Conversion is completed. The Company
anticipates that net proceeds will be at least
$23.2 million. See "Use of Proceeds" for the
assumptions used to arrive at this estimate.
Between 10.8% and 10.6% of the net proceeds
retained by the Company will be used for a loan
by the Company to the ESOP to enable it to
purchase 10% of the shares of Common Stock
issued in the Conversion. The loan will fund
the entire purchase price of the shares
purchased by the ESOP in the Conversion ($3.8
million at the Total Maximum of the Estimated
Valuation Range plus the ESOP shares) and will
be repaid principally from Mercer Mutual's
contributions to the ESOP and from dividends
payable on unallocated shares of Common Stock
held by the ESOP. The Company has received
Pennsylvania Department approval to contribute
$5.0 million of net proceeds from the Offerings
to Mercer Mutual in exchange for all of the
capital stock of Mercer Mutual to be issued in
the Conversion. Assuming net proceeds from the
Offerings of between $23.2 million and $35.6
million and the implementation of the ESOP, the
Company would retain between $15.7 million and
$26.8 million after acquiring the stock of
Mercer Mutual. These funds will be available
for a variety of corporate purposes including,
but not limited to, additional capital
contributions to Mercer Mutual, future
acquisitions within the property and casualty
insurance industry, dividends to shareholders
and future repurchases of Common Stock to the
extent permitted by Pennsylvania law and the
Pennsylvania Department. With the exception of
the ESOP Loan and the capital contribution to
Mercer Mutual, the Company currently has no
specific plans, intentions, arrangements or
understandings regarding any of the foregoing
activities. See "Dividend Policy."
The portion of the net proceeds contributed to
Mercer Mutual will become part of Mercer
Mutual's capital, thereby expanding
underwriting capacity and permitting
diversification of its business. Mercer Mutual
intends to cause a portion of the net proceeds
it receives from the Company to be contributed
to MIC to enable MIC to expand its New Jersey
business beyond workers' compensation insurance
to include the same types of insurance
currently written by Mercer Mutual.
NON-TRANSFERABILITY OF
SUBSCRIPTION RIGHTS........... The Plan provides that no person shall transfer
or enter into any agreement or understanding to
transfer the legal or beneficial ownership of
subscription rights issued under the Plan or,
prior to exercise of the subscription rights,
the shares of Common Stock to be issued upon
their exercise. Persons violating such
prohibition will lose their right to purchase
Common Stock in the Conversion. Each person
exercising subscription rights will be required
to certify that his or her purchase of Common
Stock is solely for the
14
<PAGE> 18
purchaser's own account and that there is no
agreement or understanding regarding the sale
or transfer of such shares.
MARKET FOR THE COMMON STOCK... The Company has received approval to have the
Common Stock quoted on the Nasdaq National
Market under the symbol "MRCR," subject to
completion of the Conversion. Sandler O'Neill
has advised the Company that following the
Conversion, it intends to make a market in the
Common Stock, but it is under no obligation to
do so. Prior to the Offerings, there was no
public market for the Common Stock and there
can be no assurance that an active and liquid
trading market for the Common Stock will
develop or that if developed, it will continue,
nor is there any assurance that persons
purchasing shares of Common Stock will be able
to sell their shares at or above the Purchase
Price or that quotations will be available on
the Nasdaq National Market as contemplated. See
"Market for the Common Stock."
DIVIDENDS..................... Declaration of dividends by the Board of
Directors of the Company will depend on a
number of factors, including the requirements
of applicable law and the determination by the
Board of Directors of the Company that the net
income, capital and financial condition of the
Company and the Insurance Companies, industry
trends, general economic conditions and other
factors justify the payment of dividends. The
Company has not yet determined whether it will
pay dividends to its shareholders in the
foreseeable future, and no assurance can be
given that dividends will ultimately be
declared by the Board of Directors of the
Company. See "Dividend Policy" and
"Business -- Regulation."
ANTITAKEOVER PROVISIONS....... The Articles of Incorporation and Bylaws of the
Company, Pennsylvania statutory provisions and
employee benefit arrangements, as well as
certain other provisions of state and federal
law, may have the effect of discouraging or
preventing a non-negotiated change in control
of the Company, as well as a proxy contest for
control of the Board of Directors of the
Company. For a detailed discussion of those
provisions, see "Risk Factors -- Articles of
Incorporation, Bylaw and Statutory Provisions
that Could Discourage Hostile Acquisitions of
Control," "Management -- Certain Benefit Plans
and Agreements," "Certain Restrictions on
Acquisition of the Company" and "Description of
Capital Stock."
15
<PAGE> 19
MERCER MUTUAL
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
Mercer Mutual prior to the Conversion and should be read in conjunction with the
Consolidated Financial Statements, and accompanying notes thereto and other
financial information included elsewhere herein, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
consolidated statement of income data for the year ended December 31, 1994 and
the consolidated balance sheet data at December 31, 1995 are derived from the
audited consolidated financial statements of Mercer Mutual and its subsidiaries
not included in this Prospectus. The consolidated statement of income data for
the year ended December 31, 1993 and for the six months ended June 30, 1997 and
1998 and the consolidated balance sheet data at December 31, 1993 and 1994 and
at June 30, 1997 and 1998 are derived from the unaudited consolidated financial
statements of Mercer Mutual and its subsidiaries and include all adjustments
(consisting only of normal recurring accruals) that the Company considers
necessary for a fair presentation of such financial information for such
periods.
16
<PAGE> 20
MERCER MUTUAL
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ------- ---------- ------- ------- ----------- -----------
(UNAUDITED) (DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written........... $ 15,155 $13,951 $ 28,453 $24,958 $24,699 $24,355 $23,349
Net premiums written(1)(2)........ 13,677 8,017 17,461 20,124 21,245 19,377 18,964
Statement of Income Data:
Net premiums earned............... 10,931 8,691 17,969 20,634 20,817 18,681 18,225
Net investment income............. 1,108 1,214 2,350 2,289 2,132 1,904 2,196
Net realized investment gains..... 378 300 589 596 53 277 509
Other income...................... 81 99 173 155 161 166 159
---------- ------- ---------- ------- ------- ------- -------
Total revenues............ 12,498 10,304 21,081 23,674 23,163 21,028 21,089
---------- ------- ---------- ------- ------- ------- -------
Losses and Expenses:
Losses and loss adjustment
expenses(2)(3)................ 5,811 5,412 10,594 14,801 13,296 14,107 11,631
Other underwriting expenses..... 4,737 3,617 7,269 8,062 8,360 8,976 8,494
---------- ------- ---------- ------- ------- ------- -------
Total expenses............ 10,548 9,029 17,863 22,863 21,656 23,083 20,125
---------- ------- ---------- ------- ------- ------- -------
Income (loss) before federal
income taxes.................... 1,950 1,275 3,218 811 1,507 (2,055) 964
Federal income tax expense
(benefit)....................... 613 435 1,001 171 369 (681) 165
---------- ------- ---------- ------- ------- ------- -------
Net income (loss)(3).............. $ 1,337 $ 840 $ 2,217 $ 640 $ 1,138 $(1,374) $ 799
========== ======= ========== ======= ======= ======= =======
Selected Balance Sheet Data
(at period end): (UNAUDITED) (UNAUDITED)
Total investments and cash...... $ 53,743 $46,185 $ 48,506 $45,434 $44,022 $35,470 $40,414
Total assets.................... 75,731 72,534 74,085 74,074 77,523 71,750 71,110
Total liabilities............... 50,172 51,820 50,849 54,792 58,560 57,547 53,469
Total equity.................... $ 25,559 $20,714 $ 23,236 $19,282 $18,963 $14,202 $17,641
GAAP Ratios:
Loss and loss adjustment expense
ratio(3)(4)................... 53.2% 62.3% 58.9% 71.7% 63.9% 75.5% 63.8%
Underwriting expense ratio(5)... 43.3% 41.6% 40.5% 39.1% 40.2% 48.0% 46.6%
Combined ratio(6)............... 96.5% 103.9% 99.4% 110.8% 104.1% 123.5% 110.4%
Statutory Data:
Statutory combined ratio........ 92.2% 104.7% 102.1% 110.5% 103.0% 122.6% 110.7%
Industry combined ratio(7)...... -- -- 101.6% 105.9% 106.4% 108.4% 106.9%
Statutory surplus............... $ 22,119 $18,177 $ 20,132 $16,087 $14,938 $11,133 $12,979
Ratio of statutory net written
premiums to statutory
surplus(8).................... 1.24x .88x .87x 1.25x 1.42x 1.74x 1.46x
Pro Forma Data(9):
Net income...................... $ $1,255 $ 2,051
Net income per share of Common
Stock......................... $ 0.55 $ 0.90
Weighted average number of
shares of Common Stock
outstanding................... 2,288,094 2,269,288
</TABLE>
- ---------------
(1) The increase from June 30, 1997 to June 30, 1998 reflects the restructuring
of Mercer Mutual's reinsurance programs during both years.
(2) The decrease from December 31, 1996 to December 31, 1997 reflects the
termination, as of December 31, 1996, of Mercer Mutual's participation in a
pooling arrangement with two other insurance companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Losses and loss adjustment expenses, net income and loss and loss expense
ratios for the years ended December 31, 1994 and 1996 were adversely
affected by the frequency and severity of weather-related
17
<PAGE> 21
MERCER MUTUAL
SELECTED CONSOLIDATED FINANCIAL DATA -- (CONTINUED)
property losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(4) Calculated by dividing losses and loss adjustment expenses by net premiums
earned.
(5) Calculated by dividing other underwriting expenses by net premiums earned.
(6) The sum of the Loss and Loss Adjustment Expense Ratio and the Underwriting
Expense Ratio.
(7) As reported by A.M. Best Company, Inc., an independent insurance rating
organization. Data for the periods ended June 30, 1997 and June 30, 1998 is
unavailable.
(8) Annualized for the periods ended June 30, 1997 and 1998.
(9) Information excerpted from unaudited Pro Forma Condensed Consolidated
Statements of Income for the year ended December 31, 1997 and the six months
ended June 30, 1998. See "Pro Forma Data."
18
<PAGE> 22
RISK FACTORS
Before investing in the Common Stock offered hereby, prospective investors
should carefully consider all of the information set forth in this prospectus
and, in particular, the matters presented below.
POSSIBLE ADVERSE IMPACT OF CATASTROPHE AND NATURAL PERIL LOSSES ON FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In common with other property and casualty insurers, Mercer Mutual is
subject to claims arising from catastrophes that may have a significant impact
on its results of operations and financial condition. Mercer Mutual has
experienced, and can be expected to experience in the future, catastrophe losses
that may materially affect its financial condition and results of operations.
Catastrophe losses can be caused by various events, including coastal storms,
snow storms, ice storms, freezing, hurricanes, earthquakes, tornadoes, wind,
hail and fires, and their incidence and severity are inherently unpredictable.
The extent of net losses from catastrophes is a function of three factors: the
total amount of insured exposure in the area affected by the event, the severity
of the event and the amount of reinsurance coverage.
Mercer Mutual's financial condition and results of operations also are
affected periodically by losses caused by natural perils, regardless of whether
such losses, because of their magnitude, qualify as "catastrophes" as classified
by the Property Claims Service Division of American Insurance Services Group,
Inc., an insurance industry body. Because of the geographic concentration of its
business, Mercer Mutual may be more exposed to losses of this type than other
property and casualty insurers. The blizzard of January 1996 that adversely
affected Mercer Mutual's results of operations for 1996 is an example of a
"catastrophe." A multiplicity of such events, all or some of which do not
qualify as catastrophes, in the aggregate, may materially affect the Company's
financial condition and results of operations, partly because losses from
individual events may not permit recovery under Mercer Mutual's catastrophe
reinsurance coverage. The frequency and severity of winter storms during 1994
that adversely affected Mercer Mutual's results of operations for such year is
an example of this phenomenon. See "-- Geographic Concentration of Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Reinsurance."
POSSIBLE ADVERSE IMPACT DUE TO GEOGRAPHIC CONCENTRATION OF BUSINESS
All direct premiums written by Mercer Mutual are generated in New Jersey
and Pennsylvania. For the years ended December 31, 1995, 1996 and 1997 and the
six months ended June 30, 1998, 99.3%, 99.1%, 98.7% and 98.7%, respectively, of
Mercer Mutual's direct premiums written were derived from policies written in
New Jersey. As such, Mercer Mutual has a significant exposure to weather-related
property losses, as evidenced by severe winter storms in New Jersey that were
largely responsible for Mercer Mutual's $1.4 million net loss for the year ended
December 31, 1994 and that reduced net income by $665,000 in the year ended
December 31, 1996. The revenues and profitability of Mercer Mutual could be
significantly affected by legal and judicial trends and prevailing economic,
regulatory, demographic and other conditions in New Jersey as well as the impact
of catastrophe and natural peril losses in that state. See "-- Catastrophe and
Natural Peril Losses."
POSSIBLE ADVERSE IMPACT OF POTENTIAL LITIGATION
On February 11, 1997, the affiliated companies of Old Guard Mutual
Insurance Company, Old Guard Mutual Fire Insurance Company and
Goschenhoppen-Home Mutual Insurance Company (the "Old Guard Companies")
completed the first mutual to stock conversions under the Pennsylvania Insurance
Company Mutual to Stock Conversion Act (the "Act"). Since such time, no other
mutual to stock conversions similar to the Conversion have been completed under
the Act. On January 7, 1997, a policyholder of one of the Old Guard Companies
filed an action in the Commonwealth Court of Pennsylvania against the
Pennsylvania Department, the Old Guard Companies and their holding company
seeking, among other things, to have the court (1) declare the Act
unconstitutional, and (2) direct the Pennsylvania Department to rescind its
approval of the conversions (the "Old Guard Policyholder Action"). On July 21,
1997, the Old Guard Policyholder
19
<PAGE> 23
Action was settled and the litigation terminated without any admissions of
liability or lack of merit of the claims. Under the terms of this settlement,
(i) the Pennsylvania Department implemented certain additional procedures
designed to ensure the dissemination of greater information and disclosure to
policyholders and others; (ii) the Pennsylvania Department agreed to use certain
defined criteria to evaluate whether a hearing should be held on a conversion
plan; (iii) the parties mutually released each other from all claims relating to
the Old Guard Policyholder Action; and (iv) no money or other consideration was
paid by any party to the litigation to any other party to the litigation.
On February 10, 1997, the Old Guard Companies and their holding company and
each of their respective directors were served with an eleven count combination
class action and derivative lawsuit, filed in the United States District Court
for the Eastern District of Pennsylvania (the "Old Guard Class Action")
challenging the constitutionality of the Act, and alleging violations of the Act
and the breach by the directors of the Old Guard Companies of their fiduciary
duties of care and loyalty. The suit seeks compensatory damages as may be
allowed by law, a declaration that the plan of conversion violates the Act and
the United States and Pennsylvania Constitutions and the rights of the
plaintiffs thereunder, and other relief. The holding company for the Old Guard
Companies has stated in its filings under the Exchange Act that the Old Guard
Companies and their directors believe they have meritorious defenses to the
action and intend to defend this action vigorously. The Old Guard Class Action
is still pending.
The Pennsylvania Department has stated that it believes the Act is
constitutional. The Company and Mercer Mutual, based on the advice of their
counsel, believe that it is unlikely that any litigation challenging the
constitutionality of the Act would be successful principally because of (i) the
existence of court decisions that have consistently upheld the constitutionality
of a very similar federal statutory provision providing for the conversion to
stock form of mutual savings and loan associations, pursuant to which over 1,000
mutual to stock conversions have been completed to date, and (ii) a court
decision upholding the constitutionality of a similar Pennsylvania statutory
provision providing for the conversion to stock form of a Pennsylvania mutual
savings bank. However, because of the recent passage of the Act in December 1995
and the settlement of the Old Guard Policyholder Action, no legal precedent
exists directly governing the determination of the claims made in the Old Guard
Class Action.
In May 1998, Franklin Mutual Insurance Company ("Franklin") filed with the
Pennsylvania Department a petition to intervene and request for a full
adjudicatory hearing with respect to all proceedings of the Pennsylvania
Department concerning Mercer Mutual's application for approval of the Plan. In
approving the Plan, the Pennsylvania Department denied Franklin's petition to
intervene and its request for an adjudicatory hearing. Franklin could attempt to
bring an action before the Pennsylvania Commonwealth Court challenging the
Pennsylvania Department's approval of the Plan or its denial of Franklin's
petition. See "-- Requirement for Policyholder Approval" and "Business -- Offer
to Acquire Mercer Mutual" and "-- Legal Proceedings."
No assurance can be given that if any litigation is commenced, that the
Company or Mercer Mutual would ultimately prevail. In addition, no assurance can
be given that the commencement of any litigation and the risks associated
therewith would not result in less than the minimum number of shares of Common
Stock being sold, in which case the Conversion would not be consummated, or that
only the minimum number of shares of Common Stock will be sold, resulting in a
sale of Common Stock at the lower end of the Estimated Valuation Range and
reduced net proceeds therefrom.
Mercer Mutual's directors and officers liability insurance policy may not
cover losses, damages, liabilities, and attorneys' fees and other expenses
resulting from any claims made against its directors and officers arising as a
result of the Conversion (collectively, "Director and Officer Liabilities").
Mercer Mutual intends to indemnify and hold harmless its directors and officers
from and against all Director and Officer Liabilities to the fullest extent
permitted by law. Even if Mercer Mutual is successful on the merits defending
its directors and officers against any such claims, the attorneys' fees and
expenses incurred in such a defense could be material.
20
<PAGE> 24
If the Conversion is completed but the Act, or any portion of the Act, is
declared unconstitutional, or the Conversion is otherwise declared by a court to
be invalid, the remedy a court would grant is uncertain, and is subject to the
court's broad discretion. Relief could be applied on a prospective basis only or
on a retroactive basis. No prediction can be made concerning the remedy a court
would fashion in such an event. However, in the event of any litigation against
Company challenging the validity of the Conversion, two possibilities include:
- A requirement that the Company pay all purchasers of Common Stock, (i)
the aggregate Purchase Price paid, plus interest, or (ii) the market
value of the Common Stock sold in the Conversion, less any proceeds
received by such purchaser from a subsequent sale of such Common Stock;
or
- The Company could be required to distribute to policyholders of Mercer
Mutual all or a portion of the surplus of Mercer Mutual as of the date of
the Conversion (statutory surplus as of June 30, 1998 was $22.1 million).
Such distribution could be required to be made in cash, Common Stock or
other debt or equity securities. Any required distribution of Common
Stock or other equity securities would materially dilute the interests of
existing holders of the Common Stock.
No assurance can be given that the Company would have sufficient funds, or the
capacity to borrow sufficient funds, to honor any of its obligations under any
remedy imposed by a court in any litigation. In such event, the Company could be
forced to seek the protection of the bankruptcy laws and Mercer Mutual could be
deemed insolvent and seized by the Pennsylvania Department. In addition, the
commencement of any litigation could have a material adverse impact on the
market price of the Common Stock during the pendency of the litigation and an
adverse determination of such litigation would have such a material adverse
effect.
POSSIBLE ADVERSE IMPACT OF BROAD VALUATION RANGE AND ITS USE TO DETERMINE THE
NUMBER OF SHARES OF COMMON STOCK SOLD
If the value set forth in the final updated Appraisal is within the
Estimated Valuation Range, the Conversion can be completed and the Company can
sell between 2,507,500 and 3,392,500 shares of Common Stock. There is a
difference of approximately $8.9 million between the minimum and the maximum of
the Estimated Valuation Range. As a result, the percentage interest in the
Company that a subscriber for a fixed number of shares of Common Stock will have
is approximately 26% smaller if 3,392,500 shares are sold than if 2,507,500
shares are sold. Furthermore, as a result of this broad range, the final updated
Appraisal may estimate a consolidated pro forma market value for Mercer Mutual
as a subsidiary of the Company that is materially more or less than the
aggregate dollar amount of subscriptions received by the Company. Subscribers
will not receive a refund or have any right to withdraw subscriptions if the
updated Appraisal estimates a consolidated pro forma market value that is within
the Estimated Valuation Range, but is less than the aggregate dollar amount of
subscriptions received by the Company. Therefore, subscribers, in the aggregate
and on a per share basis, may pay materially more for the Common Stock than the
estimated consolidated pro forma market value of Mercer Mutual as a subsidiary
of the Company. Accordingly, no assurance can be given that the market price for
the Common Stock immediately following the Conversion will equal or exceed the
Purchase Price.
POSSIBLE ADVERSE IMPACT OF NEW JERSEY TAX LAWS
Prior to the Redomestication, Mercer Mutual, as a New Jersey-domiciled
insurance company, paid an annual tax to New Jersey in an amount equal to 2.1%
of 12.5% of the total net direct premiums collected by Mercer Mutual on all
policies of insurance wherever issued and an annual tax to Pennsylvania in an
amount equal to 2.0% of the total net direct premiums collected by Mercer Mutual
on all policies of insurance issued to policyholders located in Pennsylvania.
For the year ended December 31, 1997, Mercer Mutual has calculated expenses of
approximately $72,000 and $7,000 for amounts due to New Jersey and Pennsylvania,
respectively, pursuant to such taxes. New Jersey has a statutory retaliatory tax
provision that, because Mercer Mutual is now a Pennsylvania-domiciled insurance
company, could be interpreted to require Mercer Mutual to pay, for all or a
portion of 1997 and for all future years, a tax to New Jersey equal to 2.0% of
the total net direct premiums collected by Mercer Mutual on all policies of
insurance issued to policyholders located in
21
<PAGE> 25
New Jersey. If such interpretation is correct, Mercer Mutual would be required
to pay substantially more in taxes to New Jersey than it has in the past, which
would have a material adverse effect on the results of operations of Mercer
Mutual. Under this interpretation, if the Redomestication had occurred on
January 1, 1997, Mercer Mutual would have been required to pay approximately
$542,000 in taxes to New Jersey for the year ended December 31, 1997, $469,000
more than the amount which has been calculated as due for such year.
No assurance can be given that the New Jersey taxing authorities will not
interpret such retaliatory tax provision in a manner adverse to Mercer Mutual,
and that if so, they would not seek to enforce such retaliatory tax provision
against Mercer Mutual. If enforcement is sought, Mercer Mutual would likely
challenge such enforcement before the appropriate administrative and judicial
authorities, but no assurance can be given that Mercer Mutual would be
successful in such a challenge. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Effect of Conversion and
Redomestication on the Company's Future Financial Condition and Results of
Operations -- State Taxes."
POSSIBLE SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
The operating results of property and casualty insurers are subject to
significant fluctuation due to a number of factors, including extreme weather
conditions and natural disasters, regulation, competition, judicial trends,
changes in the investment and interest rate environment and general economic
conditions. The Company's operating results may also be affected by changes in
the supply of, and the pricing for, property and casualty insurance and
reinsurance, which historically have been highly cyclical. The unpredictability
of claims experience and the competitive nature of the property and casualty
insurance industry has contributed historically to significant
quarter-to-quarter and year-to-year fluctuations in the underwriting results and
net earnings of Mercer Mutual. Because of these and other factors, historic
results of operations may not be indicative of future operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POSSIBLE ADVERSE IMPACT OF INADEQUATE LOSS RESERVES ON FINANCIAL CONDITION AND
RESULTS OF OPERATION
Mercer Mutual is required to maintain reserves to cover its estimated
ultimate liability for losses and loss adjustment expenses ("LAE") with respect
to reported and unreported claims incurred. Reserves are estimates involving
actuarial and statistical projections at a given time of what Mercer Mutual
expects to be the cost of the ultimate settlement and administration of claims
based on facts and circumstances then known, predictions of future events,
estimates of future trends in claims severity and judicial theories of
liability, legislative activity and other variable factors, such as inflation.
Mercer Mutual's overall reserve practice provides for ongoing claims evaluation
and adjustment (if necessary) based on the development of related data and other
relevant information pertaining to such claims. Loss and LAE reserves, including
reserves for claims that have been incurred but not yet reported, are adjusted
no less frequently than quarterly. The uncertainties of estimating insurance
reserves are greater for certain types of property and casualty insurance lines
written by the Insurance Companies, particularly workers' compensation and other
liability coverages, because a longer period of time may elapse before a
definitive determination of ultimate liability may be made and because of the
changing judicial and political climates relating to these types of claims.
Management believes that Mercer Mutual's reserves for losses and loss
adjustment expenses are adequate and are in accordance with generally accepted
actuarial principles and practices. However, the establishment of appropriate
loss and loss adjustment expense reserves is an inherently uncertain process and
there can be no assurance that ultimate losses will not exceed Mercer Mutual's
loss reserves. To the extent that reserves prove to be inadequate in the future,
Mercer Mutual would have to increase reserves which would adversely affect
earnings in the period such reserves are increased and could have a material
adverse effect on the Company's results of operations and financial condition.
See "Business -- Loss and LAE Reserves."
22
<PAGE> 26
POSSIBLE ADVERSE OR INADEQUATE IMPACT OF GEOGRAPHIC DIVERSIFICATION STRATEGY
The Company intends to pursue a strategy of growth through the attraction
of new agencies in Pennsylvania and the acquisition of other insurance companies
in Pennsylvania and other jurisdictions. The success of the Company's growth
strategy will depend largely upon its ability to attract new agencies and
successfully market to them, and to identify suitable acquisition candidates and
effect acquisitions at a reasonable cost. No assurance can be given that the
Company will be successful in implementing its growth strategy. Moreover, this
growth strategy may present special risks, such as the risk that Mercer Mutual
will not efficiently integrate an acquisition with present operations, the risk
of dilution of book value and earnings per share of the Common Stock as a result
of an acquisition, the risk that the Company and Mercer Mutual will not be able
to attract and retain qualified personnel needed for expanded operations, and
the risk that internal monitoring and control systems may prove inadequate.
Purchasers of Common Stock should also be aware that the Company, in many
instances, may be able to make an acquisition without shareholder approval.
HIGHLY COMPETITIVE NATURE OF INSURANCE INDUSTRY
The property and casualty insurance market is highly competitive.
Competition is based on many factors, including perceived financial strength of
the insurer, premiums charged, policy terms and conditions, service, reputation
and experience. Mercer Mutual competes with stock insurance companies, mutual
companies, local cooperatives and other underwriting organizations. Certain of
these competitors have substantially greater financial, technical and operating
resources than Mercer Mutual. Many of the lines of insurance written by Mercer
Mutual are subject to significant price competition. Some companies may offer
insurance at lower premium rates through the use of salaried personnel or other
methods, rather than the use of agents paid on a commission basis as Mercer
Mutual does. See "Business -- Competition."
POSSIBLE ADVERSE IMPACT OF CHANGE IN A.M. BEST RATING
Ratings assigned by A.M. Best Company, Inc. ("A.M. Best") are an important
factor influencing the competitive position of insurance companies. A.M. Best
ratings are based upon factors of concern to policyholders and are not directed
toward the protection of investors. As such, the Insurance Companies' A.M. Best
rating should not be relied upon as a basis for an investment decision to
purchase the Common Stock. A.M. Best affirmed an "A-" (Excellent) rating (its
fourth highest out of 15 rating categories) for the Insurance Companies as a
group in 1997 based on year-end 1996 financial data. However, A.M. Best stated
in its report that due to the Insurance Companies' considerable catastrophe
exposure, it viewed the Insurance Companies' ratings outlook as negative. This
catastrophe exposure results from the geographic concentration of the Insurance
Companies' business. As a geographically concentrated insurer, the Insurance
Companies are susceptible to a weather-related event such as a windstorm, a
hurricane, hail, a tornado, freezing temperatures or other extraordinary event.
In fact, Mercer Mutual's exposure to severe weather conditions has been a major
factor affecting its underwriting results since 1991. See "-- Possible Adverse
Impact Due to Geographic Concentration of Business." Therefore, there can be no
assurance that the Insurance Companies will be able to maintain their current
A.M. Best rating.
Management believes that the Insurance Companies' business is sensitive to
ratings and that a rating downgrade may affect their ability to underwrite new
business. As a result, if the Insurance Companies were to experience a rating
downgrade, the independent agents that sell the Insurance Companies' products
could be inclined to place their customers with higher-rated insurance carriers,
which could have a material adverse effect on the Company's business and results
of operations.
Management met with A.M. Best personnel in February 1997 to discuss the
measures the Insurance Companies are implementing to reduce the risk caused by
their exposure to severe weather conditions and preserve their A.M. Best Rating.
These measures include an increase in the rates charged for homeowners
insurance, the termination of their relationships with unprofitable agencies,
decreasing their catastrophe exposure by improving the Insurance Companies' mix
of business through an increase in commercial and casualty writings, the planned
geographic diversification of business through the acquisition of other
insurance
23
<PAGE> 27
companies, and the planned improvement of capital strength through the
Conversion and the Offerings. Each of these measures is in various stages of
implementation. See "Business -- A.M. Best Rating."
RELIANCE ON KEY AGENCIES AND PRODUCT LINES
For the six months ended June 30, 1998 and the year ended December 31,
1997, the Insurance Companies' largest agency accounted for approximately 8.6%
and 7.3%, respectively, of the Insurance Companies' direct premiums written, and
generated approximately $1.3 million and $2.1 million, respectively, in premium
revenue for the Insurance Companies. For the six months ended June 30, 1998 and
the year ended December 31, 1997, the Insurance Companies' 10 largest agencies
accounted for 31.5% and 26.8%, respectively, of direct premiums written. A
significant decrease in business from, or the loss of, its largest agency or
several of its other large agencies would have a material adverse effect on the
Company. Furthermore, the Insurance Companies' largest agency has written a
significant portion of its business with religious institutions using a
specialized multi-peril policy specially designed by Mercer Mutual for this
market segment. See "Business -- Products -- Commercial Multi-Peril
Products -- Religious Institutions." Decisions by such institutions to
discontinue certain coverages or to emphasize certain coverages over others, and
any inability of Mercer Mutual to offer such coverages at a price satisfactory
to such institutions may have a material adverse effect on the Company.
POSSIBLE ADVERSE IMPACT OF REGULATORY CHANGES
The Insurance Companies are subject to substantial regulation by government
agencies in the states in which they do business. Such regulation usually
includes (i) regulating premium rates, policy forms, and lines of business, (ii)
setting minimum capital and surplus requirements, (iii) imposing guaranty fund
assessments and requiring residual market participation, (iv) licensing
companies and agents, (v) approving accounting methods and methods of setting
loss and expense reserves, (vi) setting requirements for and limiting the types
and amounts of investments, (vii) establishing requirements for the filing of
annual statements and other financial reports, (viii) conducting periodic
statutory examinations of the affairs of insurance companies, (ix) approving
proposed changes in control, (x) limiting the amount of dividends that may be
paid without prior notice or approval, (xi) regulating transactions with
affiliates, and (xii) regulating trade practices and market conduct. Such
regulation and supervision are primarily for the benefit and protection of
policyholders and not for the benefit of investors. The insurance regulatory
structure has been subject to increased scrutiny in recent years by federal and
state legislative bodies and state regulatory authorities.
In 1990, the National Association of Insurance Commissioners (the "NAIC")
began an accreditation program to ensure that states have adequate procedures in
place for effective insurance regulation, especially with respect to financial
solvency. The accreditation program requires that a state meet specific minimum
standards in over five regulatory areas to be considered for accreditation. The
accreditation program is an ongoing process and once accredited, a state must
enact any new or modified standards approved by the NAIC within two years
following adoption. As of June 30, 1998, Pennsylvania and New Jersey, the states
in which Mercer Mutual and MIC, respectively, are domiciled, were accredited.
The NAIC has adopted risk-based capital ("RBC") requirements that require
insurance companies to calculate and report information under a risk-based
formula that attempts to measure statutory capital and surplus needs based on
the risks in a company's mix of products and investment portfolio. The formula
is designed to allow state insurance regulators to identify weakly capitalized
companies. The RBC requirements provide for four different levels of regulatory
attention in the event of noncompliance with required capital levels, which
range from a requirement to file a corrective plan of action to mandatory
seizure. Neither of the Insurance Companies has ever failed to meet the required
levels of capital. There can be no assurance, however, that the capital
requirements applicable to the respective businesses of the Insurance Companies
will not increase in the future, or that the Insurance Companies will continue
to meet these requirements.
The NAIC has also developed a set of eleven financial ratios, referred to
as the Insurance Regulatory Information System ("IRIS"), for use by state
insurance regulators in monitoring the financial condition of insurance
companies. The NAIC has established an acceptable range of values for each of
the eleven IRIS
24
<PAGE> 28
financial ratios. Generally, an insurance company will become the subject of
increased scrutiny when four or more of its IRIS ratios fall outside the range
deemed acceptable by the NAIC. The nature of increased regulatory scrutiny
resulting from IRIS ratios that are outside the acceptable range is subject to
the judgment of the applicable state insurance department, but generally will
result in accelerated review of annual and quarterly filings. Depending on the
nature and severity of the underlying cause of the IRIS ratios being outside the
acceptable range, increased regulatory scrutiny could range from increased but
informal regulatory oversight to placing a company under regulatory control.
During the years ended December 31, 1995 and 1996, each of the Insurance
Companies reported two ratios outside the acceptable range for certain IRIS
tests. However, neither of the Insurance Companies had four or more IRIS ratios
outside the acceptable range and, to their knowledge, neither of the Insurance
Companies is subject to increased regulatory scrutiny. During the year ended
December 31, 1997, neither Insurance Company reported any ratio outside the
acceptable IRIS range. See "Business -- Regulation."
No assurance can be given that future legislation or regulatory changes
will not adversely affect the business and results of operations of the
Insurance Companies. See "Business -- Regulation."
Adverse legislative and regulatory activity constraining the Insurance
Companies' ability to price adequately workers' compensation and other insurance
coverages may occur in the future. In recent years, insurers have been under
pressure from regulators, legislatures and special interest groups to reduce,
freeze or set workers' compensation insurance rates at levels that may not
correspond with current underlying costs. Any such required rate levels could
have a material adverse effect on the Company's business and results of
operations.
DEPENDENCE UPON DIVIDENDS FROM INSURANCE COMPANIES
Because the operations of the Company following the Conversion will be
conducted through the Insurance Companies, the Company will be dependent upon
dividends and other payments from Mercer Mutual for funds to meet its
obligations. State law regulates the distribution of dividends and other
payments by Mercer Mutual to the Company and by MIC to Mercer Mutual. Such
restrictions or any subsequently imposed restrictions may in the future affect
the Company's ability to pay debt, expenses and cash dividends. See "Dividend
Policy" and "Business -- Regulation."
AVAILABILITY AND ADEQUACY OF REINSURANCE
The Insurance Companies' insurance operations rely on the use of
reinsurance arrangements to limit and manage the amount of risk retained, to
stabilize underwriting results and increase underwriting capacity. The
availability and cost of reinsurance are subject to prevailing market conditions
and may vary significantly over time. No assurance can be given that reinsurance
will continue to be available to the Insurance Companies in the future at
commercially reasonable rates. While the Insurance Companies seek to obtain
reinsurance with coverage limits that they believe are appropriate for the risk
exposures assumed, there can be no assurance that losses experienced by the
Insurance Companies will be within the coverage limits of their reinsurance
treaties and facultative arrangements. During 1997 and 1998, the Company has
reduced its reliance on reinsurance by increasing the maximum exposure retained
by the Insurance Companies on individual property and casualty risks. The
Company may further increase such maximum exposure in the future. The Company
will rely, in part, on the additional capital raised in the Conversion to
protect itself in the event of individual property losses up to the increased
maximum exposure amounts under its reinsurance agreements. The Company's maximum
exposure will be adjusted by the Company from time to time based on the amount
of capital raised in the Conversion, the Company's evaluation of its ability to
incur multiple losses without a corresponding material adverse effect on its
future financial condition and results of operations, and negotiations with its
reinsurers.
The decrease in reinsurance will increase the Company's risk of loss. The
Insurance Companies also are subject to credit risk with respect to their
reinsurers because the ceding of risk to reinsurers does not relieve the
Insurance Companies of their liability to insureds. The insolvency or inability
of any reinsurer to meet its
25
<PAGE> 29
obligations may have a material adverse effect on the business and results of
operations of the Company. See "Business -- Strategy" and "-- Reinsurance."
RELIANCE ON EXISTING MANAGEMENT
The operations of the Company and the Insurance Companies are largely
dependent on existing management. The loss to the Company or the Insurance
Companies of one or more of their existing executive officers could have a
material adverse effect on the Company's business and results of operations. The
Company has entered into employment agreements with the chief executive officer
and chief operating officer of the Company and the Insurance Companies. See
"Management of the Company -- Executive Officers" and "-- Certain Benefit Plans
and Agreements."
POTENTIAL BENEFITS OF CONVERSION TO MANAGEMENT AND IMPACT OF PURCHASES BY
MANAGEMENT AND STOCK BENEFIT PLANS
It is currently expected that directors and executive officers of the
Insurance Companies and their associates will subscribe for approximately
186,500 shares of the Common Stock to be issued in the Conversion, or 7.4%
thereof at the Total Minimum of the Estimated Valuation Range, and that the ESOP
will purchase 10% of the shares to be issued in the Conversion. In addition,
following the Conversion, and subject to shareholder approval, the Company
intends to implement the MRP and the Compensation Plan. At the Total Minimum,
Total Midpoint and Total Maximum, assuming that all options that may be granted
under the Compensation Plan are granted and exercised, such persons would
receive under the MRP and the Stock Compensation Plan, in the aggregate,
351,050, 413,000 and 474,950 shares, respectively, or in each case, 12.7% of the
Common Stock issued in the Conversion and outstanding after such issuance and
exercise. In addition to the possible financial benefits under the ESOP, MRP and
Compensation Plan, management could benefit from certain statutory and
regulatory provisions, as well as certain provisions in the Company's Articles
of Incorporation and Bylaws, that may tend to promote the continuity of existing
management and discourage certain acquisition proposals.
As a result of the foregoing, management could acquire a substantial
interest in the Company and, if each member of management were to act
consistently with each other, could have significant influence over the outcome
of the election of directors and any other shareholder vote, especially a vote
on matters requiring the approval of 80% of the outstanding Common Stock, such
as certain business combinations. Management might thus have the power to
authorize actions that may be viewed as contrary to the best interests of non-
affiliated holders of Common Stock and might have substantial power to block
actions that such holders may deem to be in their best interests. See "Pro Forma
Data," "Management -- Certain Benefit Plans and Agreements," "The
Conversion -- Proposed Management Purchases," and "Certain Restrictions on
Acquisition of the Company."
REQUIREMENT FOR POLICYHOLDER APPROVAL
The Conversion is contingent upon the approval of the Plan by the Eligible
Policyholders. Approval of the Plan will require the affirmative vote, either in
person or by proxy, of at least two-thirds of the votes cast by the Eligible
Policyholders. Each Eligible Policyholder is entitled to one vote. The Special
Meeting has been scheduled for , 1998 for the purpose of considering
and voting on the Plan. Mercer Mutual's Board of Directors is unanimously
recommending to the Eligible Policyholders that they vote in favor of the Plan.
On March 3, 1998, Mercer Mutual received an unsolicited offer from
Franklin, an Eligible Policyholder, to purchase from Mercer Mutual, upon the
consummation of the Conversion, all of the to-be-issued capital stock of Mercer
Mutual for a purchase price of $23.2 million, representing the net worth of
Mercer Mutual at December 31, 1997 under generally accepted accounting
principles. Under Franklin's proposal, Mercer Mutual was asked to amend the Plan
to provide that policyholders would receive the $23.2 million payment. Franklin
also committed to contribute an additional $5 million of capital to Mercer
Mutual. Mercer Mutual's Board of Directors unanimously rejected such offer.
26
<PAGE> 30
On April 27, 1998, Mercer Mutual received correspondence from Franklin
demanding permission to examine Mercer Mutual's list of all Eligible
Policyholders and to make copies of or extracts from such list, for the purpose
of communicating with Eligible Policyholders concerning the Plan. On May 7,
1998, Mercer Mutual rejected such request and filed an action in the Court of
Common Pleas of Chester County, Pennsylvania, seeking, among other things, a
declaratory judgment that Franklin is not entitled to examine or make copies of
or extracts from Mercer Mutual's list of Eligible Policyholders. Mercer Mutual
believes that Franklin's intended purposes for requesting a list of Eligible
Policyholders were (i) to solicit opposition to the Plan so that the Conversion
would not be approved by the Eligible Policyholders and Mercer Mutual, a
competitor of Franklin, would not be able to complete the Conversion and become
a stronger competitor, and (ii) to use the list to make an offer for the stock
of Mercer Mutual that violates applicable insurance holding company laws.
Franklin also could use the list to communicate and market Franklin and its
insurance products directly to Mercer Mutual's policyholders. On May 11, 1998,
Franklin responded to Mercer Mutual's action by filing in the same court an
application to compel production of the policyholder list. On August 7, 1998 the
Court ordered Mercer Mutual to deliver the policyholder list to a third party
mailer designated by Franklin. The mailer is prohibited from disclosing the list
to Franklin or any other person. The mailer will mail Franklin's communications
to Mercer Mutual policyholders but only if the Department (or in lieu of the
Department, the Court) determines that Franklin's communications do not violate
any law.
If, as a result of Franklin's efforts in opposition to the Plan or
otherwise, the Eligible Policyholders fail to approve the Plan at the Special
Meeting, the Company will cancel the Offerings and all subscription funds will
be returned promptly to subscribers without interest. In such event, Mercer
Mutual would maintain and continue its existence as an independent property and
casualty insurance company.
RISK OF DELAYED OFFERING
The Company and Mercer Mutual expect to complete the Conversion within the
time periods indicated in this Prospectus. Nevertheless, it is possible,
although not anticipated, that adverse market, economic or regulatory
conditions, or other factors could significantly delay the completion of the
Conversion and result in increased Conversion costs or in changes in the
Estimated Valuation Range. The Subscription and Community Offerings could be
extended to , 1998. If the Conversion is not completed within 45
days after , 1998, the Offerings will be terminated and all funds
held will be promptly returned without interest. See "The Conversion -- The
Conversion Offerings" and "-- Purchases in the Conversion Offerings."
DILUTIVE EFFECT OF STOCK OPTIONS AND MRP
The Compensation Plan and the MRP will be subject to shareholder approval
at the Company's first annual meeting of shareholders to be held after the
Conversion. The Company anticipates that, if approved, these plans would be
implemented as soon as practicable after such meeting. Because the shares of
Common Stock issued pursuant to the exercise of options granted under the
Compensation Plan would consist of newly issued shares, upon the exercise of
options granted under the Compensation Plan, the interests of existing
shareholders would be diluted. The total number of shares that could be issued
pursuant to the exercise of options granted under the Compensation Plan would be
an amount equal to 10% of the Common Stock issued in the Conversion. In
addition, in lieu of purchasing shares of Common Stock for the MRP in the open
market, the Company may issue authorized but unissued shares of Common Stock to
the MRP. The total number of shares that could be issued to the MRP would be an
amount equal to 4% of the Common Stock issued in the Conversion. Such newly
issued shares would dilute the interests of existing shareholders. See
"-- Potential Benefits of Conversion to Management and Impact of Purchases by
Management and Stock Benefit Plans," "Pro Forma Data" and "Management -- Certain
Benefit Plans and Agreements -- Stock Compensation Plan" and "-- Management
Recognition Plan."
27
<PAGE> 31
ARTICLES OF INCORPORATION, BYLAW AND STATUTORY PROVISIONS THAT COULD DISCOURAGE
HOSTILE ACQUISITIONS OF THE COMPANY
The Company's Articles of Incorporation and Bylaws contain certain
provisions that may have the effect of discouraging a non-negotiated tender or
exchange offer for the Common Stock, a proxy contest for control of the Company,
the assumption of control of the Company by a holder of a large block of Common
Stock or the removal of the Company's management, all of which certain
shareholders might deem to be in their best interests. These provisions include,
among other things (i) the classification of the terms of the members of the
Board of Directors, (ii) supermajority provisions for the approval of certain
business combinations and the amendment of the Articles of Incorporation or
Bylaws of the Company, (iii) elimination of cumulative voting in the election of
directors, and (iv) restrictions on the voting of the Company's equity
securities by any individual, entity or group owning more than 10% of the Common
Stock. The provisions in the Company's Articles of Incorporation requiring a
supermajority vote for the approval of certain business combinations and
containing restrictions on voting of the Company's equity securities provide
that the supermajority voting requirements and voting restrictions do not apply
to business combinations and acquisitions of Common Stock meeting specified
Board of Directors' approval requirements. The Articles of Incorporation also
authorize the issuance of 5,000,000 shares of preferred stock as well as
additional shares of Common Stock. These shares could be issued without
shareholder approval on terms or in circumstances that could deter a future
takeover attempt.
In addition, the Pennsylvania Business Corporation Law (the "Pennsylvania
BCL") provides for certain restrictions on the acquisition of the Company, and
Pennsylvania law contains various restrictions on acquisitions of control of
insurance holding companies.
The Articles of Incorporation, Bylaw and statutory provisions, as well as
certain other provisions of state and federal law, may have the effect of
discouraging or preventing a future takeover attempt not supported by the
Company's Board of Directors in which shareholders of the Company otherwise
might receive a substantial premium for their shares over then-current market
prices. For a detailed discussion of those provisions, see
"Management -- Certain Benefit Plans and Agreements," "Certain Restrictions on
Acquisition of the Company," "Certain Anti-Takeover Provisions in the Articles
of Incorporation and Bylaws" and "Description of Capital Stock."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the subscription rights granted to Eligible Policyholders are deemed to
have an ascertainable value, receipt of such rights could result in taxable gain
to those Eligible Policyholders who receive or exercise the subscription rights,
in an amount equal to such value. Additionally, Mercer Mutual could recognize a
gain for tax purposes on such distribution. Whether subscription rights are
considered to have ascertainable value is an inherently factual determination.
Mercer Mutual has been advised by Sheshunoff that the subscription rights
granted to Eligible Policyholders have no value. However, Sheshunoff's
conclusion is not binding on the Internal Revenue Service ("IRS"). See "The
Conversion -- Effects of Conversion on Policyholders" and "-- Tax Effects."
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The Company has never issued capital stock, and consequently there is no
established market for the Common Stock. The Company has received approval to
have the Common Stock quoted on the Nasdaq National Market under the symbol
"MRCR," subject to completion of the Conversion. However, there can be no
assurance that an active and liquid trading market for the Common Stock will
develop or that, if one develops, it will continue, nor is there any assurance
that persons purchasing Common Stock will be able to sell the Common Stock at or
above the Purchase Price. See "Market for the Common Stock."
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<PAGE> 32
USE OF PROCEEDS
The Company has received Pennsylvania Department approval to contribute
$5.0 million of net proceeds from the Offering to Mercer Mutual in exchange for
all of its capital stock. The Company will retain the balance of the net
proceeds, from which it will fund a loan to the ESOP in the amount necessary to
purchase 10% of the shares of Common Stock sold in the Offering (the "ESOP
Loan"). The amount of the ESOP Loan may range from $2.5 million to $3.8 million
based on a sale of 250,750 shares to the ESOP (at the Total Minimum) and 376,944
shares to the ESOP (at the Total Maximum plus the shares sold to the ESOP),
respectively, at the Purchase Price. It is anticipated that the ESOP Loan will
have a ten year term with interest payable at the prime rate as published in The
Wall Street Journal on the closing date of the Conversion. The ESOP Loan will be
repaid principally from Mercer Mutual's contributions to the ESOP and from any
dividends paid on the unallocated shares of Common Stock held by the ESOP. See
"Management of the Company -- Certain Benefit Plans and Agreements -- Employee
Stock Ownership Plan."
On a short-term basis, the remaining net proceeds retained by the Company
will be invested primarily in U.S. government securities and other federal
agency securities. The net proceeds retained by the Company will be available
for a variety of corporate purposes, including additional capital contributions,
future acquisitions and diversification of business and dividends to
shareholders. The Company also may use a portion of the net proceeds of the
Offerings to fund the purchase by the MRP, if implemented, in the open market of
all or a portion of the shares of Common Stock to be acquired by the MRP.
Implementation of the MRP requires shareholder approval, which is expected to be
sought at the first annual meeting of shareholders to be held no earlier than
six months following the Conversion. See "Management of the Company -- Certain
Benefit Plans and Agreements -- Management Recognition Plan."
The net proceeds used to acquire the stock of Mercer Mutual will become
part of Mercer Mutual's capital, thereby expanding underwriting capacity and
permitting diversification of its business. Mercer Mutual intends to cause a
portion of the net proceeds it receives from the Company to be contributed to
MIC to enable MIC to expand its New Jersey business beyond workers' compensation
insurance, to include the same types of insurance currently written by Mercer
Mutual. Any payment of dividends by Mercer Mutual to the Company and by MIC to
Mercer Mutual will be limited by state regulatory restrictions on capital
distributions. See "Business -- Regulation."
With the exception of the ESOP Loan, the capital contributions to Mercer
Mutual and MIC, and the possible funding of the MRP, the Company and Mercer
Mutual currently have no specific plans, arrangements or understandings
regarding the use of the net proceeds from the Offerings. See "Dividend Policy"
and "Management of the Company -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan" and "-- Management Recognition
Plan."
The amount of proceeds from the sale of Common Stock in the Offerings will
depend upon the total number of shares actually sold, the relative percentages
of Common Stock sold in the Subscription, Community and Syndicated Community
Offerings and the actual expenses of the Conversion. As a result, the net
proceeds from the sale of Common Stock cannot be determined until the Conversion
is completed. Set forth below are the estimated net proceeds to the Company,
assuming the sale of Common Stock at the Total Minimum, Total Midpoint and Total
Maximum, and at the Total Maximum plus the shares to be issued to the ESOP,
based upon the following assumptions: (i) shares of Common Stock will be sold as
follows: (a)(1) 10% of the shares will be sold to the ESOP and (2) 186,500
shares will be sold to the directors, officers and employees of the Company and
Mercer Mutual, with respect to which no commission will be paid to Sandler
O'Neill and (b) the remaining shares will be sold to Eligible Policyholders and
the community with respect to which the Company will pay a 2.0% commission to
Sandler O'Neill; (ii) the purchase of the shares sold to the ESOP will be
financed with the proceeds of the ESOP Loan from the Company; and (iii) other
Conversion expenses, not including sales commissions, will be approximately $1.4
million. The foregoing assumption that all shares will be purchased in the
Subscription Offerings is illustrative only and is based upon one (and the only)
recent comparable transaction. Actual expenses may vary from those estimated.
29
<PAGE> 33
<TABLE>
<CAPTION>
TOTAL
TOTAL TOTAL TOTAL MAXIMUM OF
MINIMUM OF MIDPOINT OF MAXIMUM OF 3,392,500
2,507,500 2,950,000 3,392,500 SHARES AT
SHARES AT SHARES AT SHARES AT $10.00 PER
$10.00 $10.00 $10.00 SHARE PLUS
PER SHARE PER SHARE PER SHARE ESOP SHARES
---------- ----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross proceeds of Offerings............... $25,075 $29,500 $33,925 $37,694
Less estimated expenses, including
underwriting fees.................... (1,866) (1,946) (2,025) (2,093)
------- ------- ------- -------
Estimated net proceeds.................... 23,209 27,554 31,900 35,601
Less:
Common Stock to be acquired by ESOP..... (2,508) (2,950) (3,393) (3,769)
------- ------- ------- -------
Estimated net proceeds, as adjusted(1).... $20,701 $24,604 $28,507 $31,832
======= ======= ======= =======
</TABLE>
- ---------------
(1) Does not include any adjustment for the portion of the estimated net
proceeds of the Offerings which may be used to fund the purchase by the MRP,
if implemented, of shares of Common Stock in the open market because (i) the
implementation of the MRP is subject to shareholder approval, (ii) any such
implementation would not occur until at least six months after the
consummation of the Conversion and, therefore, the Company is unable to
predict with any certainty the market price of the Common Stock at that
time, (iii) the Company may fund a portion of the costs of such purchase
from its cash flow, and (iv) the Company may issue new shares directly to
the MRP in lieu of purchasing shares in the open market.
DIVIDEND POLICY
Payment of dividends on the Common Stock is subject to determination and
declaration by the Company's Board of Directors. Any dividend policy of the
Company will depend upon the financial condition, results of operations and
future prospects of the Company. At present, the Company has not made any
determination as to whether it intends to pay dividends to its shareholders in
the foreseeable future. There can be no assurance that dividends will be paid
or, if paid initially, that they will continue to be paid in the future. In
addition, because the Company initially will have no significant source of
income other than dividends from Mercer Mutual and earnings from the repayment
of the ESOP Loan and the investment of the net proceeds of the Conversion
retained by the Company, the payment of dividends by the Company will depend
significantly upon receipt of dividends from Mercer Mutual, which may be subject
to regulatory restrictions. See "Business -- Regulation."
Unlike Mercer Mutual, the Company is not subject to regulatory restrictions
on the payment of dividends to shareholders. The Company is subject to the
requirements of the Pennsylvania BCL, which generally permits dividends or
distributions to be paid as long as, after making the dividend or distribution,
the Company will be able to pay its debts in the ordinary course of business and
the Company's total assets will exceed its total liabilities plus the amount
that would be needed to satisfy the preferential rights upon dissolution of
holders of stock with senior liquidation rights if the Company were to be
dissolved at the time the dividend or distribution is paid.
MARKET FOR THE COMMON STOCK
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "MRCR," subject to the completion of the Conversion.
The Company has never issued any capital stock. Consequently, there is no
established market for the Common Stock. The development of a public market
having the desirable characteristics of depth, liquidity and orderliness,
however, depends upon the presence in the marketplace of a sufficient number of
willing
30
<PAGE> 34
buyers and sellers at any given time, over which neither the Company nor any
market maker has any control. Accordingly, there can be no assurance that an
established and liquid market for the Common Stock will develop, or if one
develops, that it will continue. Sandler O'Neill has advised the Company that it
intends to make a market in the Common Stock following the Conversion, but it is
under no obligation to do so. One of the requirements for continued quotation of
the Common Stock on the Nasdaq National Market is that there be at least two
market makers for the Common Stock. There can be no assurance that there will be
two or more market makers for the Common Stock. Furthermore, there can be no
assurance that purchasers will be able to resell their shares of Common Stock at
or above the Purchase Price, or that quotations will be available on the Nasdaq
National Market, as contemplated.
31
<PAGE> 35
CAPITALIZATION
The following table sets forth information regarding the consolidated
historical capitalization of Mercer Mutual and its subsidiaries at June 30, 1998
and the pro forma consolidated capitalization of the Company giving effect to
the sale of Common Stock at the Total Minimum, Total Midpoint and Total Maximum
of the Estimated Valuation Range, and at the Total Maximum of the Estimated
Valuation Range plus the shares to be issued to the ESOP in an amount equalling
10% of the shares issued in the Conversion, based upon the assumptions set forth
under "Use of Proceeds." For additional financial information regarding Mercer
Mutual, see the Consolidated Financial Statements and related Notes appearing
elsewhere herein. Depending on market and financial conditions, the total number
of shares to be issued in the Conversion will range from 2,507,500 shares to
3,392,500 shares. See "Use of Proceeds" and "The Conversion -- Stock Pricing and
Number of Shares to be Issued."
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CAPITALIZATION OF THE
COMPANY BASED ON THE SALE OF
-------------------------------------------------
3,392,500
HISTORICAL SHARES AT
CONSOLIDATED $10.00
CAPITALIZATION 2,507,500 2,950,000 3,392,500 PER
OF MERCER SHARES AT SHARES AT SHARES AT SHARE PLUS
MUTUAL AT $10.00 $10.00 $10.00 ESOP
JUNE 30, 1998 PER SHARE PER SHARE PER SHARE SHARES
-------------- --------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Long term debt........................ -- -- -- -- --
Shareholders' equity(1):
Preferred stock, authorized
5,000,000 shares; 0 shares
outstanding...................... -- -- -- -- --
Common stock, no par value per
share: authorized -- 15,000,000
shares; shares to be
outstanding -- as shown(2)....... -- 23,209 27,554 31,900 35,601
Retained earnings................... 22,030 22,030 22,030 22,030 22,030
Unrealized gains.................... 3,529 3,529 3,529 3,529 3,529
Less:
Common stock to be acquired by
ESOP(3).......................... -- (2,508) (2,950) (3,393) (3,769)
------ ------ ------ ------ ------
Total(4).................... 25,559 46,260 50,163 54,066 57,391
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Pro forma shareholders' equity is not intended to represent the fair market
value of the Common Stock, the net fair market value of the Company's assets
and liabilities or the amounts, if any, that would be available for
distribution to shareholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Conversion and by other factors.
(2) Does not reflect additional shares of Common Stock that could be purchased
pursuant to the Compensation Plan, if implemented, under which directors,
executive officers and other employees of the Company would be granted
options to purchase an aggregate amount of Common Stock equal to 10% of the
shares issued in the Conversion (250,750, 295,000, 339,250 and 376,944
shares at the Total Minimum, Total Midpoint, Total Maximum and Total Maximum
plus ESOP shares, respectively). Implementation of the Compensation Plan
requires shareholder approval, which is expected to be sought at the first
annual meeting of shareholders to be held no earlier than six months
following the Conversion. See "Risk Factors -- Dilutive Effect of Stock
Options" and "Management of the Company -- Certain Benefit Plans and
Agreements -- Stock Compensation Plan."
(3) Assumes that 10% of the shares of Common Stock to be sold in the Conversion
are purchased by the ESOP, and that the funds used to purchase such shares
are borrowed from the Company. Under GAAP, the aggregate Purchase Price of
shares of Common Stock to be purchased by the ESOP in the Offering
represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As the ESOP
32
<PAGE> 36
Loan is repaid, shares are released and allocated to ESOP participants'
accounts, and a corresponding reduction in the charge against capital will
occur. See "Pro Forma Data" and "Management of the Company -- Certain
Benefit Plans and Agreements -- Employee Stock Ownership Plan."
(4) Does not reflect any adjustments to shareholders' equity that would result
from the implementation of the MRP because (i) of the total shares of Common
Stock to be acquired by the MRP, an undetermined portion may be newly issued
shares and an undetermined portion may be purchased in the open market, each
of which methods and amounts would have different and varying effects on the
Company's shareholders' equity, (ii) the implementation of the MRP is
subject to shareholder approval, (iii) any such implementation would not
occur until at least six months after the consummation of the Conversion
and, therefore, the Company is unable to predict with any certainty the
market price of the Common Stock at that time, and (iv) the Company may fund
a portion of the costs of any open-market purchase of shares from its then
current cash flow. See "Management of the Company -- Certain Benefit Plans
and Agreements -- Management Recognition Plan."
PRO FORMA DATA
The following pro forma condensed consolidated balance sheet as of June 30,
1998 gives effect to the Conversion and implementation of the ESOP as if they
had occurred as of June 30, 1998 and assumes that 2,507,500 shares of Common
Stock (the minimum number of such shares required to be sold) are sold in the
Subscription Offering. The following pro forma condensed consolidated statements
of income for the year ended December 31, 1997 and the six months ended June 30,
1998 present consolidated operating results for Mercer Mutual and its
subsidiaries as if the Conversion and implementation of the ESOP had occurred as
of January 1, 1997. Pursuant to the Plan, Mercer Mutual will convert from a
Pennsylvania-chartered mutual insurance company to a Pennsylvania-chartered
stock insurance company and simultaneously issue shares of its capital stock to
the Company in exchange for a portion of the net proceeds from the sale of
Common Stock in the Offerings. The Conversion will be accounted for as a
simultaneous reorganization, recapitalization and share offering which will not
change the historical accounting basis of Mercer Mutual's consolidated financial
statements. Completion of the Conversion is contingent on the sale of a minimum
of 2,507,500 shares of Common Stock. If less than 2,507,500 shares of Common
Stock are subscribed for in the Conversion Offerings, the remaining shares, up
to a maximum of 3,392,500 shares (not including shares sold to the ESOP), will
be offered in the Syndicated Community Offering.
The unaudited pro forma information does not purport to represent what
Mercer Mutual's consolidated financial position or results of operations
actually would have been had the Conversion and implementation of the ESOP
occurred on the dates indicated, or to project Mercer Mutual's consolidated
financial position or results of operations for any future date or period. The
pro forma adjustments are based on available information and certain assumptions
that Mercer Mutual believes are factually supportable and reasonable under the
circumstances. The unaudited pro forma consolidated financial information should
be read in conjunction with the accompanying notes thereto, and the other
consolidated financial information pertaining to Mercer Mutual included
elsewhere in this Prospectus.
The pro forma adjustments and pro forma consolidated amounts are provided
for informational purposes only. Mercer Mutual's consolidated financial
statements will reflect the effects of the Conversion and implementation of the
ESOP only from the dates such events occur.
33
<PAGE> 37
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
CONSOLIDATED ADJUSTMENTS CONSOLIDATED(4)
------------ ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Investments:
Fixed income securities............................ $35,752 $20,701(1) $56,453
Equity securities.................................. 13,557 13,557
------- ------- -------
Total investments.................................. 49,309 20,701 70,010
Cash and cash equivalents............................ 4,434 4,434
Receivables.......................................... 13,984 13,984
Prepaid reinsurance premiums......................... 981 981
Deferred policy acquisition costs, and other
assets............................................. 7,023 7,023
------- ------- -------
Total assets......................................... $75,731 $20,701 $96,432
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses................ $30,073 $30,073
Unearned premiums.................................. 15,403 15,403
Other liabilities.................................. 4,696 4,696
------- ------- -------
Total liabilities.................................. 50,172 0 50,172
Shareholders' equity:
Common stock....................................... -- 23,209 23,209
Unearned Employee Stock Ownership Plan
compensation.................................... -- (2,508)(2) (2,508)
Retained earnings.................................. 22,030 22,030
Accumulated other comprehensive income.............
Unrealized gains in investments net of deferred
income taxes.................................... 3,529 3,529
------- ------- -------
Total shareholders' equity........................... 25,559 20,701(3) 46,260
------- ------- -------
Total liabilities and stockholders' equity........... $75,731 $20,701 $96,432
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet
34
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) The pro forma adjustment to reflect the Conversion is as follows (in
thousands):
<TABLE>
<S> <C>
Issuance of 2,507,500 shares at $10/share................... $25,075
Estimated conversion expenses............................... (1,866)
-------
Net proceeds from Conversion................................ $23,209
=======
Less: Common Stock to be purchased by ESOP.................. (2,508)
-------
Net investable proceeds..................................... $20,701
=======
</TABLE>
(2) Upon completion of the Conversion, the Company will implement an ESOP for
the benefit of participating employees. The ESOP will borrow funds from the
Company in an amount sufficient to purchase 10% of the Common Stock issued in
the Conversion or $2,508. The ESOP Loan will bear interest at a per annum rate
equal to the prime rate as published in The Wall Street Journal on the closing
date of the Conversion, which rate is currently 8.5%. The ESOP Loan will require
monthly principal payments of approximately $21 for a term of ten years. The
amount of this borrowing has been reflected as a reduction from gross proceeds
to determine estimated net investable proceeds. Mercer Mutual intends to make
contributions to the ESOP at least equal to the principal and interest
requirement of the ESOP Loan. As the ESOP Loan is repaid, shareholders' equity
will be increased. Mercer Mutual's payment of amounts due under the ESOP Loan is
based upon equal installments of principal over a 10-year period, assuming a
combined federal and state income tax rate of 34.0%. Interest income earned by
the Company on the ESOP Loan offsets the interest paid by Mercer Mutual on the
ESOP Loan. The ESOP expense reflects adoption of Statement of Position 93-6,
which will require recognition of expense based upon shares committed to be
allocated under the ESOP, and the exclusion of unallocated shares from earnings
per share computations. The valuation of shares committed to be allocated under
the ESOP, would be based upon the average market value of the shares during the
year, which, for purposes of this calculation, was assumed to be equal to the
Purchase Price. See "Management of the Company -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
(3) Does not reflect the proposed implementation of the MRP, which is subject to
shareholder approval and, therefore, is not "factually supportable," within the
meaning of the Securities and Exchange Commission's rules and regulations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Effect of Conversion on the Company's Future Financial Condition
and Results of Operations," and "Management of the Company -- Certain Benefit
Plans and Agreements -- Management Recognition Plan."
(4) The unaudited pro forma condensed consolidated balance sheet, as prepared,
gives effect to the sale of Common Stock at the Total Minimum of the Estimated
Valuation Range based upon the assumptions set forth under "Use of Proceeds."
The following table provides a comparison between the sale of Common Stock at
the Total Minimum and Total Maximum of the Estimated Valuation Range and at the
Total Maximum of the Estimated Valuation Range plus shares issued to the ESOP in
the amount equal to 10% of the shares issued in the Conversion.
<TABLE>
<CAPTION>
TOTAL
MAXIMUM
TOTAL TOTAL PLUS
MINIMUM MAXIMUM ESOP
------- ------- -------
<S> <C> <C> <C>
Net proceeds from Conversion................................ $23,209 $31,900 $35,601
Common Stock to be acquired by ESOP......................... $2,508 $3,393 $ 3,769
</TABLE>
35
<PAGE> 39
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
CONSOLIDATED ADJUSTMENTS(1) CONSOLIDATED(5)
------------ -------------- ---------------
<S> <C> <C> <C>
Revenue:
Net premiums earned.............................. $17,969 $ 17,969
Investment income, net of expenses............... 2,350 2,350
Net realized investment gains.................... 589 589
Other revenue.................................... 173 173
------- ----- ----------
Total revenue............................ 21,081 0 21,081
------- ----- ----------
Expenses:
Losses and loss adjustment expenses.............. 10,594 10,594
Amortization of deferred policy acquisition
costs......................................... 4,706 4,706
Operating expenses............................... 2,563 251(2) 2,814
------- ----- ----------
Total expenses........................... 17,863 251(3) 18,114
------- ----- ----------
Income before taxes................................ 3,218 (251) 2,967
Income taxes....................................... 1,001 (85)(4) 916
------- ----- ----------
Net income......................................... $ 2,217 $(166) $ 2,051
======= ===== ==========
Earnings per share data:
Net income per share of Common Stock..... $ 0.90
Weighted average number of shares of
Common Stock outstanding............... 2,269,288(6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Income.
36
<PAGE> 40
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
CONSOLIDATED ADJUSTMENTS(1) CONSOLIDATED(5)
------------ -------------- ---------------
<S> <C> <C> <C>
Revenue:
Net premiums earned........................... $10,931 $ 10,931
Investment income, net of expenses............ 1,108 1,108
Net realized investment gains................. 378 378
Other revenue................................. 81 81
------- ----- ----------
Total revenue......................... 12,498 0 12,498
------- ----- ----------
Expenses:
Losses and loss adjustment expenses........... 5,811 5,811
Amortization of deferred policy acquisition
costs...................................... 3,400 3,400
Operating expenses............................ 1,337 125(2)(3) 1,462
------- ----- ----------
Total expenses........................ 10,548 125 10,673
------- ----- ----------
Income before taxes............................. 1,950 (125) 1,825
Income taxes.................................... 613 (43)(4) 570
------- ----- ----------
Net income...................................... $ 1,337 $ (82) $ 1,255
======= ===== ==========
Earnings per share data:
Net income per share of Common Stock.......... $ 0.55
Weighted average number of shares of
Common Stock outstanding................... 2,288,094(6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Income.
37
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(1) Does not reflect any income from the investment of net investable proceeds
assumed to be received as of January 1, 1997, as such income is not "factually
supportable" as that term is used in the Securities and Exchange Commission's
rules and regulations. On a short-term basis, such proceeds will be invested
primarily in U.S. government securities and other federal agency securities. The
average three-month U.S. Treasury bill rate during the year ended December 31,
1997 was 5.14% per annum. If such proceeds were invested at 5.14% for the year
ended December 31, 1997 and the six months ended June 30, 1998, pro forma net
income (after tax), as reported herein, would have increased by $702 and $351
for the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively, and pro forma net income per share, as reported herein, would have
increased by $0.31 and $0.15, respectively.
(2) Pro forma adjustment to recognize compensation expense under ESOP for shares
of Common Stock committed to be released to participants as the principal
balance of the ESOP Loan is repaid. Interest income earned by the Company on the
ESOP Loan offsets the interest expense paid by Mercer Mutual under the ESOP Loan
at the assumed rate of 8.5% for 10 years. Therefore, no pro forma adjustment is
required with respect to the interest paid on the ESOP Loan.
(3) Does not reflect compensation expense associated with the grant of shares
which may be awarded under the MRP, as implementation of the MRP is subject to
shareholder approval and, therefore, is not "factually supportable," within the
meaning of the Securities and Exchange Commission's rules and regulations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Effect of Conversion on the Company's Financial Condition and
Results of Operations," and "Management of the Company -- Certain Benefit Plans
and Agreements -- Management Recognition Plan."
(4) Adjustment to reflect the federal income tax effects of (2) above.
(5) The unaudited pro forma condensed consolidated statements of income, as
prepared, give effect to the sale of Common Stock at the Total Minimum of the
Estimated Valuation Range based upon the assumptions set forth under "Use of
Proceeds." The following table provides a comparison between the sale of Common
Stock at the Total Minimum and Total Maximum of the Estimated Valuation Range.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
------------------------ ------------------------
MINIMUM MAXIMUM MINIMUM MAXIMUM
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Compensation expense.............. $ 251 $ 339 $ 125 $ 170
Net income........................ $ 2,051 $ 1,993 $ 1,255 $ 1,225
Net income per share of Common
Stock........................... $ 0.90 $ 0.65 $ 0.55 $ 0.40
Weighted average number of shares
of Common Stock outstanding..... 2,269,288 3,070,213 2,288,094 3,095,657
</TABLE>
(6) Calculation of weighted average number of shares outstanding:
<TABLE>
<CAPTION>
TOTAL SHARES LESS: UNALLOCATED SHARES WEIGHTED
ISSUED ESOP SHARES OUTSTANDING AVERAGE
------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C>
January 1, 1997................. 2,507,500 (250,750) 2,256,750 --
Shares allocated................ -- 25,075 25,075 --
--------- -------- --------- ---------
December 31, 1997............... 2,507,500 (225,675) 2,281,825 2,269,288
Shares allocated................ -- 12,538 12,538 --
--------- -------- --------- ---------
June 30, 1998................... 2,507,500 (213,137) 2,294,363 2,288,094
========= ======== ========= =========
</TABLE>
ESOP shares are allocated evenly to plan participants throughout each of
the periods and therefore the weighted average number of shares outstanding is
determined by adding beginning of period and end of period shares outstanding
and dividing by two.
38
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. As a result, this discussion relates to the financial condition
and results of operations of Mercer Mutual and its subsidiaries on a
consolidated basis.
The Insurance Companies underwrite property and casualty insurance,
including homeowners, commercial multi-peril, general liability and other lines
of business, in New Jersey and Pennsylvania. The Insurance Companies market
their products through independent agencies. Historically, due to the
concentration of the Insurance Companies' business in New Jersey, the Insurance
Companies' results have been influenced by weather-related property losses in
that state. These results have also been influenced by other factors affecting
the property and casualty insurance industry in general, such as competition,
catastrophic events, regulation, general economic conditions and changes in the
investment environment.
This analysis of Mercer Mutual's consolidated financial condition and
results of operations, as well as the selected financial data set forth in the
table below, should be read in conjunction with Mercer Mutual's Consolidated
Financial Statements and the other financial data regarding Mercer Mutual found
elsewhere in this Prospectus. The discussion covers Mercer Mutual's consolidated
financial condition and results of operations for the six months ended June 30,
1997 and 1998 and the three years ended December 31, 1997. Mercer Mutual's
fiscal year ends on December 31, and reference herein to a particular year
means, unless otherwise stated, the fiscal year ended on December 31 of that
year. For an explanation of certain terms used in this discussion and analysis
that are commonly used in the insurance industry, see the "Glossary to Selected
Insurance Terms."
39
<PAGE> 43
MERCER INSURANCE GROUP, INC.
MD & A SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
(UNAUDITED) YEAR ENDED DECEMBER 31,
----------------------------- ----------------------------------------------------
% % %
1998 CHANGE 1997 1997 CHANGE 1996 CHANGE 1995
------- ------ ------- ------- ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written... $15,155 8.6% $13,951 $28,453 14.0% $24,958 1.0% $24,699
Assumed premiums
written................ 303 11.4% 272 547 (89.1)% 5,013 (51.3)% 10,287
Ceded premiums written.... 1,781 (71.3)% 6,206 11,539 17.2% 9,847 (28.3)% 13,741
------- ------- ------- ------- -------
Net premiums written...... 13,677 70.6% 8,017 17,461 (13.2)% 20,124 (5.3)% 21,245
Change in unearned
premiums............... (2,746) 674 508 510 (428)
------- ------- ------- ------- -------
Net premiums earned....... 10,931 25.8% 8,691 17,969 (12.9)% 20,634 (0.9)% 20,817
Net investment income..... 1,108 (8.7)% 1,214 2,350 2.7% 2,289 7.4% 2,132
Net realized investment
gains.................. 378 26.0% 300 589 (1.2)% 596 1,024.5% 53
Other income.............. 81 (18.2)% 99 173 11.6% 155 (3.7)% 161
------- ------- ------- ------- -------
Total revenue..... 12,498 21.3% 10,304 21,081 (11.0)% 23,674 2.2% 23,163
------- ------- ------- ------- -------
Losses and expenses:
Loss and loss adjustment
expenses............... 5,811 7.4% 5,412 10,594 (28.4)% 14,801 11.3% 13,296
Other underwriting
expenses............... 4,737 31.0% 3,617 7,269 (9.8)% 8,062 (3.6)% 8,360
------- ------- ------- ------- -------
Total expenses.... 10,548 16.8% 9,029 17,863 (21.9)% 22,863 5.6% 21,656
------- ------- ------- ------- -------
Income before federal income
taxes..................... 1,950 52.9% 1,275 3,218 296.8% 811 (46.2)% 1,507
Federal income tax
expenses.................. 613 40.9% 435 1,001 485.4% 171 (53.7)% 369
------- ------- ------- ------- -------
Net income.................. $ 1,337 59.2% $ 840 $ 2,217 246.4% $ 640 (43.8)% $ 1,138
======= ======= ======= ======= =======
Loss and loss adjustment
expense ratio............. 53.2% 62.3% 58.9% 71.7% 63.9%
Expense ratio............... 43.3% 41.6% 40.5% 39.1% 40.2%
Combined ratio.............. 96.5% 103.9% 99.4% 110.8% 104.1%
</TABLE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1997
Premiums -- Direct premiums written for the six months ended June 30, 1998
increased by $1.2 million or 8.6%, as compared to the same period in 1997,
reflecting Mercer Mutual's strategic decision to increase its commercial
business. Commercial lines premiums increased by $1.3 million, or 21.2%, for the
six months ended June 30, 1998 over the comparable prior period. The increase in
commercial lines writings reflects the continued success of recently introduced
commercial programs such as the religious institution program and the commercial
automobile program. Commercial lines now represent nearly 50% of the total
direct writings of Mercer Mutual. The effect on direct premiums written caused
by the increase in direct commercial writings was slightly offset by a decrease
in personal lines writings of $64,000.
Assumed premiums written increased by $31,000 or 11.4%, reflecting Mercer
Mutual's share of increasing residual market facilities. Certain residual
markets in which Mercer Mutual must participate, as directed by statute, have
grown in recent years thereby increasing Mercer Mutual's dollar participation.
40
<PAGE> 44
Ceded premiums written decreased $4.4 million, or 71.3%, for the six months
ended June 30, 1998 compared to the six months ended June 30, 1997, reflecting
changes in Mercer Mutual's reinsurance programs during both periods. Effective
January 1, 1998, Mercer Mutual converted its reinsurance program to one that is
predominantly an excess of loss program, and also increased its retention
levels. As a result, there have been significant reductions in premiums ceded to
outside reinsurers. Ceded premiums for the six months ended June 30, 1997
included approximately $1.3 million of additional ceded premiums attributable to
the introduction of a new quota share reinsurance program for the homeowners
business (the "Homeowners Quota Share Program") at January 1, 1997. See
"Business -- Reinsurance" for a description of Mercer Mutual's reinsurance
programs.
Net premiums written increased $5.7 million or 70.6%, to $13.7 million for
the six months ended June 30, 1998 from the six months ended June 30, 1997. For
the same comparative period, net premiums earned increased by $2.2 million, or
25.8%, to $10.9 million. The increases in net premiums written and net premiums
earned for the six months ended June 30, 1998 are attributable to the increase
in direct commercial writings and the restructuring of the reinsurance program
discussed above.
Net Investment Income -- Net investment income decreased $106,000, or 8.7%,
to $1.1 million for the six months ended June 30, 1998, as compared to the same
period in 1997. This decrease was partly due to a slight decrease in the yield
on fixed income securities, which was 6.42% for the six months ended June 30,
1998 compared to 6.72% for the same period in 1997. In addition, investment
income from equity securities decreased by $27,000 for the six months ended June
30, 1998 compared to the same period in 1997.
Net Realized Investment Gains -- Net realized investment gains increased by
$78,000 for the six months ended June 30, 1998 compared to the six months ended
June 30, 1997. Realized investment gains in the first half of 1998 reflect the
continued favorable equity market conditions in which Mercer Mutual
participates.
Underwriting Results -- For the six months ended June 30, 1998, Mercer
Mutual had an underwriting gain of $383,000 and a combined ratio of 96.5%,
compared to an underwriting loss of $338,000 and a combined ratio of 103.9% for
the six months ended June 30, 1997. The improvement in underwriting results
reflects the low claim volume for the first half of 1998, due in part to the
lack of severe weather conditions during such period, and the restructuring of
its reinsurance program.
Losses and Loss Adjustment Expenses -- Net losses and loss adjustment
expenses incurred increased by $399,000, or 7.4%, to $5.8 million for the six
months ended June 30, 1998 from the same period in 1997. Despite such increase,
loss and loss adjustment expenses were 53.2% of net premiums earned for the six
months ended June 30, 1998 compared to 62.3% for the six months ended June 30,
1997. The favorable ratio for the first half of 1998 is largely attributable to
the lack of severe weather conditions during such period. Winter conditions were
extremely mild, and the number of losses reported to Mercer Mutual during the
six months ended June 30, 1998 was the lowest number reported during the first
half in the past five years.
Underwriting Expenses -- Underwriting expenses increased by $1.1 million,
or 31.0%, to $4.7 million for the six months ended June 30, 1998 from the same
period in 1997. This increase was primarily attributable to an increase in net
commissions, which resulted from changes in Mercer Mutual's reinsurance program.
The termination of most of the proportional reinsurance arrangements
significantly reduces the amount of ceded commissions received. The reduction in
ceded commissions results in the increase in net commissions.
Federal Income Tax Expense -- Federal income tax expense was $613,000 for
the six months ended June 30, 1998 compared to $435,000 for the same period in
1997, which is attributable to the increase in net income before taxes.
Net Income -- Mercer Mutual had net income of $1.3 million for the six
months ended June 30, 1998, compared to $840,000 for the same period in 1997,
primarily as a result of the factors discussed above.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
Premiums -- Mercer Mutual experienced an increase in direct premiums
written for the year ended December 31, 1997 of $3.5 million or 14.0%, as
compared to the same period in 1996, which reflects Mercer
41
<PAGE> 45
Mutual's strategy to increase its commercial business. Commercial lines premiums
increased by $2.6 million, or 28.2%, for the year ended December 31, 1997 over
the comparable prior period. The increase in commercial lines business reflects
the introduction of a religious institution program and a commercial automobile
program in early 1997, combined with enhancements to existing commercial
products. In addition to the commercial lines increase, homeowners premiums
increased in the year ended December 31, 1997, as compared to the prior period,
as a result of an increase in certain rates. Territorial rating by county was
introduced for Mercer Mutual's New Jersey homeowners product to better reflect
Mercer Mutual's exposures. This rate change resulted in an increase of 7.9% in
direct homeowners premiums written despite a decrease of 4.3% in the number of
homeowners policies written.
Assumed premiums written decreased by $4.5 million, or 89.1%, for the year
ended December 31, 1997 as compared to the same period in 1996. Approximately
$4.3 million of this decrease is directly attributable to the termination of
Mercer Mutual's participation in the New Jersey Homeowners Pool (the "Homeowners
Pool") as of December 31, 1996 because premiums are no longer assumed under the
terms of that agreement.
Ceded premiums written increased $1.7 million, or 17.2%, for the year ended
December 31, 1997 compared to the year ended December 31, 1996, principally
because of the above-described increase in direct premiums written of 14.0%. As
premiums subject to reinsurance coverage increase, ceded written premiums
increase at similar levels. The increase in ceded premiums also reflects the
introduction of reinsurance for Mercer Mutual's new commercial automobile
program and small increases in certain premium rates.
Net premiums written decreased $2.7 million or 13.2%, to $17.4 million for
the year ended December 31, 1997 from the year ended December 31, 1996. For the
same comparative period, net premiums earned decreased by $2.7 million, or
12.9%, to $18.0 million. The decrease in net premiums written and net premiums
earned for the year ended December 31, 1997 is principally attributable to the
termination of the Homeowners Pool.
Net Investment Income -- Net investment income increased $61,000, or 2.7%,
to $2.4 million for the year ended December 31, 1997 as compared to the same
period in 1996. Mercer Mutual continues to principally invest its available
funds in taxable fixed income securities which generally produce higher yields
than nontaxable securities. For the year ended December 31, 1997, the yield on
fixed income securities remained at the 6.7% level attained in 1996.
Net Realized Investment Gains -- Net realized investment gains decreased by
$7,000 for the year ended December 31, 1997 compared to the year ended December
31, 1996. Despite this small decrease, realized investment gains in 1997 reflect
continued favorable equity market conditions.
Underwriting Results -- For the year ended December 31, 1997, Mercer Mutual
had an underwriting gain of $106,000 and a combined ratio of 99.4% compared to
an underwriting loss of $2.2 million and a combined ratio of 110.8% for the year
ended December 31, 1996. The change in underwriting results is largely
attributable to the improved winter weather conditions in 1997. In addition, the
improvement in underwriting results reflects Mercer Mutual's strategy to
increase its casualty business, which is less sensitive to weather conditions.
Losses and Loss Adjustment Expenses -- Net losses and loss adjustment
expenses incurred decreased by $4.2 million, or 28.4%, to $10.6 million for the
year ended December 31, 1997 from the same period in 1996. Loss and loss
adjustment expenses were 58.9% of net premiums earned for the year ended
December 31, 1997 compared to 71.7% for the year ended December 31, 1996. The
favorable improvement in this ratio is largely attributable to the lack of
severe weather conditions in the 1997 period. The 1997 winter conditions were
among the mildest in recent history, as compared to the severe winter conditions
of 1996 which resulted in increased property loss claims. In January 1996, a
damaging blizzard struck Mercer Mutual's operating region. The net cost of the
blizzard was approximately $1 million in additional claims. In addition, as of
January 1, 1997, the Homeowners Pool was replaced with the Homeowners Quota
Share Program. The termination of the Homeowners Pool and the placement of the
Homeowners Quota Share Program served to reduce net loss and loss adjustment
expenses in 1997 by $2.3 million over 1996. In 1996, participation in the
Homeowners Pool increased losses and loss adjustment expenses by $1.4 million.
In 1997, however, because participation in
42
<PAGE> 46
the Homeowners Quota Share Program does not require the assumption of premiums
or losses (unlike the Homeowners Pool) but does require the ceding of premiums
and losses, such participation decreased loss and loss adjustment expenses by
$865,000. See "Business -- Reinsurance" for a description of the Homeowners
Pool, the Homeowners Quota Share Program and Mercer Mutual's other reinsurance
programs.
Underwriting Expenses -- Underwriting expenses decreased by $793,000, or
9.8%, to $7.3 million for the year ended December 31, 1997 from the same period
in 1996. This decrease was partially attributable to a reduction in net
commissions, which resulted from changes in Mercer Mutual's reinsurance program.
The new Homeowners Quota Share Program pays a higher ceding commission to Mercer
Mutual than was available as a participant in the Homeowners Pool. In addition,
the termination of the Homeowners Pool resulted in a substantial reduction in
assumed commissions. Also, favorable weather conditions during the year ended
December 31, 1997 resulted in additional ceded commissions recognized under
profit commission arrangements.
Federal Income Tax Expense -- Federal income tax expense was $1.0 million
for the year ended December 31, 1997 compared to $171,000 for the same period in
1996, which is attributable to the increase in net income before taxes.
Net Income -- Mercer Mutual had net income of $2.2 million for the year
ended December 31, 1997, compared to $640,000 for the same period in 1996,
primarily as a result of the factors discussed above.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR
ENDED DECEMBER 31, 1995
Premiums -- Mercer Mutual experienced a 1.0% increase in direct premiums
written in the year ended December 31, 1996 to $25.0 million, as compared to
$24.7 million for the year ended December 31, 1995. Premiums written under
commercial line classifications increased during 1996 as Mercer Mutual
substantially increased its underwriting in this direction. The increase in
commercial lines business was somewhat offset by a reduction in business caused
by the termination of unprofitable agencies.
Assumed premiums written decreased by $5.3 million in 1996, reflecting the
termination of Mercer Mutual's participation in the Homeowners Pool. See
"Business -- Reinsurance." As a result of this termination, unearned premium
reserves assumed from the other pool participants were returned on December 31,
1996, which resulted in the reduction of assumed written premiums for the year.
Ceded premiums written decreased $3.9 million for the year ended December
31, 1996 compared to the year ended December 31, 1995. As a result of the
termination of the Homeowners Pool, unearned premium reserves ceded to the other
pool participants were returned to Mercer Mutual. The return of ceded unearned
premium reserves was offset by an increase in catastrophe reinsurance premiums,
as Mercer Mutual restructured its catastrophe reinsurance coverage.
Net premiums written decreased $1.1 million, or 5.3%, to $20.1 million for
the year ended December 31, 1996 from the year ended December 31, in 1995. For
the same comparative periods, net premiums earned decreased by $183,000, or
0.9%, to $20.6 million. The decrease in net premiums earned was the result of
the previously discussed increase in direct premiums written, decrease in
premiums assumed from reinsurers, decrease in premiums ceded to reinsurers and a
decrease in unearned premiums of $510,000.
Net Investment Income -- Net investment income increased $158,000, or 7.4%,
to $2.3 million for the year ended December 31, 1996 from the year ended
December 31, 1995. Reflecting Mercer Mutual's continued strategy to principally
invest in high grade fixed income securities, fixed income securities increased
$1.3 million, or 4.0%, to $35.0 million for the year ended December 31, 1996
from the year ended December 31, 1995. For the year ended December 31, 1996, the
yield on fixed income securities remained at the 6.8% level attained for the
year ended December 31, 1995. As a result, income from fixed income securities
increased by $258,000.
Due to increased claim activity from the 1996 winter conditions, cash and
cash equivalents decreased $892,000 to $2.7 million for the year ended December
31, 1996 from the year ended December 31, 1995. This resulted in a decrease in
1996 of investment income from cash and cash equivalents of $50,000. Income from
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<PAGE> 47
other investments was down slightly in 1996, from $54,000 in 1995 to $46,000 in
1996, as funds have principally been reinvested in fixed income securities.
Net Realized Investment Gains -- Net realized investment gains were
$596,000 for the year ended December 31, 1996 compared to $53,000 for the year
ended December 31, 1995. Investment gains in 1996 reflect more favorable equity
market conditions, and compare with smaller gains recognized in 1995.
Investments gains in 1995 from equity securities were offset by investment
losses recognized on the disposal of certain collateralized mortgage obligations
("CMOs"). This reflected Mercer Mutual's restructuring of its fixed income
portfolio in 1995 to less interest rate sensitive products.
Underwriting Results -- For the year ended December 31, 1996, Mercer Mutual
had an underwriting loss of $2.2 million and a combined ratio of 110.8% compared
to an underwriting loss of $839,000 and a combined ratio of 104.1% for the year
ended December 31, 1995. The increased underwriting loss for the year ended
December 31, 1996 was primarily attributable to severe winter weather conditions
in New Jersey.
Losses and Loss Adjustment Expenses -- Net losses and loss adjustment
expenses incurred increased by $1.5 million, or 11.3%, to $14.8 million for the
year ended December 31, 1996 from the year ended December 31, 1995. Loss and
loss adjustment expenses were 71.7% of net premiums earned for the year ended
December 31, 1996 compared to 63.9% for the year ended December 31, 1995.
Affecting losses and loss adjustment expenses in 1996 were severe winter
weather conditions which resulted in increased property loss claims. In January
1996, a damaging blizzard struck Mercer Mutual's operating region. The net cost
of the blizzard was approximately $1 million in additional claims. Mercer Mutual
was further impacted by additional smaller localized severe conditions. The
difference in non-storm activity between 1996 and 1995 was further influenced by
favorable weather conditions in 1995.
Underwriting Expenses -- Underwriting expenses decreased by $298,000, or
3.6%, for the year ended December 31, 1996 to $8.1 million for the year ended
December 31, 1995. This decrease was largely attributable to a reduction in net
commissions resulting from the restructuring of Mercer Mutual's reinsurance
programs. For the year ended December 31, 1996, Mercer Mutual had an
underwriting expense ratio of 39.1% compared to 40.2% for the year ended
December 31, 1995.
Federal Income Tax Expense -- Federal income tax expense was $171,000 for
the year ended December 31, 1996 compared to $369,000 for the year ended
December 31, 1995. This decrease is attributable to the decrease in net income
before taxes for the compared periods.
Net Income -- Mercer Mutual had net income of $640,000 for the year ended
December 31, 1996 compared to $1.1 million for the year ended December 31, 1995,
primarily as a result of the factors discussed above.
EFFECT OF CONVERSION AND REDOMESTICATION ON THE COMPANY'S FUTURE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The future financial condition and results of operations of the Company
will be affected by the Conversion and related transactions. Upon completion of
the Conversion, the Company's capital will increase by between $20.7 million and
$31.8 million, an increase of approximately 84.4% to 129.7% over the
consolidated capital of Mercer Mutual at December 31, 1997. See "Use of
Proceeds," "Capitalization" and "Pro Forma Data." This increased capitalization
should permit the Company to (i) increase direct premium volume to the extent
competitive conditions permit, (ii) increase net premium volume by decreasing
its reliance on reinsurance (see "Business -- Strategy -- Reduced Reliance on
Reinsurance"), and (iii) enhance investment income by increasing its investable
capital.
ESOP. In connection with the Conversion, the ESOP intends to finance the
purchase of 10% of the Common Stock issued in the Conversion with the proceeds
from the ESOP Loan, and Mercer Mutual will make annual contributions to the ESOP
sufficient to repay the ESOP Loan, which the Company estimates will total, on a
pre-tax basis, between $250,750 (at the Total Minimum) and $376,944 (at the
Total Maximum) annually, plus interest at the prime rate in effect as of the
consummation of the Conversion. See
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<PAGE> 48
"Management of the Company -- Certain Benefit Plans and Agreements -- Employee
Stock Ownership Plan."
MRP. The Company may contribute to the MRP the amount necessary to
purchase up to an aggregate number of shares equal to 4% of the shares of Common
Stock that were issued in the Conversion (up to 135,700 shares at the Total
Maximum of the Estimated Valuation Range). The cost of any Common Stock
purchased by the MRP will represent unearned compensation. As the Company
accrues compensation expense to reflect the vesting of such shares, unearned
compensation will be reduced accordingly. This compensation expense will be
deductible for federal income tax purposes. Implementation of the MRP is subject
to shareholder approval. See "Management of the Company -- Certain Benefit Plans
and Agreements -- Management Recognition Plan."
State Taxes. Prior to the Redomestication, which occurred on October 16,
1997, Mercer Mutual was subject to tax in New Jersey as a New Jersey-domiciled
insurance company. New Jersey has a statutory retaliatory tax provision that,
because Mercer Mutual is now a Pennsylvania-domiciled insurance company, could
be interpreted to require Mercer Mutual to pay, for all or a portion of 1997 and
for all future years, substantially more in taxes to New Jersey than it has in
the past, which would have a material adverse affect on the results of
operations of Mercer Mutual. Under this interpretation, if the Redomestication
had occurred on January 1, 1997, Mercer Mutual would have been required to pay
$542,000 in taxes to New Jersey for the year ended December 31, 1997, $469,000
more than the amount which has been calculated as due for such year. If this
interpretation is correct, the New Jersey retaliatory tax provision would
materially affect the Company's future results of operations and cash flows, but
would not be expected to materially affect the Company's liquidity because the
investment and reinsurance strategies in place provide liquidity to Mercer
Mutual. See "Risk Factors -- Possible Adverse Impact of New Jersey Tax Laws."
Mercer Mutual, however, may have the ability to mitigate a portion of any
adverse tax consequences by renewing policies in MIC, a New Jersey domestic
insurance company.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the ability to generate sufficient cash to meet
cash obligations as they come due. Historically, the principal sources of Mercer
Mutual's cash flow have been premiums, investment income, and maturing
investments. In addition to the need for cash flow to meet operating expenses,
the liquidity requirements of Mercer Mutual relate primarily to the payment of
losses and loss adjustment expenses. The short- and long-term liquidity
requirements of Mercer Mutual vary because of the uncertainties regarding the
settlement dates for liabilities for unpaid claims and because of the potential
for large losses, either individually or in the aggregate.
Mercer Mutual maintains investment and reinsurance programs which are
intended to provide sufficient funds to meet Mercer Mutual s obligations without
forced sales of investments. Mercer Mutual maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds. Mercer Mutual had no material commitments for capital
expenditures at June 30, 1998.
The NAIC's risk based capital standards require insurance companies to
calculate and report statutory capital and surplus needs based on a formula
measuring underwriting, investment and other business risks inherent in an
individual company's operations. At December 31, 1997, the capital and surplus
of each of the Insurance Companies were substantially above these requirements.
See "Risk Factors -- Possible Adverse Impact of Regulatory Changes."
The principal source of liquidity for the Company will be dividend payments
and other fees received from Mercer Mutual. Mercer Mutual will be restricted by
the insurance laws of Pennsylvania as to the amount of dividends or other
distributions it may pay to the Company without the prior approval of the
Pennsylvania Department. Under Pennsylvania law, the maximum amount that may be
paid by Mercer Mutual during any twelve-month period after notice to, but
without prior approval of, the Pennsylvania Department cannot exceed the greater
of 10% of Mercer Mutual's statutory surplus as reported on its most recent
annual statement filed with the Pennsylvania Department, or the net income of
Mercer Mutual for the period covered by such annual statement. As of December
31, 1997, amounts available for payment of dividends from Mercer
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<PAGE> 49
Mutual in 1998 without the prior approval of the Pennsylvania Department would
have been approximately $2.0 million. MIC is required to provide notice to the
New Jersey Department prior to its payment of any dividends. The New Jersey
Department has the power to limit or prohibit dividend payments if certain
conditions exist. Such restrictions or any subsequently imposed restrictions may
in the future affect the Company's liquidity.
CHANGES IN REINSURANCE
Mercer Mutual terminated its participation in the Garden State Reinsurance
Association ("GSRA") as of December 31, 1997. The termination of this
arrangement is not expected to have a material impact on the Company's results
of operations and cash flows because the cost to reinsure this business should
approximate the net cost incurred in participating in the GSRA.
Effective January 1, 1998, the Insurance Companies restructured their
reinsurance program by increasing the exposure retained by the Insurance
Companies on certain coverages. The level of such restructuring with respect to
each coverage was based largely on historical loss experience, with overall
consideration given to a recent reduction in the amount of the Insurance
Companies' Probable Maximum Loss. By increasing retention levels, the amount of
premiums ceded to reinsurers will decrease, thus increasing net premiums. Losses
and loss adjustment expenses will increase because fewer losses and loss
adjustment expenses will be recovered from reinsurers. Net reserve estimates
should increase as recoveries from reinsurers decrease. Management believes that
by restructuring the Insurance Companies' retention levels, there should be a
positive impact on its results of operations and financial condition, as
increased premium earnings should exceed any increase in losses and loss
adjustment expenses caused by this restructuring. No assurance can be made,
however, that any future losses resulting from this restructuring would not
exceed the aggregate increase in net premiums resulting from the restructuring,
or would not otherwise have a material adverse effect on the Insurance
Companies' financial condition and results of operations. See "Business --
Reinsurance."
CHANGES IN INTEREST RATES
Much of the Company's fixed income investment portfolio matures after five
years. It is the Company's strategy to hold these securities until maturity.
Even so, fluctuations in near-term interest rates could have an impact on the
Company's results of operations and cash flows. Certain of these securities have
call features. In a declining interest rate environment, these securities may be
called by their issuer and replaced with securities bearing lower interest
rates. In a rising interest rate environment, because of its strategy of holding
these securities to maturity, the Company's ability to invest in higher yielding
securities would be limited.
EFFECTS OF INFLATION
The effects of inflation on Mercer Mutual are implicitly considered in
estimating reserves for unpaid losses and loss adjustment expenses, and in the
premium rate-making process. The actual effects of inflation on Mercer Mutual's
results of operations cannot be accurately known until the ultimate settlement
of claims. However, based upon the actual results reported to date, it is
management's opinion that Mercer Mutual's loss reserves, including reserves for
losses that have been incurred but not yet reported, make adequate provision for
the effects of inflation.
NEW ACCOUNTING STANDARDS
Stock-Based Compensation (Financial Accounting Standards Board ("FASB")
Statement No. 123) -- The Company does not presently have any stock-based
compensation plans. It plans to account for any shares issued under the proposed
stock-based compensation plans under APB Opinion 25 and will disclose the
difference, if any, on net earnings and earnings per share if compensation cost
were determined under FASB Statement No. 123.
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<PAGE> 50
Earnings Per Share (FASB Statement No. 128) -- This Statement defines the
computation, presentation and disclosure requirements for earnings per share
calculations. The Company plans to adopt these provisions in reports to
shareholders when the Statement becomes effective (periods ended after December
15, 1997).
Comprehensive Income (FASB Statement No. 130) -- The Company adopted FASB
Statement No. 130 in 1997 and comprehensive income is displayed in its
statements of changes in surplus for all periods presented. Material provisions
of this statement include reclassification adjustments of other comprehensive
income components, the prominent display of other comprehensive income
components and the disclosure on the amount of income tax expense or benefit
allocated to each component. All such provisions have been applied for all
periods presented.
Segment Disclosures (FASB Statement No. 131) -- This statement establishes
standards for the way that public companies report operating segments and
standards for related disclosure about products and services, geographic areas
and major customers. It is effective for fiscal years beginning December 15,
1997. The Company is in the process of determining the effect of this statement
upon its financial reporting requirements.
IMPACT OF YEAR 2000 ISSUE
The Insurance Companies are taking measures to address the impact of the
"Year 2000" issue on its information systems. The Year 2000 issue, which is
common to most businesses, concerns the inability of certain information
systems, primarily certain computer software programs, to properly recognize and
process date sensitive information beyond the year 1999. This inability could
result in system failures or miscalculations causing possible inaccuracies in
data and disruption of operations, including among other things, a temporary
inability to process transactions, prepare invoices, or engage in similar normal
business activities.
The Company has completed an initial assessment of the impact of this issue
on the Company, and has determined that its vulnerability is mainly (i) with the
third party provider who processes all of the Insurance Companies' premium, loss
and billing transactions, and (ii) under policies of insurance providing
business interruption and other coverages to insureds who are adversely impacted
by the Year 2000.
Under the Insurance Companies' agreement with the third party provider, the
provider is obligated to pay all software related costs incurred in order to
make its system Year 2000 compliant. The provider has prepared a detailed
schedule of functions to be performed in its compliance project. The expected
completion of the project is scheduled for December 1998. The Insurance
Companies are obligated to incur only the hardware cost associated with
implementing the changes required by the service provider. The hardware costs
are not expected to be material. Other computer programs utilized by the
Insurance Companies, such as accounting packages and investment packages, either
are believed to be Year 2000 compliant or are expected to be Year 2000 compliant
in the near future at no significant cost to the Insurance Companies. With
respect to insurance policies providing coverages to insureds who may incur
losses as a result of Year 2000 problems, the Insurance Companies are in the
process of reviewing these coverages to evaluate the Insurance Companies'
possible exposure under such coverages. To the extent that the Insurance
Companies' systems and those of their policyholders are not fully Year 2000
compliant, there can be no assurance that systems interruptions, the cost
necessary to update software, or resulting losses and loss adjustment expenses
under policies issued by the Insurance Companies would not have a materially
adverse effect on the Insurance Companies' business, financial condition and
results of operations.
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<PAGE> 51
BUSINESS
THE COMPANY
The Company was incorporated under Pennsylvania law in November 1997 for
the purpose of serving as a holding company for Mercer Mutual upon the
acquisition of all of its capital stock in the Conversion. The Company has
applied for approvals from the Pennsylvania Department to acquire control of
Mercer Mutual and the New Jersey Department to acquire control of MIC. Prior to
the Conversion, the Company has not engaged and will not engage in any
significant operations. Upon completion of the Conversion, the Company's primary
assets will be the outstanding capital stock of Mercer Mutual and a portion of
the net proceeds of the Conversion.
Management believes that the holding company structure will permit the
Company to expand the products and services it offers to beyond those currently
offered through the Insurance Companies, although presently there are no
definitive plans or arrangements for such expansion. As a holding company, the
Company will have greater flexibility to diversify its business activities
through existing or newly formed subsidiaries or through the issuance of capital
stock to facilitate acquisitions or mergers or to obtain additional financing in
the future. The portion of the net proceeds from the sale of Common Stock in the
Conversion that the Company will contribute to Mercer Mutual will substantially
increase Mercer Mutual's surplus, which will, in turn, enhance policyholder
protection and increase the amount of funds available to support both current
operations and future growth. After the Conversion, the Company will be subject
to regulation by the Pennsylvania Department and the New Jersey Department as
the holding company for Mercer Mutual and MIC, respectively.
THE INSURANCE COMPANIES
Mercer Mutual is a Pennsylvania mutual insurance company that was
originally incorporated under a special act of the Legislature of the State of
New Jersey in 1844. Mercer Mutual commenced operations under the name Mercer
County Mutual Fire Insurance Company, which was changed to its current name in
1958. On October 16, 1997, Mercer Mutual filed Articles of Domestication with
Pennsylvania completing the Redomestication and thereby changing its state of
domicile from New Jersey to Pennsylvania. Mercer Mutual owns all of the issued
and outstanding capital stock of QHC, which owns all of the issued and
outstanding capital stock of MIC.
Mercer Mutual is a property and casualty insurer of small and medium-sized
businesses and property owners located in New Jersey and Pennsylvania. Mercer
Mutual markets homeowners and commercial multi-peril policies, as well as other
liability, workers' compensation, fire, allied, inland marine and commercial
automobile coverages through approximately 160 independent agencies. Mercer
Mutual is subject to examination and comprehensive regulation by the
Pennsylvania Department. See "Business -- Regulation."
MIC is a property and casualty stock insurance company that was
incorporated in 1981. MIC offers only workers' compensation insurance to
businesses located in New Jersey. MIC is subject to examination and
comprehensive regulation by the New Jersey Department. See
"Business -- Regulation."
Direct premiums written in New Jersey accounted for in excess of 98.7% of
the direct premiums written by the Insurance Companies for the six months ended
June 30, 1998 and each of the years in the three-year period ended December 31,
1997. As of June 30, 1998, the Insurance Companies had approximately 42,000
property and casualty policies in force. Mercer Mutual is licensed to underwrite
property and casualty insurance in New Jersey and Pennsylvania. MIC is licensed
only in New Jersey. At June 30, 1998, the consolidated assets of Mercer Mutual
and its subsidiaries were $75.7 million.
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<PAGE> 52
STRATEGY
The Company's principal strategies for the future are to:
- Improve the mix of business by increasing commercial and casualty
writings in order to enhance profitability and lessen the impact of
property losses on overall results;
- Geographically diversify its risk through its acquisition of other
insurance companies in Pennsylvania and other jurisdictions, in order to
reduce its overall exposure to weather-related property losses in its
primary coverage area;
- Attract and retain high-quality agencies having diverse customer bases
located in the Company's targeted growth markets within Pennsylvania and
western New Jersey, through increased marketing activities and the
development and tailoring of commercial programs meeting the needs of
their customers; and
- Reduce its reliance on reinsurance by increasing the maximum exposure
retained by the Insurance Companies on individual property and casualty
risks, and thereby increase net premium volume.
Management views the Conversion as a critical component of its strategic
plan. The additional capital generated by the Conversion will permit the
Insurance Companies to accelerate implementation of these strategies and the
resulting holding company structure will provide needed flexibility to achieve
the Company's goals.
Diversification of Lines of Business. Mercer Mutual has taken, and will
continue to take, steps to increase commercial and casualty premium volume, both
to provide greater product diversification from personal into commercial lines
that may provide greater flexibility in establishing rates, higher premiums and
a countercyclical balance to personal lines and to potentially reduce property
loss exposure.
One such initiative is a religious institution program available for
churches and synagogues which includes many preferred coverages and special
pricing. Management believes that this market is underserved and Mercer Mutual's
program has been able to attract agencies which have substantial books of
business with religious institutions. Mercer Mutual has developed new policy
forms tailored for these institutions, which typically have long-standing
relationships with Mercer Mutual's agencies. Mercer Mutual has also refined and
expanded its "main street" business owner program, which targets commercial
coverages for those businesses that are a normal daily part of "main street"
business, such as bakeries, funeral homes, delicatessens, pizzerias, florists
and restaurants. Under this program, insurance packages are written using
existing policy forms and are chosen based on the experience of the underwriting
staff and market opportunities available to existing agents. Mercer Mutual also
introduced a program in 1997 offering a two-tiered pricing approach for
commercial automobile insurance covering light to medium weight trucks and
business-owned private passenger-type vehicles used for commercial purposes. In
addition to a standard rate, Mercer Mutual offered a preferred rate for risks
meeting specified underwriting standards, with the goal to complement the
coverages maintained by its existing accounts as well as to attract new
accounts. To further its goal of increasing its commercial business, in June
1997 Mercer Mutual received approval from the Pennsylvania Department to
transact commercial automobile liability and workers' compensation insurance in
Pennsylvania.
Management believes that it has the opportunity to increase the volume of
casualty business by (i) marketing such business to existing agents, many of
whom have traditionally associated Mercer Mutual with homeowners' property
insurance and may not identify and choose Mercer Mutual for their customers as
providers of casualty line products, and (ii) forming and developing
relationships with new agencies that focus on commercial and casualty business.
Management believes an increasing share of this market is desirable and
attainable given the existing relationships among Mercer Mutual, its agents and
its insureds, as well as the extensive experience and agency relationships of
its commercial business management personnel.
Capital raised in the Conversion is expected to supply additional surplus
necessary to support any substantial increase in commercial and casualty premium
volume.
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<PAGE> 53
Geographic Diversification. The Company's goal is to geographically
diversify its risk by increasing the level of its business outside of New Jersey
in areas with reduced or different weather-related property loss exposure and in
which management believes insurers generally have been permitted to manage risk
selection and pricing without undue regulatory interference. Concentration of
property insurance in New Jersey has caused Mercer Mutual to be susceptible to
localized severe weather conditions. The Company expects to accomplish
geographic diversification principally through acquisitions.
Upon completion of the Conversion, the Company plans to seek acquisitions
outside of New Jersey. The Company is currently targeting for acquisition
companies located in Pennsylvania and other jurisdictions within the
mid-Atlantic and Mid-western United States. Completion of the Conversion will
provide funds for cash acquisitions and the holding company structure will
facilitate the use of capital stock for acquisitions.
High-Quality Agencies. Management believes the Insurance Companies have a
strong reputation for personal attention and prompt efficient service to
agencies and insureds. This reputation has allowed the Insurance Companies to
grow and foster their relationships with many high volume agencies, several of
which focus primarily on commercial business and are located in areas which the
Insurance Companies have targeted as growth areas within Pennsylvania and New
Jersey. The Company intends to focus its marketing efforts on maintaining and
improving its relationship with these agencies, as well as on attracting new
high-quality agencies in areas with a substantial potential for growth,
particularly in Pennsylvania. The Company also intends to continue to develop
and tailor its commercial programs to enable its products to meet the needs of
the customers served by its agencies. The religious institutions, "main street"
business and commercial automobile programs are successful examples of this
effort.
Reduced Reliance on Reinsurance. The Company intends to reduce its
reliance on reinsurance by increasing the maximum exposure retained by the
Insurance Companies on individual property and casualty risks. The Company will
rely on the additional capital raised in the Conversion to protect itself in the
event of individual property losses up to the increased maximum exposure amounts
under its reinsurance agreements. The precise increase in its maximum exposure
will be determined by the Company based on the amount of capital raised in the
Conversion, the Company's evaluation of its ability to incur multiple losses
without a corresponding material adverse effect on its future financial
condition and results of operations, and negotiations with its reinsurers. A
decrease in reinsurance could result in a decrease in ceded premiums and a
corresponding increase in net premium income, but would increase the Company's
risk of loss.
PRODUCTS
Mercer Mutual offers a variety of property and casualty insurance products
primarily designed to meet the insurance needs of the businesses and property
owners located in New Jersey and Pennsylvania. MIC offers only workers'
compensation insurance to businesses located in New Jersey.
Mercer Mutual's products are developed in part by MSO, Inc. which provides
custom product development, rating and statistical services for the property and
casualty lines of its member companies, both mutual and stock. MSO, Inc.'s
programs are currently available in a regional area which includes New Jersey,
Pennsylvania, Maryland and Delaware. It is also licensed in Massachusetts and
Virginia, and its programs may be licensed to companies in other states.
The following tables set forth the direct premiums written, net premiums
earned, net loss ratios, expense ratios and combined ratios by product line of
the Insurance Companies on a consolidated basis for the periods indicated:
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<PAGE> 54
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------------------------
% OF % OF % OF % OF % OF
1998 TOTAL 1997 TOTAL 1997 TOTAL 1996 TOTAL 1995 TOTAL
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DIRECT PREMIUMS WRITTEN:
Homeowners................. $ 6,165 40.7% $ 6,116 43.8% $13,057 45.9% $12,101 48.5% $11,602 47.0%
Commercial multi-peril..... 3,752 24.8 3,145 22.5 6,374 22.4 5,065 20.3 4,437 17.8
Other liability............ 2,153 14.2 2,076 14.9 3,965 13.9 3,486 14.0 3,563 14.3
Fire, allied, inland
marine................... 1,687 11.1 1,702 12.2 3,413 12.0 3,437 13.8 4,112 16.5
Workers' compensation...... 870 5.7 759 5.5 1,239 4.4 869 3.5 985 3.9
Commercial automobile...... 527 3.5 153 1.1 405 1.4 -- -- -- --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total.................... $15,155 100.0% $13,951 100.0% $28,453 100.0% $24,958 100.0% $24,699 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
NET PREMIUMS EARNED:
Homeowners................. $ 4,890 44.7% $ 4,016 46.2% $ 8,215 45.7% $10,347 50.1% $10,182 48.9%
Commercial multi-peril..... 1,911 17.5 1,416 16.3 2,969 16.5 2,903 14.1 2,471 11.9
Other liability............ 1,729 15.8 1,284 14.8 2,825 15.7 2,925 14.2 2,829 13.6
Fire, allied, inland
marine................... 1,506 13.8 1,380 15.9 2,746 15.3 3,250 15.8 3,991 19.2
Workers' compensation...... 706 6.5 597 6.8 1,235 6.9 1,209 5.8 1,344 6.5
Commercial automobile(1)... 188 1.7 (2) -- (21) (0.1) -- -- -- --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total.................... $10,931 100.0% $ 8,691 100.0% $17,969 100.0% $20,634 100.0% $20,817 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
NET LOSS RATIOS:
Homeowners(2).............. 50.9% 76.2% 67.2% 85.4% 78.8%
Commercial multi-peril..... 64.2 42.2 33.5 59.3 34.3
Other liability............ 62.1 59.3 70.7 102.7 72.1
Fire, allied, inland
marine................... 35.4 39.6 49.4 36.3 38.4
Workers' compensation...... 62.4 74.2 54.4 5.2 63.8
Commercial automobile(1)... 23.9 (25.7) (239.4) -- --
Total.................... 53.2% 62.3% 58.9% 71.7% 63.9%
EXPENSE RATIOS:
Homeowners................. 43.7% 39.6% 43.1% 38.4% 41.4%
Commercial multi-peril..... 42.6 45.4 31.2 42.1 38.9
Other liability............ 42.0 46.0 42.5 39.1 41.8
Fire, allied, inland
marine................... 39.7 39.4 38.6 37.0 37.0
Workers' compensation...... 49.5 39.6 40.7 43.2 39.0
Commercial automobile(1)... 59.6 (567.0) (173.4) -- --
Total.................... 43.3% 41.6% 40.5% 39.1% 40.2%
COMBINED RATIOS(3):
Homeowners................. 94.7% 115.4% 110.3% 123.8% 120.2%
Commercial multi-peril..... 106.8 87.6 64.7 101.4 73.3
Other liability............ 104.1 105.4 113.2 141.8 113.9
Fire, allied, inland
marine................... 75.0 78.9 88.0 73.3 75.3
Workers' compensation...... 111.9 113.8 95.1 48.4 102.8
Commercial automobile(1)... 83.5 (592.6) (412.8) -- --
Total.................... 96.5% 103.9% 99.4% 110.8% 104.1%
Industry Combined
Ratio(4)................. -- -- 101.6% 105.9% 106.4%
</TABLE>
- ---------------
(1) The Insurance Companies commenced writing commercial automobile coverages in
1997. The negative balances for commercial automobile result from the
minimum reinsurance charges incurred in connection with the commencement of
this line of business.
(2) The reduction in the net loss ratio related to homeowners insurance for the
six months ended June 30, 1998 as compared to the six months ended June 30,
1997, and for the year ended December 31, 1997 as compared to the year ended
December 31, 1996, is principally due to improved weather conditions and
51
<PAGE> 55
lower claim volume combined with changes in the Insurance Companies'
reinsurance programs introduced in 1997. See "Management's Discussion and
Analyses of Financial Condition and Results of Operations -- Results of
Operations for the Year Ended December 31, 1997 compared to the Year Ended
December 31, 1996.
(3) A combined ratio over 100% means that an insurer's underwriting operations
are not profitable.
(4) Data unavailable for the six month periods ended June 30, 1998 and 1997.
Homeowners
Mercer Mutual's current homeowners policy, introduced in 1987, is a
multi-peril policy providing property and liability coverages and optional
inland marine coverage. The homeowners policy is sold to provide coverage for an
insured's residence. Mercer Mutual markets both a standard and a preferred
homeowner product targeted for both the newly constructed homes and the older
more mature market. As of June 30, 1998, Mercer Mutual had approximately 29,350
homeowners policies in force, with 28.3% of those the preferred product.
Commercial Multi-peril Products.
Commercial Multi-Peril. Mercer Mutual writes a number of multi-peril
policies in New Jersey and Pennsylvania providing property and liability
coverage to accounts that include all of Mercer Mutual's 3-4 family dwelling
policies, as well as a number of larger apartment risks. Various other
non-business owners risk classes are also written on this policy, such as larger
contractors. As of June 30, 1998, approximately 1,600 multi-peril policies were
in force. Mercer Mutual is working to increase market penetration for this
product because it includes commercial liability risks that have more flexible
and profitable rate structures and also help to diversify exposures and lessen
the impact of property losses on overall results.
Businessowners. Mercer Mutual introduced a businessowners policy in the
mid-1980s that provides property and liability coverages to small businesses
throughout New Jersey. This product is marketed to several distinct groups: (i)
apartment building owners with 60 or fewer units; (ii) condominium associations;
(iii) business owners who lease their buildings to tenants; (iv) mercantile
businessowners, such as florists, delicatessens, and beauty parlors; and (v)
offices with owner and/or tenant occupancies. As of June 30, 1998, approximately
2,400 businessowners policies were in force.
Religious Institutions. Mercer Mutual enhanced its product offerings for
religious institutions in 1997 through the creation of a specialized multi-peril
policy specifically designed for this market segment. The enhanced product
included the introduction of directors and officers coverage, religious
counseling coverage and systems breakdown coverage (through a reinsurance
arrangement). Coverage for child care centers and schools is also available.
Other Liability.
Commercial General Liability. Mercer Mutual also writes liability coverage
for insureds who do not have property exposure or whose property exposure is
insured elsewhere. The majority of these policies are written for small
contractors such as carpenters, painters or electricians, who choose to
self-insure small property items. Coverage for both premises/operations and
products/completed operations exposures are routinely provided. Coverage is
provided for other exposures such as vacant land and habitational risks. There
were approximately 1,400 commercial general liability policies in force as of
June 30, 1998.
Commercial Umbrella Liability. Commercial umbrella coverage is available
for insureds who insure their primary general liability exposures with Mercer
Mutual through a businessowners, commercial multi-peril, religious institution
or commercial general liability policy. Limits of $1,000,000 to $5,000,000 are
readily available with higher limits provided if needed. To improve processing
efficiencies and maintain underwriting standards, Mercer Mutual is beginning to
offer this coverage as an endorsement to the underlying liability policy rather
than as a separate stand-alone policy.
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<PAGE> 56
Personal Excess Liability. Mercer Mutual writes personal line excess
liability, or "umbrella," policies covering personal liabilities in excess of
amounts covered under Mercer Mutual's homeowners policies. Such policies are
available generally with limits of $1 million to $5 million. Mercer Mutual does
not generally market excess liability policies to individuals unless they also
write an underlying primary liability policy.
Fire, Allied Lines and Inland Marine.
Fire, Allied Lines and Inland Marine. Fire and allied lines insurance
generally covers fire, lightning, and removal and extended coverage. Inland
marine coverage insures merchandise or cargo in transit and business and
personal property. Mercer Mutual offers these coverages for property exposures
in cases where it is not insuring the companion liability exposures. Generally,
the rates charged on these policies are higher than those for the same property
exposures written on a multi-peril or businessowners policy.
Combination Dwelling Policy. The current combination dwelling product,
developed in 1987, is a flexible, multi-line package of insurance coverage. It
is targeted to be written on an owner or tenant occupied dwelling of no more
than four families. The dwelling policy combines property and liability
insurance but may also be written on a monoline basis. The property portion is
considered a fire, allied lines and inland marine policy, and the liability
portion is considered an other liability policy.
Commercial Automobile
This product was introduced in New Jersey in 1997 and is designed to cover
light and medium weight trucks used in business, as well as company-owned
private passenger type vehicles. Other specialty classes such as church vans and
funeral directors vehicles can also be covered. The policy is marketed as a
companion offering to Mercer Mutual's businessowners, commercial multi-peril,
religious institution, commercial property or general liability policies.
Workers' Compensation.
The Insurance Companies generally write workers' compensation policies in
conjunction with an otherwise eligible businessowners, commercial multi-peril,
religious institution, commercial property or general liability policy.
Stand-alone workers' compensation policies are available only as a management
accommodation and, as of June 30, 1998, most of the Insurance Companies'
workers' compensation insureds have other Mercer Mutual policies. There were
approximately 1,200 workers' compensation policies in effect as of June 30,
1998.
MARKETING
The Insurance Companies market their property and casualty insurance
products in New Jersey and Pennsylvania exclusively through approximately 160
independent agencies, most of which are located in New Jersey. The Insurance
Companies manage their agencies through quarterly business reviews (with
underwriter participation) and establishment of benchmarks/goals for premium
volume and profitability. The Insurance Companies have in recent years
eliminated a number of low volume or unprofitable agencies. All of the Insurance
Companies' independent agencies represent multiple carriers and are established
businesses in the communities in which they operate. The Insurance Companies'
independent agencies generally market and write the full range of the Insurance
Companies' products. The Insurance Companies consider their relationships with
agencies to be good.
For the six months ended June 30, 1998 and the year ended December 31,
1997, the Insurance Companies' largest agency accounted for approximately 8.6%
and 7.3%, respectively, of the Insurance Companies' direct premiums written, and
no other agency accounted for more than 5% of the Insurance Companies' direct
premiums written. For the six months ended June 30, 1998 and the year ended
December 31, 1997, the Insurance Companies' top 10 agencies accounted for 31.5%
and 26.8%, respectively, of direct premiums written, with the largest agency
generating approximately $1.3 million and $2.1 million, respectively, in premium
revenue for the Insurance Companies.
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<PAGE> 57
The Insurance Companies emphasize personal contact between their agents and
the policyholders. The Insurance Companies believe that their fast and efficient
service, name recognition, policyholder loyalty and policyholder satisfaction
with agency and claims relationships are the principal sources of new customer
referrals, cross-selling of additional insurance products and policyholder
retention.
The Insurance Companies depend upon their agency force to produce new
business and to provide customer service. The network of independent agencies
also serves as an important source of information about the needs of the
communities served by the Insurance Companies. This information is utilized by
the Insurance Companies to develop new products and new product features.
Agencies are compensated through a fixed base commission with an
opportunity for profit sharing depending on the agency's premiums earned and
loss experience.
The Insurance Companies' independent agencies are monitored and supported
by marketing representatives, who are employees of the Insurance Companies and
who also have principal responsibility for recruiting agencies and training new
agents. To support their marketing efforts, the Insurance Companies hold
seminars for agents and conduct training programs that provide both technical
training about products and sales training on how to market such products. The
Insurance Companies also provide personal computer software to agencies that
allows them to quote rates on homeowners and commercial multi-peril policies.
The Insurance Companies marketing efforts are further supported by their claims
philosophy, which is designed to provide prompt and efficient service, thereby
making the claims process a positive experience for agents and policyholders.
UNDERWRITING
The Insurance Companies write their personal and commercial lines by
evaluating each risk with consistently applied standards. The Insurance
Companies maintain information on all aspects of their business that is
regularly reviewed to determine product line profitability. The Insurance
Companies' employ 15 underwriters, who generally specialize in either personal
or commercial lines. Specific information is monitored with regard to individual
insureds that is used to assist the Insurance Companies in making decisions
about policy renewals or modifications. The Insurance Companies' underwriters
have an average of over 12 years of experience as underwriters.
The Insurance Companies rely on information provided by their independent
agencies who, subject to certain guidelines, also act as field underwriters and
pre-screen policy applicants. Their independent agencies have the authority to
sell and bind insurance coverages in accordance with pre-established guidelines.
Agencies' underwriting results are monitored and, on occasion, agencies with
historically poor loss ratios have had their binding authority removed until
more profitable underwriting results were achieved.
CLAIMS
Claims on insurance policies written by the Insurance Companies are
received directly from the insured or through the Insurance Companies'
independent agencies. Claims are then assigned to either an in-house adjuster or
an independent adjuster, depending upon the size and complexity of the claim,
who investigates and settles the claim. As of June 30, 1998, the Insurance
Companies had six in-house adjusters and worked with 15 independent adjusters.
Until December 31, 1997 workers' compensation claims were assigned to the GSRA,
an insurance pool which provides for the sharing of workers' compensation losses
under an excess of loss reinsurance treaty. As of January 1, 1998, workers'
compensation claims are being handled in the same manner as all other claims.
Claims settlement authority levels are established for each claims adjuster
based upon his or her level of experience. Multi-line teams exist to handle all
claims. The claims department is responsible for reviewing all claims, obtaining
necessary documentation, estimating the loss reserves and resolving the claims.
The Insurance Companies attempt to minimize claims costs by encouraging the
use of alternative dispute resolution procedures. Less than 21% of all open
claims under the Insurance Companies' policies have resulted in litigation.
Litigated claims are assigned to outside counsel.
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<PAGE> 58
REINSURANCE
Reinsurance Ceded
In accordance with insurance industry practice, the Insurance Companies
reinsure a portion of their exposure and pay to the reinsurers a portion of the
premiums received on all policies reinsured. Insurance is ceded principally to
reduce net liability on individual risks, to mitigate the effect of individual
loss occurrences (including catastrophic losses), to stabilize underwriting
results and to increase the Insurance Companies' underwriting capacity.
Reinsurance can be facultative reinsurance or treaty reinsurance. Under
facultative reinsurance, each risk or portion of a risk is reinsured
individually. Under treaty reinsurance, an agreed-upon portion of business
written is automatically reinsured. Reinsurance can also be classified as quota
share reinsurance, pro-rata insurance or excess of loss reinsurance. Under quota
share reinsurance and pro-rata insurance, the ceding company cedes a percentage
of its insurance liability to the reinsurer in exchange for a like percentage of
premiums less a ceding commission, and in turn will recover from the reinsurer
the reinsurer's share of all losses and loss adjustment expenses incurred on
those risks. Under excess reinsurance, an insurer limits its liability to all or
a particular portion of the amount in excess of a predetermined deductible or
retention. Regardless of type, reinsurance does not legally discharge the ceding
insurer from primary liability for the full amount due under the reinsured
policies. However, the assuming reinsurer is obligated to reimburse the ceding
company to the extent of the coverage ceded. The Insurance Companies place all
of their reinsurance either through the use of brokers or directly with the
reinsurance company.
The Insurance Companies determine the amount and scope of reinsurance
coverage to purchase each year based upon their evaluation of the risks
accepted, consultations with reinsurance representatives and a review of market
conditions, including the availability and pricing of reinsurance. The Insurance
Companies' reinsurance arrangements are placed with non-affiliated reinsurers,
and are generally renegotiated annually. For the year ended December 31, 1996,
the Insurance Companies ceded to reinsurers $14.4 million of earned premiums.
For the year ended December 31, 1997, the Insurance Companies ceded to
reinsurers earned premiums of $9.5 million. The significant decrease in ceded
premiums for the year ended December 31, 1997 reflects the effect of a
restructuring of the reinsurance program as of January 1, 1997, which
restructuring is described below. For the six months ended June 30, 1998, the
Insurance Companies ceded to reinsurers earned premiums of $3.8 million,
compared to $4.5 million in earned premiums ceded to reinsurers for the six
months ended June 30, 1997.
For the year ended December 31, 1997, the largest exposure retained by the
Insurance Companies on any one individual property risk was $75,000. Excess
reinsurance was provided on a treaty basis in layers as follows: Individual
property risks in excess of $75,000 were covered on an excess of loss basis up
to $250,000 per risk pursuant to various reinsurance treaties. Except for
commercial automobile physical damage, per risk property losses in excess of
$250,000 was reinsured on a proportional basis through treaty coverage or
facultative coverage. Commercial automobile physical damage was reinsured
separately on a quota share and excess of loss basis. The maximum commercial
automobile physical damage exposure was $50,000.
Effective January 1, 1998, the largest exposure retained by the Insurance
Companies on any one individual property risk is $250,000. Individual property
risks in excess of $250,000 are covered on an excess of loss basis pursuant to
various reinsurance treaties. As of January 1, 1998, all property lines of
business, including commercial automobile physical damage, are reinsured under
the same treaties.
For the year ended December 31, 1997, except for workers' compensation,
umbrella liability, and commercial automobile liability, individual casualty
risks that were in excess of $100,000 were covered on an excess of loss basis,
up to $1.2 million per occurrence, pursuant to various reinsurance treaties.
Casualty losses arising from workers' compensation claims were reinsured on a
per occurrence and per person treaty basis by various reinsurers up to $10.0
million through GSRA. Umbrella liability losses were reinsured on a 95% quota
share basis up to $1.0 million and a 100% quota share basis in excess of $1.0
million up to $5.0 million with a ceding commission of 35.0%. Commercial
automobile liability was reinsured separately on a quota share and excess of
loss basis. The maximum commercial automobile liability exposure was $50,000.
The Insurance
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<PAGE> 59
Companies also purchased casualty contingency loss excess reinsurance providing
$3.0 million of coverage in excess of $1.2 million.
Effective January 1, 1998, except for umbrella liability, individual
casualty risks that are in excess of $250,000 are covered on an excess of loss
basis up to $1.0 million per occurrence, pursuant to various reinsurance
treaties. Casualty losses in excess of $1.0 million arising from workers'
compensation claims are reinsured up to $10.0 million on a per occurrence and
per person treaty basis by various reinsurers. Umbrella liability losses are
reinsured on a 90% quota share basis up to $1.0 million and a 100% quota share
basis in excess of $1.0 million up to $5.0 million, with a ceding commission of
32.5%. The Insurance Companies also purchase casualty contingency loss excess
reinsurance providing $3.0 million of coverage in excess of $1.0 million.
Catastrophic reinsurance protects the ceding insurer from significant
aggregate loss exposure arising from a single event such as windstorm, hail,
tornado, hurricane, earthquake, riot, blizzard, freezing temperatures or other
extraordinary events. Mercer Mutual purchased layers of excess treaty
reinsurance for catastrophic property losses for 1997, under which Mercer Mutual
reinsured 100% of losses per occurrence in excess of $1.0 million and up to $2.0
million, and 95% of losses per occurrence in excess of $2.0 million, up to a
maximum of $45.0 million per occurrence.
Effective January 1, 1998, Mercer Mutual purchased layers of excess treaty
reinsurance for catastrophic property losses, under which Mercer Mutual
reinsures 100% of losses per occurrence in excess of $1.0 million and up to $2.0
million, and 97.5% of losses per occurrence in excess of $2.0 million, up to a
maximum of $32.0 million per occurrence. Mercer Mutual reduced its catastrophe
excess reinsurance amounts in 1998 because its estimated exposure to
catastrophes, as calculated in 1997 by computer modeling techniques,
demonstrated a significant reduction in such exposures.
Mercer Mutual also has an aggregate excess of loss treaty reinsurance
agreement designed to protect against multiple events each of which is below the
$1.0 million retention under the primary catastrophe reinsurance treaty. During
1997, under this agreement, losses were reinsured for 90% of losses exceeding
70% of annual earned premiums, up to $2.2 million. Such agreement has been
amended so that, effective January 1, 1998, losses are reinsured for 90% of
losses exceeding 70% of annual earned premiums up to $2.7 million.
Effective January 1, 1997, the Insurance Companies terminated their
participation in the Homeowners Pool. Prior to 1997, the Insurance Companies
pooled their New Jersey homeowners business with two other companies providing
homeowners coverage to New Jersey residents. Premiums were ceded to the other
Homeowners Pool participants based on the respective writings reinsured in the
Homeowners Pool. The Insurance Companies in turn assumed reinsurance from the
other participants. Losses were reinsured among the Homeowners Pool participants
on a pro-rata basis in the same proportion premiums were ceded. At January 1,
1997, the Insurance Companies replaced the Homeowners Pool reinsurance with a
combination of the Homeowners Quota Share Program and its existing pro-rata
agreements. The Homeowners Pool was terminated in order to reduce the Insurance
Companies' New Jersey exposure and to eliminate fluctuations in operating
results arising from business assumed from outside the Insurance Companies under
the Homeowners Pool. The restructuring of the reinsurance program caused a
material reduction in both the consolidated net earned premiums and net expense
of Mercer Mutual. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The insolvency or inability of any reinsurer to meet its obligations to the
Insurance Companies could have a material adverse effect on the results of
operations or financial condition of the Insurance Companies. As of
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<PAGE> 60
June 30, 1998 the Company's five largest reinsurers based on percentage of ceded
premiums are set forth in the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF A.M. BEST
NAME CEDED PREMIUMS BEST RATING
- ---- -------------- -----------
<S> <C> <C>
American Re-Insurance Co.......................... 21.06% A+
Motors Insurance Corporation...................... 17.07% A+
Hartford Fire Insurance Co........................ 15.93% A+
Vesta Fire Insurance Corporation.................. 3.92% A
Gerling Global Reinsurance Corp. ................. 2.83% A -
</TABLE>
The following table sets forth the five largest amounts of loss and loss
expenses recoverable from reinsurers on unpaid claims as of June 30, 1998.
<TABLE>
<CAPTION>
LOSS AND
LOSS EXPENSES
RECOVERABLE A.M. BEST
NAME ON UNPAID CLAIMS RATING
- ---- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C>
Franklin Mutual Insurance Co....................... 1,220 A
Cumberland Mutual Fire Ins. Co..................... 1,205 A+
Hartford Fire Insurance Co......................... 1,108 A+
Odyssey Reinsurance Co............................. 716 A-
Motors Insurance Corporation....................... 710 A+
</TABLE>
The A+ and A ratings are the second and third highest of A.M. Best's
fifteen ratings. All of the Insurance Companies' other reinsurers are rated "A-"
or better by A.M. Best. According to A.M. Best, companies with a rating of "A-"
or better have a strong ability to meet their ongoing obligations to
policyholders. The Insurance Companies monitor the solvency of reinsurers
through regular review of their financial statements and A.M. Best ratings. The
Insurance Companies have experienced no significant difficulties collecting
amounts due from reinsurers.
Reinsurance Assumed
The Insurance Companies assume reinsurance on a voluntary and non-voluntary
basis. Reinsurance is assumed on an excess of loss basis and pro-rata basis. For
the year ended December 31, 1996 the Insurance Companies assumed $10.3 million
in earned premiums. For the year ended December 31, 1997, the Insurance
Companies assumed $598,000 in earned premiums. The significant decrease in
assumed earned premiums for the year ended December 31, 1997 reflects the
above-described termination by the Insurance Companies of their participation in
the Homeowners Pool effective December 31, 1996, which resulted in the Insurance
Companies no longer assuming business from the other Homeowners Pool
participants. For the six months ended June 30, 1998, the Insurance Companies
assumed $273,000 in earned premiums compared with $292,000 in earned premiums
assumed for the six months ended June 30, 1997.
Under its agreement with GSRA, which was terminated effective December 31,
1997, the Insurance Companies assumed reinsurance on a voluntary basis from four
mutual insurance companies providing workers' compensation coverage to New
Jersey businesses. The Insurance Companies assumed 7% of losses incurred by
those carriers in excess of $50,000 up to $250,000 or a maximum of $14,000 per
occurrence. In return, the Insurance Companies assume 7% of the premiums of such
carrier on the same excess of loss basis.
The Insurance Companies are also required by statute to participate in two
residual market pools. The Insurance Companies assume business for workers'
compensation and for property exposures which are not insured in the voluntary
marketplace. The Insurance Companies participate in these residual markets on a
market share basis for the jurisdiction in which it writes business.
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LOSS AND LAE RESERVES
Property and Casualty Reserves. The Insurance Companies are required by
applicable insurance laws and regulations to maintain reserves for payment of
losses and loss adjustment expenses ("LAE") for both reported claims and for
claims incurred but not reported ("IBNR"), arising from the policies they have
issued. These laws and regulations require that provision be made for the
ultimate cost of those claims without regard to how long it takes to settle them
or the time value of money. The determination of reserves involves actuarial and
statistical projections of what the Insurance Companies expect to be the cost of
the ultimate settlement and administration of such claims based on facts and
circumstances then known, estimates of future trends in claims severity, and
other variable factors such as inflation and changing judicial theories of
liability.
The estimation of ultimate liability for losses and LAE is an inherently
uncertain process and does not represent an exact calculation of that liability.
The Insurance Companies' reserve policy recognizes this uncertainty by
maintaining reserves at a level providing for the possibility of adverse
development relative to the estimation process. The Insurance Companies do not
discount their reserves to recognize the time value of money.
When a claim is reported to the Insurance Companies, claims personnel
establish a "case reserve" for the estimated amount of the ultimate payment.
This estimate reflects an informed judgment based upon general insurance
reserving practices and on the experience and knowledge of the estimator
regarding the nature and value of the specific claim, the severity of injury or
damage, and the policy provisions relating to the type of loss. Case reserves
are adjusted by the Insurance Companies' claims staff as more information
becomes available. It is the Insurance Companies' policy to settle each claim as
expeditiously as possible.
The Insurance Companies maintain IBNR reserves to provide for future
reporting of already incurred claims and developments on reported claims. The
IBNR reserve is determined by estimating the Insurance Companies' ultimate net
liability for both reported and IBNR claims and then subtracting the case
reserves for reported claims.
Each quarter, the Insurance Companies compute their estimated ultimate
liability using principles and procedures applicable to the lines of business
written. Such reserves are also considered annually by the Insurance Companies'
independent auditors in connection with their audit of the Insurance Companies'
consolidated financial statements. However, because the establishment of loss
reserves is an inherently uncertain process, there can be no assurance that
ultimate losses will not exceed the Insurance Companies' loss reserves.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. As required by
insurance regulatory authorities, the Insurance Companies submit to the
jurisdictions in which they are licensed a statement of opinion by its appointed
actuary concerning the adequacy of statutory reserves. The results of these
actuarial studies have consistently indicated that reserves are adequate.
Management of the Insurance Companies does not believe the Insurance Companies
are subject to any material potential asbestos or environmental liability
claims.
The following table provides a reconciliation of beginning and ending
consolidated loss and LAE reserve balances of Mercer Mutual for the six months
ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996 and
1995 as prepared in accordance with GAAP.
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<PAGE> 62
RECONCILIATION OF RESERVE FOR LOSSES
AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at the beginning of period.... $31,872 $35,221 $35,221 $36,176 $35,531
Less: Reinsurance recoverables and
receivables............................ (12,021) (15,147) (15,147) (16,819) (17,233)
------- ------- ------- ------- -------
Net reserves for losses and loss
adjustment expenses at beginning of
period................................. 19,851 20,074 20,074 19,357 18,298
------- ------- ------- ------- -------
Add: Provision for losses and loss
adjustment expenses for claims
occurring in:
The current year.................... 6,194 6,332 11,649 16,445 14,251
Prior years......................... (383) (921) (1,055) (1,644) (955)
------- ------- ------- ------- -------
Total incurred losses and loss
adjustment expenses............... 5,811 5,411 10,594 14,801 13,296
------- ------- ------- ------- -------
Less: Loss and loss adjustment expenses
payments for claims occurring in:
The current year.................... 1,644 1,745 4,775 7,715 5,302
Prior years......................... 2,743 4,476 6,042 6,369 6,935
------- ------- ------- ------- -------
Total losses and loss adjustment
expenses.......................... 4,387 6,221 10,817 14,084 12,237
------- ------- ------- ------- -------
Net reserves for losses and loss
adjustment expenses at end of period... 21,275 19,264 19,851 20,074 19,357
Add: Reinsurance recoverables and
receivables............................ 8,798 14,355 12,021 15,147 16,819
------- ------- ------- ------- -------
Reserves for losses and loss adjustment
expenses at end of period.............. 30,073 33,619 $31,872 $35,221 $36,176
======= ======= ======= ======= =======
</TABLE>
The following table shows the development of the consolidated reserves for
unpaid losses and LAE from 1987 through 1997 for the Insurance Companies on a
GAAP basis. The top line of the table shows the liabilities at the balance sheet
date, including losses incurred but not yet reported. The upper portion of the
table shows the cumulative amounts subsequently paid as of successive years with
respect to the liability. The lower portion of the table shows the reestimated
amount of the previously recorded liability based on experience as of the end of
each succeeding year. The estimates change as more information becomes known
about the frequency and severity of claims for individual years. The redundancy
(deficiency) exists when the reestimated liability at each December 31 is less
(greater) than the prior liability estimate. The "cumulative redundancy
(deficiency)" depicted in the table, for any particular calendar year,
represents the aggregate change in the initial estimates over all subsequent
calendar years.
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<PAGE> 63
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE net
of reinsurance recoverable............ $ 7,646 $ 9,266 $13,247 $16,698 $18,509 $20,067 $18,995 $18,298
Cumulative amount of liability paid
through:
One year later........................ 2,760 3,268 4,702 5,195 5,621 6,329 6,023 6,935
Two years later....................... 4,101 5,129 7,282 8,091 8,587 9,940 9,786 10,272
Three years later..................... 5,181 6,684 9,342 10,307 11,315 12,723 12,144 12,336
Four years later...................... 5,825 7,899 10,888 12,112 13,162 14,160 13,590
Five years later...................... 6,363 8,643 11,694 12,904 14,033 14,852
Six years later....................... 6,627 9,063 11,997 13,262 14,389
Seven years later..................... 6,800 9,169 12,096 13,470
Eight years later..................... 6,857 9,236 12,177
Nine years later...................... 6,851 9,275
Ten years later....................... 6,864
Liability estimated as of:
One year later........................ 7,895 10,446 14,766 16,168 17,400 18,246 17,746 17,344
Two years later....................... 7,657 10,914 13,989 15,632 16,293 17,603 17,088 16,860
Three years later..................... 7,581 10,330 13,540 14,787 15,973 16,985 16,779 16,495
Four years later...................... 7,256 10,076 12,724 14,209 15,411 16,490 16,244
Five years later...................... 7,272 9,603 12,643 13,945 15,298 16,225
Six years later....................... 7,100 9,595 12,556 13,996 15,153
Seven years later..................... 7,055 9,586 12,518 13,963
Eight years later..................... 7,035 9,522 12,517
Nine years later...................... 7,033 9,529
Ten years later....................... 7,040
Cumulative total redundancy
(deficiency).......................... 606 (263) 730 2,735 3,356 3,842 2,751 1,803
Gross liability -- end of year.......... 38,472 33,308 35,531
Reinsurance recoverables................ 18,405 14,313 17,233
------- ------- -------
Net liability -- end of year............ $20,067 $18,995 $18,298
======= ======= =======
Gross reestimated liability-latest...... 33,323 28,775 31,011
Reestimated reinsurance
recoverables-latest................... 17,097 12,531 14,515
------- ------- -------
Net reestimated liability-latest........ 16,225 16,244 16,495
======= ======= =======
Gross cumulative redundancy............. 5,149 4,533 4,520
======= ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Liability for unpaid losses and LAE net
of reinsurance recoverable............ $19,357 $20,074 $19,851
Cumulative amount of liability paid
through:
One year later........................ 6,368 6,042 --
Two years later....................... 9,554
Three years later.....................
Four years later......................
Five years later......................
Six years later.......................
Seven years later.....................
Eight years later.....................
Nine years later......................
Ten years later.......................
Liability estimated as of:
One year later........................ 17,712 19,018 --
Two years later....................... 17,247
Three years later.....................
Four years later......................
Five years later......................
Six years later.......................
Seven years later.....................
Eight years later.....................
Nine years later......................
Ten years later.......................
Cumulative total redundancy
(deficiency).......................... 2,110 1,056 --
Gross liability -- end of year.......... 36,176 35,221 31,872
Reinsurance recoverables................ 16,819 15,147 12,021
------- ------- -------
Net liability -- end of year............ $19,357 $20,074 $19,851
======= ======= =======
Gross reestimated liability-latest...... 30,974 31,539
Reestimated reinsurance
recoverables-latest................... 13,726 12,521
------- -------
Net reestimated liability-latest........ 17,247 19,018
======= =======
Gross cumulative redundancy............. 5,202 3,682
======= =======
</TABLE>
60
<PAGE> 64
INVESTMENTS
On a consolidated basis, all of Mercer Mutual's investment securities are
classified as available for sale and are carried at fair market value.
An important component of the consolidated operating results of Mercer
Mutual has been the return on invested assets. The Company's investment
objectives are (i) to maximize current yield, (ii) to maintain safety of capital
through a balance of high quality, diversified investments which minimize risk,
(iii) to maintain adequate liquidity for its insurance operations, (iv) to meet
regulatory requirements, and (v) to increase surplus through appreciation.
The Board of Directors sets the investment policy of the Company, which
requires that investments be made in a portfolio consisting of bonds, common
stock and short-term money market instruments. The Company's equity investments
are required to be concentrated in larger capitalization, quality companies. The
policy does not permit investment in unincorporated businesses, private
placements or direct mortgages, foreign denominated securities, financial
guarantees or commodities.
The following table sets forth certain consolidated information concerning
Mercer Mutual's investments.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
------------------ -------------------- --------------------
MARKET MARKET MARKET
COST(2) VALUE COST(2) VALUE COST(2) VALUE
------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed income securities(1):
United States government and
government agencies....... $23,745 $23,928 $25,195 $25,407 $23,702 $23,691
Obligations of states and
political subdivisions.... 5,851 5,927 3,396 3,517 4,313 4,343
Industrial and
miscellaneous............. 603 602 300 300 -- --
Mortgage-backed securities... 5,523 5,295 6,106 5,723 7,631 6,930
------- ------- ------- ------- ------- -------
Total fixed income
securities......... 35,722 35,752 34,997 34,947 35,646 34,964
Equity securities.............. 8,240 13,557 6,948 10,852 5,892 7,795
------- ------- ------- ------- ------- -------
Total................ $43,962 $49,309 $41,945 $45,799 $41,538 $42,759
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) In the consolidated financial statements of Mercer Mutual, investments are
carried at fair value as established by quoted market prices on secondary
markets.
(2) Original cost of equity securities; original cost of fixed income securities
adjusted for amortization of premium and accretion of discount.
61
<PAGE> 65
The table below contains consolidated information concerning the investment
ratings of Mercer Mutual's fixed maturity investments at June 30, 1998.
<TABLE>
<CAPTION>
AMORTIZED MARKET
TYPE/RATINGS OF INVESTMENT(1) COST VALUE PERCENTAGES(2)
----------------------------- --------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Government and agencies.............. $23,745 $23,928 66.9%
AAA....................................... 10,294 10,115 28.3
AA........................................ 769 795 2.2
A......................................... 814 811 2.3
BBB....................................... 100 103 0.3
------- ------- -----
Total........................... $35,722 $35,752 100.0%
======= ======= =====
</TABLE>
- ---------------
(1) The ratings set forth in this table are based on the ratings, if any,
assigned by Standard & Poor's Corporation ("S&P"). If S&P's ratings were
unavailable, the equivalent ratings supplied by Moody's Investors Services,
Inc., Fitch Investors Service, Inc. or the NAIC were used where available.
(2) Represents percent of market value for classification as a percent of total
for each portfolio.
The table below sets forth the maturity profile of Mercer Mutual's
consolidated fixed maturity investments as of June 30, 1998:
<TABLE>
<CAPTION>
AMORTIZED MARKET
MATURITY COST(1) VALUE PERCENTAGES(2)
- -------- --------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
1 year or less.................................... $ 100 $ 101 0.3%
More than 1 year through 5 years.................. 1,064 1,077 3.0
More than 5 years through 10 years................ 24,001 24,220 67.7
More than 10 years................................ 5,034 5,059 14.2
Mortgage-backed securities(3)..................... 5,523 5,295 14.8
------- ------- -----
Total................................... $35,722 $35,752 100.0%
======= ======= =====
</TABLE>
- ---------------
(1) Fixed maturities are carried at market value in the consolidated financial
statements of Mercer Mutual.
(2) Represents percent of market value of the classification as a percent of the
total.
(3) Mortgage backed securities consist of mortgage pass-through holdings and
securities collateralized by home equity loans. These securities follow a
structured principal repayment schedule and are of high credit quality rated
"AAA" or better by Standard & Poor's. These securities are presented
separately in the maturity schedule due to the inherent risk associated with
prepayment or early authorization. The average duration of this portfolio is
3.6 years.
The average duration of Mercer Mutual's fixed maturity investments,
excluding mortgage backed securities which are subject to paydown, as of June
30, 1998 was approximately 5.8 years. As a result, the market value of the
Company's investments may fluctuate significantly in response to changes in
interest rates. In addition, the Company may experience investment losses to the
extent its liquidity needs require the disposition of fixed maturity securities
in unfavorable interest rate environments.
62
<PAGE> 66
Mercer Mutual's consolidated net investment income, average cash and
invested assets and return on average cash and invested assets for the six
months ended June 30, 1998 and 1997 and the years ended December 31, 1997, 1996
and 1995 and were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average invested assets.......... $51,125 $45,810 $46,970 $44,728 $39,746
Net investment income............ 1,108 1,214 2,350 2,289 2,132
Return on average invested
assets......................... 4.3% 5.3% 5.0% 5.1% 5.4%
</TABLE>
A.M. BEST RATING
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns an "A-" (Excellent) rating (its fourth highest
rating category out of 15 categories) to the Insurance Companies as a group.
A.M. Best assigns "A" or "A-" ratings to companies which, in its opinion, have
demonstrated excellent overall performance when compared to the standards
established by A.M. Best. Companies rated "A" and "A-" have a strong ability to
meet their obligations to policyholders over a long period of time. In
evaluating a company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage and liquidity, as well as the company's
book of business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its loss reserves, the
adequacy of its surplus, its capital structure, the experience and competency of
its management and its market presence. No assurance can be given that A.M. Best
will not reduce the Insurance Companies' current rating in the future. In its
1997 ratings report on the Insurance Companies, in which A.M. Best assigned the
Insurance Companies an "A-" rating, A.M. Best also stated that due to the
Insurance Companies' considerable catastrophe exposure, it viewed the Insurance
Companies' ratings outlook as negative. In 1997, management met with A.M. Best
personnel to discuss the measures the Insurance Companies are implementing to
mitigate the concerns expressed by A.M. Best. These measures include an increase
in the rates charged for homeowners insurance, the termination of relationships
with unprofitable agencies, decreasing their catastrophe exposure by improving
their mix of business through an increase in commercial and casualty writings,
the planned geographic diversification of its business through acquisitions, and
the planned improvement of capital strength through the Offerings. A.M. Best
uses independent computer modeling systems to measure an insurance company's
catastrophe exposure. One of the measurements generated by such computer
modeling systems and utilized by A.M. Best in the rating process is Probable
Maximum Loss. From August 31, 1996 to August 31, 1997, the Probable Maximum Loss
(before catastrophe reinsurance) of the Insurance Companies has been reduced by
69.5% or from $64.9 million to $19.8 million. See "Risk Factors -- A.M. Best
Rating."
COMPETITION
The property and casualty insurance market is highly competitive. The
Insurance Companies compete with stock insurance companies, mutual companies,
local cooperatives and other underwriting organizations. Certain of these
competitors have substantially greater financial, technical and operating
resources than the Insurance Companies. The Insurance Companies' ability to
compete successfully in their principal markets is dependent upon a number of
factors, many of which (including market and competitive conditions) are outside
the Insurance Companies' control. Many of the lines of insurance written by the
Insurance Companies are subject to significant price competition. Some companies
may offer insurance at lower premium rates through the use of salaried personnel
or other methods, rather than through independent agents paid on a commission
basis, as the Insurance Companies do. In addition to price, competition in the
lines of business written by the Insurance Companies is based on quality of the
products, quality and speed of service (including claims service), financial
strength, ratings, distribution systems and technical expertise.
63
<PAGE> 67
REGULATION
General. Insurance companies are subject to supervision and regulation in
the states in which they transact business. Such supervision and regulation
relates to numerous aspects of an insurance company's business and financial
condition. The primary purpose of such supervision and regulation is the
protection of policyholders. The extent of such regulation varies, but generally
derives from state statutes which delegate regulatory, supervisory and
administrative authority to state insurance departments. Accordingly, the
authority of the state insurance departments includes the establishment of
standards of solvency which must be met and maintained by insurers, the
licensing to do business of insurers and agents, the nature of and limitations
on investments, premium rates for property and casualty insurance, the
provisions which insurers must make for current losses and future liabilities,
the deposit of securities for the benefit of policyholders, the approval of
policy forms, notice requirements for the cancellation of policies and the
approval of certain changes in control. State insurance departments also conduct
periodic examinations of the affairs of insurance companies and require the
filing of annual and other reports relating to the financial condition of
insurance companies.
Examinations. Examinations are regularly conducted by the Pennsylvania
Department and the New Jersey Department every three to five years. Because the
volume of Mercer Mutual's business in Pennsylvania to date has been minimal and
Mercer Mutual did not change its domicile from New Jersey to Pennsylvania until
October 1997, Mercer Mutual has never been examined by the Pennsylvania
Department. The New Jersey Department's last examination of Mercer Mutual and
MIC was as of December 31, 1995. These examinations did not result in any
adjustments to the financial position of either of the Insurance Companies. In
addition, there were no substantive qualitative matters indicated in the
examination reports that had a material adverse impact on the operations of the
Insurance Companies.
NAIC Requirements. In addition to state-imposed insurance laws and
regulations, the NAIC has adopted risk-based capital ("RBC") requirements that
require insurance companies to calculate and report information under a
risk-based formula that attempts to measure statutory capital and surplus needs
based on the risks in a company's mix of products and investment portfolio.
Under the formula, a company first determines its Authorized Control Level
risk-based capital ("ACL") by taking into account (i) the risk with respect to
the insurer's assets; (ii) the risk of adverse insurance experience with respect
to the insurer's liabilities and obligations, (iii) the interest rate risk with
respect to the insurer's business; and (iv) all other business risks and such
other relevant risks as are set forth in the RBC instructions. A company's
"Total Adjusted Capital" is the sum of statutory capital and surplus and such
other items as the RBC instructions may provide. The formula is designed to
allow state insurance regulators to identify potential weakly capitalized
companies.
The requirements provide for four different levels of regulatory attention.
The "Company Action Level" is triggered if a company's Total Adjusted Capital is
less than 2.0 times its ACL but greater than or equal to 1.5 times its ACL. At
the Company Action Level, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions to improve the
capital position. The "Regulatory Action Level" is triggered if a company's
Total Adjust Capital is less than 1.5 times but greater than or equal to 1.0
times its ACL. At the Regulatory Action Level, the regulatory authority will
perform a special examination of the company and issue an order specifying
corrective actions that must be followed. The "Authorized Control Level" is
triggered if a company's Total Adjusted Capital is than 1.0 times but greater
than or equal to 0.7 times its ACL, and the regulatory authority may take action
it deems necessary, including placing the company under regulatory control. The
"Mandatory Control Level" is triggered if a company's Total Adjusted Capital is
less than 0.7 times its ACL, and the regulatory authority is mandated to place
the company under its control. The Insurance Companies have never failed to
exceed these required levels of capital. There can be no assurance, however,
that the capital requirements applicable to the business of the Insurance
Companies will not increase in the future.
The NAIC has also developed a set of eleven financial ratios, referred to
as the Insurance Regulatory Information System (IRIS), for use by state
insurance regulators in monitoring the financial condition of insurance
companies. The NAIC has established an acceptable range of values for each of
the IRIS financial ratios. Generally, an insurance company will become the
subject of increased scrutiny where four or more of
64
<PAGE> 68
its IRIS ratio results fall outside the range deemed acceptable by the NAIC. The
nature of increased regulatory scrutiny resulting from IRIS ratio results that
are outside the acceptable range is subject to the judgment of the applicable
state insurance department, but generally will result in accelerated review of
annual and quarterly filings. Depending on the nature and severity of the
underlying cause of the IRIS ratio results being outside the acceptable range,
increased regulatory scrutiny could range from increased but informal regulatory
oversight to placing a company under regulatory control.
During the years ended December 31, 1995 and 1996, either or both of the
Insurance Companies reported results outside the acceptable range for the
following IRIS tests: the two-year overall operating ratio and the change in net
writings. The two-year overall operating ratio is a measure of company
profitability which combines three ratios: the loss ratio, plus the expense
ratio, minus the investment income ratio. A ratio result below 100% indicates a
profit, and a ratio result above 100% indicates a loss. The change in net
writings ratio is a measurement of the stability of a company's operations. For
the year ended December 31, 1997, neither of the Insurance Companies reported
results outside the acceptable range for any IRIS test. The table below sets
forth IRIS ratios outside the acceptable range for the Insurance Companies
during 1995, 1996 and 1997:
<TABLE>
<CAPTION>
INSURANCE
VALUES
EQUAL TO OR MERCER MUTUAL MIC
------------- -------------------- --------------------
RATIO NAME/DESCRIPTION OVER UNDER 1997 1996 1995 1997 1996 1995
- ---------------------- ---- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in net writings................... 33 (33) 263 (84)
Two-year overall operating ratio......... 100 100 109
</TABLE>
For Mercer Mutual, the 1995 two-year overall operating ratio was outside
the acceptable range. Operating results were adversely impacted by winter storms
and wind storms which resulted in significant losses in 1994, thereby increasing
the 1995 two-year operating ratio.
For MIC, the 1995 two-year overall operating ratio was outside the
acceptable range. This ratio was negatively impacted by MIC's share of losses
from winter storms and wind storms it assumed from Mercer Mutual under terms of
their reinsurance treaties at the time. (These storms occurred in 1994 and
increased MIC's 1995 two-year operating ratio.) The treaties with Mercer Mutual
were terminated as of January 1, 1995. The termination of the intercompany
reinsurance agreements resulted in the return of unearned premium reserves from
MIC to Mercer Mutual. As a result, net writings dropped dramatically in 1995.
The drop in net premium writings in 1995 caused the unusual results for the 1996
and 1995 net writings ratio.
Guaranty Fund Laws. The states in which the Insurance Companies do
business (New Jersey and Pennsylvania) have guaranty fund laws under which
insurers doing business in such states can be assessed on the basis of premiums
written by the insurer in that state in order to fund policyholder liabilities
of insolvent insurance companies. Under these laws in general, an insurer is
subject to assessment, depending upon its market share of a given line of
business, to assist in the payment of policyholder claims against insolvent
insurers. The Insurance Companies make accruals for their portion of assessments
related to such insolvencies when notified of assessments by the guaranty
associations.
New and Proposed Legislation and Regulations. The property and casualty
insurance industry has recently received a considerable amount of publicity
because of rising insurance costs and the unavailability of insurance. New
regulations and legislation are being proposed to limit damage awards, to
control plaintiffs' counsel fees, to bring the industry under regulation by the
federal government and to control premiums, policy terminations and other policy
terms. It is not possible to predict whether, in what form or in what
jurisdictions any of these proposals might be adopted or the effect, if any, on
the Insurance Companies. However, most of these proposals relate to automobile
insurance. The Insurance Companies do not write, nor do they have any present
intention to write in the future, personal automobile insurance (except through
businesses which may be acquired through acquisition), and the Insurance
Companies' commercial automobile insurance business is not material to the
business of the Insurance Companies.
Dividends. The Insurance Companies are restricted by the insurance laws of
their respective states of domicile as to the amount of dividends or other
distributions they may pay without notice to or the prior
65
<PAGE> 69
approval of the state regulatory authority. Under Pennsylvania law, the maximum
amount that may be paid by Mercer Mutual during any twelve-month period after
notice to, but without prior approval of, the Pennsylvania Department cannot
exceed the greater of 10% of Mercer Mutual's statutory surplus as reported on
the most recent annual statement filed with the Pennsylvania Department, or the
net income of Mercer Mutual for the period covered by such annual statement. As
of December 31, 1997, amounts available for payment of dividends by Mercer
Mutual to the Company in 1998 without the prior approval of the Pennsylvania
Department would have been approximately $2.0 million.
Holding Company Laws. Most states have enacted legislation that regulates
insurance holding company systems. Each insurance company in a holding company
system is required to register with the insurance supervisory agency of its
state of domicile and furnish information concerning the operations of companies
within the holding company system that may materially affect the operations,
management or financial condition of the insurers within the system. Pursuant to
these laws, the respective insurance departments may examine the Insurance
Companies and the Company at any time, require disclosure of material
transactions by the Insurance Companies and the Company and require prior notice
of approval of certain transactions, such as "extraordinary dividends" from the
Insurance Companies to the Company.
All transactions within the holding company system affecting the Insurance
Companies and the Company must be fair and equitable. Notice of certain material
transactions between an insurer and any person in its holding company system is
required to be given to the applicable insurance commissioner and, in some
states, certain of such transactions cannot be consummated without the prior
approval of the applicable insurance commissioner.
Approval of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer. In New Jersey
and Pennsylvania, the acquisition of 10% or more of the outstanding capital
stock of an insurer or its holding company is presumed to be a change in
control.
OFFER TO ACQUIRE MERCER MUTUAL
Pennsylvania law also prohibits any person from making a tender offer for,
or a request or invitation for tenders of, or seeking to acquire or acquiring
any voting security of an insurer if, after the consummation of such an
acquisition, such person would be in control of such insurer, unless such offer,
request, invitation or acquisition has received the prior approval of the
Pennsylvania Department. On March 3, 1998, Mercer Mutual received an unsolicited
offer from Franklin Mutual Insurance Company ("Franklin") to purchase from
Mercer Mutual, upon the consummation of the Conversion, all of the to-be-issued
capital stock of Mercer Mutual for a purchase price of $23.2 million,
representing the net worth of Mercer Mutual at December 31, 1997 under generally
accepted accounting principles. Under Franklin's proposal, Mercer Mutual was
asked to amend the Plan to provide that policyholders would receive the $23.2
million payment.
Franklin also committed to contribute an additional $5 million of capital to
Mercer Mutual. Franklin made such offer without receiving the prior approval of
the Pennsylvania Department. Mercer Mutual's Board of Directors unanimously
rejected such offer. On April 3, 1998, Mercer Mutual received a letter from
Franklin reextending its offer. Such reextention was also made without the prior
approval of the Pennsylvania Department. Mercer Mutual's Board of Directors
again unanimously rejected such offer.
LEGAL PROCEEDINGS
On April 27, 1998, Franklin delivered a letter to Mercer Mutual demanding
that Mercer Mutual allow Franklin to examine Mercer Mutual's list of Eligible
Policyholders and to make copies of or extracts from such list, for the purpose
of communicating with Eligible Policyholders concerning the Plan. Mercer Mutual
refused such demand and on May 7, 1998 filed an action against Franklin in the
Court of Common Pleas of Chester County, Pennsylvania seeking, among other
things, a declaratory judgment that Franklin is not entitled to examine or make
copies or extracts from Mercer's Mutual's list of Eligible Policyholders.
Mercer Mutual denied Franklin's request because management of Mercer Mutual
believes that Franklin's intended purposes for requesting a list of Eligible
Policyholders were (i) to solicit opposition to the Plan so that Conversion
would not be approved by the Eligible Policyholders and Mercer Mutual, a
competitor of Franklin,
66
<PAGE> 70
would not be able to complete the Conversion and become a stronger competitor,
and (ii) to use the list to make an offer for the stock of Mercer Mutual that
violates applicable insurance holding company laws (see
"-- Regulation -- Holding Company Laws"). Further, allowing Franklin to inspect
and copy Mercer Mutual's policyholder list would enable Franklin to communicate
and market Franklin and its insurance products directly to Mercer Mutual's
policyholders.
On May 11, 1998, Franklin responded by filing in the same court an
application to compel production of the policyholder list. On August 7, 1998 the
Court ordered Mercer Mutual to deliver the policyholder list to a third party
mailer designated by Franklin. The mailer is prohibited from disclosing the list
to Franklin or any other person. The mailer will mail Franklin communications to
Mercer Mutual policyholders but only if the Department (or in lieu of the
Department, the Court) determines that Franklin's communications do not violate
any law.
In addition to the foregoing, the Insurance Companies are parties to
litigation in the normal course of business. Based upon information presently
available to them, the Insurance Companies' do not consider any threatened or
pending litigation to be material. However, given the uncertainties attendant to
litigation, there can be no assurance that the Insurance Companies' results of
operations and financial condition will not be materially adversely affected by
any threatened or pending litigation. See "Risk Factors -- Possible Adverse
Impact of Potential Litigation" for a description of the potential for
litigation in connection with the Conversion.
INTERCOMPANY AGREEMENTS
Mercer Mutual and MIC are parties to a Management Agreement pursuant to
which, in exchange for functions and services performed by employees of Mercer
Mutual, all expenses for the workers' compensation business conducted by the
Insurance Companies are borne by MIC. Mercer Mutual and MIC are also parties,
together with QHC, to a Consolidated Tax Allocation Agreement whereby each
company is allocated a pro rata share of the consolidated income tax expense
based upon its contribution of taxable income to the consolidated group.
PROPERTIES
The Company's and Insurance Companies' main offices are located at 10 North
Highway 31, Pennington, New Jersey in a 14,357 square foot facility owned by
Mercer Mutual. The Company also owns a residential property at 158
Pennington-Harbourtown Road, Pennington, New Jersey from which it receives
rental income. Mercer Mutual also leases 1,000 square feet of office space in
Yardley, Pennsylvania.
EMPLOYEES
As of June 30, 1998, the total number of full-time equivalent employees of
Mercer Mutual was 48. None of these employees are covered by a collective
bargaining agreement and Mercer Mutual believes that employee relations are
good. MIC does not have any employees.
MANAGEMENT OF THE COMPANY
DIRECTORS
The Board of Directors of the Company consists of Roland D. Boehm, James J.
Freda, William C. Hart, George T. Hornyak, Richard U. Niedt, Andrew R. Speaker,
Eric W. Turner, Jr. and Richard G. Van Noy, each of whom presently serves as a
director of Mercer Mutual. The Board is divided into three classes with
directors serving for three-year terms with approximately one-third of the
directors being elected at each annual meeting of shareholders, beginning with
the first annual meeting of shareholders following the Conversion. Messrs.
Hornyak, Speaker and Turner have terms of office expiring at the first annual
meeting, Messrs. Boehm and Freda have terms of office expiring at the annual
meeting to be held one year thereafter,
67
<PAGE> 71
and Messrs. Hart, Niedt and Van Noy have terms of office expiring at the annual
meeting to be held two years thereafter.
The following table sets forth certain information regarding the directors
of the Company.
<TABLE>
<CAPTION>
AGE AT BUSINESS EXPERIENCE
JUNE 30, DIRECTOR FOR THE LAST FIVE YEARS;
1998 SINCE(1) OTHER DIRECTORSHIPS
-------- -------- ------------------------
<S> <C> <C> <C>
Roland D. Boehm......... 60 1980 Vice Chairman of the Board of Directors of the
Company, Mercer Mutual and MIC; Owner of Boehm
Appraisal; Director of Prestige Financial Corp.
James J. Freda.......... 77 1985 Director of the Company, Mercer Mutual and MIC;
Owner of James J. Freda, Inc.
William C. Hart......... 65 1970 President, Chief Executive Officer and Director
of the Company, Mercer Mutual and MIC
George T. Hornyak, 48 1985 Director of the Company, Mercer Mutual and MIC;
Jr.................... President, Chief Executive Officer and Director
of Pulse Bancorp, Inc. and Pulse Savings Bank
Richard U. Niedt........ 66 1979 Director of the Company, Mercer Mutual and MIC;
Retired
Andrew R. Speaker....... 35 1997 Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Treasurer and
Director of the Company, Mercer Mutual and MIC
Eric W. Turner, Jr...... 76 1968 Director of the Company, Mercer Mutual and MIC;
Retired
Richard G. Van Noy...... 57 1979 Chairman of the Board of Directors of the
Company and Mercer Mutual and MIC; Hopewell
Township Administrator
</TABLE>
- ---------------
(1) Indicates year first elected as a director of Mercer Mutual. All members of
the Board of Directors of the Company have served as directors of the
Company since its incorporation.
Following the Conversion, directors of Mercer Mutual will be paid a monthly
retainer of $950 and a monthly meeting fee of $700 and directors of MIC will be
paid a monthly retainer of $350. No director of the Company has received any
remuneration from the Company since its formation and the Company does not
presently intend to pay any fees for service as a director of the Company.
Directors of Mercer Mutual elected after October 1, 1997 who receive a salary
from Mercer Mutual or its affiliates are not entitled to receive an annual
retainer or other additional compensation from Mercer Mutual for services
rendered as directors or committee members.
Certain Transactions
Mercer Mutual is a party to consulting agreements (the "Consulting
Agreements") with directors Roland D. Boehm and Eric W. Turner, Jr. The
Consulting Agreements provide that Messrs. Boehm and Turner are required to
provide certain advisory services to Mercer Mutual for annual compensation of
$31,200 and $6,000, respectively, until their respective Consulting Agreement is
terminated by the mutual consent of the parties.
EXECUTIVE OFFICERS
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors of the Company.
68
<PAGE> 72
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
AGE AT EXECUTIVE
JUNE 30, OFFICER BUSINESS EXPERIENCE
NAME 1998 SINCE(1) TITLE FOR THE LAST FIVE YEARS
---- -------- --------- ----- -----------------------
<S> <C> <C> <C> <C>
William C. Hart........ 65 1986 President and Chief President, Chief Executive
Executive Officer Officer, and Director of Mercer
Mutual and MIC
Andrew R. Speaker...... 35 1990 Executive Vice Senior Vice President of Mercer
President, Chief Mutual and MIC from April 1994
Operating Officer, Chief to October 1, 1997; Chief
Financial Officer and Financial Officer and Treasurer
Treasurer of Mercer Mutual and MIC since
1990
Marion J. Crum......... 55 1984 Vice President and Vice President and Secretary of
Secretary Mercer Mutual and MIC
John G. Danka.......... 50 1995 Vice President and Vice President of Mercer Mutual
Marketing Director and MIC since 1995; Marketing
Director of Mercer Mutual and
MIC since 1994; Senior Manager,
American Reliance Companies
from 1988 to 1994
Paul D. Ehrhardt....... 40 1996 Vice President Vice President of Mercer Mutual
and MIC since 1996; Regional Vice
President, VIK Brothers
Insurance Group from 1995 to
1996; Branch Manager, American
Reliance Companies from 1991 to
1995
</TABLE>
- ---------------
(1) Indicates year first appointed as an executive officer of Mercer Mutual.
Each executive officer of the Company was first appointed on November 12,
1997.
EXECUTIVE COMPENSATION
The executive officers of the Company have received no compensation from
the Company since its formation. The following table sets forth information
regarding the compensation of the President and Chief Executive Officer, the
Executive Vice President, Chief Operating Officer, Chief Financial Officer and
Treasurer, and a Vice President of the Company, for each of the fiscal years
ended December 31, 1995, 1996 and 1997. All compensation paid in 1995, 1996 and
1997 to such executive officers was paid by Mercer Mutual. No other executive
officer of the Company received compensation in excess of $100,000 for the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
SALARY ALL OTHER
NAME AND PRINCIPAL POSITION YEAR (1)(2) BONUS COMPENSATION(3)
- --------------------------- ---- -------- ------- ---------------
<S> <C> <C> <C> <C>
William C. Hart................................. 1997 $144,905 $30,000 $5,925
President and Chief Executive Officer 1996 135,776 9,102 5,919
1995 129,136 12,191 5,165
Andrew R. Speaker............................... 1997 108,421 25,000 4,110
Executive Vice President, 1996 97,964 7,079 3,768
Chief Operating Officer, 1995 94,254 9,144 3,063
Chief Financial Officer and Treasurer
Paul D. Ehrhardt................................ 1997 84,616 19,000 2,003
Vice President 1996(4) 50,769 4,045 0
1995(4) 0 0 0
</TABLE>
- ---------------
(1) Includes amounts which were deferred pursuant to Mercer Mutual's 401(k)
plan. Under the 401(k) plan, employees who elect to participate may elect to
have earnings reduced and to cause the amount of such reduction to be
contributed to the 401(k) plan's related trust in an amount up to 15% of
earnings.
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Any employee who has completed one year of service and has worked 1,000
hours in a plan year is eligible to participate in the 401(k) plan.
(2) Mercer Mutual provided other benefits to the executive officers in
connection with their employment. The value of such personal benefits, which
is not directly related to job performance, is not included in the table
above because the value of such benefits does not exceed the lesser of
$50,000 or 10% of the salary and bonus paid to any executive officer.
(3) Includes amounts contributed under the 401(k) plan for the benefit of the
executive officer. Mercer Mutual contributes 2% of an employee's salary. In
addition, Mercer Mutual will make a matching contribution equal to 66.7% of
the employee's salary reduction up to a maximum of 2% of the employee's
salary.
(4) Mr. Ehrhardt commenced his employment with Mercer Mutual in 1996.
CERTAIN BENEFIT PLANS AND AGREEMENTS
In connection with the Conversion, the Company's Board of Directors has
approved the ESOP and certain employment agreements with the executive officers
of the Company. After completion of the Conversion, the Company's Board of
Directors intends to adopt the Compensation Plan and the MRP, subject to
shareholder approval. In addition, Mercer Mutual has an existing 401(k) plan and
profit sharing plan in which the executive officers of the Company will be
eligible to participate after the Conversion.
Stock Compensation Plan.
After completion of the Conversion, the Company's Board of Directors
intends to adopt the Compensation Plan, subject to receipt of shareholder
approval at the Company's first annual meeting of shareholders after the
Conversion.
The purpose of the Compensation Plan will be to provide additional
incentive to directors and employees of the Company and Mercer Mutual by
facilitating their purchase of stock in the Company. It is anticipated that the
Compensation Plan will have a term of ten years from the date of its approval by
the Company's shareholders (unless the plan is earlier terminated by the Board
of Directors of the Company), after which ten year period no awards may be made.
Pursuant to the Compensation Plan, a number of shares equal to 10% of the shares
of Common Stock that are issued in the Conversion will be reserved for future
issuance by the Company, in the form of newly-issued or treasury shares, upon
exercise of stock options ("Options") or stock appreciation rights ("SARs"), or
the grant of restricted stock ("Restricted Stock"). Options, SARs, and
Restricted Stock are collectively referred to herein as "Awards."
It is intended that Options granted under the Compensation Plan will
constitute either incentive stock options (options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
that do not result in tax deductions to the Company unless participants fail to
comply with Section 422 of the Code) ("ISOs")) or options that do not so qualify
("Non-ISOs"). Management expects that the exercise price for Options will be
determined as of the date the Option is granted based on the then market price
of the Common Stock and other factors.
A SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not a SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive
all or a percentage of the excess of the then fair market value of the shares of
Common Stock subject to the SAR at the time of its exercise, over the aggregate
exercise price of the shares subject to the SAR.
Restricted Stock is Common Stock which is nontransferable and forfeitable
until a grantee's interest therein vests. Nevertheless, the grantee typically is
entitled to vote the Restricted Stock and to receive dividends and other
distributions made with respect to the Restricted Stock.
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The terms and conditions of the Compensation Plan are currently under
consideration by the Company's Board of Directors. The initial grant of Options
under the Compensation Plan is expected to take place on the date of the receipt
of shareholder approval of the Compensation Plan. No decisions concerning the
number of options to be granted to any director or officer have been made at
this time. No Awards will be made prior to the receipt of shareholder approval
of the Compensation Plan.
Employee Stock Ownership Plan.
In connection with the Conversion, the Company's Board of Directors has
adopted the Company's Employee Stock Ownership Plan (the "ESOP") for the
exclusive benefit of participating employees, to be implemented upon the
completion of the Conversion. Participating employees are all employees of the
Company and its subsidiaries who have attained age 21 and completed one year of
service with the Company or its subsidiaries. The Company will submit to the IRS
an application for a letter of determination as to the tax-qualified status of
the ESOP. Although no assurances can be given, the Company expects that the ESOP
will receive a favorable letter of determination from the IRS.
The ESOP intends to borrow funds from the Company pursuant to the ESOP Loan
in an amount sufficient to purchase 10% of the Common Stock issued in the
Conversion. The ESOP Loan will bear an interest rate equal to the prime rate of
interest set forth in The Wall Street Journal on the closing date of the
Conversion. At the Total Midpoint, the ESOP Loan will require the ESOP to make
monthly principal payments of $24,583, plus interest, for a term of 10 years.
The loan will be secured by the shares of Common Stock purchased and earnings
thereon. Shares purchased with the ESOP Loan proceeds will be held in a suspense
account for allocation among participants as the ESOP Loan is repaid. Mercer
Mutual expects to contribute sufficient funds to the ESOP to repay the ESOP
Loan.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of their annual wages subject
to federal income tax withholding, plus any amounts withheld under a plan
qualified under Sections 125 or 401(k) of the Code and sponsored by the Company
or an affiliate of the Company. Participants must be employed at least 500 hours
in a calendar year in order to receive an allocation. A participant becomes 100%
vested in his or her right to ESOP benefits only after completing 5 years of
service. For vesting purposes, a year of service means any year in which an
employee completes at least 1,000 hours of service. Vesting will be accelerated
to 100% upon a participant's attainment of age 65, death, or disability.
Forfeitures will be reallocated to participants on the same basis as other
contributions. Benefits are payable upon a participant's retirement, death,
disability, or separation from service, and will be paid in a lump sum or whole
shares of Common Stock (with cash paid in lieu of fractional shares). Dividends
paid on allocated shares are expected to be credited to participant accounts
within the ESOP or paid to participants, and dividends on unallocated shares are
expected to be used to repay the ESOP loan.
The Company will administer the ESOP, and an unaffiliated bank or trust
company will be appointed as trustee of the ESOP (the "ESOP Trustee"). The ESOP
Trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participants. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustee in the
same proportion as the participant-directed voting of allocated shares.
Management Recognition Plan.
After completion of the Conversion, the Company's Board of Directors
intends to adopt the MRP subject to receipt of shareholder approval at the
Company's first annual meeting of shareholders after the Conversion. The
objective of the MRP will be to enable the Company to reward and retain key
personnel. Those eligible to receive benefits under the MRP will be directors
and executive officers of the Company and the Insurance Companies.
It is intended that the MRP may grant up to an aggregate number of shares
equal to 4% of the shares of the Common Stock that were issued in the Conversion
(the "MRP Shares"). The Company intends to contribute sufficient funds to the
MRP Trust to enable it to purchase the MRP shares in the open market.
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<PAGE> 75
However, if the MRP Trustees are unable to purchase all of the MRP Shares in the
open market at a price which is satisfactory to the MRP Trustees in their
discretion, then all or a portion of the MRP Shares will consist of newly issued
shares of authorized Common Stock issued directly by the Company to the MRP
Trust. Subject to the foregoing, at the Total Minimum, Total Midpoint, Total
Maximum, the Company anticipates that the number of MRP Shares purchased in the
open market would be 100,300 shares, 118,000 shares, and 135,700 shares,
respectively, and assuming that all of the MRP Shares purchased in the open
market are purchased at the Purchase Price, the cost to the Company would be
$1,003,000, $1,180,000 and $1,357,000, respectively.
It is anticipated that all of the MRP Shares will be awarded to eligible
directors and executive officers at no cost to them pursuant to the terms of the
MRP. It is further anticipated that vesting will occur at the rate of 20% per
year of service following the award date.
The terms and conditions of the MRP are currently under consideration by
the Company's Board of Directors. The Company's Board of Directors intends to
seek shareholder approval of the MRP at the first annual meeting of shareholders
following completion of the Conversion. No decisions have been made concerning
the number of MRP awards to be granted to any director or officer. No awards
will be made prior to shareholder approval of the MRP.
Executive Employment Agreements.
As of October 1, 1997, William C. Hart and Andrew R. Speaker entered into
Employment Agreements with the Company and Mercer Mutual (the "Employment
Agreements"). Each Employment Agreement has an initial three-year term and
provides for annual one-year extensions, upon review by the Board of Directors,
commencing on October 1, 1998 and continuing on each October 1 thereafter unless
the Company or the executive gives prior written notice of nonrenewal. Under
their respective Employment Agreements, Mr. Hart is entitled to receive an
annual base salary of not less than $150,000, which will increase to $160,000 on
April 1, 1998 and to $170,000 on October 1, 1998, and Mr. Speaker is entitled to
receive an annual base salary of not less than $115,000, which will increase to
$125,000 on April 1, 1998 and to $135,000 on October 1, 1998. In addition,
Messrs. Hart and Speaker are each entitled to participate in any other incentive
compensation and employee benefit plans that the Company maintains.
In the event the Company terminates the executive's employment for "Cause"
as defined in the Employment Agreements, the executive will be entitled to
receive his accrued but unpaid base salary and an amount for all accumulated but
unused vacation time earned through the date of his termination.
In the event the Company terminates the executive's employment without
Cause, the executive will be entitled to receive an annual amount equal to the
greater of (i) his highest base salary received during one of the two years
immediately preceding the year in which he is terminated, or (ii) his base
salary in effect immediately prior to his termination, for the remainder of the
term of his Employment Agreement. In addition, during the remaining term of his
Employment Agreement, the executive will annually be entitled to (i) an amount
equal to the higher of the aggregate bonuses paid to him in one of the two years
immediately preceding the year in which he is terminated and (ii) an amount
equal to the sum of the highest annual contribution made on his behalf (other
than his own salary reduction contributions) to each of the Company's tax
qualified and non-qualified defined contribution plans (as such term is defined
in Section 3(35) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) in the year in which he is terminated or in one of the two
years immediately preceding such year. The executive will also be entitled to
certain retirement, health and welfare benefits.
In the event the executive terminates his employment with the Company for
"Good Reason," as defined in the Employment Agreements, the executive will be
entitled to receive the same amounts and benefits he would receive if terminated
without Cause. In the event the executive terminates his employment with the
Company without Good Reason, the executive will be entitled to receive his
accrued but unpaid base salary until the date of termination and an amount for
all accumulated but unused vacation time through the date of the determination
of his employment.
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In the event of the executive's death or disability during the term of his
employment, the executive and his eligible dependents or his spouse and her
eligible dependents, as the case may be, will be entitled to receive certain
cash amounts and certain health and welfare benefits.
In the event that the executive is required to pay any excise tax imposed
under Section 4999 of the Code (or any similar tax imposed under federal, state
or local law) as a result of any compensation and benefits received under his
Employment Agreement in connection with a change in control, the Company will
pay to the executive an additional amount such that the net amount retained by
him, after the payment of such excise taxes (and any additional income tax
resulting from such payment by the Company), equals the amount he would have
received but for the imposition of such taxes.
The Employment Agreements further provide that in the event the executive's
employment is terminated for Cause or he voluntarily terminates his employment
prior to a "Change in Control," as defined in the Employment Agreements, the
executive may not, for a period of twelve months after the date of termination,
without the prior written consent of the Company's Board of Directors, become an
officer, director or a shareholder or equity owner of 4.9% or more of any entity
engaged in the property and casualty insurance business with its corporate
headquarters located within New Jersey. In addition, during the executive's
employment and for a period of 12 months following the termination of his
employment, except following a Change in Control, the executive may not solicit,
endeavor to entice away from the Company, its subsidiaries or affiliates, or
otherwise interfere with the relationship of the Company or its subsidiaries or
affiliates with any person who is, or was within the then most recent 12-month
period, an employee or associate of the Company or any of its subsidiaries or
affiliates.
THE CONVERSION
THE PLAN HAS BEEN APPROVED BY THE PENNSYLVANIA DEPARTMENT, SUBJECT TO THE
PLAN'S APPROVAL BY THE POLICYHOLDERS OF MERCER MUTUAL ENTITLED TO VOTE AND THE
SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE PENNSYLVANIA DEPARTMENT
IN ITS APPROVAL. APPROVAL BY THE PENNSYLVANIA DEPARTMENT DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN.
BACKGROUND AND REASONS FOR THE CONVERSION
Mercer Mutual's exposure to severe winter weather conditions has been a
major factor affecting its underwriting results since 1991. Operating results in
1994 and 1996 were adversely affected by losses from severe winter storms in
such years that were largely responsible for Mercer Mutual's $1.4 million net
operating loss in 1994 and that reduced net income by $665,000 in 1996. In order
to reduce the risk caused by this exposure, Mercer Mutual's strategic plan is
expressly predicated upon geographically diversifying its business and improving
capital strength. Mercer Mutual's Board of Directors believes that the
geographic diversification that could be achieved under Mercer Mutual's current
organizational structure as a mutual insurance company, by engaging in
relationships with independent agencies in other geographic areas, through
acquisitions or otherwise, would be a lengthy process, and would be limited to
the extent of Mercer Mutual's capital and personnel resources, as well as by its
inability to issue stock to finance acquisitions. The Board of Directors of
Mercer Mutual has determined that the fastest and most effective method to
achieve its goals is through a conversion to a stock company and a simultaneous
and substantial infusion of capital. The ability to issue stock and the
additional capital would immediately allow Mercer Mutual to seek and finance the
acquisition of companies with significant business in other geographic areas,
and would provide additional policyholder protection.
Since 1996, Mercer Mutual has considered various capital formation
alternatives and has elected to proceed with the Conversion in accordance with
the provisions of the Pennsylvania Insurance Company Mutual to Stock Conversion
Act (the "Act"). The Act was passed by the Pennsylvania General Assembly in
December 1995. On August 12, 1997, management was directed by the Board of
Directors of Mercer Mutual to explore the process and feasibility of Conversion
under the Act. On September 11, 1997, the Board of Directors authorized further
study and requested a presentation with respect to the process at its meeting on
September 26, 1997. At such meeting, management was directed to prepare the Plan
for consideration at the
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next regularly scheduled meeting of the Board of Directors. On October 17, 1997,
the Board of Directors of Mercer Mutual unanimously adopted the Plan, subject to
approval by the Pennsylvania Department and the policyholders of Mercer Mutual.
The Board of Directors unanimously adopted amendments to the Plan on November
12, 1997 and on April 15 and May 13, 1998. An application with respect to the
Conversion was filed by Mercer Mutual with the Pennsylvania Department on
November 26, 1997 and notice of the filing and the opportunity to comment on and
to request and receive a copy of the Plan was mailed on December 2, 1997 to all
Eligible Policyholders, as required by law. In May 1998, Franklin Mutual
Insurance Company ("Franklin") filed with the Pennsylvania Department a petition
to intervene and request for a full adjudicatory hearing with respect to all
proceedings of the Pennsylvania Department concerning Mercer Mutual's
application for approval of the Plan. The Pennsylvania Department held an
informational public hearing regarding the Conversion on June 5, 1998, and the
Plan was approved by the Pennsylvania Department on August , 1998. In
approving the Plan, the Pennsylvania Department denied Franklin's petition to
intervene and its request for an adjudicatory hearing. Franklin could attempt to
bring an action before the Pennsylvania Commonwealth Court challenging the
Pennsylvania Department's approval of the Plan or its denial of Franklin's
petition. See "Risk Factors -- Possible Adverse Impact of Potential Litigation"
and "-- Requirement for Policyholder Approval," and "Business -- Offer to
Acquire Mercer Mutual" and "-- Legal Proceedings." The Plan is subject to the
approval of Eligible Policyholders at the Special Meeting.
GENERAL
The Conversion will be accomplished through the filing with the Department
of State of the Commonwealth of Pennsylvania of amended and restated Articles of
Incorporation of Mercer Mutual to authorize the issuance of shares of the
capital stock of Mercer Mutual and to conform to the requirements of a
Pennsylvania stock insurance company. The Company has received the approval of
the Pennsylvania Department to contribute $5.0 million of the net proceeds of
the Offering to Mercer Mutual in exchange for all of the capital stock of Mercer
Mutual to be issued in the Conversion. See "Use of Proceeds." Upon issuance of
the shares of capital stock of Mercer Mutual to the Company, Mercer Mutual will
become a wholly-owned subsidiary of the Company. The Conversion will be effected
only upon completion of the sale of at least the minimum number of shares of
Common Stock required to be sold by the Company pursuant to the Plan. The
Conversion will be accounted for as a simultaneous reorganization,
recapitalization and share offering which will not change the historical
accounting basis of Mercer Mutual's financial statements.
The aggregate purchase price of the Common Stock to be issued in the
Conversion will be within the Estimated Valuation Range of between $25,075,000
and $33,925,000, based upon an independent Appraisal of the estimated
consolidated pro forma market value of the Common Stock prepared by Sheshunoff.
All shares of Common Stock to be issued and sold in the Conversion will be sold
at the same price of $10.00 per share. The independent Appraisal will be
affirmed or, if necessary, updated upon the completion of the Conversion
Offerings if all shares are subscribed for or at the completion of any
Syndicated Community Offering. Sheshunoff is a consulting firm experienced in
corporate valuations. For additional information, see "Stock Pricing and Number
of Shares to be Issued" herein.
The following is a summary of certain aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the Plan,
a copy of which is available for inspection at the Company's principal executive
offices located at 10 North Highway 31, Pennington, New Jersey. The Plan is also
filed as an exhibit to the Registration Statement of which this Prospectus is a
part, copies of which may be obtained from the SEC. See "Available Information."
OFFERING OF COMMON STOCK
Under the Plan, the Company is offering shares of Common Stock in the
Subscription Offering first to the Eligible Policyholders, second to the ESOP,
and third to the directors, officers and employees of Mercer Mutual.
Subscription rights received in the third category will be subordinated to the
subscription rights of the Eligible Policyholders. The Company is also
concurrently offering Common Stock to the general public in the Community
Offering. See "The Conversion Offerings." It is anticipated that all shares not
subscribed for in
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the Conversion Offerings will be offered for sale by the Company to the general
public in the Syndicated Community Offering. See "Syndicated Community
Offering."
The completion of the Offerings is subject to market conditions and other
factors beyond the Company's control. In the event that the Conversion is not
completed, Mercer Mutual will remain a mutual insurance company and all
subscription funds will be promptly returned to subscribers without interest. In
addition, Mercer Mutual would be required to charge all Conversion expenses
against current income.
BUSINESS PURPOSES
The Company was formed to serve as the holding company for all of the
issued and outstanding capital stock of Mercer Mutual upon completion of the
Conversion. The portion of the net proceeds from the sale of Common Stock in the
Conversion that the Company will contribute to Mercer Mutual will substantially
increase Mercer Mutual's surplus which will, in turn, enhance policyholder
protection and increase the amount of funds available to support both current
operations and future growth and thereby provide increased opportunities for
existing employees while creating new jobs. The holding company structure also
will provide greater flexibility for diversification of business activities and
geographic operations. Management believes that this increased capital and
operating flexibility will enable the Company and Mercer Mutual to compete more
effectively with other insurance companies. In addition, the Conversion will
enhance the future access of the Company and Mercer Mutual to the capital
markets.
After completion of the Conversion, the unissued Common Stock and preferred
stock authorized by the Company's Articles of Incorporation will permit the
Company to raise additional equity capital through further sales of securities
and to issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities following the Conversion, other than the proposed issuance of
additional shares under the MRP and Compensation Plan, if implemented. Following
completion of Conversion, the Company also will be able to use stock-related
incentive programs to attract, motivate and retain highly qualified employees
for itself and its subsidiaries. See "Management of the Company -- Certain
Benefit Plans and Agreements."
EFFECT OF CONVERSION ON POLICYHOLDERS
General.
Each policyholder in a mutual insurance company, including each
policyholder of Mercer Mutual, has certain interests in its policy issuing
insurance company in addition to the contractual right to insurance coverage
afforded by the policyholder's policy of insurance. These interests are (i) the
right to vote with respect to the election of directors of the company and
certain other fundamental corporate transactions, such as an amendment to the
articles of incorporation of the company or a merger of the company, and (ii)
the right to receive dividends if, as and when declared by the board of
directors of the company (Mercer Mutual has never declared a policyholder
dividend and currently does not anticipate doing so in the future). In addition,
Pennsylvania law is unclear as to the consequences in the unlikely event of a
solvent dissolution of the company. One provision of Pennsylvania law with
respect to nonstock corporations (such as Mercer Mutual) states that in the
absence of any controlling provisions of the articles, bylaws or other documents
evidencing membership in a nonstock corporation, upon a solvent dissolution,
members have the right to receive a pro rata distribution of any surplus
remaining after the satisfaction of all claims and other liabilities of the
company. A more recently enacted provision of Pennsylvania law that is
specifically applicable to mutual insurance companies states that any surplus of
a mutual insurance company remaining after satisfaction of all claims and
liabilities escheats to the Commonwealth of Pennsylvania. In the view of the
Pennsylvania Department, the more recent statute specifically applicable to
mutual insurance companies which provides for escheat is controlling.
In any event, all interests in a mutual insurance company are incident to,
and contingent upon the existence of, the underlying insurance policy. These
interests have no tangible market value separate from such insurance policy, and
a policyholder who terminates his policy automatically forfeits the interests in
the
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company described above. Upon the completion of the Conversion, policyholder
interests in Mercer Mutual, other than contract rights under policies of
insurance, will be terminated as a result of the Conversion.
If the Plan is not approved by the Eligible Policyholders or if the
Conversion fails to be completed for any other reason, Mercer Mutual will
continue its existence as a mutual insurance company and Eligible Policyholders
will retain the rights described above.
Continuity of Insurance Coverage and Business Operations.
The Conversion will not affect the contractual rights of policyholders to
insurance protection under their individual insurance policies with Mercer
Mutual. During and after the Conversion, the normal business of Mercer Mutual of
issuing insurance policies in exchange for premium payments and processing and
paying claims will continue without change or interruption. After the
Conversion, Mercer Mutual will continue to provide services for policyholders
under current policies and by its present management and staff.
The Board of Directors of Mercer Mutual at the time of the Conversion will
continue to serve as the Board of Directors of Mercer Mutual after the
Conversion. The Board of Directors of the Company will consist of the following
persons, each of whom is an existing director of Mercer Mutual: Roland D. Boehm,
James J. Freda, William C. Hart, George T. Hornyak, Richard U. Niedt, Andrew R.
Speaker, Eric W. Turner, Jr. and Richard G. Van Noy. See "Management of the
Company -- Directors." All officers of Mercer Mutual at the time of the
Conversion will retain their positions with Mercer Mutual after the Conversion.
Voting Rights.
Upon completion of the Conversion, the voting rights of all policyholders
in Mercer Mutual will terminate and policyholders will no longer have the right
to elect the directors of Mercer Mutual or approve transactions involving Mercer
Mutual. Instead, voting rights in Mercer Mutual will be vested exclusively in
the Company, which will own all the capital stock of Mercer Mutual. Voting
rights in the Company will be vested exclusively in the shareholders of the
Company, including Eligible Policyholders who purchase shares of Common Stock in
the Subscription Offering. Each holder of Common Stock shall be entitled to vote
on any matter to be considered by the shareholders of the Company, subject to
the terms of the Company's Articles of Incorporation, Bylaws and to the
provisions of Pennsylvania and federal law. See "Description of Capital
Stock -- Common Stock."
Policyholder Dividends.
The Conversion will not affect the right of a policyholder to receive
dividends from Mercer Mutual in accordance with the terms of the policyholder's
existing policy of insurance, which provides that dividends will be paid only
if, as and when declared by the Board of Directors of Mercer Mutual. However,
Mercer Mutual has never declared a policyholder dividend and presently does not
anticipate doing so in the future, whether or not Mercer Mutual converts to
stock form. With respect to the Company, its shareholders, including Eligible
Policyholders who purchase shares of Common Stock in the Subscription Offering,
will have the exclusive right to receive dividends paid by the Company, if any.
See "Description of Capital Stock -- Common Stock."
Rights Upon Dissolution.
While it may be unclear what right policyholders would have if there were a
solvent dissolution of Mercer Mutual, it is clear that after the Conversion,
policyholders will no longer have the right to receive a pro rata distribution
of any remaining surplus of Mercer Mutual. Instead, this right will vest in the
Company as the sole shareholder of Mercer Mutual. In the event of a liquidation,
dissolution or winding up of the Company, shareholders of the Company, including
Eligible Policyholders who purchase shares of Common Stock in the Subscription
Offering, would be entitled to receive, after payment of all debts and
liabilities of the Company, a pro rata portion of all assets of the Company. See
"Description of Capital Stock -- Common Stock."
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THE CONVERSION OFFERINGS
Subscription Offering.
Nontransferable subscription rights to purchase shares of Common Stock are
being issued to all persons entitled to purchase stock in the Subscription
Offering at no cost to such persons. The amount of Common Stock that these
parties may purchase will be determined, in part, by the total number of shares
of Common Stock to be issued and the availability of Common Stock for purchase
under the categories set forth in the Plan.
Preference categories have been established for the allocation of Common
Stock to the extent that shares are available. These categories are as follows:
Subscription Category No. 1 is reserved for Eligible Policyholders of
Mercer Mutual (those persons who are named insureds at the close of business on
October 17, 1997 (the "Eligibility Record Date") under an existing insurance
policy issued by Mercer Mutual). Each Eligible Policyholder will receive,
without payment, subscription rights to purchase up to 100,000 shares of Common
Stock at the Purchase Price; provided, however, that the maximum number of
shares that may be purchased by Eligible Policyholders in the aggregate is
3,392,500 shares. In the event of an oversubscription, shares of Common Stock
will be allocated among subscribing Eligible Policyholders, as follows. First,
shares of Common Stock will be allocated among subscribing Eligible
Policyholders so as to permit each such Eligible Policyholder, to the extent
possible, to purchase the lesser of (i) 1,000 shares, or (ii) the number of
shares for which such Eligible Policyholder has subscribed. Second, any shares
of Common Stock remaining after such initial allocation will be allocated among
the subscribing Eligible Policyholders whose subscriptions remain unsatisfied in
the proportion in which the aggregate number of shares as to which each such
Eligible Policyholder's subscription remains unsatisfied bears to the aggregate
number of shares as to which all Eligible Policyholders' subscriptions remain
unsatisfied; provided, however, that no fractional shares of Common Stock shall
be issued. If, because of the magnitude of the oversubscription, shares of
Common Stock cannot be allocated among subscribing Eligible Policyholders so as
to permit each such Eligible Policyholder to purchase the lesser of 1,000 shares
or the number of shares subscribed for, then shares of Common Stock will be
allocated among the subscribing Eligible Policyholders in the proportion in
which: (i) the aggregate number of shares subscribed for by each such Eligible
Policyholder bears to (ii) the aggregate number of shares subscribed for by all
Eligible Policyholders; provided, however, that no fractional shares of
Conversion Stock shall be issued.
The following table sets forth the maximum number of shares that an
Eligible Policyholder could purchase if a certain number of Eligible
Policyholders each subscribed for the maximum number of shares:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF MAXIMUM NUMBER
ELIGIBLE POLICYHOLDERS ELIGIBLE POLICYHOLDERS OF SHARES
SUBSCRIBING FOR SUBSCRIBING FOR EACH SUBSCRIBER
100,000 SHARES(1) 100,000 SHARES COULD PURCHASE(1)
- ---------------------- ---------------------- -----------------
<S> <C> <C>
42,178 100% 80
31,634 75% 107
21,089 50% 160
10,545 25% 321
</TABLE>
- ---------------
(1) Assumes that all subscribing Eligible Policyholders subscribe for 100,000
shares. If any other Eligible Policyholders subscribes for less than 100,000
shares, the maximum number of shares that a subscriber for 100,000 shares
could purchase could be less than the amount reflected in the table.
Subscription Category No. 2 is reserved for the ESOP, which shall receive,
without payment, nontransferable subscription rights to purchase at the Purchase
Price, in the aggregate, up to 10% of the total shares of Common Stock to be
issued in the Offerings. The ESOP is expected to purchase 10% of the total
shares of Common Stock issued in the Offerings. See "Management of the
Company -- Certain Benefit Plans and Agreements -- Employee Stock Ownership
Plan."
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<PAGE> 81
Subscription Category No. 3 is reserved for directors, officers and
employees of Mercer Mutual. Each director, officer and employee of Mercer Mutual
will receive, without payment, subscription rights to purchase up to 100,000
shares of Common Stock at the Purchase Price; provided, however, that such
subscription rights will be subordinated to the subscription rights received by
the Eligible Policyholders and may be exercised only to the extent that there
are shares of Common Stock that could have been purchased by Eligible
Policyholders, but which remain unsold after satisfying the subscriptions of all
Eligible Policyholders. In the event of an oversubscription among the directors,
officers and employees, shares of Common Stock shall be allocated among them on
the basis of a point system under which each director, officer and employee will
be assigned one point for each year of service to Mercer Mutual, one point for
each then current annual salary increment of $5,000, and one point for each
office held in Mercer Mutual. Each subscribing director, officer or employee
will then receive that number of shares of Common Stock equal to the remaining
unallocated shares of Common Stock multiplied by a fraction the numerator of
which is the number of points held by such director, officer or employee and the
denominator of which is the total number of points held by all subscribing
directors, officers and employees. A director, officer or employee of Mercer
Mutual who subscribes to purchase shares of Common Stock and who is also
eligible to purchase shares of Common Stock as an Eligible Policyholder will be
deemed to purchase Common Stock first in his or her capacity as an Eligible
Policyholder. The total number of shares that each director, officer or employee
will be able to purchase both in his or her capacities as an Eligible
Policyholder and a director, officer or employee, will equal 100,000 shares in
the aggregate. Each of the Company's directors and executive officers is also an
Eligible Policyholder and will purchase all of his or her shares in his or her
capacity as an Eligible Policyholder and not under Subscription Category No. 3.
The Company will make reasonable efforts to comply with the securities laws
of all states in the United States in which persons entitled to subscribe for
Common Stock pursuant to the Plan reside. However, no person will be offered or
allowed to purchase any Common Stock under the Plan if he or she resides in a
foreign country or in a state of the United States with respect to which any or
all of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in such state or foreign country;
(ii) the granting of subscription rights or the offer or sale of shares of
Common Stock to such persons would require the Company or Mercer Mutual or their
employees to register, under the securities laws of such state, as a broker,
dealer, salesman or agent or to register or otherwise qualify its securities for
sale in such state or foreign country; or (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise. No
payments will be made in lieu of the granting of subscription rights to any such
person.
Community Offering.
Concurrently with the Subscription Offering, the Company is offering shares
of the Common Stock to the general public in a Community Offering. Preference in
the Community Offering will be given to (i) natural persons and trusts of
natural persons (including individual retirement and Keogh retirement accounts
and personal trusts in which such natural persons have substantial interests)
who are permanent residents in the Local Community of the State of New Jersey or
the Commonwealth of Pennsylvania, (ii) principals of Eligible Policyholders in
the case of an Eligible Policyholder that is a corporation, partnership, limited
liability company or other entity, (iii) licensed insurance agencies who have
been appointed by Mercer Mutual to market and distribute insurance products, and
their owners, (iv) named insureds under policies of insurance issued by Mercer
Mutual after October 17, 1997, and (v) providers of goods or services to, and
identified by, Mercer Mutual. The term "resident," as used in relation to the
preference afforded natural persons in the Local Community, means any natural
person who occupies a dwelling within the Local Community, has an intention to
remain within the Local Community for a period of time (manifested by
establishing a physical, ongoing, non-transitory presence within one of the
states in the Local Community) and continues to reside in the Local Community at
the time of the Community Offering. The Company may utilize policyholder records
or such other evidence provided to it to make the determination whether a person
is a resident of the Local Community. In the case of a corporation or other
business entity, such entity shall be deemed to be a resident of the Local
Community only if its principal place of business or headquarters is located
within the Local Community. All determinations as to the status of a person as a
resident of the Local Community shall be made by Mercer Mutual in its sole and
absolute discretion.
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<PAGE> 82
Subscriptions for Common Stock received from members of the general public
in the Community Offering will be subject to the availability of shares of
Common Stock after satisfaction of all subscriptions in the Subscription
Offering, as well as the maximum and minimum purchase limitations set forth in
the Plan. If 2,507,500 or more shares of the Common Stock are subscribed for in
the Subscription Offering, the Company, in its sole discretion, will determine
whether to accept subscriptions for shares in the Community Offering. If
3,392,500 or more shares of the Common Stock are subscribed for in the
Subscription Offering, no shares will be sold in the Community Offering.
FURTHERMORE, THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE COMMUNITY
OFFERING, INCLUDING THE PREFERRED SUBSCRIBERS DESCRIBED IN CLAUSES (I)-(V)
ABOVE, IS SUBJECT TO THE ABSOLUTE RIGHT OF THE COMPANY TO ACCEPT OR REJECT SUCH
PURCHASES IN WHOLE OR IN PART.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan requires that the purchase price of the Common Stock be based on
the appraised pro forma market value of Mercer Mutual following the Conversion,
on a consolidated basis, as a subsidiary of the Company, as determined on the
basis of an independent valuation by an appraiser who is experienced in
corporate valuation. The Company has retained Sheshunoff to prepare the
appraisal, and Sheshunoff, as part of its investment banking business, is
engaged regularly in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, private placements, and valuations for various other
purposes and in the determination of adequate consideration in such
transactions. Sheshunoff will receive a fee of approximately $75,000 for its
appraisal.
Sheshunoff has determined that, as of August 19, 1998, the estimated
consolidated pro forma market value of Mercer Mutual as a subsidiary of the
Company was between $25.1 million and $33.9 million. Under the Plan, the
aggregate purchase price of the common Stock to be offered in the Conversion
must equal the pro forma market value of Mercer Mutual following the Conversion,
on a consolidated basis, as a subsidiary of the Company. Under the Act, the
Company is permitted to require a minimum subscription of 25 shares of Common
Stock provided that any required minimum subscription amount established cannot
exceed $500. Based on these minimum subscription parameters, the maximum price
at which the Company could offer shares of Common Stock in the Conversion is $20
per share. However, at a purchase price of $20 per share, the maximum number of
shares of Common Stock that could be offered in the Conversion would be
1,696,250 shares compared to a maximum of 3,392,500 shares at $10 per share.
Therefore, the Company determined to offer the Common Stock in the Conversion at
the price of $10.00 per share to increase the number of shares available for
purchase by policyholders. There were no other factors considered by the Board
of Directors of the Company in determining to offer shares of Common Stock at
$10.00 per share in the Conversion. The Purchase Price will be $10.00 per share
regardless of any change in the estimated consolidated pro forma market value of
Mercer Mutual following the Conversion as a subsidiary of the Company, as
determined by Sheshunoff. The Company plans to issue between 2,507,500 and
3,392,500 shares (exclusive of purchases by the ESOP) of the Common Stock in the
Conversion. This range was determined by dividing the price per share into the
Estimated Valuation Range.
The Plan requires that an appraiser establish a valuation range (the
"Estimated Valuation Range") consisting of a midpoint valuation (the "Total
Midpoint"), a valuation 15 percent (15%) above the midpoint valuation (the
"Total Maximum") and a valuation 15 percent (15%) below the midpoint valuation
(the "Total Minimum"). Accordingly, Sheshunoff has established an Estimated
Valuation Range of $25,075,000 to $33,925,000. Upon completion of the Conversion
Offerings, after taking into account factors similar to those involved in its
initial Appraisal, Sheshunoff will submit to the Company and to the Pennsylvania
Department its updated estimate of the consolidated pro forma market value of
Mercer Mutual following the Conversion as a subsidiary of the Company
immediately prior to the completion of the Offerings. If such updated estimated
valuation does not fall within the Estimated Valuation Range, the Company may
cancel the Offerings and terminate the Plan. If the Company proceeds with the
Offerings using the updated estimated valuation, subscribers will be promptly
notified by mail of the updated estimated valuation and subscribers will be
given an opportunity to confirm or modify their orders. The funds of any
subscribers who do not withdraw or confirm their orders will be returned
promptly without interest. Subscription orders may not be withdrawn for any
reason if the updated appraisal is within the Estimated Valuation Range.
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<PAGE> 83
THE APPRAISAL IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK. IN
PREPARING THE VALUATION, SHESHUNOFF HAS RELIED UPON AND ASSUMED THE ACCURACY AND
COMPLETENESS OF FINANCIAL AND STATISTICAL INFORMATION PROVIDED BY THE COMPANY
AND MERCER MUTUAL. SHESHUNOFF DID NOT INDEPENDENTLY VERIFY THE FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE COMPANY AND MERCER MUTUAL AND
SHESHUNOFF DID NOT VALUE INDEPENDENTLY THE ASSETS AND LIABILITIES OF THE COMPANY
AND MERCER MUTUAL. THE VALUATION CONSIDERS THE COMPANY AND MERCER MUTUAL ONLY AS
A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION
VALUE OF THE COMPANY AND MERCER MUTUAL. MOREOVER, BECAUSE SUCH VALUATION IS
NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF
WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT
PERSONS PURCHASING COMMON STOCK WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT
OR ABOVE THE INITIAL PURCHASE PRICE. COPIES OF THE APPRAISAL REPORT OF
SHESHUNOFF SETTING FORTH THE METHOD AND ASSUMPTIONS FOR SUCH APPRAISAL ARE ON
FILE AND AVAILABLE FOR INSPECTION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
COMPANY. ANY SUBSEQUENT UPDATED APPRAISAL REPORT OF SHESHUNOFF ALSO WILL BE
AVAILABLE FOR INSPECTION.
If the updated estimated valuation Sheshunoff submits to the Company and
the Pennsylvania Department upon completion of the Offerings falls within the
Estimated Valuation Range, the following steps will be taken:
Subscription Offering Meets or Exceeds Total Maximum.
If, upon conclusion of the Conversion Offerings, the number of shares
subscribed for by participants in the Subscription Offering is equal to or
greater than 3,392,500 shares, then in such event the Conversion shall be
promptly consummated and the Company shall, on the effective date of the
Conversion (the "Effective Date"), issue shares of Common Stock to the
subscribing participants; provided, however, that the number of shares of Common
Stock issued shall not exceed the number of shares of Common Stock offered in
the Subscription Offering. In the event of an oversubscription in the
Subscription Offering, shares of Common Stock shall be allocated among the
subscribing participants in the priorities set forth in the Plan; provided,
however, that no fractional shares of Common Stock shall be issued. See
"-- Subscription Offering" herein.
Subscription Offering Meets or Exceeds Total Minimum.
If, upon conclusion of the Conversion Offerings, the number of shares of
Common Stock subscribed for by participants in the Subscription Offering is
equal to or greater than 2,507,500 shares, but less than 3,392,500 shares, then
in such event the Company may promptly consummate the Conversion, in which case
the Company shall on the Effective Date issue to the subscribing participants
shares of Common Stock in an amount sufficient to satisfy the subscriptions of
such participants in full. Prior to consummating the Conversion, however, the
Company shall have the right in its absolute discretion to accept, in whole or
in part, subscriptions received from any or all subscribers in the Community
Offering and/or to offer shares of Common Stock to purchasers in the Syndicated
Community Offering; provided, however, that no more than 3,392,500 shares of
Common Stock shall be issued in the Offerings (not including shares issued to
the ESOP); and, provided further, that no fractional shares of Common Stock
shall be issued.
Subscription Offering Does Not Meet Total Minimum.
If, upon conclusion of the Conversion Offerings, the number of shares of
Common Stock subscribed for by participants in the Subscription Offering is less
than 2,507,500 shares, the Company will accept subscriptions received from
subscribers in the Community Offering and/or sell shares of Common Stock to
purchasers in a Syndicated Community Offering so that the aggregate number of
shares of Common Stock sold in the Offerings is equal to or greater than
2,507,500 shares. The Conversion will be consummated promptly and the Company
shall on the Effective Date: (i) issue to subscribing participants in the
Subscription Offering shares of Common Stock in an amount sufficient to satisfy
the subscriptions of such participants in full, and (ii) issue to subscribers in
the Community Offering and/or to purchasers in any Syndicated Community Offering
such additional number of shares of Common Stock such that the aggregate number
of shares of Common Stock to be issued in the Offerings will be equal to
2,507,500 shares; provided, however, that no fractional shares of Common Stock
will be issued. In order to raise additional capital, or to
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<PAGE> 84
satisfy Nasdaq National Market listing requirements (see "Management of the
Company -- Certain Benefit Plans and Agreements -- Management Recognition
Plan"), the Company may in its absolute discretion elect to issue in excess of
2,507,500 shares of Common Stock to subscribers in the Community Offering and/or
to purchasers in any Syndicated Community Offering; provided, however, that the
number of shares of Common Stock issued shall not exceed 3,392,500 shares of
Common Stock (not including shares issued to the ESOP). See "The
Conversion -- The Conversion Offerings -- Community Offering" and "-- Syndicated
Community Offering."
Offerings Do Not Meet Minimum.
If the aggregate number of shares of Common Stock subscribed for in the
Offerings is less than 2,507,500 shares, then in such event the Company will
cancel the Offerings and all subscription funds will be returned promptly to
subscribers without interest.
The Company shall have the right in its absolute discretion and without
liability to any subscriber, purchaser, underwriter or any other person: (i) to
determine which subscriptions, if any, to accept in the Community Offering and
to accept or reject any such subscription in whole or in part for any reason or
for no reason, and (ii) to determine whether and to what extent shares of Common
Stock are to be offered or sold in a Syndicated Community Offering.
There is a difference of approximately $8.9 million between the Total
Minimum and the Total Maximum of the Estimated Valuation Range. As a result, the
percentage interest in the Company that a subscriber for a fixed number of
shares of Common Stock will have is approximately 26% smaller if 3,392,500
shares are sold than if 2,507,500 shares are sold. Furthermore, as a result of
this broad range, the updated appraisal may estimate a consolidated pro forma
market value for Mercer Mutual as subsidiary of the Company that is materially
more or less than the aggregate dollar amount of subscriptions received by the
Company. Subscribers will not receive a refund or have any right to withdraw
subscriptions if the updated appraisal estimates a consolidated pro forma market
value that is less than the aggregate dollar amount of subscriptions received by
the Company. Therefore, subscribers, in the aggregate and on a per share basis,
may pay more for the Common Stock than the estimated consolidated pro forma
market value of Mercer Mutual as subsidiary of the Company. Accordingly, no
assurance can be given that the market price for the Common Stock immediately
following the Conversion will equal or exceed the Purchase Price. Also,
subscribers should be aware that, prior to the consummation of the Offerings,
they will not have available to them information concerning the final updated
Appraisal. After completion of the Offerings, the final updated Appraisal will
be filed with the Securities and Exchange Commission pursuant to a
post-effective amendment to the registration statement of which this prospectus
forms a part. See "Available Information."
TAX EFFECTS.
General.
Mercer Mutual has submitted to the IRS a request (the "Ruling Request
Submission") for a private letter ruling (the "PLR") concerning the material tax
effects of the Conversion and the Subscription Offering to Mercer Mutual,
Eligible Policyholders, and certain other participants in the Subscription
Offering. Mercer Mutual expects that the IRS will issue the PLR substantially in
the form requested by Mercer Mutual, but the IRS has not taken final action on
the Ruling Request Submission as of the date hereof. If the Ruling Request
Submission is still pending before the IRS at the conclusion of the Offerings,
counsel to the Company and Mercer Mutual expects to provide the Company and
Mercer Mutual with the Tax Opinion (the "Tax Opinion") described below. Unlike a
private letter ruling issued by the IRS, an opinion of counsel is not binding on
the IRS and the IRS could disagree with one or more of the opinions provided in
the Tax Opinion. In the event of such disagreement, no assurance can be given
that the opinions provided in the Tax Opinion would be sustained by a court if
challenged by the IRS.
The receipt by Mercer Mutual of either the PLR or the Tax Opinion is a
condition to the closing of the Conversion. The PLR or the Tax Opinion will be
an exhibit to a post-effective amendment to the registration statement of which
this Prospectus is a part. This post-effective amendment will be filed prior to
the
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<PAGE> 85
completion of the Offerings and when filed, can be obtained through the
Securities and Exchange Commission directly or accessed through its Internet web
site at http://www.sec.gov. See "Available Information." If Mercer Mutual does
not receive the PLR prior to the completion of the Offerings and counsel is
unable to deliver the Tax Opinion, then the Plan and the Offerings will be
terminated and all subscriptions will be promptly refunded without interest.
The PLR.
In the Ruling Request Submission, Mercer Mutual has requested that the IRS
confirm, among other things, that the Conversion of Mercer Mutual from a mutual
to stock form of corporation will constitute a reorganization within the meaning
of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the
"Code"), and that, for federal income tax purposes: (i) no gain or loss will be
recognized by Mercer Mutual in its pre-Conversion mutual or post-Conversion
stock form as a result of the Conversion; (ii) Mercer Mutual's basis in its
assets, holding period for its assets, net operating loss carryforward, if any,
capital loss carryforward, if any, earnings and profits and accounting methods
will not be affected by the Conversion; (iii) as discussed below, Eligible
Policyholders will be required to recognize gain upon the receipt of
subscription rights if and to the extent that the subscription rights that are
allocated to an Eligible Policyholder are determined to have fair market value;
(iv) the basis of the Common Stock purchased by an Eligible Policyholder
pursuant to the exercise of subscription rights will equal the sum of the
Purchase Price of such stock, plus the gain, if any, recognized by the Eligible
Policyholder on the subscription rights that are exercised by the Eligible
Policyholder; and (v) the holding period of the Common Stock purchased by an
Eligible Policyholder pursuant to the exercise of subscription rights will begin
on the date on which the subscription rights are exercised. In all other cases,
the holding period of Common Stock purchased by an Eligible Policyholder will
begin on the date following the date on which the stock is purchased.
Subscription Rights.
Generally, the federal income tax consequences of the receipt, exercise and
lapse of subscription rights are uncertain. They present novel issues of tax law
which are not addressed by any direct authorities. Nevertheless, Mercer Mutual
expects that the IRS will rule in the PLR that any gain realized by an Eligible
Policyholder as a result of the receipt of subscription rights with a fair
market value must be recognized, whether or not such rights are exercised. The
amount of gain recognized by each Eligible Policyholder should equal the fair
market value of subscription rights received by the Eligible Policyholder. If an
Eligible Policyholder is required to recognize gain on the receipt of
subscription rights and does not exercise some or all of such subscription
rights, such Eligible Policyholder should recognize a corresponding loss upon
the expiration or lapse of such Eligible Policyholder's unexercised subscription
rights. The amount of such loss should equal the gain previously recognized upon
receipt of such unexercised subscription rights, although such loss may not have
the same character as the corresponding gain. Although not free from doubt,
provided the subscription rights are capital assets in the hands of an Eligible
Policyholder and are treated as issued to the Eligible Policyholders by the
Company, any gain resulting from the receipt of the subscription rights should
constitute a capital gain, and provided the Common Stock that an Eligible
Policyholder would have received upon exercise of the lapsed subscription rights
would have constituted a capital asset, the resulting loss upon expiration of
such subscription rights should constitute a capital loss. For purposes of
determining gain, it is unclear how the subscription rights should be valued or
how to determine the number of subscription rights that may be allocated to each
Eligible Policyholder during the Subscription Offering.
In the opinion of Sheshunoff, the subscription rights do not have any fair
market value, inasmuch as such rights are nontransferable, personal rights of
short duration, that are provided to Eligible Policyholders and other
participants in the Subscription Offering without charge, and afford the holder
only the right to purchase shares of Common Stock in the Subscription Offering
at a price equal to its estimated fair market value, which is the same price at
which such stock will be sold to purchasers in the Community Offering or the
Syndicated Community Offering, if any. Nevertheless, Eligible Policyholders are
encouraged to consult with their tax advisors about the tax consequences of the
Conversion and the Subscription Offering.
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<PAGE> 86
The Tax Opinion.
If the Ruling Request Submission is pending before the IRS at the
conclusion of the Offerings, Stevens & Lee, counsel to the Company and Mercer
Mutual, expects to provide Mercer Mutual with the Tax Opinion in which Stevens &
Lee will opine, on the basis of certain facts and assumptions set forth in the
Tax Opinion, that for federal income tax purposes, the conversion of Mercer
Mutual from a mutual to stock form of corporation will constitute a
reorganization within the meaning of Section 368(a)(1)(E) of the Code, and that:
(i) no gain or loss will be recognized by Mercer Mutual in its pre-Conversion
mutual or post-Conversion stock form solely as a result of the Conversion; (ii)
Mercer Mutual's basis in its assets, holding period for its assets, net
operating loss carry forward, if any, capital loss carry forward, if any,
earnings and profits and accounting methods will not be affected by the
Conversion; (iii) as discussed above, Eligible Policyholders will be required to
recognize gain upon the receipt of subscription rights if and to the extent that
the subscription rights that are allocated to an Eligible Policyholder are
determined to have fair market value; (iv) the basis of Common Stock purchased
by an Eligible Policyholder pursuant to the exercise of subscription rights will
equal the sum of the Purchase Price of such stock, plus the gain, if any,
recognized by the Eligible Policyholder on the subscription rights that are
exercised by the Eligible Policyholder, provided the subscription rights are
treated as issued to Eligible Policyholders by the Company; and (v) the holding
period of the Common Stock purchased by an Eligible Policyholder pursuant to the
exercise of subscription rights should begin on the date on which the
subscriptions rights are exercised. In all other cases, the holding period of
Common Stock purchased by an Eligible Policyholder will begin on the date
following the date on which stock is purchased.
Based upon rulings previously issued by the IRS, Mercer Mutual expects
that, for federal income tax purposes, Eligible Policyholders will be treated as
transferring certain policyholder rights to the Company in exchange for
subscription rights issued by the Company directly to the Eligible
Policyholders. Nevertheless, the IRS could assert that, for federal income tax
purposes, the Company will be treated as issuing subscription rights to Mercer
Mutual and that Eligible Policyholders will be treated as transferring certain
policyholder rights to Mercer Mutual in exchange for subscription rights. If the
IRS were to make such an assertion concerning the path of subscription rights,
the IRS might also assert that Mercer Mutual will recognize gain on its deemed
distribution of subscription rights to Eligible Policyholders and that gain
recognized by Eligible Policyholders on the receipt of subscription rights is
taxable as a dividend. Although not free from doubt, the amount of gain that
would be recognized by Mercer Mutual on a deemed distribution of subscription
rights, and by Eligible Policyholders on receipt of a deemed dividend of
subscription rights, should equal the fair market value of the subscription
rights distributed or received by Mercer Mutual and the Eligible Policyholders,
respectively. Stevens & Lee will not express any opinion on the path of the
subscription rights or on the potential tax effects to Mercer Mutual and the
Eligible Policyholders if the IRS asserts that, for federal income tax purposes,
Eligible Policyholders will be treated as receiving subscription rights directly
from Mercer Mutual.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO
CONSIDER ALL ASPECTS OF FEDERAL INCOME TAXATION WHICH MAY BE RELEVANT TO EACH
ELIGIBLE POLICYHOLDER THAT MAY BE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE,
SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS,
INSURANCE COMPANIES, AND ELIGIBLE POLICYHOLDERS WHO ARE EMPLOYEES OF AN
INSURANCE COMPANY OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE
TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE POLICYHOLDER IS
URGED TO CONSULT HIS OR HER TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH
FEDERAL INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND
CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND
ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES ARISING OUT OF
THE CONVERSION.
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PURCHASES IN THE CONVERSION OFFERINGS.
Termination Dates.
The Conversion Offerings will expire at 1:00 p.m., Eastern Standard Time,
on , 1998, unless extended by the Board of Directors of the Company
for up to an additional 45 days (such date and time, including any extension,
are referred to herein as the "Termination Date"). Subscription rights not
exercised prior to the Termination Date will be void. If the Company extends the
Subscription Offering or the Community Offering, it will give written notice of
such extension to all subscribers on or before , 1998, at which time
each subscriber may withdraw or confirm his or her subscription by the extended
Termination Date. If a subscriber does not confirm a subscription by the
extended Termination Date, the subscriber's funds will be returned promptly
without interest. No action to extend the Subscription Offering or Community
Offering will be taken by the Company after , 1998.
Orders will not be executed by the Company until at least 2,507,500 shares
of Common Stock have been subscribed for or sold. If at least the 2,507,500
shares of Common Stock have not been subscribed for or sold by the extended
Termination Date, all funds delivered to the Company pursuant to the Offerings
will be promptly returned to subscribers without interest.
Use of Order Forms.
Rights to subscribe may be exercised only by completion of a Stock Order
Form. Any person who desires to subscribe for shares of Common Stock must do so
prior to the Termination Date by delivering by mail to the Conversion Center at
P.O. Box 15, Pennington, New Jersey 08534-0015, or in person at the Company's
principal executive offices located at 10 North Highway 31, Pennington, New
Jersey, a properly executed and completed Stock Order Form, together with full
payment for all shares for which the subscription is made. All checks or money
orders must be made payable to "MERCER INSURANCE GROUP, INC." All subscription
rights under the Plan will expire at 1:00 p.m., local time, on the Termination
Date whether or not the Company has been able to locate each person entitled to
such subscription rights. ONCE TENDERED, ORDERS TO PURCHASE COMMON STOCK IN THE
OFFERING CANNOT BE REVOKED.
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Termination Date in accordance with Rule 15c2-8 under the Exchange Act,
no Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the Stock
Order Form will confirm receipt or delivery in accordance with Rule 15c2-8.
Stock Order Forms will be distributed only with a Prospectus. Photocopies and
facsimile copies of Stock Order Forms will not be accepted. Payment by cash,
check or money order must accompany the Stock Order Form. No wire transfers will
be accepted.
Each subscription right may be exercised only by the Eligible Policyholder
to whom it is issued and only for his or her own account. THE SUBSCRIPTION
RIGHTS GRANTED UNDER THE PLAN ARE NONTRANSFERABLE. Each Eligible Policyholder
subscribing for shares of Common Stock is required to represent to the Company
that such Eligible Policyholder is purchasing such shares for such Eligible
Policyholder's own account and that such Eligible Policyholder has no agreement
or understanding with any other person for the sale or transfer of such shares.
The Company is not aware of any restrictions which would prohibit Eligible
Policyholders who purchase shares of Common Stock in the Conversion, and who are
not executive officers or directors of the Company or Mercer Mutual, from freely
transferring such shares after the Conversion. See "-- Limitations on Resales."
In the event a subscriber submits a Stock Order Form that (i) is not
delivered and is returned to the sender by the United States Postal Service or
the Company is unable to locate the addressee, (ii) is not returned or is
received after the Termination Date (iii) is defectively completed or executed,
or (iv) is not accompanied by payment in full for the shares of Common Stock
subscribed for, any subscription rights of such subscriber will not be honored,
and such subscriber will be treated as having failed to return the completed
Stock Order Form within the time period specified therein. Alternatively, the
Company may (but will not be required to) waive any irregularity relating to any
Stock Order Form or require the submission of a corrected Stock Order Form or
the remittance of full payment for the shares of Common Stock subscribed for
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<PAGE> 88
by such date as the Company may specify. Subscription orders, once tendered, may
not be revoked. The Company's interpretations of the terms and conditions of the
Plan and determinations with respect to the acceptability of the Stock Order
Forms will be final, conclusive and binding upon all persons and neither the
Company nor Mercer Mutual (or the directors, officers, employees and agents of
any of them) shall be liable to any person in connection with any such
interpretation or determination.
Payment for Shares.
Payment in full for all subscribed shares of Common Stock is required to
accompany all completed Stock Order Forms for subscriptions to be considered
complete. Payment for subscribed shares of Common Stock may be made by check or
money order in U.S. Dollars. Payments will be placed in an Escrow Account at
State Street Bank and Trust Company, N.A. (the "Escrow Agent"). The Escrow
Account will be administered by the Escrow Agent. An executed Stock Order Form,
once received by the Company, may not be modified, amended or rescinded without
the consent of the Company. Funds accompanying Stock Order Forms will not be
released until the Conversion is completed or terminated.
The ESOP will not be required to pay for the shares at the time it
subscribes, but is required to pay for such shares at or before the completion
of the Offerings.
Delivery of Certificates.
Certificates representing shares of the Common Stock will be delivered to
subscribers promptly after completion of the Offerings. Until certificates for
the Common Stock are available and delivered to subscribers, subscribers may not
be able to sell the shares of Common Stock for which they subscribed even though
trading of the Common Stock will have commenced.
MARKETING AND UNDERWRITING ARRANGEMENTS
Mercer Mutual and the Company have engaged Sandler O'Neill as a marketing
advisor in connection with the offering of the Common Stock, and Sandler O'Neill
has agreed to use its best efforts to assist the Company with its solicitation
of subscriptions and purchase orders for shares of Common Stock in the
Offerings. Sandler O'Neill is not obligated to take or purchase any shares of
Common Stock in the Offerings. Mercer Mutual and the Company have agreed to pay
Sandler O'Neill a fee equal to 2.0% of the aggregate Purchase Price of Common
Stock sold in the Conversion Offerings, excluding subscriptions by any director,
officer or employee of Mercer Mutual or the Company or members of their
immediate families or the ESOP, for which Sandler O'Neill will not receive a
fee. In the event that the Company enters into selected dealers' agreements with
one or more NASD member firms in connection with a Syndicated Community
Offering, the Company will pay a fee to such selected dealer, any sponsoring
dealer's fees, and a management fee to Sandler O'Neill of 1.5% for shares sold
by the NASD member firm pursuant to such selected dealer's agreement; provided,
however, that the aggregate fees payable to Sandler O'Neill for Common Stock
sold pursuant to such selected dealer's agreement shall not exceed 2.0% of the
aggregate Purchase Price and that the aggregate fees payable to Sandler O'Neill
and the selected and sponsoring dealers will not exceed 7% of the aggregate
Purchase Price of the shares sold under any such agreement. Fees to Sandler
O'Neill and to any other broker-dealer may be deemed to be underwriting fees and
Sandler O'Neill and such broker-dealers may be deemed to be underwriters.
Sandler O'Neill will also be reimbursed for its reasonable out-of-pocket
expenses, including legal fees, in an amount not to exceed $75,000. In the event
the Conversion is not consummated or Sandler O'Neill ceases, under certain
circumstances after the subscription solicitation activities are commenced, to
provide assistance to the Company, Sandler O'Neill will be entitled to be
reimbursed for its reasonable out-of-pocket expenses incurred prior to
termination as described above. The Company and Mercer Mutual have agreed to
indemnify Sandler O'Neill for reasonable costs and expenses in connection with
certain claims or liabilities, including certain liabilities under the
Securities Act. Sandler O'Neill has received advances towards its fees and
expenses totaling $25,000. Total marketing fees to Sandler O'Neill are expected
to be $489,050 and $648,350 at the Total Minimum and the Total Maximum,
respectively. See "Pro Forma Data" for the assumptions used to arrive at these
estimates.
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<PAGE> 89
Sandler O'Neill will also perform Conversion and records management
services for Mercer Mutual in the Conversion and will receive a fee for this
service of $30,000, plus reimbursement of reasonable out-of-pocket expenses to
be billed to Mercer Mutual.
Directors and executive officers of the Company and Mercer Mutual may
participate in the solicitation of offers to purchase Common Stock. Other
employees of Mercer Mutual may participate in the Offerings in ministerial
capacities or by providing clerical work in effecting a sales transaction. Other
questions from prospective purchasers will be directed to executive officers or
registered representatives. Such other employees have been instructed not to
solicit offers to purchase Common Stock or provide advice regarding the purchase
of Common Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and
sales of Common Stock will be conducted within the requirements of Rule 3a4-1,
so as to permit officers, directors and employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or Mercer Mutual
will be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, in the sole
discretion of the Company, all shares of Common Stock not purchased in the
Conversion Offerings, if any, may be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company, to
assist the Company and Mercer Mutual in the sale of the Common Stock. THE
COMPANY AND MERCER MUTUAL RESERVE THE RIGHT TO REJECT ORDERS IN WHOLE OR PART IN
THEIR SOLE DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Sandler
O'Neill nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the Common Stock in the Syndicated Community Offering;
however, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be the Purchase Price. Shares of Common Stock purchased in the
Syndicated Community Offering by any persons, together with associates of or
persons acting in concert with such persons, will be aggregated with purchases
in the Conversion Offerings for purposes of the maximum purchase limitation of
100,000 shares.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If a Stock Order Form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the Stock Order Form on behalf of a
purchaser, the selected dealer is required to forward the Stock Order Form and
funds to Mercer Mutual for deposit in a segregated account on or before noon of
the business day following receipt of the Stock Order Form or execution of the
Stock Order Form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for shares.
Such selected dealers shall subsequently contact their customers who indicated
an interest and seek their confirmation as to their intent to purchase. Those
indicating an intent to purchase shall execute Stock Order Forms and forward
them to their selected dealer or authorize the selected dealer to execute such
forms. The selected dealer will acknowledge receipt of the order to its customer
in writing on the following business day and will debit such customer's account
on the third business day after the customer has confirmed his intent to
purchase (the "debit date") and on or before noon of the next business day
following the debit date will send Stock Order Forms and funds to Mercer Mutual
for deposit in a segregated account. Although purchasers' funds are not required
to be in their accounts with selected dealers until the debit date in the event
that such alternative procedure is employed, once a confirmation of an intent to
purchase has been received by the selected dealer, the purchaser has no right to
rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
Stock Order Form as soon as practicable following consummation of the sale of
the Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
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<PAGE> 90
The Syndicated Community Offering will terminate no more than 45 days
following the Termination Date.
LIMITATIONS ON PURCHASES OF COMMON STOCK
The Plan provides for certain limitations upon the purchase of shares in
the Conversion. No person may purchase fewer than 25 shares of Common Stock in
the Conversion. Except for the ESOP, which intends to purchase 10% of the total
number of shares of Common Stock issued in the Conversion, no purchaser
(including Eligible Policyholders who elect to purchase stock in the Conversion)
together with such person's affiliates and associates (as defined in the Plan)
or a group acting in concert (as defined in the Plan) may purchase more than
100,000 shares of Common Stock in the Conversion (4.0%, 3.4% and 3.0% of the
number of shares to be issued in the Conversion at the Total Minimum, Total
Midpoint and Total Maximum, respectively, of the Estimated Valuation Range). The
Plan states that subscribers in the Subscription Offering can purchase up to
100,000 shares. There are 42,178 Eligible Policyholders. In the event that
subscriptions by Eligible Policyholders for Common Stock exceed the maximum of
the Estimated Valuation Range, the Company will be obligated under the Plan to
sell to Eligible Policyholders 3,392,500 shares, which is the maximum number of
shares offered hereby, and shares of Common Stock would be allocated among
Eligible Policyholders in proportion to their respective amounts subscribed for.
If each Eligible Policyholder subscribed for 100,000 shares of Common Stock
offered, then each Eligible Policyholder would receive only approximately 80
shares. The Company is unable to predict the number of Eligible Policyholders
that may participate in the Subscription Offering.
Shares of Common Stock to be held by the ESOP and attributable to a
participant thereunder shall not be aggregated with shares of Common Stock
purchased by such participant or any other purchase of Common Stock in the
Conversion.
Officers and directors of Mercer Mutual and the Company, together with
their associates, may not purchase, in the aggregate, more than thirty-four
percent (34.0%) of the shares of Common Stock. Directors of the Company and of
Mercer Mutual shall not be deemed to be associates of one another or a group
acting in concert with other directors solely as a result of membership on the
Board of Directors of the Company or the Board of Directors of Mercer Mutual or
any subsidiary of Mercer Mutual.
Subject to any required regulatory approval and the requirements of
applicable law, the Company may increase or decrease any of the purchase
limitations at any time. In the event that the individual purchase limitation is
increased after commencement of the Conversion Offerings, the Company shall
permit any person who subscribed for the maximum number of shares of Common
Stock to purchase an additional number of shares, such that such person shall be
permitted to subscribe for the then maximum number of shares permitted to be
subscribed for by such person, subject to the rights and preferences of any
person who has priority subscription rights. In the event that either the
individual purchase limitation or the number of shares of Common Stock to be
sold in the Conversion is decreased after commencement of the Conversion
Offerings, the order of any person who subscribed for the maximum number of
shares of Common Stock shall be decreased by the minimum amount necessary so
that such person shall be in compliance with the then maximum number of shares
permitted to be subscribed for by such person.
Each person purchasing Common Stock in the Conversion shall be deemed to
confirm that such purchase does not conflict with the purchase limitations under
the Plan or otherwise imposed by law. In the event that such purchase
limitations are violated by any person (including any associate or affiliate of
such person or person otherwise acting in concert with such person), the Company
shall have the right to purchase from such person at the Purchase Price all
shares acquired by such person in excess of any such purchase limitation or, if
such excess shares have been sold by such person, to receive the difference
between the aggregate Purchase Price paid for such excess shares and the
proceeds received by such person from the sale of such excess shares. This right
of the Company to purchase such excess shares shall be assignable by the
Company.
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<PAGE> 91
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate number
of shares of Common Stock intended to be purchased by each of the directors and
executive officers of the Company and Mercer Mutual, including each such
person's associates, and by all directors, trustees and executive officers as a
group, including all of their associates, and other related information. For
purposes of the following table, it has been assumed that sufficient shares will
be available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
TOTAL
NAME SHARES(1)(2)(3)
- ---- ---------------
<S> <C>
Roland D. Boehm(4)(5)....................................... 20,000
James J. Freda(4)........................................... 15,000
William C. Hart(4)(6)....................................... 15,000
George T. Hornyak, Jr.(4)................................... 100,000
Richard U. Niedt(4)......................................... 6,000
Andrew R. Speaker(4)(7)..................................... 10,000
Eric W. Turner, Jr.(4)...................................... 500
Richard G. Van Noy(4)(8).................................... 15,000
Marion J. Crum(9)........................................... 1,000
John Danka(9)............................................... 1,500
Paul Ehrhardt(9)............................................ 2,500
-------
Total.................................................. 186,500
=======
</TABLE>
- ---------------
(1) Does not include shares that could be allocated to participants in the ESOP,
under which officers and other employees would be allocated, in the
aggregate, 10% of the Common Stock issued in the Conversion. See "Management
of the Company -- Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(2) Does not include shares that would be awarded to participants in the MRP, if
implemented, under which directors, officers and other employees would be
awarded, at no cost to them, an aggregate number of shares equal to 4% of
the Common Stock issued in the Conversion (100,300, 118,000, 135,700 and
150,778 shares at the Total Minimum, Total Midpoint, Total Maximum and Total
Maximum plus ESOP shares, respectively). Implementation of the MRP requires
shareholder approval. See "Management of the Company -- Certain Benefit
Plans and Agreements -- Management Recognition Plan."
(3) Does not include shares that would be purchased by participants in the
Compensation Plan, if implemented, under which directors, executive officers
and other employees would be granted options to purchase an aggregate amount
of Common Stock equal to 10% of the shares issued in the Conversion
(250,750, 295,000, 339,250 and 376,944 shares at the Total Minimum, Total
Midpoint, Total Maximum and Total Maximum plus ESOP shares). Implementation
of the Compensation Plan requires shareholder approval. See "Management of
the Company -- Certain Benefit Plans and Agreements -- Stock Compensation
Plan."
(4) Director of the Company and Mercer Mutual.
(5) Vice Chairman of the Board of Directors of the Company and Mercer Mutual.
(6) President and Chief Executive Officer of the Company and Mercer Mutual.
(7) Executive Vice President, Chief Operating Officer, Chief Financial Officer
and Treasurer of the Company and Mercer Mutual.
(8) Chairman of the Board of Directors of the Company and Mercer Mutual.
(9) Executive officer of the Company and Mercer Mutual. See "Management of the
Company -- Executive Officers."
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<PAGE> 92
LIMITATIONS ON RESALES
The Common Stock issued in the Conversion will be freely transferable under
the Securities Act; provided, however that shares issued to directors and
officers of Mercer Mutual or of the Company would be restricted as to transfer
for a period of one year from the Effective Date pursuant to the provisions of
the Conversion Act and would be subject to additional resale restrictions under
Rule 144 of the Securities Act. Shares of Common Stock issued to directors and
officers will bear a legend giving appropriate notice of these restrictions and
the Company will give instructions to the transfer agent for the Common Stock
with respect to these transfer restrictions. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted stock shall be subject to the same restrictions. Shares acquired by
directors and officers other than in the Conversion will not be subject to these
restrictions.
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by the
Board of Directors of Mercer Mutual and the Board of Directors of the Company
will be final. The Plan may be amended at any time before it is approved by the
Pennsylvania Department by the affirmative vote of two-thirds of the directors
of the Company and Mercer Mutual. The Plan similarly may be amended at any time
after it is approved by the Pennsylvania Department, subject to the Pennsylvania
Department's approval of such amendment. The Plan may be amended at any time
after it is approved by the Eligible Policyholders of Mercer Mutual and prior to
the Effective Date by the affirmative vote of two-thirds of the directors of the
Company and of Mercer Mutual then in office; provided, however, that any such
amendment shall be subject to approval by the Pennsylvania Department; and
provided further, that, if such amendment is determined by the Pennsylvania
Department to be material, such amendment shall be subject to approval by the
affirmative vote of at least two-thirds of the votes cast at a meeting of
Eligible Policyholders called for that purpose. In the event Eligible
Policyholders are required to approve an amendment to the Plan, the Company will
send a Proxy Statement to each Eligible Policyholder as soon as practical after
the amendment is approved by the directors of the Company and Mercer Mutual and,
if required, the Pennsylvania Department.
In the event that the Pennsylvania Department adopts regulations containing
mandatory or optional provisions applicable to the Conversion prior to the
Effective Date, the Plan may be amended to conform to such regulations at any
time prior to such Effective Date by the affirmative vote of two-thirds of the
directors of the Company and Mercer Mutual, and no resolicitation of proxies or
further approval by Eligible Policyholders shall be required.
TERMINATION
The Plan may be terminated at any time before it is approved by the
Pennsylvania Department by the affirmative vote of two-thirds of the directors
of the Company and Mercer Mutual. The Plan may be terminated at any time after
it is approved by the Pennsylvania Department by the affirmative vote of two-
thirds of the directors of the Company and Mercer Mutual. The Plan may be
terminated at any time after it is approved by Eligible Policyholders and prior
to the Effective Date by the affirmative vote of two-thirds of the directors of
the Company and Mercer Mutual provided, however, that any such termination shall
be subject to approval by the Pennsylvania Department.
CONDITIONS
As required by the Plan, the Plan has been approved by the Pennsylvania
Department and the Board of Directors of the Company and Mercer Mutual.
Completion of the Conversion also requires approval of the Plan by the
affirmative vote of at least two-thirds of the votes cast by Eligible
Policyholders of Mercer Mutual. If the Eligible Policyholders do not approve the
Plan, the Plan will be terminated, and Mercer Mutual will continue to conduct
business as a mutual insurance company.
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<PAGE> 93
CERTAIN RESTRICTIONS ON ACQUISITION
OF THE COMPANY
PENNSYLVANIA LAW
The Pennsylvania BCL contains certain provisions applicable to the Company
that may have the effect of impeding a change in control of the Company. These
provisions, among other things, (a) require that, following any acquisition by
any person or group of 20% of a public corporation's voting power, the remaining
shareholders have the right to receive payment for their shares, in cash, from
such person or group in an amount equal to the "fair value" of their shares,
including an increment representing a proportion of any value payable for
acquisition of control of the corporation; and (b) prohibit, for five years
after an interested shareholder's acquisition date, a "business combination"
(which includes a merger or consolidation of the corporation or a sale, lease or
exchange of assets having a minimum specified aggregate value or representing a
minimum specified percentage earning power or net income of the corporation)
with a shareholder or group of shareholders beneficially owning 20% or more of a
public corporation's voting power.
In 1990, the Pennsylvania legislature further amended the Pennsylvania BCL
to expand the antitakeover protections afforded by Pennsylvania law by
redefining the fiduciary duty of directors and adopting disgorgement and
control-share acquisition statutes. To the extent applicable to the Company at
the present time, this legislation generally (a) expands the factors and groups
(including shareholders) that the Board of Directors can consider in determining
whether a certain action is in the best interests of the corporation; (b)
provides that the Board of Directors need not consider the interests of any
particular group as dominant or controlling; (c) provides that directors, in
order to satisfy the presumption that they have acted in the best interests of
the corporation, need not satisfy any greater obligation or higher burden of
proof with respect to actions relating to an acquisition or potential
acquisition of control; (d) provides that actions relating to acquisitions of
control that are approved by a majority of "disinterested directors" are
presumed to satisfy the directors' standard unless it is proven by clear and
convincing evidence that the directors did not assent to such action in good
faith after reasonable investigation; and (e) provides that the fiduciary duty
of directors is solely to the corporation and may be enforced by the corporation
or by a shareholder in a derivative action, but not by a shareholder directly.
The 1990 amendments to the BCL explicitly provide that the fiduciary duty
of directors shall not be deemed to require directors (a) to redeem any rights
under, or to modify or render inapplicable, any shareholder rights plan; (b) to
render inapplicable, or make determinations under, provisions of the BCL
relating to control transactions, business combinations, control-share
acquisitions or disgorgement by certain controlling shareholders following
attempts to acquire control; or (c) to act as the board of directors, a
committee of the board or an individual director solely because of the effect
such action might have on an acquisition or potential or proposed acquisition of
control of the corporation or the consideration that might be offered or paid to
shareholders in such an acquisition. One of the effects of these fiduciary duty
provisions may be to make it more difficult for a shareholder to successfully
challenge the actions of the Company's Board of Directors in a potential change
in control context. Pennsylvania case law appears to provide that the fiduciary
duty standard under the 1990 amendment to the BCL grants directors the statutory
authority to reject or refuse to consider any potential or proposed acquisition
of the corporation.
Under the Pennsylvania control-share acquisition statute, a person or group
is entitled to voting rights with respect to "control shares" only after
shareholders (both disinterested shareholders and all shareholders) have
approved the granting of such voting rights at a meeting of shareholders.
"Control shares" are shares acquired since January 1, 1988, that upon
acquisition of voting power by an "acquiring person," would result in a
"control-share acquisition." ("Control shares" also include voting shares where
beneficial ownership was acquired by the "acquiring person" within 180 days of
the control-share acquisition or with the intention of making a control-share
acquisition.) An "acquiring person" is a person or group who makes or proposes
to make a "control-share acquisition." A "control-share acquisition" is an
acquisition, directly or indirectly, of voting power over voting shares that
would, when added to all voting power of the person over other voting shares,
entitle the person to cast or direct the casting of such percentage of votes for
the first time with respect to any of the following ranges that all shareholders
would be entitled to cast in an election of directors: (a) at
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<PAGE> 94
least 20% but less than 33 1/3%; (b) at least 33 1/3 but less than 50%; or (c)
50% or more. The effect of these provisions is to require a new shareholder vote
when each threshold is exceeded. In the event shareholders do not approve the
granting of voting rights, voting rights are lost only with respect to "control
shares."
A special meeting of shareholders is required to be called to establish
voting rights of control shares if an acquiring person (a) files with the
corporation an information statement containing specified information, (b) makes
a written request for a special meeting at the time of delivery of the
information statement, (c) makes a control-share acquisition or a bona fide
written offer to make a control-share acquisition, and (d) provides a written
undertaking at the time of delivery of the information statement to pay or
reimburse the corporation for meeting expenses. If the information statement is
filed and a control-share acquisition is made or proposed to be made, but no
request for a special meeting is made or no written undertaking to pay expenses
is provided, the issue of voting rights will be submitted to shareholders at the
next annual or special meeting of shareholders of the corporation.
A corporation may redeem all "control shares" at the average of the high
and low sales price, as reported on a national securities exchange or national
quotation system or similar quotation system, on the date the corporation
provides notice of redemption (a) at any time within 24 months after the date on
which the control-share acquisition occurs if the acquiring person does not,
within 30 days after the completion of the control-share acquisition, properly
request that shareholders consider the issue of voting rights to be accorded to
control shares and (b) at any time within 24 months after the issue of voting
rights is submitted to shareholders and such voting rights either are not
accorded or are accorded and subsequently lapse. Voting rights accorded to
control shares by a vote of shareholders lapse and are lost if any proposed
control-share acquisition is not consummated within 90 days after shareholder
approval is obtained.
A person will not be considered an "acquiring person" if the person holds
voting power within any of the ranges specified in the definition of
"control-share acquisition" as a result of a solicitation of revocable proxies
if such proxies (a) are given without consideration in response to a proxy or
consent solicitation made in accordance with the Exchange Act and (b) do not
empower the holder to vote the shares except on the specific matters described
in the proxy and in accordance with the instructions of the giver of the proxy.
The statute does not apply to certain control-share acquisitions effected
pursuant to a gift or laws of inheritance, in connection with certain family
trusts or pursuant to a merger, consolidation or plan of share exchange if the
corporation is a party to the agreement.
The effect of this statutory provision is to deter the accumulation of a
substantial block of Common Stock, including accumulation with a view to
effecting a non-negotiated tender or exchange offer for Common Stock.
Under the disgorgement provisions of the Pennsylvania BCL, any profit
realized by any person or group who is or was a "controlling person or group"
from the disposition of any equity security of a corporation shall belong to and
be recoverable by the corporation where the profit is realized (i) within 18
months after the person becomes a "controlling person or group" and (ii) the
equity security had been acquired by the "controlling person or group" within 24
months prior to or 18 months after obtaining the status of a "controlling person
or group."
A "controlling person or group" is a person or group who (a) has acquired,
offered to acquire or, directly or indirectly, publicly disclosed the intention
of acquiring 20% voting power of the corporation or (b) publicly disclosed that
it may seek to acquire control of the corporation.
A person will not be deemed a "controlling person or group" if the person
holds voting power as a result of a solicitation of revocable proxies if, among
other things, such proxies (a) are given without consideration in response to a
proxy or consent solicitation made in accordance with the Exchange Act and (b)
do not empower the holder to vote the shares except on the specific matters
described in the proxy and in accordance with the instructions of the giver of
the proxy. This exception does not apply to proxy contests in connection with or
as a means toward acquiring control of the Company.
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<PAGE> 95
The effect of this statutory provision is to deter the accumulation of a
substantial block of Common Stock with a view to putting the Company "in play"
and then selling shares at a profit (whether to the Company, in the market or in
connection with an acquisition of the Company).
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION AND BYLAWS
While the Board of Directors of the Company is not aware of any effort that
might be made to obtain control of the Company after Conversion, the Board
believes that it is appropriate to include certain provisions as part of the
Company's Articles of Incorporation to protect the interests of the Company and
its shareholders from hostile takeovers that the Board might conclude are not in
the best interests of the Company or the Company's shareholders. These
provisions may have the effect of discouraging a future takeover attempt that is
not approved by the Board but which individual shareholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over the then current market price. As a result, shareholders
who might desire to participate in such a transaction may not have an
opportunity to do so. Such provisions will also render the removal of the
Company's current Board of Directors or management more difficult.
The following discussion is a general summary of certain provisions of the
Articles of Incorporation and Bylaws of the Company that may be deemed to have
such an "anti-takeover" effect. The description of these provisions is
necessarily general and reference should be made in each case to the Articles of
Incorporation and Bylaws of the Company. For information regarding how to obtain
a copy of these documents without charge, see "Additional Information."
Classified Board of Directors and Related Provisions
The Company's Articles of Incorporation provide that the Board of Directors
is to be divided into three classes which shall be as nearly equal in number as
possible. The directors in each class will hold office following their initial
appointment to office for terms of one year, two years and three years,
respectively, and, upon reelection, will serve for terms of three years
thereafter. Each director will serve until his or her successor is elected and
qualified. The Articles of Incorporation provide that a director may be removed
by shareholders only upon the affirmative vote of at least a majority of the
votes which all shareholders would be entitled to cast. The Articles of
Incorporation further provide that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office.
A classified board of directors could make it more difficult for
shareholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Because the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year. In the absence of the provisions of the Articles of Incorporation
classifying the Board, all of the directors would be elected each year.
Management of the Company believes that the staggered election of directors
tends to promote continuity of management because only one-third of the Board of
Directors is subject to election each year. Staggered terms guarantee that in
the ordinary course approximately two-thirds of the Directors, or more, at any
one time have had at least one year's experience as directors of the Company,
and moderate the pace of change in the composition of the Board of Directors by
extending the minimum time required to elect a majority of Directors from one to
two years.
Other Antitakeover Provisions
The Company's Articles of Incorporation and Bylaws contain certain other
provisions that may also have the effect of deterring or discouraging, among
other things, a non-negotiated tender or exchange offer for the Common Stock, a
proxy contest for control of the Company, the assumption of control of the
Company by a holder of a large block of the Common Stock and the removal of the
Company's management. These provisions: (1) empower the Board of Directors,
without shareholder approval, to issue preferred stock, the
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<PAGE> 96
terms of which, including voting power, are set by the Board; (2) restrict the
ability of shareholders to remove directors; (3) require that shares with at
least 80% of total voting power approve mergers and other similar transactions,
if the transaction is not approved, in advance, by the Board of Directors; (4)
prohibit shareholders' actions without a meeting; (5) eliminate the right of
shareholders to call a special meeting; (6) require that shares with at least
80%, or in certain instances a majority, of total voting power approve the
repeal or amendment of the Articles of Incorporation; (7) require any person who
acquires stock of the Company with voting power of 25% or more to offer to
purchase for cash all remaining shares of the Company's voting stock at the
highest price paid by such person for shares of the Company's voting stock
during the preceding year; (8) limit the right of a person or entity to vote
more than 10% of the Company's voting stock; (9) eliminate cumulative voting in
elections of directors; and (10) require that shares with at least 66 2/3% of
total voting power approve, repeal or amend the Bylaws.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 15,000,000 shares of Common Stock,
without par value, and 5,000,000 shares of preferred stock, having such par
value as the Board of Directors of the Company shall fix and determine. The
Company currently expects to issue between 2,507,500 and 3,392,500 shares (or,
as permitted by the Plan, in the event the ESOP purchases shares in excess of
the maximum of the Estimated Valuation Range in order to satisfy its 10%
subscription, up to 3,769,444 shares), subject to adjustment, of the Common
Stock and no shares of preferred stock in the Conversion.
COMMON STOCK
Voting Rights
Each share of the Common Stock will have the same relative rights and will
be identical in all respects with every other share of the Common Stock. The
holders of the Common Stock will possess exclusive voting rights in the Company,
except to the extent that shares of preferred stock issued in the future may
have voting rights, if any. Each holder of shares of the Common Stock will be
entitled to one vote for each share held of record on all matters submitted to a
vote of holders of shares of the Common Stock. Holders of Common Stock will not
be entitled to cumulate their votes for election of directors.
Dividends
The Company may, from time to time, declare dividends to the holders of
Common Stock, who will be entitled to share equally in any such dividends. For
additional information as to cash dividends, see "Dividend Policy."
Liquidation
In the event of any liquidation, dissolution or winding up of Mercer
Mutual, the Company, as holder of all of the capital stock of Mercer Mutual,
would be entitled to receive all assets of Mercer Mutual after payment of all
debts and liabilities of Mercer Mutual. In the event of a liquidation,
dissolution or winding up of the Company, each holder of shares of Common Stock
would be entitled to receive, after payment of all debts and liabilities of the
Company, a pro rata portion of all assets of the Company available for
distribution to holders of Common Stock. If any preferred stock is issued, the
holders thereof may have a priority in liquidation or dissolution over the
holders of the Common Stock.
Other Characteristics
Holders of the Common Stock will not have preemptive rights with respect to
any additional shares of Common Stock that may be issued. The Common Stock is
not subject to call for redemption, and the
93
<PAGE> 97
outstanding shares of Common Stock, when issued and upon receipt by the Company
of the full purchase price therefor, will be fully paid and nonassessable.
PREFERRED STOCK
None of the 5,000,000 authorized shares of preferred stock of the Company
will be issued in the Conversion. After the Conversion is completed, the Board
of Directors of the Company will be authorized, without shareholder approval, to
issue preferred stock and to fix and state voting powers, designations,
preferences or other special rights of such shares and the qualifications,
limitations and restrictions thereof. The preferred stock may rank prior to the
Common Stock as to dividend rights or liquidation preferences, or both, and may
have full or limited voting rights. The Board of Directors has no present
intention to issue any of the preferred stock. Should the Board of Directors of
the Company subsequently issue preferred stock, no holder of any such stock
shall have any preemptive right to subscribe for or purchase any stock or any
other securities of the Company other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company, Cranford, New Jersey.
LEGAL OPINIONS
The legality of the Common Stock and, if a private letter ruling concerning
the material tax effects of the Conversion (the "PLR") is not received from the
IRS by the conclusion of the Offerings, certain federal income tax matters (the
"Tax Opinion") will be passed upon for the Company by Stevens & Lee, Wayne,
Pennsylvania. For a description of the PLR and the Tax Opinion, see "The
Conversion -- Tax Effects." If Stevens & Lee delivers the Tax Opinion, the Tax
Opinion will be an exhibit to a post-effective amendment to the registration
statement of which this Prospectus is a part. Such post-effective amendment
would be filed prior to the completion of the Offerings and could be obtained
through the Securities and Exchange Commission. See "Available Information."
Stevens & Lee has consented to the reference herein to its opinions.
Certain legal matters will be passed upon for Sandler O'Neill by Lord,
Bissell & Brook, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedules of Mercer Mutual as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997 have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
Sheshunoff has consented to the publication herein of the summary of its
opinion as to the estimated consolidated pro forma aggregate market value of the
Common Stock to be issued in the Conversion and the value of subscription rights
to purchase the Common Stock, and to the use of its name and statements with
respect to it appearing herein.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission ("SEC") a
Registration Statement on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby (the "Registration Statement"). As permitted by the
rules and regulations of the SEC, this prospectus does not
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<PAGE> 98
contain all the information set forth in the Registration Statement. Such
information and all exhibits to the Registration Statement, including the
Appraisal which is an exhibit to the Registration Statement, can be examined
without charge at the public reference facilities of the SEC located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's Regional Offices located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and at Seven World Trade Center, Suite
1300, New York, New York 10048, and copies of such material can be obtained from
the SEC at prescribed rates.
In addition, copies of such documents may be obtained on the Internet at
http://www.sec.gov.
Mercer Mutual has filed an Application to Convert from Mutual to Stock Form
with the Pennsylvania Department with respect to the Conversion. The application
may be examined at the principal office of the Pennsylvania Department located
in Harrisburg, Pennsylvania.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, the annual and periodic reporting requirements,
the restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, and certain other requirements of the Exchange Act. Under
the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion.
A copy of the Articles of Incorporation and the Bylaws of the Company and
Mercer Mutual are available without charge from Mercer Mutual.
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<PAGE> 99
GLOSSARY OF SELECTED INSURANCE TERMS
Acquisition costs............. Agents' or brokers' commissions, premium taxes,
marketing, and certain underwriting expenses
associated with the production of business.
Assumed reinsurance........... Insurance or reinsurance transferred from
another insurance or reinsurance entity.
Cede.......................... To transfer to an insurer or a reinsurer all or
a part of the insurance or reinsurance written
by an insurance or reinsurance entity.
Combined ratio................ The sum of the expense ratio and the loss
ratio, determined either in accordance with
statutory accounting practices or GAAP. A
combined ratio under 100% generally indicates
an underwriting profit and a combined ratio
over 100% generally indicates an underwriting
loss. The extent by which the combined ratio
deviates from 100% indicates relative
underwriting profit or loss.
Commercial Multi-peril........ Commercial multi-peril coverage insures against
losses to businesses and business personal
property, such as those caused by fire, wind,
hail, water damage, theft and vandalism, as
well as comprehensive general liability for
injuries to others. Optional coverages written
include inland marine, crime and boiler and
machinery.
Direct written premiums....... Total premiums written by an insurer other than
premiums for reinsurance assumed by an insurer.
Earned premiums............... The portion of net written premiums applicable
to the expired period of policies.
Expense ratio................. Under statutory accounting practices, the ratio
of underwriting expenses to net written
premiums.
Fire & Allied Lines........... Fire and allied lines insurance generally
covers fire, lightning, and removal and
extended coverage.
Gross premiums................ Total premiums for insurance written and
reinsurance assumed during a given period.
Homeowners.................... Homeowners coverage insures individuals for
losses to their residences and personal
property, such as those caused by fire, wind,
hail, water damage, theft and vandalism, and
against third party liability claims.
Incurred losses............... The sum of losses paid plus the change in the
estimated liability for claims which have been
reported but which have not been settled and
claims which have occurred but have not yet
been reported to the insurer.
Inland marine................. Inland marine coverage insures merchandise or
cargo in transit and business and personal
property. It is also written as an endorsement
to a homeowner's policy to provide coverage for
scheduled property, such as antiques, fine art,
sports equipment, boats, firearms, jewelry and
camera equipment.
Loss adjustment expenses...... The expenses of settling claims, including
legal and other fees and the general expenses
of administering the claims adjustment process.
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<PAGE> 100
Loss and LAE ratio............ Under statutory accounting practices, the ratio
of incurred losses and loss adjustment expenses
to earned premiums.
Net earned premiums........... The portion of written premiums that is
recognized for accounting purposes as revenue
during a period.
Net premiums.................. Gross premiums written less premiums ceded to
reinsurers.
Net written premiums.......... Gross premiums written and insured by an
insurer less premiums ceded to reinsurers.
Probable Maximum Loss......... The largest loss that a catastrophe will
probably cause under most circumstances. It is
not ordinarily the "maximum possible loss,"
which is the worst possible scenario and which
would, in many cases, be 100% of the property
value. It is a concept used by underwriters,
reinsurers and A.M. Best in evaluating
catastrophe loss potential.
Reinsurance................... A procedure whereby an insurer remits or cedes
a portion of the premiums to another insurer or
reinsurer as payment to that insurer or
reinsurer for assuming a portion of the related
risk.
Statutory accounting
practices..................... Recording transactions and preparing financial
statements in accordance with the rules and
procedures prescribed or permitted by statute
or regulatory authorities, generally reflecting
a liquidating, rather than a going concern,
concept of accounting. The principal
differences between statutory accounting
practices ("SAP") and GAAP for property and
casualty insurance companies, are: (a) under
SAP, certain assets that are not admitted
assets are eliminated from the balance sheet;
(b) under SAP, policy acquisition costs are
expenses as incurred, while under GAAP, they
are deferred and amortized over the term of the
policies; (c) under SAP, no provision is made
for deferred income taxes; (d) under SAP,
certain reserves are recognized that are not
recognized under GAAP; and (e) under SAP, fixed
income securities (bonds, redeemable preferred
stocks and mortgage-backed securities) are
carried at cost, while under GAAP, they are
carried at market value.
Statutory surplus............. The sum remaining after all liabilities are
subtracted from all assets, applying statutory
accounting practices. This sum is regarded as
financial protection to policyholders in the
event an insurance company suffers unexpected
or catastrophic losses.
Umbrella policy............... An insurance policy covering liabilities in
excess of amounts covered under a standard
policy.
Underwriting.................. The process whereby an insurer reviews
applications submitted for insurance coverage
and determines whether it will accept all or
part of the coverage being requested and what
the applicable premiums should be. Underwriting
also includes an ongoing review of existing
policies and their pricing.
Underwriting expenses......... The aggregate of policy acquisition costs and
the portion of administrative, general and
other expenses attributable to underwriting
operations.
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<PAGE> 101
Underwriting profit (loss).... The excess (deficiency), determined under
statutory accounting practices, resulting from
the difference between earned premiums and the
sum of incurred losses, loss adjustment
expenses and underwriting expenses.
Voluntary market.............. The market consisting of those persons who
insurance companies voluntarily choose to
insure because such companies believe that they
can do so profitably at competitive rates.
Workers' Compensation......... Workers' compensation coverage insures
employers against employee medical and
indemnity claims resulting from injuries
related to work as well as third party
employer's liability.
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<PAGE> 102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF MERCER MUTUAL
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS (As of December 31, 1997 and 1996)..... F-3
STATEMENTS OF EARNINGS (For the years ended December
31, 1997, 1996 and 1995)............................. F-4
STATEMENTS OF CHANGES IN SURPLUS (For the years ended
December 31, 1997, 1996 and 1995).................... F-5
STATEMENTS OF CASH FLOWS (For the years ended December
31, 1997, 1996 and 1995)............................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............ F-7
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
BALANCE SHEETS (Unaudited) (As of June 30, 1998 and
December 31, 1997)................................... F-18
STATEMENTS OF EARNINGS (Unaudited) (For the six months
ended June 30, 1998 and 1997)........................ F-19
STATEMENTS OF CHANGES IN SURPLUS (Unaudited) (For the
six months ended June 30, 1998 and 1997)............. F-20
STATEMENTS OF CASH FLOWS (Unaudited) (For the six
months ended June 30, 1998 and 1997)................. F-21
</TABLE>
F-1
<PAGE> 103
INDEPENDENT AUDITORS REPORT
The Board of Directors
Mercer Mutual Insurance Company:
We have audited the accompanying consolidated balance sheets of Mercer
Mutual Insurance Company and subsidiaries (the Group) as of December 31, 1997
and 1996, and the related statements of earnings, changes in surplus, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Group as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick, LLP
Philadelphia, Pennsylvania
February 18, 1998
F-2
<PAGE> 104
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments, at fair value:
Fixed income securities, available-for-sale............... $34,947 $34,964
Equity securities......................................... 10,852 7,795
Total investments...................................... 45,799 42,759
Cash and cash equivalents................................... 2,707 2,675
Premiums receivable......................................... 3,334 2,308
Reinsurance receivables..................................... 13,206 18,908
Prepaid reinsurance premiums................................ 3,046 994
Deferred policy acquisition costs........................... 3,019 2,989
Accrued investment income................................... 625 602
Property and equipment, net................................. 1,413 1,441
Deferred income taxes....................................... -- 802
Other assets................................................ 936 596
------- -------
Total assets........................................... $74,085 $74,074
======= =======
LIABILITIES AND SURPLUS
Liabilities:
Losses and loss adjustment expenses....................... $31,872 $35,221
Unearned premiums......................................... 14,723 13,179
Accounts payable and accrued expenses..................... 2,417 1,700
Deferred income taxes..................................... 177 --
Other reinsurance balances................................ 835 4,028
Other liabilities......................................... 825 664
------- -------
Total liabilities...................................... 50,849 54,792
------- -------
Surplus:
Unassigned surplus........................................ 20,693 18,476
Accumulated other comprehensive income:
Unrealized gains in investments, net of deferred income
taxes................................................. 2,543 806
------- -------
Total surplus.......................................... 23,236 19,282
------- -------
Total liabilities and surplus.......................... $74,085 $74,074
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 105
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Net premiums earned....................................... $17,969 $20,634 $20,817
Investment income, net of expenses........................ 2,350 2,289 2,132
Net realized investment gains............................. 589 596 53
Other revenue............................................. 173 155 161
------- ------- -------
Total revenue.......................................... 21,081 23,674 23,163
------- ------- -------
Expenses:
Losses and loss adjustment expenses....................... 10,594 14,801 13,296
Amortization of deferred policy acquisition costs......... 4,706 5,491 5,944
Other expenses............................................ 2,563 2,571 2,416
------- ------- -------
Total expenses......................................... 17,863 22,863 21,656
------- ------- -------
Income before income tax.................................... 3,218 811 1,507
Income tax.................................................. 1,001 171 369
------- ------- -------
Net income.................................................. $ 2,217 $ 640 $ 1,138
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 106
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period................................ $19,282 $18,963 $14,203
Net income.................................................. 2,217 640 1,138
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period (net of
related income tax expense of $1,095, $37 and
$1,884).............................................. 2,126 72 3,657
Less:
Reclassification adjustment for gains included in net
income (net of related income tax expense of $200,
$203 and $18)........................................ (389) (393) (35)
------- ------- -------
Total.................................................. 1,737 (321) 3,622
------- ------- -------
Comprehensive income...................................... 3,954 319 4,760
------- ------- -------
Balance, end of period...................................... $23,236 $19,282 $18,963
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 107
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,217 $ 640 $ 1,138
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment................. 117 137 134
Net accretion of discount.............................. (51) (58) (54)
Net realized investment gain........................... (589) (596) (53)
Net realized gain on sale of property and equipment.... -- 3 --
Deferred income tax.................................... 83 (120) (55)
Change in assets and liabilities:
Premiums receivable.................................. (1,026) 2,345 (286)
Reinsurance receivables.............................. 5,702 (2,019) 368
Prepaid reinsurance premiums......................... (2,052) 4,564 (55)
Deferred policy acquisition costs.................... (30) 167 174
Other assets......................................... (363) 98 724
Losses and loss expenses............................. (3,349) (955) 645
Unearned premiums.................................... 1,544 (5,074) 483
Other liabilities.................................... (2,355) 2,300 (214)
------- ------- --------
Net cash provided by (used in) operating
activities...................................... (152) 1,432 2,949
------- ------- --------
Cash flows from investing activities:
Purchase of fixed income securities, available-for-sale... (7,747) (6,477) (15,118)
Purchase of equity securities............................. (7,477) (6,938) (5,891)
Sale and maturity of fixed income securities
available-for-sale..................................... 8,368 4,294 10,146
Sale of equity securities, available for sale............. 7,089 6,983 9,412
Change in receivable/payable of securities................ 40 (39) 99
Purchase of property and equipment........................ (89) (176) (92)
Sale of property and equipment............................ -- 29 --
------- ------- --------
Net cash used in investing activities.................. 184 (2,324) (1,444)
------- ------- --------
Net increase (decrease) in cash and cash equivalents... 32 (892) 1,505
Cash and cash equivalents at beginning of year.............. 2,675 3,567 2,062
------- ------- --------
Cash and cash equivalents at end of period.................. $ 2,707 $ 2,675 $ 3,567
======= ======= ========
Cash paid during the year for:
Interest.................................................. $ 0 $ 0 $ 0
Income taxes.............................................. $ 730 $ 125 $ 281
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 108
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Mercer Mutual Insurance Company (MMIC), its subsidiary Queenstown Holding
Company, Inc. (QHC) and QHC's subsidiary Mercer Insurance Company (MIC)
collectively referred herein as the "Group", provide property and casualty
insurance to both individual and commercial customers in New Jersey and
Pennsylvania. The principal lines of business are homeowners, commercial
multi-peril, general liability and fire and allied which represent approximately
46%, 22%, 13% and 10%, respectively, of net premiums written in 1997.
MMIC has filed an application with the Insurance Department of the
Commonwealth of Pennsylvania to form of an insurance holding company,
incorporated in Pennsylvania, to purchase all of the authorized stock of MMIC,
which plans to convert from the mutual to the stock form of organization.
Consolidation Policy and Basis of Presentation
The consolidated financial statements include the accounts of each member
of the Group. All significant intercompany accounts and transactions have been
eliminated in consolidation. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles, which
differ in some respects from those followed in reports to insurance regulatory
authorities.
Use of Estimates
The preparation of the accompanying financial statements 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 could differ from those
estimates.
Investments
Due to periodic shifts in the portfolio arising out of income tax and
asset-liability matching, as well as securities markets and economic factors,
management considers the entire portfolio of fixed income securities as
available-for-sale. Fixed income securities available-for-sale and equity
securities are stated at fair value with changes in fair value, net of deferred
income tax, reflected in surplus. Realized gains and losses are calculated on
the specific identification basis.
Interest on fixed maturities is credited to income as it accrues on the
principal amounts outstanding, adjusted for amortization of premiums and
accretion of discounts computed utilizing the effective interest rate method.
Premiums and discounts on mortgage-backed securities are amortized using
anticipated prepayments with significant changes in anticipated prepayments
accounted for prospectively.
Cash and cash equivalents
Cash and cash equivalents are carried at cost which approximates market
value. The Group considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Fair Values of Financial Instruments
The Group has used the following methods and assumptions in estimating its
fair values:
Investments -- The fair values for fixed income securities
available-for-sale are based on quoted market prices, when available. If not
available, fair values are based on values obtained from investment brokers.
Fair
F-7
<PAGE> 109
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
values for marketable equity securities are based on quoted market prices and on
statutory equity for the security indicated below.
The fair value of an equity security in a reinsurance company is estimated
based on statutory book value because the security is not traded and because of
restrictions placed on the investors. After receipt of a bona fide offer to
purchase this security, the stock must first be offered to the investee or its
other shareholders at the lower of statutory book value or the offered price.
The investee also has the ability to determine that the potential purchaser is
not appropriate and void such an offer.
Cash and cash equivalents -- The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Premium and reinsurance receivables -- The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Reinsurance
The Group cedes insurance to, and assumes insurance from, unrelated
insurers to limit its maximum loss exposure through risk diversification. Ceded
reinsurance receivables and unearned premiums are reported as assets; loss and
loss adjustment expenses are reported gross of ceded reinsurance credits.
Deferred Policy Acquisition Costs
Acquisition costs such as commissions, premium taxes and certain other
expenses which vary with and are directly related to the production of business,
are deferred and amortized over the effective period of the related insurance
policies. The method followed in computing deferred policy acquisition costs
limits the amount of such deferred costs to their estimated realizable value,
which gives effect to premiums to be earned, loss and loss adjustment expenses
and certain other maintenance costs expected to be incurred as the premiums are
earned. To the extent that deferred policy acquisition costs are not realizable,
the deficiency is charged to income currently.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation
calculated on the straight-line basis. Property is depreciated over useful lives
ranging from five to forty-five years. Equipment is depreciated three to ten
years.
Premium Revenue
Premiums include direct writings plus reinsurance assumed less reinsurance
ceded to other insurers and are recognized as revenue over the period that
coverage is provided using the monthly pro-rata method. Unearned premiums
represent that portion of premiums written that are applicable to the unexpired
terms of policies in force.
Losses and Loss Adjustment Expenses
The liability for losses includes the amount of claims which have been
reported to the Company and are unpaid at the statement date as well as
provision for claims incurred but not reported, after deducting anticipated
salvage and subrogation. The liability for loss adjustment expenses is
determined as a percentage of the liability for losses based on the historical
ratio of paid adjustment expenses to paid losses by line of business.
Management believes that the liabilities for losses and loss adjustment
expenses at December 31, 1997 are adequate to cover the ultimate net cost of
losses and claims to date, but these liabilities are necessarily
F-8
<PAGE> 110
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on estimates, and the amount of losses and loss adjustment expenses
ultimately paid may be more or less than such estimates.
Income Taxes
The Group uses the asset and liability method of accounting for income
taxes. Deferred income taxes arise from the recognition of temporary differences
between financial statement carrying amounts and the tax bases of the Group's
assets and liabilities. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax asset will not be realized. The
effect of a change in tax rates is recognized in the period of the enactment
date.
(2) INVESTMENTS
Net investment income, net realized investment gains and change in
unrealized capital gains (losses) on investment securities are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investment income:
Fixed income securities.............................. $2,379 $2,326 $2,068
Equity securities.................................... 192 153 168
Cash and cash equivalents............................ 118 143 194
Other................................................ 41 46 54
------ ------ ------
Gross investment income........................... 2,730 2,668 2,484
Less investment expenses(1)............................ 380 379 352
------ ------ ------
Net investment income............................. 2,350 2,289 2,132
Realized gains (losses):
Fixed income securities.............................. (78) (21) (173)
Equity securities.................................... 667 617 226
------ ------ ------
Net realized investment gains..................... 589 596 53
------ ------ ------
Net investment income and net realized investment
gains........................................... $2,939 $2,885 $2,185
====== ====== ======
</TABLE>
Change in unrealized gains (losses) of securities, net of tax, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Fixed income securities................................. $ 417 $(576) $1,987
Equity securities....................................... 1,320 255 1,635
------ ----- ------
$1,737 $(321) $3,622
====== ===== ======
</TABLE>
- ---------------
(1) Investment expenses include salaries, counseling fees and other
miscellaneous expenses attributable to the maintenance of investment
activities.
F-9
<PAGE> 111
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost and estimated fair value of available-for-sale investment
securities at December 31, 1997 and 1996 are shown below.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
1997 COST(1) GAINS LOSSES VALUE
- ---- ------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed income securities, available-for-sale
U.S. Government and government agencies......... $25,195 $ 266 $ 54 $25,407
Obligations of states and political
subdivisions................................. $ 3,396 $ 121 $ -- $ 3,517
Industrial and miscellaneous.................... $ 300 $ 1 $ 1 $ 300
Mortgage-backed securities...................... $ 6,106 $ 10 $393 $ 5,723
------- ------ ---- -------
Total fixed maturities............................ $34,997 $ 398 $448 $34,947
------- ------ ---- -------
Equity securities:
At market value................................. $ 6,854 $2,664 $104 $ 9,414
At estimated value.............................. $ 94 $1,344 $ -- $ 1,438
------- ------ ---- -------
Total equity securities........................... $ 6,948 $4,008 $104 $10,852
------- ------ ---- -------
Total available-for-sale.......................... $41,945 $4,406 $552 $45,799
======= ====== ==== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
1996 COST(1) GAINS LOSSES VALUE
---- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed income securities, available-for-sale
U.S. Government and government agencies........... $23,702 $ 223 $ 234 $23,691
Obligations of states and political
subdivisions................................. 4,313 48 18 4,343
Mortgage-backed securities...................... 7,631 12 713 6,930
------- ------ ------ -------
Total fixed maturities............................ 35,646 283 965 34,964
------- ------ ------ -------
Equity securities:
At market value................................. 5,892 1,119 329 6,682
At estimated value.............................. -- 1,113 -- 1,113
------- ------ ------ -------
Total equity securities........................... 5,892 2,232 329 7,795
------- ------ ------ -------
Total available-for-sale.......................... $41,538 $2,515 $1,294 $42,759
======= ====== ====== =======
</TABLE>
- ---------------
(1) Original cost of equity securities; original cost of fixed income securities
adjusted for amortization of premium and accretion of discount.
F-10
<PAGE> 112
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of fixed income securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due after one year through five years................... $ 1,361 $ 1,496
Due after five years through ten years.................. 25,251 25,470
Due after ten years..................................... 2,279 2,258
------- -------
28,891 29,224
Mortgage backed securities.............................. 6,106 5,723
------- -------
$34,997 $34,947
======= =======
</TABLE>
The gross realized gains and losses on investment securities are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross realized gains...................................... $1,027 $ 921 $ 778
Gross realized losses..................................... (438) (325) (725)
------ ----- -----
$ 589 $ 596 $ 53
====== ===== =====
</TABLE>
Proceeds from the sale of available-for-sale securities were $15,457,
$11,276 and $19,032 for 1997, 1996 and 1995, respectively.
(3) DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1.................................... $ 2,989 $ 3,155 $ 3,330
Acquisition costs deferred............................ 4,736 5,325 5,769
Amortization charged to earnings...................... (4,706) (5,491) (5,944)
------- ------- -------
Balance, December 31.................................. $ 3,019 $ 2,989 $ 3,155
======= ======= =======
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment was as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Home Office:
Land...................................................... $ 456 $ 456
Buildings and improvements................................ 1,479 1,468
Furniture, fixtures and equipment......................... 1,368 1,290
------- -------
3,303 3,214
Accumulated depreciation.................................. (1,890) (1,773)
------- -------
$ 1,413 $ 1,441
======= =======
</TABLE>
F-11
<PAGE> 113
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liabilities for losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1................................. $ 35,221 $ 36,176 $ 35,531
Less reinsurance recoverable on unpaid losses and
loss expenses................................. (15,147) (16,819) (17,233)
-------- -------- --------
Net balance at January 1........................... 20,074 19,357 18,298
Incurred related to:
Current year..................................... 11,649 16,445 14,251
Prior years...................................... (1,055) (1,644) (955)
-------- -------- --------
Total incurred..................................... 10,594 14,801 13,296
-------- -------- --------
Paid related to:
Current year..................................... 4,775 7,715 5,302
Prior years...................................... 6,042 6,369 6,935
Total paid......................................... 10,817 14,084 12,237
-------- -------- --------
Net balance, December 31........................... 19,851 20,074 19,357
Plus reinsurance recoverable on unpaid losses and
loss expenses................................. 12,021 15,147 16,819
-------- -------- --------
Balance at December 31............................. $ 31,872 $ 35,221 $ 36,176
======== ======== ========
</TABLE>
The Group has geographic exposure to catastrophe losses in its operating
region. Catastrophes can be caused by various events including hurricanes,
windstorms, earthquakes, hail, explosion, severe weather and fire. The incidence
and severity of catastrophes are inherently unpredictable. The extent of losses
from a catastrophe is a functions of both the total amount of insured exposure
in the area affected by the event and the severity of the event. Most
catastrophes are restricted to small geographic areas. However, hurricanes and
earthquakes may produce significant damage in large, heavily populated areas.
The Group generally seeks to reduce its exposure to catastrophe through
individual risk selection and the purchase of catastrophe reinsurance.
(6) REINSURANCE
In the ordinary course of business, the Company seeks to limit its exposure
to loss on individual claims and from the effects of catastrophes by entering
into reinsurance contracts with other insurance companies. Reinsurance is ceded
on excess of loss and pro-rata bases with the Company's retention not exceeding
$100,000 per occurrence. Insurance ceded by the Company does not relieve its
primary liability as the originating insurer. The Company also assumes
reinsurance from other companies on a pro-rata basis.
The effect of reinsurance with unrelated insurers on premiums written and
earned is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PREMIUMS WRITTEN
Direct............................................ $ 28,453 $24,958 $ 24,699
Assumed........................................... 547 5,013 10,287
Ceded............................................. (11,539) (9,847) (13,741)
-------- ------- --------
Net............................................... $ 17,461 $20,124 $ 21,245
======== ======= ========
</TABLE>
F-12
<PAGE> 114
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
PREMIUMS EARNED
Direct............................................ $26,858 $ 24,760 $ 24,700
Assumed........................................... 598 10,286 9,803
Ceded............................................. (9,487) (14,412) (13,686)
------- -------- --------
Net............................................... $17,969 $ 20,634 $ 20,817
======= ======== ========
</TABLE>
The effect of reinsurance on unearned premiums as of December 31, 1997,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Direct.............................................. $14,552 $12,957 $12,759
Assumed............................................. 171 222 5,494
------- ------- -------
Net................................................. $14,723 $13,179 $18,253
======= ======= =======
</TABLE>
The effect of reinsurance on the liabilities for losses and loss adjustment
and losses and loss adjustment expenses incurred is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Liabilities
Direct.............................................. $27,068 $27,429 $27,906
Assumed............................................. 4,804 7,792 8,270
------- ------- -------
$31,872 $35,221 $36,176
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Expenses Incurred
Direct.............................................. $11,743 $14,597 $13,120
Assumed............................................. 301 7,234 6,694
Ceded............................................... (1,450) (7,030) (6,518)
------- ------- -------
Net................................................. $10,594 $14,801 $13,296
======= ======= =======
</TABLE>
The Group performs credit reviews of its reinsurers, focusing on financial
stability. To the extent that a reinsurer may be unable to pay losses for which
it is liable under the terms of a reinsurance agreement, the Group is exposed to
the risk of continued liability for such losses. At December 31, 1997, three
independent reinsurers accounted for approximately $4,867 of amounts recoverable
for paid losses and loss adjustment expenses.
Effective December 31, 1996, the Group terminated its participation in
certain ceded and assumed reinsurance agreements. As a result of the termination
of these agreements, premiums unearned as of December 31, 1996 were returned to
the ceding companies, less commission. The Group, as a ceding reinsured,
received back from reinsurers $4,895 in unearned premium less $1,224 in
commission. The Group, as an assuming reinsurer, returned to reinsureds $5,508
in unearned premium less $1,377 in commission. Ceded loss and loss adjustment
reserves attributable to these agreements were $5,669 at December 31, 1996, and
assumed loss and loss adjustment reserves attributable to these agreements were
$6,016 at December 31, 1996.
F-13
<PAGE> 115
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) RETIREMENT PLANS AND DEFERRED DIRECTORS' FEES
Effective January 1, 1997, the Company implemented a defined contribution
pension plan to replace a defined benefit pension plan. The plan covers
substantially all of its employees. Benefits are based on years of service and
the employee's annual compensation. Pension expense from the defined
contribution plan in 1997 amounted to $95.
Benefits under the defined benefit pension plan ceased accruing to
participants as of December 31, 1996. Benefits were based on years of service
and the employee's career-average annual compensation. The Group's funding
policy was to contribute annually at least the minimum required contribution in
accordance with minimum funding standards established by ERISA. Contributions
were intended to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future. As a result of the
termination of the defined benefit pension plan, the Group incurred a loss of
$173. In December 1997, the Group completed distribution of all benefits. Plan
assets were sufficient to discharge all obligations without further expense
attributable to the defined benefit pension plan.
Plan assets were generally invested in fixed income and equity securities.
The following table sets forth the year-end funded status of the terminated
defined benefit pension plan:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Actuarial present value of benefit obligations:
Accumulated and projected benefit obligation, including
vested benefits of $1,009............................. $(1,021)
Plan assets at fair value.................................. 862
Excess of the projected benefit obligation over plan....... (159)
</TABLE>
The net periodic pension cost for the terminated defined benefit pension
plan included the following components:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Service costs -- benefits earned during the period.......... $ 119 $ 98
Interest cost on projected benefit obligation............... 95 81
Return on plan assets....................................... (120) (56)
Net amortization and deferral............................... 62 7
----- -----
Net periodic pension cost................................... $ 156 $ 130
===== =====
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted-average discount rate was 7.5% and 7.25% for 1996 and
1995, respectively. The rate of increase in future compensation levels was 4.5%.
The expected long-term rate of return on retirement plan assets was 8.0%.
The Group also maintains a 401(k) retirement savings plan covering
substantially all employees. The Group matches a percentage of each employees'
pre-tax contribution and also contributes an amount equal to 2% of each
employee's annual compensation. The cost of this plan amounted to $57, $58 and
$56 for the years ended December 31, 1997, 1996 and 1995, respectively.
The Group maintains a non-qualified unfunded retirement plan for its
directors. The plan provides for monthly payments for 10 years upon retirement.
The expense for this plan amounted to $57, $55 and $52 for 1997, 1996 and 1995,
respectively. Costs accrued under this plan amounted to $306 and $249 at
December 31, 1997 and 1996, respectively.
The Group maintains a deferred directors' compensation plan. Under the
plan, a director may elect to defer receipt of all or a portion of their fees.
Amounts deferred, together with accumulated interest, are
F-14
<PAGE> 116
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distributed either as a lump sum or in installments over a period of not greater
than ten years. Deferred directors' fees and accumulated interest amounted to
$549 and $476 at December 31, 1997 and 1996, respectively.
(8) FEDERAL INCOME TAXES
The tax effect of significant temporary differences that give rise to the
Group's net deferred tax asset (liability) as of December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net loss reserve discounting............................. $ 1,173 $ 1,181
Net unearned premiums.................................... 794 828
Unrealized loss on investments........................... 188 440
Other.................................................... 272 298
------- -------
Deferred tax assets.................................... 2,427 2,747
------- -------
Deferred policy acquisition costs........................ 1,027 1,016
Unrealized gain on investment............................ 1,498 855
Other.................................................... 79 74
------- -------
Deferred tax liabilities............................... 2,604 1,945
------- -------
Net deferred tax asset (liability)..................... $ (177) $ 802
======= =======
</TABLE>
The deferred tax asset has not been reduced by a valuation allowance
because management believes that, while it is not assured, it is more likely
than not that it will generate sufficient future taxable income to utilize these
net excess tax deductions. The amount of the deferred tax asset considered
realizable, however, could be materially reduced in the near term if estimates
of future taxable income in the years in which the differences are expected to
reverse are not realized.
Actual income tax expense differed from expected tax expense, computed by
applying the United States federal corporate tax rate of 34% to income before
income taxes, for each of the three years ended December 31 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Expected tax expense....................................... $1,094 $276 $ 513
Tax-exempt interest........................................ (56) (73) (107)
Dividends received deduction............................... (28) (25) (35)
Other...................................................... (9) (7) (2)
------ ---- ------
Income tax expense....................................... $1,001 $171 $ 369
====== ==== ======
</TABLE>
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current.................................................... $ 918 $291 $ 424
Deferred................................................... 83 (120) (55)
------ ---- ------
Income tax expense....................................... $1,001 $171 $ 369
====== ==== ======
</TABLE>
F-15
<PAGE> 117
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RECONCILIATION OF STATUTORY FILINGS TO AMOUNTS REPORTED HEREIN
A reconciliation of the Group's statutory net income and surplus to the
Group's net income and surplus, under generally accepted accounting principles
(GAAP), is as follows:
<TABLE>
<CAPTION>
NET INCOME: 1997 1996 1995
----------- ------ ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income....................................... $2,129 $809 $1,219
Deferred policy acquisition................................ 30 (167) (174)
Deferred federal income taxes.............................. (83) 120 55
Pension.................................................... 116 (129) 24
Other...................................................... 25 7 14
------ ---- ------
GAAP net income............................................ $2,217 $640 $1,138
====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
SURPLUS: 1997 1996 1995
-------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statutory surplus..................................... $20,132 $16,087 $14,938
Deferred policy acquisition........................... 3,019 2,989 3,155
Deferred federal income taxes......................... (177) 802 516
Non-admitted assets................................... 177 185 192
Unrealized gain (loss) on fixed income securities..... (50) (682) 192
Other................................................. 135 (99) (30)
------- ------- -------
GAAP surplus.......................................... $23,236 $19,282 $18,963
======= ======= =======
</TABLE>
The Group's insurance companies are required to file statutory financial
statements with various state insurance regulatory authorities. Statutory
financial statements are prepared in accordance with accounting principles and
practices prescribed or permitted by the various states of domicile. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices differ from state to state, may differ from company to company within
a state, and may change in the future. Furthermore, the NAIC has a project to
codify statutory accounting practices, the result of which is expected to
constitute the only source of "prescribed" statutory accounting practices.
Accordingly, that project will likely change the definitions of what comprise
prescribed versus permitted statutory accounting practices, and may result in
changes to the accounting policies that insurance enterprises use to prepare
their statutory financial statements. The effects of any such changes are not
presently determinable and will not likely affect financial statements prepared
under generally accepted accounting principles.
(10) DEMUTUALIZATION
In October 1997 the Group's Boards of Directors approved a plan of
conversion for changing the corporate form of MMIC from the mutual form to the
stock form (demutualization). Under the plan, policyholders and certain other
groups will have the opportunity to acquire stock in a newly formed holding
company, Mercer Insurance Group, Inc. (MRCR).
MRCR will in turn acquire all of the newly issued stock of MMIC upon
conversion. Prior to the conversion, MRCR will not engage in any significant
operations and will have no assets or liabilities. The demutualization plan is
subject to approval from the Pennsylvania Insurance Department and ultimately
receipt of sufficient stock subscriptions to effect the transaction. The Group
has requested a ruling from the Internal Revenue Service regarding the tax
treatment of the demutualization as a tax-free reorganization. In
F-16
<PAGE> 118
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the event that the plan is executed, the converted companies will be subject to
certain insurance laws and regulations specific to stock insurance companies as
well as regulations of the Securities and Exchange Commission. Limitations on
the payment of dividends and Insurance Holding Company regulations are among the
types of regulatory requirements with which the Group will have to comply.
Assuming the conversion were complete as of December 31, 1997, dividends and
other distributions in 1997 to MRCR from MMIC would be limited to approximately
$2,000 without prior approval of the Insurance Department.
(11) FAIR AUTOMOBILE INSURANCE REFORM ACT OF 1990
The Fair Automobile Insurance Reform Act of 1990 (FAIRA) substantially
reformed various aspects of the State of New Jersey s motor vehicle system. As a
result of this legislation, the Group has paid $410, $420 and $467 in 1997, 1996
and 1995, respectively, as its share of the funding of the New Jersey Full
Insurance Underwriting Association (the JUA). The amounts represent the sixth,
seventh and eighth installments of eight to be paid toward funding the JUA. Such
amounts are based on the premiums written in New Jersey.
F-17
<PAGE> 119
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments, at fair value:
Fixed income securities, available-for-sale............... $35,752 $34,947
Equity securities......................................... 13,557 10,852
------- -------
Total investments...................................... 49,309 45,799
Cash and cash equivalents................................... 4,434 2,707
Premiums receivable......................................... 3,915 3,334
Reinsurance receivables..................................... 10,069 13,206
Prepaid reinsurance Premiums................................ 981 3,046
Deferred policy acquisition costs........................... 3,562 3,019
Accrued investment income................................... 612 625
Property and equipment, net................................. 1,459 1,413
Other assets................................................ 1,390 936
------- -------
Total assets........................................... $75,731 $74,085
------- -------
LIABILITIES AND SURPLUS
Liabilities:
Losses and loss adjustment expenses....................... $30,073 $31,872
Unearned premiums......................................... 15,403 14,723
Accounts payable and accrued expenses..................... 2,298 2,417
Deferred income taxes..................................... 538 177
Other reinsurance balances................................ 931 835
Other liabilities......................................... 929 825
------- -------
Total liabilities...................................... 50,172 50,849
------- -------
Surplus:
Unassigned surplus........................................ 22,030 20,693
Accumulated other comprehensive income:
Unrealized gains in investments, net of deferred income
taxes................................................. 3,529 2,543
------- -------
Total surplus.......................................... 25,559 23,236
------- -------
Total liabilities and surplus.......................... $75,731 $74,085
======= =======
</TABLE>
F-18
<PAGE> 120
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Revenue:
Net premiums earned....................................... $10,931 $ 8,691
Investment income, net of expenses........................ 1,108 1,214
Net realized investment gains............................. 378 300
Other revenue............................................. 81 99
------- -------
Total revenue..................................... 12,498 10,304
------- -------
Expenses:
Losses and loss adjustment expenses....................... 5,811 5,412
Amortization of deferred policy acquisition costs......... 3,400 2,268
Other expenses............................................ 1,337 1,349
------- -------
Total expenses.................................... 10,548 9,029
------- -------
Income before income tax.................................... 1,950 1,275
Income tax.................................................. 613 435
------- -------
Net income.................................................. $ 1,337 $ 840
------- -------
</TABLE>
F-19
<PAGE> 121
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Balance, beginning of period................................ $23,236 $19,282
Net income.................................................. 1,337 840
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period (net of
related income tax expense of $636, and $407)......... 1,235 790
Less:
Reclassification adjustment for gains included in net
income (net of related income tax expense of $128
and $102)........................................... (249) (198)
------- -------
986 592
------- -------
Comprehensive income...................................... 2,323 1,432
------- -------
Balance, end of period...................................... $25,559 $20,714
------- -------
</TABLE>
F-20
<PAGE> 122
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,337 $ 840
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation of property and equipment................. 69 49
Net accretion of discount.............................. (21) (27)
Net realized investment gain........................... (378) (300)
Deferred income tax.................................... (147) (48)
Change in assets and liabilities:
Premiums receivable.................................. (581) (1,003)
Reinsurance receivables.............................. 3,137 4,360
Prepaid reinsurance premiums......................... 2,065 (1,683)
Deferred policy acquisition costs.................... (543) 253
Other assets......................................... (441) 85
Losses and loss expenses............................. (1,799) (1,603)
Unearned premiums.................................... 680 1,009
Other liabilities.................................... 55 (2,317)
------- -------
Net cash provided by (used in) operating
activities....................................... 3,433 (385)
------- -------
Cash flows from investing activities:
Purchase of fixed income securities, available-for-sale... (7,163) (3,883)
Purchase of equity securities............................. (4,578) (3,187)
Sale and maturity of fixed income securities
available-for-sale..................................... 6,519 3,856
Sale of equity securities................................. 3,606 3,963
Change in receivable/payable for securities............... 25 (60)
Purchase of property and equipment........................ (115) (28)
------- -------
Net cash provided by (used in) investing
activities.......................................... (1,706) 661
------- -------
Net increase in cash and cash equivalents............ 1,727 276
Cash and cash equivalents at beginning of period............ 2,707 2,675
------- -------
Cash and cash equivalents at end of period.................. $ 4,434 $ 2,951
------- -------
Cash paid during the year for:
Interest.................................................. $ 0 $ 0
Income taxes.............................................. $ 992 $ 425
</TABLE>
F-21
<PAGE> 123
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Company, Mercer Mutual, or Sandler O'Neill. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any of the securities
offered hereby to any person in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful.
Neither the delivery of this Prospectus nor any sale hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company or Mercer Mutual, since the date as of which information
is furnished herein or since the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 6
Mercer Mutual Selected Consolidated Financial Data.......... 16
Risk Factors................................................ 19
Use of Proceeds............................................. 29
Dividend Policy............................................. 30
Market for the Common Stock................................. 30
Capitalization.............................................. 32
Pro Forma Data.............................................. 33
Management's Discussion and Analysis of Financial Condition 39
and Results of Operations.................................
Business.................................................... 48
Management of the Company................................... 67
The Conversion.............................................. 73
Certain Restrictions on Acquisition of the Company.......... 90
Description of Capital Stock................................ 93
Transfer Agent and Registrar................................ 94
Legal Opinions.............................................. 94
Experts..................................................... 94
Available Information....................................... 94
Glossary of Selected Insurance Terms........................ 96
Index to Consolidated Financial Statements.................. F-1
</TABLE>
Until , 1998, or days after commencement of the
Syndicated Community Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
<PAGE> 124
MERCER INSURANCE GROUP, INC.
(PROPOSED HOLDING COMPANY FOR
MERCER MUTUAL INSURANCE COMPANY)
UP TO
3,392,500 SHARES
COMMON STOCK
------------------------
PROSPECTUS
------------------------
SANDLER O'NEILL & PARTNERS, L.P.
AUGUST , 1998
<PAGE> 125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSE OF ISSUANCE AND DISTRIBUTION.
The Company anticipates the following expenses:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,423
Printing, postage, and mailing*............................. $ 350,000
Legal fees and expenses*.................................... $ 400,000
Accounting fees and expenses*............................... $ 175,000
Appraisal fees and expenses................................. $ 225,000
Blue sky fees and expenses (including counsel fees)*........ $ 25,000
Transfer and conversion agent fees and expenses*............ $ 100,000
Miscellaneous*.............................................. $ 90,577
----------
Total..................................................... $1,377,000
==========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pennsylvania law provides that a Pennsylvania corporation may indemnify
directors, officers, employees, and agents of the corporation against
liabilities they may incur in such capacities for any action taken or any
failure to act, whether or not the corporation would have the power to indemnify
the person under any provision of law, unless such action or failure to act is
determined by a court to have constituted recklessness or willful misconduct.
Pennsylvania law also permits the adoption of a Bylaw amendment, approved by
shareholders, providing for the elimination of a director's liability for
monetary damages for any action taken or any failure to taken any action unless
(1) the director has breached or failed to perform the duties of his/ her
office; and (2) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
The Bylaws of the Company provide for (1) indemnification of directors,
officers, employees, and agents of the Company and its subsidiaries; and (2) the
elimination of a director's liability for monetary damages, each to the fullest
extent permitted by Pennsylvania law.
Directors and officers are also insured against certain liabilities for
their actions as such by an insurance policy obtained by the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
(a) Exhibits:
1.1 Form of Agency Agreement among the Company, Mercer Mutual
and Sandler O'Neill**
2.1 Plan of Conversion, dated as of October 17, 1997, as amended
and restated on May 13, 1998, of Mercer Mutual Insurance
Company**
3.1.1 Articles of Incorporation of Mercer Insurance Group, Inc.**
3.1.2 Articles of Amendment to Articles of Incorporation of Mercer
Insurance Group, Inc.**
3.2 Bylaws of Mercer Insurance Group, Inc.**
4.1 Form of certificate evidencing shares of Mercer Insurance
Group, Inc.**
</TABLE>
II-1
<PAGE> 126
<TABLE>
<S> <C>
5. Opinion of Stevens & Lee re: Legality**
10.1 Mercer Insurance Group, Inc. Employee Stock Ownership Plan**
10.2 Employment Agreement, dated as October 1, 1997, between Mercer Insurance Group, Inc., Mercer Mutual
Insurance Company and William C. Hart**
10.3 Employment Agreement, dated as of October 1, 1997, between Mercer Insurance Group, Inc., Mercer Mutual
Insurance Company and Andrew R. Speaker**
10.4 Consultant's Agreement, dated April 1, 1994, among Mercer Mutual Insurance Company, Mercer Insurance
Company and Roland D. Boehm**
10.5 Consultant's Agreement, dated August 5, 1986, among Mercer Mutual Insurance Company, Mercer Insurance
Company and Eric W. Turner, Jr.**
10.6 Mercer Mutual Insurance Company Corporate Director Deferred Compensation Plan dated April 1, 1986, as
amended**
23.1 Consent of KPMG Peat Marwick LLP and Report on Schedules (contained in Schedules)
23.2 Consent of Alex Sheshunoff & Company
23.3 Consent of Stevens & Lee (contained in Exhibit 5)
24.1 Power of Attorney**
27.1 Financial Data Schedule
99.1.1 Conversion Valuation Report, as amended through June 4, 1998, prepared for Mercer Mutual Insurance Company
by Alex Sheshunoff & Company**
99.1.2 Conversion Valuation Update Report dated August 19, 1998 prepared for Mercer Mutual Insurance Company by
Alex Sheshunoff & Company
99.2 Stock Order Form**
99.3 Question and Answer Brochures**
99.4 Letters to prospective purchasers**
99.5 Mercer Mutual Insurance Company Policyholder Information Statement**
</TABLE>
- ---------------
** Previously Filed
(b) Financial Statement Schedules:
Independent Auditor's Consent and Report on Schedules
<TABLE>
<S> <C>
Schedule I -- Summary of Investments -- Other than Investments in
Related Parties.
Schedule II -- Condensed Financial Information of Registrant (Not
Applicable).
Schedule IV -- Reinsurance.
Schedule VI -- Supplemental Information Concerning Property -- Casualty
Insurance Operations.
</TABLE>
II-2
<PAGE> 127
INDEPENDENT AUDITOR'S CONSENT AND REPORT ON SCHEDULES
The Board of Directors
Mercer Mutual Insurance Company:
The audits referred to in our report dated February 18, 1998 included the
related financial statement schedules as of December 31, 1997, and for each of
the years in the three-year period ended December 31, 1997, included in the
registration statement. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
August 20, 1998
II-3
<PAGE> 128
SCHEDULES TO REGISTRATION STATEMENT
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN C COLUMN D
COLUMN A COLUMN B MARKET BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------ -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies and
authorities............................................ $31,203 $31,031 $31,031
States, municipalities and political subdivisions......... 3,396 3,517 3,517
All other................................................. 548 555 555
------- ------- -------
Total fixed maturities................................. 35,147 35,103 35,103
======= ======= =======
Equity securities:
Common stocks
Public utilities....................................... 102 111 111
Banks, trust and insurance companies................... 842 3,472 3,472
Industrial, miscellaneous and all other................ 5,854 7,113 7,113
------- ------- -------
Total equity securities.............................. 6,798 10,696 10,696
======= ======= =======
Total investments.................................... $41,945 xxxxxx $45,799
======= =======
</TABLE>
II-4
<PAGE> 129
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SCHEDULE IV -- REINSURANCE
<TABLE>
<CAPTION>
COLUMN D COLUMN F
COLUMN C ASSUMED PERCENTAGE
COLUMN B CEDED TO FROM COLUMN E OF AMOUNT
COLUMN A GROSS OTHER OTHER NET ASSUMED
PREMIUMS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- -------- -------- --------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
For the year ended December 31,
1997............................... 26,858 9,487 598 17,969 3.3%
For the year ended December 31,
1996............................... 24,760 14,412 10,286 20,634 49.8%
For the year ended December 31,
1995............................... 24,700 13,686 9,803 20,817 47.1%
</TABLE>
II-5
<PAGE> 130
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SCHEDULE VI -- SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
DEFERRED RESERVE FOR DISCOUNT
POLICY LOSSES AND IF ANY NET NET
AFFILIATION WITH ACQUISITION LOSS ADJ. DEDUCTED IN UNEARNED EARNED INVESTMENT
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME
---------------- ----------- ----------- ----------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Property and
Casualty Entities
For the year ended
December 31, 1997...... 3,019 31,872 0 14,723 17,969 2,350
For the year ended
December 31, 1996...... 2,989 35,221 0 13,179 20,634 2,289
For the year ended
December 31, 1995...... 3,155 36,176 0 18,253 20,817 2,132
</TABLE>
<TABLE>
<CAPTION>
COLUMN I COLUMN K
COLUMN H COLUMN J
LOSSES AND LAE PAID
INCURRED LOSSES AND
------------------ LOSS NET
CURRENT PRIOR AMORTIZATION ADJUSTMENT WRITTEN
YEAR YEAR OF DPAC EXPENSES PREMIUMS
-------- ------ ------------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Property and Casualty
Entities
For the year ended December 31, 1997... 11,649 (1,055) 4,706 10,817 17,461
For the year ended December 31, 1996... 16,445 (1,644) 5,491 14,084 20,124
For the year ended December 31, 1995... 14,251 (955) 5,944 12,237 21,245
</TABLE>
II-6
<PAGE> 131
ITEM 17. UNDERTAKINGS.
(a) Rule 415 Offering: The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any fact or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Request for acceleration of effective date: Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
bylaws of the registrant, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
<PAGE> 132
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 4 to Registration Statement No.
333-41497 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Borough of Pennington, State of New Jersey, on August 19,
1998.
MERCER INSURANCE GROUP, INC.
By: /s/ ANDREW R. SPEAKER
------------------------------------
Andrew R. Speaker,
Executive Vice President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 4 to Registration Statement No. 333-41497 has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ WILLIAM C. HART* President, Chief Executive August 19, 1998
- ----------------------------------------------------- Officer, and Director
William C. Hart (Principal Executive Officer)
/s/ ROLAND D. BOEHM* Vice Chairman of the Board of August 19, 1998
- ----------------------------------------------------- Directors
Roland D. Boehm
/s/ JAMES J. FREDA* Director August 19, 1998
- -----------------------------------------------------
James J. Freda
/s/ GEORGE T. HORNYAK, JR.* Director August 19, 1998
- -----------------------------------------------------
George T. Hornyak, Jr.
/s/ RICHARD U. NIEDT* Director August 19, 1998
- -----------------------------------------------------
Richard U. Niedt
/s/ ERIC W. TURNER* Director August 19, 1998
- -----------------------------------------------------
Eric W. Turner
/s/ RICHARD G. VAN NOY* Chairman of the Board of August 19, 1998
- ----------------------------------------------------- Directors
Richard G. Van Noy
</TABLE>
II-8
<PAGE> 133
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ ANDREW R. SPEAKER Executive Vice President, Chief August 19, 1998
- ----------------------------------------------------- Operating Officer, Chief
Andrew R. Speaker Financial Officer, Treasurer
and Director (Principal
Financial and Accounting
Officer)
*By /s/ ANDREW R. SPEAKER
-------------------------------------------------
Andrew R. Speaker
Attorney-in-fact
</TABLE>
II-9
<PAGE> 134
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER TITLE
- ------ -----
<C> <S>
1.1 Form of Agency Agreement among the Company, Mercer Mutual
and Sandler O'Neill**
2.1 Plan of Conversion, dated as of October 17, 1997, as amended
and restated on May 13, 1998, of Mercer Mutual Insurance
Company**
3.1.1 Articles of Incorporation of Mercer Insurance Group, Inc.**
3.1.2 Articles of Amendment to Articles of Incorporation of Mercer
Insurance Group, Inc.**
3.2 Bylaws of Mercer Insurance Group, Inc.**
4.1 Form of certificate evidencing shares of Mercer Insurance
Group, Inc.**
5. Opinion of Stevens & Lee re: Legality**
10.1 Mercer Insurance Group, Inc. -- Employee Stock Ownership
Plan**
10.2 Employment Agreement, dated as of October 1, 1997, between
Mercer Insurance Group, Inc., Mercer Mutual Insurance
Company and William C. Hart**
10.3 Employment Agreement, dated as of October 1, 1997, between
Mercer Insurance Group, Inc., Mercer Mutual Insurance
Company and Andrew R. Speaker**
10.4 Consultant's Agreement, dated April 1, 1994, among Mercer
Mutual Insurance Company, Mercer Insurance Company and
Roland D. Boehm**
10.5 Consultant's Agreement, dated August 5, 1986, among Mercer
Mutual Insurance Company, Mercer Insurance Company and Eric
W. Turner, Jr.**
10.6 Mercer Mutual Insurance Company Corporate Director Deferred
Compensation Plan dated April 1, 1986, as amended.**
23.1 Consent of KPMG Peat Marwick LLP and Report on Schedules
(contained in Schedules)
23.2 Consent of Alex Sheshunoff & Company
23.3 Consent of Stevens & Lee (contained in Exhibit 5)
24.1 Power of Attorney**
27.1 Financial Data Schedule
99.1.1 Conversion Valuation Report, as amended through June 4,
1998, prepared for Mercer Mutual Insurance Company by Alex
Sheshunoff & Company**
99.1.2 Conversion Valuation Update Report dated August 19, 1998
prepared for Mercer Mutual Insurance Company by Alex
Sheshunoff & Company
99.2 Stock Order Form**
99.3 Question and Answer Brochures**
99.4 Letters to prospective purchasers**
99.5 Mercer Mutual Insurance Company Policyholder Information
Statement**
</TABLE>
- ---------------
** Previously Filed
II-10
<PAGE> 1
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
Exhibit 23.2
August 19, 1998
Board of Directors
Mercer Insurance Group, Inc.
10 North Highway 31
Pennington, New Jersey 08534
Directors:
We hereby consent to the inclusion of our firm's name in (a) the Application for
Approval to Convert from Mutual to Stock Form of Mercer Mutual Insurance
Company dated November 26, 1997, as filed with the Pennsylvania Department of
Insurance, and any amendments thereto, and (b) the Registration Statement on
Form S-1 of Mercer Insurance Group, Inc. filed with the Securities and Exchange
Commission and any amendments thereto. We also hereby consent to the inclusion
of, summary of and reference to (i) our Conversion Valuation Report dated
November 16, 1997, as updated through August 19, 1998, and (ii) our statement
concerning the value of the subscription rights in such filings and in the
Prospectus of Mercer Insurance Group, Inc.
Sincerely,
/s/ Gerard Feil
Alex Sheshunoff & Co.
Investment Banking
98 SAN JACINTO BOULEVARD * SUITE 1925 * AUSTIN, TEXAS 78701
PHONE 512-479-8200 * FAX 512-472-8953
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 35,752
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,557
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 49,309
<CASH> 4,434
<RECOVER-REINSURE> 1,322
<DEFERRED-ACQUISITION> 3,562
<TOTAL-ASSETS> 75,731
<POLICY-LOSSES> 30,073
<UNEARNED-PREMIUMS> 15,403
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 25,559
<TOTAL-LIABILITY-AND-EQUITY> 75,731
10,931
<INVESTMENT-INCOME> 1,108
<INVESTMENT-GAINS> 378
<OTHER-INCOME> 81
<BENEFITS> 5,811
<UNDERWRITING-AMORTIZATION> 3,400
<UNDERWRITING-OTHER> 1,337
<INCOME-PRETAX> 1,950
<INCOME-TAX> 613
<INCOME-CONTINUING> 1,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,337
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 31,872
<PROVISION-CURRENT> 6,194
<PROVISION-PRIOR> (383)
<PAYMENTS-CURRENT> 1,644
<PAYMENTS-PRIOR> 2,743
<RESERVE-CLOSE> 30,073
<CUMULATIVE-DEFICIENCY> (5,797)
</TABLE>
<PAGE> 1
EXHIBIT 99.1.2
CONVERSION VALUATION UPDATE REPORT
Prepared for
MERCER MUTUAL INSURANCE COMPANY
and
MERCER INSURANCE GROUP, INC.
Pennington, New Jersey
Dated
August 19, 1998
Alex Sheshunoff & Company
Investment Banking
Nineteenth Floor
98 San Jacinto Boulevard
Austin, Texas 78701
(800) 279-2241
<PAGE> 2
[Alex Sheshunoff & Co. Letterhead]
Investment Banking
August 19, 1998
Board of Directors
Mercer Mutual Insurance Company
10 North Highway 31
Pennington, New Jersey 08534
Directors:
You have requested that we update our independent appraisal (the "Appraisal")
of the estimated pro forma market value of Mercer Mutual Insurance Group (the
"Company" or "Mercer") as a subsidiary of Mercer Insurance Group, Inc. (the
"Corporation"), Pennington, New Jersey, a newly organized Pennsylvania
corporation. The Corporation will offer common stock ("Common Stock")
consistent with our estimate of the pro forma market value of the Company. Such
shares of Common Stock are to be issued in connection with the Company's
conversion from a Pennsylvania mutual insurance company to a stock insurance
company in accordance with the Company's "Amended and Restated Plan of
Conversion from Mutual to Stock Organization" as adopted on October 17, 1997,
as amended and restated November 12, 1997 (the "Plan") and as filed on November
26, 1997 with the Insurance Department of the State of Pennsylvania (the
"Reorganization"). Our Appraisal as of November 26, 1997 and updates as of
March 3, 1998 and June 4, 1998 are incorporated herein by reference.
This Updated Appraisal was prepared and provided to the Company in conjunction
with the filing of the amended Application for Conversion as filed with the
Insurance Department and Pre-effective Amendment No. 4 to the Registration
Statement on Form S-1 with the Securities and Exchange commission. Sheshunoff
believes it is independent of the Company. Except for the fee which it will
receive for providing this appraisal, neither Sheshunoff nor the Company have
an economic interest in each other and neither has derived and does not
anticipate deriving gross revenues of a material amount from business
relationships with each other.
Alex Sheshunoff & Co. Investment Banking ("Sheshunoff"), is an independent
financial institution consulting firm recognized for its expertise in the
financial services industry. Sheshunoff is engaged exclusively in the financial
services industry in investment banking, business valuations, management
consulting and executive management educational forums. Sheshunoff's investment
banking services include advice on business and financial strategy,
<PAGE> 3
Mercer Mutual Insurance Company
August 19, 1998
Page 2
mergers & acquisitions, fairness opinions, evaluation of capital adequacy and
efficiency, finance, capital structure, initial public offerings, primary
shares offerings, and mutual to stock conversion valuations.
Sheshunoff has relied upon, without independent verification, the accuracy and
completeness of the information provided to, and reviewed by, it for the
purposes of this Appraisal. Sheshunoff has not made an independent evaluation
or valuation of the assets or liabilities of the Company. With respect to
financial estimates and projections, Sheshunoff assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of management of the Company and Sheshunoff assumed such projections
will be realized in the amounts and at the times contemplated thereby. We are
not actuaries nor have we made an assessment of the underwriting risk of the
policies in force at the Company. We have assumed that the reserves established
by the Company are adequate to meet future losses. The Appraisal also utilized
information obtained from other publicly available sources which Sheshunoff
believes to be accurate, however, we cannot attest to the accuracy of such
information.
Concurrent with the preparation of this Updated Appraisal, Sheshunoff: (i.)
reviewed the Corporation's Registration Statement on Form S-1 and a draft of
pre-effective Amendment No. 4 thereto, as filed with the Securities and
Exchange Commission ("SEC"); (ii.) reviewed financial statements and other
financial and operating data concerning the Company prepared by its management
for the period ended June 30, 1998; (iii.) reviewed certain financial
information and projections of the Company as prepared by its management; (iv.)
discussed certain aspects of the past, current and future business practices,
operations, financial condition and prospects of the Company with certain
senior members of the Company's management; (vi) reviewed the market valuation
of common stocks of property/casualty insurance companies, companies which
recently converted from mutual to stock organization and companies having made
recent initial public offerings; (vi.) compared the Company to other
property/casualty companies we deemed appropriate; (vii.) compared the Company
to certain publicly available industry averages and aggregates as provided by
authoritative industry sources; and (viii) performed such studies, business and
financial investigations we deemed appropriate.
This Updated Appraisal is not intended and must not be construed as a
recommendation to the Policyholders or any other persons as to the purchase of
common stock of the Corporation in the Offering or otherwise. This Updated
Appraisal is based upon a number of assumptions and estimates which may change
from time to time and we provide no guarantee, assurance, representations or
warranties that any person who purchases shares
<PAGE> 4
Mercer Mutual Insurance Company
August 19, 1998
Page 3
of the Corporation's common stock in this conversion will subsequently be able
to sell such shares of common stock at a price equivalent to the price
indicated in this Updated Appraisal. Sheshunoff is not a seller of securities
within the meaning of federal and state securities laws and any opinion or
report by Sheshunoff is not meant and shall not be utilized or construed as an
offer or solicitation with respect to the purchase or sale of any securities in
the Offering.
This appraisal will be updated at the conclusion of the subscription offering,
or as requested by the Company. Sheshunoff assumes no responsibility to update
the appraisal at any other time. Any changes made in the estimated market value
of Mercer as a subsidiary of the corporation will be detailed in our later
updated appraisal reports.
It is our opinion, pursuant to the instructions contained in the Plan that as
of August 19, 1998, the estimated pro forma market value of the Mercer as a
subsidiary of the Corporation was $29,500,000 at the mid-point. Based upon a
range 15% above and below the midpoint, the estimated pro forma range was
$25,075,000 million at the minimum and $33,925,000 million at the maximum.
Very truly yours,
/s/ Gerard Feil
- ------------------------
Alex Sheshunoff & Co. Investment Banking
<PAGE> 5
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
August 19, 1998
RECENT FINANCIAL PERFORMANCE OF THE COMPANY
Overall, the trends discussed in our Appraisal and updated appraisals continued
during the second quarter of 1998. Mercer reported net income of $641,000 for
the three months ended June 30, 1998, resulting in net income of $1.3 million
for the first six months of 1998. The Company continued to experience
catastrophe losses below historic norms during the quarter. Loss and loss
adjustment expenses were 53.2% of net premiums earned during the six months
ended June 30, 1998 compared to 62.3% during the comparable 1997 period.
The combined ratio during the 1998 six month period was 96.5% (compared to
103.9% during the comparable period in 1997) and the underwriting gain was
$383,000 compared to an underwriting loss of $338,000 during the first six
months of 1997. The positive underwriting trend was also the result of Mercer's
strategy of increasing its commercial and casualty business to diversify its
risk from weather related business.
Underwriting expenses increased by 31% to $43.7 million for the first six
months of 1998. The increase was primarily attributable to an increase in net
commissions, which resulted from changes in Mercer's reinsurance program.
Direct premiums written for the six months ended June 30, 1998 increased by
8.6% to $15.2 million compared to the first quarter of 1997. Commercial lines
premiums increased the largest by $1.2 million, or 21.2% as a result of the
introduction of the religious institution program and a commercial automobile
program in 1997.
Ceded premiums written decreased by $4.4 million or 71.3% during the first six
months of 1998. Effective January 1, 1998, Mercer converted its reinsurance
program to one that is predominately an excess of loss program and increased
its retention levels. As a result, there have been significant reductions in
premiums ceded to outside reinsurers. Net premiums written increased $5.7
million or 70.6% to $13.7 million.
Net investment income decreased 8.7% to $1.1 million. The Company's principal
investment is taxable fixed income securities, which produced a yield of 6.42%
during the period compared to a yield of 6.72% during the comparable period of
1997. In addition, investment income from equity securities decreased by
$27,000.
<PAGE> 6
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
August 19, 1998
Page 2
The variability of earnings in the Property and Casualty business and the
inability to predict near-term earnings remains an important risk factor
in the way the market values these Companies. We continue to believe Mercer
should be valued both on its recent historic earnings and other trends as well
as some measure of adjusted earnings to reflect the fact that 1997 and the
early part of 1998 both experienced very low levels of catastrophe losses.
In summary, extremely low catastrophe losses and the bull market continued to
result in much improved earnings for Mercer. Like many P & C companies, it is
difficult to imagine the conditions resulting in 1997 profitability could be
better in 1998. We applaud management in its efforts to diversify risk and
position the Company for future expansion. However, Mercer will continue to
face the same pressures of costly competition and, particularly after
conversion, excess capital.
COMPARATIVE GROUP PERFORMANCE
Table 1 presents the comparative group performance as of August 18, 1998. There
was a significant market sell-off during July and early August, leaving many
stocks at prior year-end prices. The sell-off hit almost all market segments,
including insurance company stocks. Among the comparative group, price declines
ranged as high as 22.8%. Eight companies experienced a decline and three price
appreciation with the median price change a decline of 8.8%.
<PAGE> 7
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
August 19, 1998
Page 3
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
Between June 3, 1998 and August 19, 1998
Page 3
<TABLE>
<CAPTION>
Price Price Percent
Company 03-Jun 18-Aug Change
- ------- ------ ------ -------
<S> <C> <C> <C>
Farm Family $39.38 $36.38 (7.62)
Motor Club of America 15.63 13.38 (14.43)
Allied Group 46.19 47.38 2.58
Alfa 19.00 20.25 6.58
State Auto 16.06 14.63 (8.09)
Selective Insurance 25.25 19.50 (22.77)
Harleysville 23.00 24.75 7.61
Donegal 19.88 16.75 (15.74)
Old Guard 19.94 16.88 (15.35)
Merchants 24.69 20.63 (16.44)
Meridian 19.63 18.50 (8.75)
Average (8.40)
Median (8.75)
</TABLE>
While stock prices overall have declined, we have not adjusted our estimate of
the pro forma market value of Mercer pursuant to the Reorganization. While
there may have been some softening in investor interest in these offerings in
light of the market decline, the expectation remains that the offering will be
fully subscribed within the valuation range. However, if the market falls
further, some adjustment may be necessary.
<PAGE> 8
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
August 19, 1998
Page 4
CONCLUSION
Based upon the following, we believe the estimated pro forma market value of
Mercer pursuant to the Reorganization was $29,500,000. The resulting range was
$25,075,000 at the minimum and $33,925,000 at the maximum.
