<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO. 333-41497
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
June 4, 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 June
4, 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 First Union National Bank
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 three months ended March 31, 1998, Mercer
Mutual and its subsidiaries had consolidated
revenue of $6.1 million and net income of
$696,000. At March 31, 1998, Mercer Mutual and
its subsidiaries had consolidated assets of
$74.7 million, total equity of $24.5 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. The Company also has
received the approvals of the Pennsylvania
Department to acquire control of Mercer Mutual
and the New Jersey Department to acquire
control of MIC.
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 June
4, 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
informa-
8
<PAGE> 12
tion provided by the Company, and 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 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
9
<PAGE> 13
cancel the Offerings and all subscription funds
will be returned promptly to subscribers
without interest.
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.
10
<PAGE> 14
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 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
11
<PAGE> 15
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
account at First Union National Bank. 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
12
<PAGE> 16
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 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
13
<PAGE> 17
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."
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.
14
<PAGE> 18
Each person exercising subscription rights will
be required to certify that his or her purchase
of Common Stock is solely for the 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 three months ended March 31, 1997
and 1998 and the consolidated balance sheet data at December 31, 1993 and 1994
and at March 31, 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>
THREE MONTHS ENDED
MARCH 31, 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........... $ 7,122 $ 6,420 $ 28,453 $24,958 $24,699 $24,355 $23,349
Net premiums written(1)(2)........ 6,440 3,082 17,461 20,124 21,245 19,377 18,964
Statement of Income Data:
Net premiums earned............... 5,265 4,384 17,969 20,634 20,817 18,681 18,225
Net investment income............. 553 614 2,350 2,289 2,132 1,904 2,196
Net realized investment gains..... 211 89 589 596 53 277 509
Other income...................... 43 37 173 155 161 166 159
---------- ------- ---------- ------- ------- ------- -------
Total revenues............ 6,072 5,124 21,081 23,674 23,163 21,028 21,089
---------- ------- ---------- ------- ------- ------- -------
Losses and Expenses:
Losses and loss adjustment
expenses(2)(3)................ 2,861 2,908 10,594 14,801 13,296 14,107 11,631
Other underwriting expenses..... 2,195 1,634 7,269 8,062 8,360 8,976 8,494
---------- ------- ---------- ------- ------- ------- -------
Total expenses............ 5,056 4,542 17,863 22,863 21,656 23,083 20,125
---------- ------- ---------- ------- ------- ------- -------
Income (loss) before federal
income taxes.................... 1,016 582 3,218 811 1,507 (2,055) 964
Federal income tax expense
(benefit)....................... 320 227 1,001 171 369 (681) 165
---------- ------- ---------- ------- ------- ------- -------
Net income (loss)(3).............. $ 696 $ 355 $ 2,217 $ 640 $ 1,138 $(1,374) $ 799
========== ======= ========== ======= ======= ======= =======
Selected Balance Sheet Data
(at period end): (UNAUDITED) (UNAUDITED)
Total investments and cash...... $ 50,625 $44,776 $ 48,506 $45,434 $44,022 $35,470 $40,414
Total assets.................... 74,697 71,625 74,085 74,074 77,523 71,750 71,110
Total liabilities............... 50,162 52,390 50,849 54,792 58,560 57,547 53,469
Total equity.................... $ 24,535 19,235 $ 23,236 $19,282 $18,963 $14,202 $17,641
GAAP Ratios:
Loss and loss adjustment expense
ratio(3)(4)................... 54.3% 66.3% 58.9% 71.7% 63.9% 75.5% 63.8%
Underwriting expense ratio(5)... 41.7% 37.3% 40.5% 39.1% 40.2% 48.0% 46.6%
Combined ratio(6)............... 96.0% 103.6% 99.4% 110.8% 104.1% 123.5% 110.4%
Statutory Data:
Statutory combined ratio........ 93.8% 113.6% 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............... $ 21,498 $16,759 $ 20,132 $16,087 $14,938 $11,133 $12,979
Ratio of statutory net written
premiums to statutory
surplus(8).................... 1.20x .74x .87x 1.25x 1.42x 1.74x 1.46x
Pro Forma Data(9):
Net income...................... $ 654 $ 2,051
Net income per share of Common
Stock......................... $ 0.29 $ 0.90
Weighted average number of
shares of Common Stock
outstanding................... 2,284,960 2,269,288
</TABLE>
- ---------------
(1) The increase from March 31, 1997 to March 31, 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 March 31, 1997 and March 31, 1998
is unavailable.
(8) Annualized for the periods ended March 31, 1997 and 1998.
(9) Information excerpted from unaudited Pro Forma Condensed Consolidated
Statements of Income for the year ended December 31, 1997 and the three
months ended March 31, 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
three months ended March 31, 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 March 31, 1998 was $21.5
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 three months ended March 31, 1998 and the year ended December 31,
1997, the Insurance Companies' largest agency accounted for approximately 10.5%
and 7.3%, respectively, of the Insurance Companies' direct premiums written, and
generated approximately $749,000 and $2.1 million, respectively, in premium
revenue for the Insurance Companies. For the three months ended March 31, 1998
and the year ended December 31, 1997, the Insurance Companies' 10 largest
agencies accounted for 30.5% 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 March 31, 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 to be granted under
the Compensation Plan are 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 are (i) to solicit opposition to the Plan so that the Conversion
will not be approved by the Eligible Policyholders and Mercer Mutual, a
competitor of Franklin, will 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. The litigation matters between
Franklin and Mercer Mutual are still pending.
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. 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."
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
27
<PAGE> 31
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."
28
<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 March 31,
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
MARCH 31, 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.................. 21,389 21,389 21,389 21,389 21,389
Unrealized gains................... 3,146 3,146 3,146 3,146 3,146
Less:
Common stock to be acquired by
ESOP(3)......................... -- (2,508) (2,950) (3,393) (3,769)
------ ------ ------ ------ ------
Total(4)................... 24,535 45,236 49,139 53,042 56,367
====== ====== ====== ====== ======
</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 March
31, 1998 gives effect to the Conversion and implementation of the ESOP as if
they had occurred as of March 31, 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 three months
ended March 31, 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 MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
CONSOLIDATED ADJUSTMENTS CONSOLIDATED(4)
------------ ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Investments:
Fixed income securities............................ $34,710 $20,701(1) $55,411
Equity securities.................................. 12,957 12,957
------- ------- -------
Total investments.................................. 47,667 20,701 68,368
Cash and cash equivalents............................ 2,958 2,958
Receivables.......................................... 15,811 15,811
Prepaid reinsurance premiums......................... 1,855 1,855
Deferred policy acquisition costs, and other
assets............................................. 6,406 6,406
------- ------- -------
Total assets......................................... $74,697 $20,701 $95,398
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses................ $31,190 $31,190
Unearned premiums.................................. 14,707 14,707
Other liabilities.................................. 4,265 4,265
------- ------- -------
Total liabilities.................................. 50,162 0 50,162
Shareholders' equity:
Common stock....................................... -- 23,209 23,209
Unearned Employee Stock Ownership Plan
compensation.................................... -- (2,508)(2) (2,508)
Retained earnings.................................. 21,389 21,389
Accumulated other comprehensive income.............
Unrealized gains in investments net of deferred
income taxes.................................... 3,146 3,146
------- ------- -------
Total shareholders' equity........................... 24,535 20,701(3) 45,236
------- ------- -------
Total liabilities and stockholders' equity........... $74,697 $20,701 $95,398
======= ======= =======
</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
THREE MONTHS ENDED MARCH 31, 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........................... $5,265 $ 5,265
Investment income, net of expenses............ 553 553
Net realized investment gains................. 211 211
Other revenue................................. 43 43
------ -------- ---------
Total revenue......................... 6,072 0 6,072
------ -------- ---------
Expenses:
Losses and loss adjustment expenses........... 2,861 2,861
Amortization of deferred policy acquisition
costs...................................... 1,477 1,477
Operating expenses............................ 718 63(2)(3) 781
------ -------- ---------
Total expenses........................ 5,056 63 5,119
------ -------- ---------
Income before taxes............................. 1,016 (63) 953
Income taxes.................................... 320 (21)(4) 299
------ -------- ---------
Net income...................................... $ 696 $ (42) $ 654
====== ======== =========
Earnings per share data:
Net income per share of Common Stock.......... $ 0.29
Weighted average number of shares of
Common Stock outstanding................... 2,284,960(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 three months ended March 31, 1998, pro forma net
income (after tax), as reported herein, would have increased by $702 and $175
for the year ended December 31, 1997 and the three months ended March 31, 1998,
respectively, and pro forma net income per share, as reported herein, would have
increased by $0.31 and $0.08, 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 MARCH 31, 1998
------------------------ ------------------------
MINIMUM MAXIMUM MINIMUM MAXIMUM
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Compensation expense.............. $ 251 $ 339 $ 63 $ 85
Net income........................ $ 2,051 $ 1,993 $ 654 $ 637
Net income per share of Common
Stock........................... $ 0.90 $ 0.65 $ 0.29 $ 0.21
Weighted average number of shares
of Common Stock outstanding..... 2,269,288 3,070,213 2,284,960 3,091,416
</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................ -- 6,269 6,269 --
--------- -------- --------- ---------
March 31, 1998.................. 2,507,500 (219,406) 2,288,094 2,284,900
========= ======== ========= =========
</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 three months ended March
31, 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>
THREE MONTHS ENDED
MARCH 31,
(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..... 7,122 10.9% 6,420 28,453 14.0% 24,958 1.0% 24,699
Assumed premiums written.... 154 41.3% 109 547 (89.1)% 5,013 (51.3)% 10,287
Ceded premiums written...... 836 (75.7)% 3,447 11,539 17.2% 9,847 (28.3)% 13,741
------ ----- ------ ------ ------
Net premiums written........ 6,440 109.0% 3,082 17,461 (13.2)% 20,124 (5.3)% 21,245
Change in unearned
premiums................. (1,175) 1,302 508 510 (428)
------ ----- ------ ------ ------
Net premiums earned......... 5,265 20.1% 4,384 17,969 (12.9)% 20,634 (0.9)% 20,817
Net investment income....... 553 (9.9)% 614 2,350 2.7% 2,289 7.4% 2,132
Net realized investment
gains.................... 211 137.1% 89 589 (1.2)% 596 1,024.5% 53
Other income................ 43 16.2% 37 173 11.6% 155 (3.7)% 161
------ ----- ------ ------ ------
Total revenue....... 6,072 18.5% 5,124 21,081 (11.0)% 23,674 2.2% 23,163
------ ----- ------ ------ ------
Losses and expenses:
Loss and loss adjustment
expenses................. 2,861 (1.6)% 2,908 10,594 (28.4)% 14,801 11.3% 13,296
Other underwriting
expenses................. 2,195 34.3% 1,634 7,269 (9.8)% 8,062 (3.6)% 8,360
------ ----- ------ ------ ------
Total expenses...... 5,056 11.3% 4,542 17,863 (21.9)% 22,863 5.6% 21,656
------ ----- ------ ------ ------
Income before federal income
taxes....................... 1,016 74.6% 582 3,218 296.8% 811 (46.2)% 1,507
Federal income tax expenses... 320 41.0% 227 1,001 485.4% 171 (53.7)% 369
------ ----- ------ ------ ------
Net income.................... 696 96.1% 355 2,217 246.4% 640 (43.8)% 1,138
====== ===== ====== ====== ======
Loss and loss adjustment
expense ratio............... 54.3% 66.3% 58.9% 71.7% 63.9%
Expense ratio................. 41.7% 37.3% 40.5% 39.1% 40.2%
Combined ratio................ 96.0% 103.6% 99.4% 110.8% 104.1%
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
Premiums -- Direct premiums written for the three months ended March 31,
1998 increased by $702,000 or 10.9%, as compared to the same period in 1997,
reflecting Mercer Mutual's strategic decision to increase its commercial
business. Commercial lines premiums increased by $731,000, or 25.8%, for the
three months ended March 31, 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 slightly more than
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 $30,000.
Assumed premiums written increased by $45,000 or 41.3%, 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.
Ceded premiums written decreased $2.6 million, or 75.7%, for the three
months ended March 31, 1998 compared to the three months ended March 31, 1997,
reflecting changes in Mercer Mutual's reinsurance
40
<PAGE> 44
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 three months ended March 31, 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 $3.4 million or 109%, to $6.4 million for
the three months ended March 31, 1998 from the three months ended March 31,
1997. For the same comparative period, net premiums earned increased by
$881,000, or 20.1%, to $5.3 million. The increases in net premiums written and
net premiums earned for the three months ended March 31, 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 $61,000, or 9.9%,
to $553,000 for the three months ended March 31, 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 6.55% for the three months ended March 31,
1998 compared to 6.67% for the same period in 1997. In addition, investment
income from equity securities decreased by $17,000 for the three months ended
March 31, 1998 compared to the same period in 1997.
Net Realized Investment Gains -- Net realized investment gains increased by
$122,000 for the three months ended March 31, 1998 compared to the three months
ended March 31, 1997. Realized investment gains in the first quarter of 1998
reflect the continued favorable equity market conditions in which Mercer Mutual
participates.
Underwriting Results -- For the three months ended March 31, 1998, Mercer
Mutual had an underwriting gain of $209,000 and a combined ratio of 96.0%,
compared to an underwriting loss of $158,000 and a combined ratio of 103.6% for
the three months ended March 31, 1997. The improvement in underwriting results
reflects the low claim volume for the quarter, due in part to Mercer Mutual's
strategic decision to increase its commercial and casualty business which is
less sensitive to weather-related property losses, and the restructuring of its
reinsurance program.
Losses and Loss Adjustment Expenses -- Net losses and loss adjustment
expenses incurred decreased by $47,000, or 1.6%, to $2.9 million for the three
months ended March 31, 1998 from the same period in 1997. Loss and loss
adjustment expenses were 54.3% of net premiums earned for the three months ended
March 31, 1998 compared to 66.3% for the three months ended March 31, 1997. The
favorable ratio for the first quarter 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
three months ended March 31, 1998 were the lowest number reported during the
first quarter in the past five years.
Underwriting Expenses -- Underwriting expenses increased by $561,000, or
34.3%, to $2.2 million for the three months ended March 31, 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 $320,000 for
the three months ended March 31, 1998 compared to $227,000 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 $696,000 for the three months
ended March 31, 1998, compared to $355,000 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
43
<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
44
<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 March 31, 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
45
<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.
46
<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.
47
<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 three months
ended March 31, 1998 and each of the years in the three-year period ended
December 31, 1997. As of March 31, 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 March 31, 1998, the
consolidated assets of Mercer Mutual and its subsidiaries were $74.7 million.
48
<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.
49
<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:
50
<PAGE> 54
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 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................... $2,782 39.1% $2,747 42.8% $13,057 45.9% $12,101 48.5% $11,602 47.0%
Commercial multi-peril....... 1,790 25.1 1,489 23.2 6,374 22.4 5,065 20.3 4,437 17.8
Other liability.............. 997 14.0 898 14.0 3,965 13.9 3,486 14.0 3,563 14.3
Fire, allied, inland
marine..................... 810 11.4 803 12.5 3,413 12.0 3,437 13.8 4,112 16.5
Workers' compensation........ 528 7.4 464 7.2 1,239 4.4 869 3.5 985 3.9
Commercial automobile........ 215 3.0 19 0.3 405 1.4 -- -- -- --
------ ----- ------ ----- ------- ----- ------- ----- ------- -----
Total...................... $7,122 100.0% $6,420 100.0% $28,453 100.0% $24,958 100.0% $24,699 100.0%
====== ===== ====== ===== ======= ===== ======= ===== ======= =====
NET PREMIUMS EARNED:
Homeowners................... $2,400 45.6% $2,034 46.4% $ 8,215 45.7% $10,347 50.1% $10,182 48.9%
Commercial multi-peril....... 840 18.0 719 16.4 2,969 16.5 2,903 14.1 2,471 11.9
Other liability.............. 851 16.2 679 15.5 2,825 15.7 2,925 14.2 2,829 13.6
Fire, allied, inland
marine..................... 726 13.8 707 16.1 2,746 15.3 3,250 15.8 3,991 19.2
Workers' compensation........ 377 7.2 254 5.8 1,235 6.9 1,209 5.8 1,344 6.5
Commercial automobile(1)..... 71 1.3 (9) (0.2) (21) (0.1) -- -- -- --
------ ----- ------ ----- ------- ----- ------- ----- ------- -----
Total...................... $5,265 100.0% $4,384 100.0% $17,969 100.0% $20,634 100.0% $20,817 100.0%
====== ===== ====== ===== ======= ===== ======= ===== ======= =====
NET LOSS RATIOS:
Homeowners(2)................ 47.6% 70.1% 67.2% 85.4% 78.8%
Commercial multi-peril....... 67.3 53.6 33.5 59.3 34.3
Other liability.............. 67.9 87.0 70.7 102.7 72.1
Fire, allied, inland
marine..................... 41.1 55.9 49.4 36.3 38.4
Workers' compensation........ 68.9 43.9 54.4 5.2 63.8
Commercial automobile(1)..... 21.5 0.0 (239.4) -- --
Total...................... 54.3% 66.3% 58.9% 71.7% 63.9%
EXPENSE RATIOS:
Homeowners................... 40.1% 36.2% 43.1% 38.4% 41.4%
Commercial multi-peril....... 43.8 35.4 31.2 42.1 38.9
Other liability.............. 41.9 42.8 42.5 39.1 41.8
Fire, allied, inland
marine..................... 43.0 35.3 38.6 37.0 37.0
Workers' compensation........ 39.1 41.0 40.7 43.2 39.0
Commercial automobile(1)..... 67.0 11.2 (173.4) -- --
Total...................... 41.7% 37.3% 40.5% 39.1% 40.2%
COMBINED RATIOS(3):
Homeowners................... 87.8% 106.3% 110.3% 123.8% 120.2%
Commercial multi-peril....... 111.1 89.0 64.7 101.4 73.3
Other liability.............. 109.9 129.8 113.2 141.8 113.9
Fire, allied, inland
marine..................... 84.2 91.2 88.0 73.3 75.3
Workers' compensation........ 108.0 85.0 95.1 48.4 102.8
Commercial automobile(1)..... 88.5 11.2 (412.8) -- --
Total...................... 96.0% 103.6% 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
three months ended March 31, 1998 as compared to the three months ended
March 31, 1997, and for the year ended December 31, 1997 as compared to the
year ended December 31, 1996, is principally due to improved
51
<PAGE> 55
weather conditions and 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 three month periods ended March 31, 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 March 31, 1998, Mercer Mutual had approximately 29,500
homeowners policies in force, with 27.5% 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 March 31, 1998, approximately 1,700 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 March 31, 1998,
approximately 2,300 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
March 31, 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.
52
<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 March 31, 1998, most of the Insurance Companies'
workers' compensation insureds have other Mercer Mutual policies. There were
approximately 1,150 workers' compensation policies in effect as of March 31,
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 three months ended March 31, 1998 and the year ended December 31,
1997, the Insurance Companies' largest agency accounted for approximately 10.5%
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 three months ended March 31, 1998 and the year ended
December 31, 1997, the Insurance Companies' top 10 agencies accounted for 30.5%
and 26.8%, respectively, of direct premiums written, with the largest agency
generating approximately $749,000 and $2.1 million, respectively, in premium
revenue for the Insurance Companies.
53
<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 March 31, 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 23% of all open
claims under the Insurance Companies' policies have resulted in litigation.
Litigated claims are assigned to outside counsel.
54
<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 three months ended March 31, 1998, the
Insurance Companies ceded to reinsurers earned premiums of $2.0 million,
compared to $2.1 million in earned premiums ceded to reinsurers for the three
months ended March 31, 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
55
<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
56
<PAGE> 60
March 31, 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.......................... 19.31% A+
Motors Insurance Corporation...................... 16.75% A+
Hartford Fire Insurance Co........................ 15.87% A+
Arkwright Mutual Insurance Company................ 5.27% A+
Vesta Fire Insurance Corporation.................. 3.56% A
</TABLE>
The following table sets forth the five largest amounts of loss and loss
expenses recoverable from reinsurers on unpaid claims as of March 31, 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....................... 1,556 A
Cumberland Mutual Fire Ins. Co..................... 1,531 A+
Hartford Fire Insurance Co......................... 1,421 A+
Odyssey Reinsurance Co............................. 716 A-
Motors Insurance Corporation....................... 617 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 three months ended March 31, 1998, the Insurance Companies
assumed $137,000 in earned premiums compared with $103,000 in earned premiums
assumed for the three months ended March 31, 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.
57
<PAGE> 61
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 various
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 three months
ended March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and
1995 as prepared in accordance with GAAP.
58
<PAGE> 62
RECONCILIATION OF RESERVE FOR LOSSES
AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 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.................... 2,967 3,068 11,649 16,445 14,251
Prior years......................... (106) (160) (1,055) (1,644) (955)
------- ------- ------- ------- -------
Total incurred losses and loss
adjustment expenses............... 2,861 2,908 10,594 14,801 13,296
------- ------- ------- ------- -------
Less: Loss and loss adjustment expenses
payments for claims occurring in:
The current year.................... 390 391 4,775 7,715 5,302
Prior years......................... 1,557 2,669 6,042 6,369 6,935
------- ------- ------- ------- -------
Total losses and loss adjustment
expenses.......................... 1,947 3,060 10,817 14,084 12,237
------- ------- ------- ------- -------
Net reserves for losses and loss
adjustment expenses at end of period... 20,765 19,922 19,851 20,074 19,357
Add: Reinsurance recoverables and
receivables............................ 10,425 14,654 12,021 15,147 16,819
------- ------- ------- ------- -------
Reserves for losses and loss adjustment
expenses at end of period.............. $31,190 $34,576 $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.
59
<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 MARCH 31, 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....... $23,238 $23,346 $25,195 $25,407 $23,702 $23,691
Obligations of states and
political subdivisions.... 5,175 5,251 3,396 3,517 4,313 4,343
Industrial and
miscellaneous............. 500 492 300 300 -- --
Mortgage-backed securities... 5,941 5,621 6,106 5,723 7,631 6,930
------- ------- ------- ------- ------- -------
Total fixed income
securities......... 34,854 34,710 34,997 34,947 35,646 34,964
Equity securities.............. 8,046 12,957 6,948 10,852 5,892 7,795
------- ------- ------- ------- ------- -------
Total................ $42,900 $47,667 $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 March 31, 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.............. $23,238 $23,346 67.3%
AAA....................................... 10,246 9,975 28.7
AA........................................ 770 795 2.3
A......................................... 500 492 1.4
BBB....................................... 100 102 0.3
------- ------- -----
Total........................... $34,854 $34,710 100.0%
======= ======= =====
</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 March 31, 1998:
<TABLE>
<CAPTION>
AMORTIZED MARKET
MATURITY COST(1) VALUE PERCENTAGES(2)
- -------- --------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
More than 1 year through 5 years.................. $ 1,232 $ 1,259 3.6%
More than 5 years through 10 years................ 22,828 22,963 66.2
More than 10 years................................ 4,853 4,867 14.0
Mortgage-backed securities(3)..................... 5,941 5,621 16.2
------- ------- -----
Total................................... $34,854 $34,710 100.0%
======= ======= =====
</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
3.5 years.
The average duration of Mercer Mutual's fixed maturity investments,
excluding mortgage backed securities which are subject to paydown, as of March
31, 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 three
months ended March 31, 1998 and 1997 and the years ended December 31, 1997, 1996
and 1995 and were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31 YEAR ENDED DECEMBER 31,
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average invested assets.......... $49,566 $45,105 $46,970 $44,728 $39,746
Net investment income............ 553 614 2,350 2,289 2,132
Return on average invested
assets......................... 4.5% 5.4% 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 are (i) to solicit opposition to the Plan so that Conversion will
not be approved by the Eligible Policyholders and Mercer Mutual, a competitor
66
<PAGE> 70
of Franklin, will not 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. Both actions are
still pending.
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.
EMPLOYEES
As of March 31, 1998, the total number of full-time equivalent employees of
Mercer Mutual was 47. 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, and Messrs. Hart, Niedt and Van Noy have
terms of office expiring at the annual meeting to be held two years thereafter.
67
<PAGE> 71
The following table sets forth certain information regarding the directors
of the Company.
<TABLE>
<CAPTION>
AGE AT BUSINESS EXPERIENCE
MARCH 31, 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......... 76 1985 Director of the Company, Mercer Mutual and
MIC; Owner of James J. Freda, Inc.
William C. Hart........ 64 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
Jr................... MIC; 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..... 56 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
MARCH 31, OFFICER BUSINESS EXPERIENCE
NAME 1998 SINCE(1) TITLE FOR THE LAST FIVE YEARS
---- --------- --------- ----- -----------------------
<S> <C> <C> <C> <C>
William C. Hart........ 64 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
Operating Officer, Chief 1994 to October 1, 1997;
Financial Officer and Chief Financial Officer and
Treasurer Treasurer of Mercer Mutual
and MIC since 1990
Marion J. Crum......... 54 1984 Vice President and Vice President and Secretary of
Secretary Mercer Mutual and MIC
John G. Danka.......... 49 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....... 39 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 50,769 4,045 0
1995 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.
69
<PAGE> 73
Any employee who has completed 1 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.
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.
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
70
<PAGE> 74
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. 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
71
<PAGE> 75
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.
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.
72
<PAGE> 76
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 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
73
<PAGE> 77
November 12, 1997 and April 15 and May 13, 1988. 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 the Conversion Offerings will be offered for sale by the
Company to the general public in the Syndicated Community Offering. See
"Syndicated Community Offering."
74
<PAGE> 78
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 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.
75
<PAGE> 79
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."
76
<PAGE> 80
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."
77
<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.
78
<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 June 4, 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.
79
<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
80
<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 will 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.
81
<PAGE> 85
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.
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, will 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
82
<PAGE> 86
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.
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
83
<PAGE> 87
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 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
84
<PAGE> 88
may be made by check or money order in U.S. Dollars. Payments made by check or
money order will be placed in an Escrow Account at First Union National Bank.
The Escrow Account will be administered by First Union National Bank (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.
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
85
<PAGE> 89
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.
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
86
<PAGE> 90
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.
87
<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, Jr.(4)(8)............................... 15,000
Marion J. Crum.............................................. 1,000
John Danka.................................................. 1,500
Paul Ehrhardt............................................... 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.
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
88
<PAGE> 92
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.
89
<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
90
<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.
91
<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
92
<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 the PLR is not received by the
conclusion of the Offerings, certain federal income tax matters will be passed
upon for the Company by Stevens & Lee, Wayne, Pennsylvania. 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 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.
94
<PAGE> 98
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.
95
<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.
96
<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.
97
<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.
98
<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 March 31, 1998 and
December 31, 1997)................................... F-18
STATEMENTS OF EARNINGS (Unaudited) (For the three
months ended March 31, 1998 and 1997)................ F-19
STATEMENTS OF CHANGES IN SURPLUS (Unaudited) (For the
three months ended March 31, 1998 and 1997).......... F-20
STATEMENTS OF CASH FLOWS (Unaudited) (For the three
months ended March 31, 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 MARCH 31, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments, at fair value:
Fixed income securities, available-for-sale............... $34,710 34,947
Equity securities......................................... 12,957 10,852
------- -------
Total investments...................................... 47,667 45,799
Cash and cash equivalents................................... 2,958 2,707
Premiums receivable......................................... 3,508 3,334
Reinsurance receivables..................................... 12,303 13,206
Prepaid reinsurance Premiums................................ 1,855 3,046
Deferred policy acquisition costs........................... 3,329 3,019
Accrued investment income................................... 452 625
Property and equipment, net................................. 1,431 1,413
Other assets................................................ 1,194 936
------- -------
Total assets........................................... $74,697 $74,085
------- -------
LIABILITIES AND SURPLUS
Liabilities:
Losses and loss adjustment expenses....................... 31,190 31,872
Unearned premiums......................................... 14,707 14,723
Accounts payable and accrued expenses..................... 2,053 2,417
Deferred income taxes..................................... 487 177
Other reinsurance balances................................ 926 835
Other liabilities......................................... 799 825
------- -------
Total liabilities...................................... 50,162 50,849
------- -------
Surplus:
Unassigned surplus........................................ 21,389 20,693
Accumulated other comprehensive income:
Unrealized gains in investments, net of deferred income
taxes................................................. 3,146 2,543
------- -------
Total surplus.......................................... 24,535 23,236
------- -------
Total liabilities and surplus.......................... $74,697 $74,085
======= =======
</TABLE>
F-18
<PAGE> 120
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------ ------
(UNAUDITED)
<S> <C> <C>
Revenue:
Net premiums earned....................................... $5,265 $4,384
Investment income, net of expenses........................ 553 614
Net realized investment gains............................. 211 89
Other revenue............................................. 43 37
------ ------
Total revenue..................................... 6,072 5,124
------ ------
Expenses:
Losses and loss adjustment expenses....................... 2,861 2,908
Amortization of deferred policy acquisition costs......... 1,477 1,123
Other expenses............................................ 718 511
------ ------
Total expenses.................................... 5,056 4,542
------ ------
Income before income tax.................................... 1,016 582
Income tax.................................................. 320 227
------ ------
Net income.................................................. $ 696 $ 355
------ ------
</TABLE>
F-19
<PAGE> 121
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Balance, beginning of period................................ $23,236 $19,282
Net income.................................................. 696 355
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
(net of related income tax expense (benefit) of $382,
and ($177))........................................... 742 (343)
Less:
Reclassification adjustment for gains included in net
income (net of related income tax expense of $72 and
$30)................................................ (139) (59)
------- -------
603 (402)
------- -------
Comprehensive income (loss)............................... 1,299 (47)
------- -------
Balance, end of period...................................... $24,535 $19,235
------- -------
</TABLE>
F-20
<PAGE> 122
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------- -------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 696 $ 355
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation of property and equipment................. 33 15
Net accretion of discount.............................. (12) (14)
Net realized investment gain........................... (211) (89)
Deferred income tax.................................... -- (39)
Change in assets and liabilities:
Premiums receivable.................................. (173) (2,338)
Reinsurance receivables.............................. 903 3,342
Prepaid reinsurance premiums......................... 1,191 (1,381)
Deferred policy acquisition costs.................... (310) 360
Other assets......................................... (87) 149
Losses and loss expenses............................. (682) (645)
Unearned premiums.................................... (16) 79
Other liabilities.................................... (199) 117
------- -------
Net cash provided by (used in) operating
activities....................................... 1,133 (89)
------- -------
Cash flows from investing activities:
Purchase of fixed income securities, available-for-sale... (4,861) (1,176)
Purchase of equity securities............................. (2,643) (1,844)
Sale and maturity of fixed income securities
available-for-sale..................................... 5,057 424
Sale of equity securities................................. 1,716 1,930
Change in receivable/payable for securities............... (100) (60)
Purchase of property and equipment........................ (51) (5)
Net cash used in investing activities................ (882) (731)
------- -------
Net increase (decrease) in cash and cash
equivalents......................................... 251 (820)
Cash and cash equivalents at beginning of period............ 2,707 2,675
------- -------
Cash and cash equivalents at end of period.................. $ 2,958 $ 1,855
------- -------
Cash paid during the year for:
Interest.................................................. $ 0 $ 0
Income taxes.............................................. $ 310 $ 100
</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 November 12, 1997, April 15, 1998 and 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 Conversion Valuation Report, as amended through June 4,
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 5, 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. 3 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 7,
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. 3 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 7, 1998
- ----------------------------------------------------- Officer, and Director
William C. Hart (Principal Executive Officer)
/s/ ROLAND D. BOEHM* Vice Chairman of the Board of August 7, 1998
- ----------------------------------------------------- Directors
Roland D. Boehm
/s/ JAMES J. FREDA* Director August 7, 1998
- -----------------------------------------------------
James J. Freda
/s/ GEORGE T. HORNYAK, JR.* Director August 7, 1998
- -----------------------------------------------------
George T. Hornyak, Jr.
/s/ RICHARD U. NIEDT* Director August 7, 1998
- -----------------------------------------------------
Richard U. Niedt
/s/ ERIC W. TURNER* Director August 7, 1998
- -----------------------------------------------------
Eric W. Turner
/s/ RICHARD G. VAN NOY* Chairman of the Board of August 7, 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 7, 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 November 12, 1997, April 15, 1998 and 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 Conversion Valuation Report, as amended through June 4,
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
EXHIBIT 1.1
Up to 3,769,444 Shares
MERCER INSURANCE GROUP, INC.
(a Pennsylvania corporation)
Common Stock
(no par value per share)
AGENCY AGREEMENT
_____________________, 1998
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
Mercer Insurance Group, Inc., a Pennsylvania corporation (the
"Company"), and Mercer Mutual Insurance Company, a Pennsylvania mutual insurance
company ("Mercer Mutual"), hereby confirm their agreement with Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill" or the "Agent") with respect to the offer and
sale by the Company of up to 3,769,444 shares of the Company's Common Stock, no
par value (the "Common Stock"). The shares of Common Stock to be sold by the
Company are hereinafter called the "Securities."
The Company is the proposed holding company for Mercer Mutual
and its subsidiary, Queenstown Holding Company ("QHC"), the holding company for
Mercer Insurance Company ("MIC," and collectively with QHC and Mercer Mutual,
the "Mercer Companies"). The Securities are being offered in connection with the
conversion of Mercer Mutual from mutual to stock form (the "Conversion") and the
simultaneous acquisition of the capital stock of Mercer Mutual by the Company
pursuant to a plan of conversion which has been adopted by the Board of
Directors of Mercer Mutual (the "Plan").
The Securities to be issued in the Conversion will be offered
by the Company at $10.00 per share (the "Purchase Price") 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
<PAGE> 2
October 17, 1997 ("Eligible Policyholders"), (ii) a tax-qualified employee stock
ownership plan of the Company (the "ESOP"), and (iii) directors, officers and
employees of the Mercer Mutual. Subscription rights in any category will be
subordinated to subscription rights in a prior category.
Concurrently, and subject to the prior rights of holders of
subscription rights, any Securities not subscribed for in the Subscription
Offering may be offered to members of the general public at the Purchase Price
in a direct community offering (the "Community Offering," and together with the
Subscription Offering, as each may be extended, the "Subscription and Community
Offering") to be commenced concurrently with the Subscription Offering.
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, (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.
It is currently anticipated by the Company and Mercer Mutual
that any Securities not subscribed for in the Subscription and Community
Offering will be offered, subject to Section 3 hereof, in a syndicated community
offering (the "Syndicated Community Offering"). The Subscription and Community
Offering and the Syndicated Community Offering are hereinafter referred to
collectively as the "Offerings."
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No.
333-41497), including a related prospectus, for the registration of the
Securities under the Securities Act of 1933, as amended (the "Securities Act"),
has filed such amendments thereto and such amended prospectuses as may have been
required to the date hereof by the Commission in order to declare such
registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectuses constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein and the
information, if any, deemed to be a part thereof pursuant to the rules and
regulations of the Commission under the Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")), are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus shall be used by the Company in connection with the Subscription and
Community Offering or the Syndicated Community Offering which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations),
the term "Prospectus" shall refer to such revised prospectus from and after the
time it is first provided to the Agent for such use.
Concurrently with the execution of this Agreement, the Company
is delivering to the Agent copies of the Prospectus of the Company to be used in
the Subscription and Community Offering. Such prospectus contains information
with respect to Mercer Mutual, the Company, the Subscription and Community
Offering, and the Common Stock.
-2-
<PAGE> 3
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and Mercer Mutual jointly and severally
represent and warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared
effective by the Commission, no stop order has been issued with respect
thereto and no proceedings therefor have been initiated or, to the
knowledge of the Company or Mercer Mutual, threatened by the
Commission. At the time the Registration Statement became effective and
at the Closing Time referred to in Section 2 hereof, the Registration
Statement complied and will comply in all material respects with the
requirements of the Securities Act and the Securities Act Regulations
and did not and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the date
hereof the Prospectus does not and at the Closing Time referred to in
Section 2 hereof, will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the representations
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information with respect to the
Agent furnished to the Company in writing by the Agent expressly for
use in the Registration Statement or Prospectus (the "Agent
Information," which the Company and Mercer Mutual acknowledge appears
only in the sections captioned "Market for Common Stock" and the first
two paragraphs of the section "The Conversion-- Marketing and
Underwriting Arrangements" of the Prospectus).
(ii) Mercer Mutual has filed with the Pennsylvania
Insurance Department (the "Department") an application requesting
approval of the Plan, and has filed such amendments thereto and
supplementary materials as may have been required to the date hereof
(such application, as amended to date, if applicable, and as from time
to time amended or supplemented hereafter, is hereinafter referred to
as the "Conversion Application"), including copies of Mercer Mutual's
Notice and Proxy Statement relating to the Conversion (the "Proxy
Statement"). The Department has, by written order dated __________,
1998, approved the Plan, such approval remains in full force and effect
and no order has been issued by the Department suspending or revoking
such approval and no proceedings therefor have been initiated or, to
the knowledge of the Company or Mercer Mutual, threatened by the
Department. At the date of such approval and at the Closing Time
referred to in Section 2, the Plan complied and will comply in all
material respects with the applicable provisions of the Conversion Act.
(iii) At the time of their use, the Proxy Statement and
any other proxy solicitation materials will comply in all material
respects with the applicable provisions of the Conversion Act and will
not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
The Company and Mercer Mutual will promptly file the Prospectus and any
supplemental sales literature with the Commission and the Department.
The Prospectus and all supplemental sales literature, as
-3-
<PAGE> 4
of the date the Registration Statement became effective and at the
Closing Time referred to in Section 2, will have received all required
authorizations for use in final form.
(iv) Neither the Commission nor the Department has, by
order or otherwise, prevented or suspended the use of the Prospectus or
any supplemental sales literature authorized by the Company or Mercer
Mutual for use in connection with the Offerings.
(v) At the Closing Time referred to in Section 2, the
Company and Mercer Mutual will have completed the conditions precedent
to the Conversion in accordance with the Plan, the ConversionAct and
all other applicable laws, regulations, decisions and orders, including
all material terms, conditions, requirements and provisions precedent
to the Conversion imposed upon the Company or Mercer Mutual by any
regulatory authority, other than those which the regulatory authority
permits to be completed after the Conversion.
(vi) Alex Sheshunoff & Co., which prepared the valuation
of Mercer Mutual as part of the Conversion, has advised the Company and
Mercer Mutual in writing that it satisfies all requirements for an
appraiser set forth in the Conversion Act.
(vii) The accountants who certified the consolidated
financial statements and supporting schedules of Mercer Mutual included
in the Registration Statement have advised the Company and Mercer
Mutual in writing that they are independent public accountants within
the meaning of the Code of Ethics of the American Institute of
Certified Public Accountants and such accountants are, with respect to
the Company and each of the Mercer Companies, independent certified
public accountants as required by the Securities Act and the Securities
Act Regulations.
(viii) The only subsidiaries of Mercer Mutual are QHC and
MIC. Upon consummation of the Conversion, the Mercer Companies will be
the only subsidiaries of the Company.
(ix) The consolidated financial statements and the
related notes thereto included in the Registration Statement and the
Prospectus present fairly the financial position of Mercer Mutual and
its consolidated subsidiaries at the dates indicated and the related
statements of operations, changes in surplus, and cash flows for the
periods specified, and comply as to form in all material respects with
the applicable accounting requirements of the Securities Act
Regulations; except as otherwise stated in the Registration Statement,
said financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis;
and the supporting schedules and tables included in the Registration
Statement present fairly the information required to be stated therein.
The pro forma consolidated financial data of the Company included in
the Registration Statement have been prepared and compiled in all
material respects on the pro forma basis described therein, and the pro
forma adjustments have in all material respects been properly and
fairly applied to the historical combined financial statements of the
Mercer Companies for the periods to which they relate. The financial
information set forth in the Prospectus under
-4-
<PAGE> 5
"Selected Consolidated Financial Data" presents fairly, on the basis
stated in the Prospectus, the information set forth therein.
(x) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as
otherwise stated therein (A) there has been no material adverse change
in the financial condition, results of operations or business affairs
of the Company and the Mercer Companies considered as one enterprise,
whether or not arising in the ordinary course of business, and (B)
except for transactions specifically referred to or contemplated in the
Prospectus, there have been no transactions entered into by the Company
or any of the Mercer Companies which are material with respect to the
Company and the Mercer Companies, considered as one enterprise.
(xi) The Company and each of the Mercer Companies has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of its respective jurisdiction of incorporation
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus;
and the Company and each of the Mercer Companies is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify would not have a
material adverse effect on the financial condition, results of
operations or business affairs of the Company and the Mercer Companies,
considered as one enterprise. Mercer Mutual has all requisite power and
authority to carry on an insurance business pursuant to and to the
extent of the certificates of authority issued under the laws of the
States of Pennsylvania and New Jersey. MIC has all requisite power and
authority to carry on an insurance business pursuant to and to the
extent of the certificates of authority issued under the laws of the
State of New Jersey. Except as disclosed in the Prospectus, the
authority of each of Mercer Mutual and MIC to write the classes and
lines of insurance authorized by such licenses, certificates, permits
and other authorizations and described in the Prospectus is
unrestricted and neither the Company nor any of the Mercer Companies is
a party to any agreement, formal or informal, with any regulatory
official or other person limiting the ability of any of the Mercer
Companies from making full use of the licenses, certificates, permits
and other authorizations issued to it or requiring the Company or any
of the Mercer Companies to comply with regulatory standards or
procedures or requirements different from those applicable to companies
with comparable or similar licenses, certificates, permits and other
authorizations, except where such restriction, limitation or
requirement would not have a material adverse effect on the financial
condition, results of operations or business affairs of the Company and
the Mercer Companies, considered as one enterprise.
(xii) The Company and each of the Mercer Companies
conducts its business in compliance in all material respects with
applicable federal, state, local and foreign laws and regulations,
except where the failure to be in compliance would not have a material
adverse effect on the financial condition, results of operations or
business affairs of the Company and the Mercer Companies, considered as
one enterprise. The Company and each of the Mercer Companies has
obtained all licenses, permits and other governmental authorizations
currently required for the conduct of their respective businesses or
required
-5-
<PAGE> 6
for the conduct of their respective businesses as contemplated by the
Conversion Application, except where the failure to obtain such
licenses, permits or other governmental authorizations would not have a
material adverse effect on the financial condition, results of
operations or business affairs of the Company and the Mercer Companies
considered as one enterprise; all such licenses, permits and other
governmental authorizations are in full force and effect and the
Company and each of the Mercer Companies is in all material respects in
compliance therewith; neither the Company nor any of the Mercer
Companies has received notice of any proceeding or action relating to
the revocation or modification of any such license, permit or other
governmental authorization which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a
material adverse effect on the financial condition, results of
operations or business affairs of the Company and the Mercer Companies,
considered as one enterprise.
(xiii) Upon consummation of the Conversion, the
authorized, issued and outstanding capital stock of the Company will be
as set forth in the Prospectus under "Capitalization" (except for
subsequent issuances, if any, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus); no shares of
Common Stock have been or will be issued and outstanding prior to the
Closing Time referred to in Section 2; at the time of Conversion, the
Securities will have been duly authorized for issuance and, when issued
and delivered by the Company pursuant to the Plan against payment of
the consideration calculated as set forth in the Plan and stated on the
cover page of the Prospectus, will be duly and validly issued and fully
paid and non-assessable; the terms and provisions of the Common Stock
and the capital stock of the Company conform to all statements relating
thereto contained in the Prospectus; the certificates representing the
shares of Common Stock conform to the requirements of applicable law
and regulations; and the issuance of the Securities is not subject to
preemptive or other similar rights. There are no options, agreements,
contracts or other rights in existence to acquire from the Company any
shares of Common Stock, except as set forth in the Prospectus.
(xiv) Upon consummation of the Conversion, the authorized
capital stock of Mercer Mutual will be 100,000 shares of common stock,
par value $1.00 per share (the "Mercer Common Stock"), and no shares of
Mercer Common Stock have been or will be issued prior to the Closing
time referred to in Section 2. The shares of Mercer Common Stock to be
issued to the Company will have been duly authorized for issuance and,
when issued and delivered by Mercer Mutual pursuant to the Plan against
payment of the consideration calculated as set forth in the Plan and as
described in the Prospectus, will be duly and validly issued and fully
paid and nonassessable, and all such Mercer Common Stock will be owned
beneficially and of record by the Company free and clear of any
security interest, mortgage, pledge, lien, encumbrance or legal or
equitable claim; the certificates representing the shares of Mercer
Common Stock will conform with the requirements of applicable laws and
regulations; and the issuance of Mercer Common Stock is not subject to
preemptive or similar rights.
(xv) All of the issued and outstanding capital stock of
QHC and MIC has been duly authorized and validly issued, is fully paid
and nonassessable and is owned by
-6-
<PAGE> 7
Mercer Mutual, directly or indirectly, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or legal or equitable
claim.
(xvi) The Company and Mercer Mutual have the corporate
power to enter into and to perform this Agreement and have taken all
corporate action necessary for them to execute, deliver and perform
this Agreement, and this Agreement has been duly executed and delivered
by, and is the valid and binding agreement of, the Company and Mercer
Mutual, enforceable in accordance with its terms, except as may be
limited by bankruptcy, insolvency or other laws affecting the
enforceability of the rights of creditors generally and judicial
limitations on the right of specific performance and except as the
enforceability of indemnification and contribution provisions may be
limited by applicable securities laws.
(xvii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
and prior to the Closing Time, except as otherwise may be indicated or
contemplated therein, none of the Company or any of the Mercer
Companies will have (A) issued any securities or incurred any liability
or obligation, direct or contingent, or borrowed money, except
borrowings in the ordinary course of business from the same or similar
sources and in similar amounts as indicated in the Prospectus, or (B)
entered into any transaction or series of transactions which is
material in light of the business of the Company and the Mercer
Companies considered as one enterprise.
(xviii) No approval of any regulatory or supervisory or
other public authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Securities that has
not been obtained and a copy of which has been delivered to the Agent,
except as may be required under the securities laws of various
jurisdictions.
(xix) Neither the Company nor any of the Mercer Companies
is in violation of its certificate of incorporation, organization
certificate, articles of incorporation or charter, as the case may be,
or bylaws (and Mercer Mutual will not be in violation of its charter or
bylaws upon consummation of the Conversion); and neither the Company
nor any of the Mercer Companies is in default (nor has any event
occurred which, with notice or lapse of time or both, would constitute
a default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company or any of the Mercer Companies is a party or by which it or any
of them may be bound, or to which any of the property or assets of the
Company or any of the Mercer Companies is subject, except for such
defaults that would not, individually or in the aggregate, have a
material adverse effect on the financial condition, results of
operations or business of the Company and the Mercer Companies
considered as one enterprise; and there are no contracts or documents
of the Company, Mercer Mutual or any of the Mercer Companies which are
required to be filed as exhibits to the Registration Statement or the
Conversion Application which have not been so filed.
(xx) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein
do not and will not conflict with or
-7-
<PAGE> 8
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Mercer Companies pursuant to any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company or any of the Mercer Companies is a
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or any of its subsidiaries is
subject, except for such defaults that would not, individually or in
the aggregate, have a material adverse effect on the financial
condition, results of operations or business affairs of the Company and
the Mercer Companies considered as one enterprise; nor will such action
result in any violation of the provisions of certificate of
incorporation, organization certificate, articles of incorporation or
charter or by-laws of the Company or any of the Mercer Companies, or
any applicable law, administrative regulation or administrative or
court decree.
(xxi) No labor dispute with the employees of the Company
or any of the Mercer Companies exists or, to the knowledge of the
Company or Mercer Mutual, is imminent or threatened; and the Company
and Mercer Mutual are not aware of any existing or threatened labor
disturbance by the employees of any of its principal suppliers or
contractors which might be expected to result in any material adverse
change in the financial condition, results of operations or business
affairs of the Company and the Mercer Companies considered as one
enterprise.
(xxii) Each of the Company and the Mercer Companies has
good and marketable title to all properties and assets for which
ownership is material to the business of the Company or any of the
Mercer Companies and to those properties and assets described in the
Prospectus as owned by them, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the
Prospectus or are not material in relation to the business of the
Company or any of the Mercer Companies considered as one enterprise;
and all of the leases and subleases material to the business of the
Company or any of the Mercer Companies under which the Company or any
of the Mercer Companies hold properties, including those described in
the Prospectus, are valid and binding agreements of the Company and the
Mercer Companies, enforceable in accordance with their terms.
(xxiii) Neither the Company nor any of the Mercer Companies
is in violation of any directive from the Department or any other
regulatory authority to make any material change in the method of
conducting their respective businesses; the Mercer Companies have
conducted and are conducting their business so as to comply in all
material respects with all applicable statutes, regulations and
administrative and court decrees (including, without limitation, all
regulations, decisions, directives and orders of the Department).
(xxiv) There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now
pending, or, to the knowledge of the Company or Mercer Mutual,
threatened, against or affecting the Company or any of the Mercer
Companies which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might result in
any material adverse change in the financial condition, results of
operations or business affairs of the Company and the Mercer Companies
considered as one enterprise, or which might materially and adversely
affect the
-8-
<PAGE> 9
properties or assets thereof or which might materially and adversely
affect the consummation of the Conversion; all pending legal or
governmental proceedings to which the Company or any of the Mercer
Companies is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, are considered in the aggregate not material; and there are
no contracts or documents of the Company or any of its subsidiaries
which are required to be filed as exhibits to the Registration
Statement or the Conversion Application which have not been so filed.
(xxv) Mercer Mutual has obtained an opinion of its
counsel, Stevens & Lee, with respect to the legality of the Securities
to be issued in the Conversion, a copy of which is filed as an exhibit
to the Registration Statement. Mercer Mutual has obtained from the
Internal Revenue Service 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. All material aspects of the
aforesaid opinion and PLR are accurately summarized in the Prospectus;
the facts and representations upon which such opinion and PLR are based
are truthful, accurate and complete in all material respects; and
neither Mercer Mutual nor the Company has taken or will take any action
inconsistent therewith.
(xxvi) The Company is not required to be registered under
the Investment Company Act of 1940, as amended.
(xxvii) To the knowledge of the Company and Mercer Mutual,
with the exception of the intended loan to Mercer Mutual's ESOP by the
Company to enable the ESOP to purchase shares of Common Stock in an
amount of up to 10% of the Common Stock issued in the Conversion, none
of the Company, Mercer Mutual or employees of any of the Mercer
Companies has made any payment of funds of the Company or any of the
Mercer Companies as a loan for the purchase of the Common Stock or made
any other payment of funds prohibited by law, and no funds have been
set aside to be used for any payment prohibited by law.
(xxviii) Neither the Company nor any of the Mercer Companies
nor any properties owned or operated by the Company or any of the
Mercer Companies is in violation of or liable under any Environmental
Law (as defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse
effect on the financial condition, results of operations or business
affairs of the Company and the Mercer Companies considered as one
enterprise. There are no actions, suits or proceedings, or demands,
claims, notices or investigations (including, without limitation,
notices, demand letters or requests for information from any
environmental agency) instituted or pending, or to the knowledge of the
Company or any of the Mercer Companies threatened, relating to the
liability of any property owned or operated by the Company or any of
the Mercer Companies, under any Environmental Law. For purposes of this
subsection, the term "Environmental Law" means any federal, state,
local or foreign law, statute, ordinance, rule, regulation, code,
license, permit, authorization, approval, consent, order, judgment,
decree, injunction or agreement with any regulatory authority relating
to (i) the protection, preservation or
-9-
<PAGE> 10
restoration of the environment (including, without limitation, air,
water, vapor, surface water, groundwater, drinking water supply,
surface soil, subsurface soil, plant and animal life or any other
natural resource), and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, whether by type or by quantity, including any
material containing any such substance as a component.
(xxix) The Company and the Mercer Companies have filed all
federal income and state and local franchise tax returns required to be
filed and have made timely payments of all taxes shown as due and
payable in respect of such returns, and no deficiency has been asserted
with respect thereto by any taxing authority.
(xxx) The Company has received approval, subject to
completion of the Conversion, to have the Securities quoted on the
National Market Tier of the Nasdaq Stock Market ("Nasdaq Stock Market")
effective as of the Closing Time referred to in Section 2 hereof.
(xxxi) The Company has filed a registration statement on
Form 8-A to register the Common Stock under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and
has requested that such registration statement be effective concurrent
with the effectiveness of the Registration Statement.
(xxxii) There is no contract or other document of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required.
(xxxiii) The Company and each of the Mercer Companies
maintains a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to
cash and other liquid assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
ledger assets are compared with existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(xxxiv) Except as described in the Prospectus, there are no
contractual encumbrances or restrictions on the ability (i) of the
Company to pay dividends or make any other distributions on the
Company's capital stock or (ii) of the Company or any of the Mercer
Companies (A) to pay any indebtedness owed to the Company or any of the
Mercer Companies, or (B) to make any loans or advances to, or
investments in, the Company or any of the Mercer Companies, or (C) to
transfer any of its property or assets to the Company or any of the
Mercer Companies.
-10-
<PAGE> 11
(b) Any certificate signed by any officer of the Company or Mercer
Mutual and delivered to either of the Agent or to counsel for the Agent shall be
deemed a representation and warranty by the Company or Mercer Mutual to the
Agent as to the matters covered thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE SECURITIES;
CLOSING.
On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby appoints Sandler O'Neill as its Agent to consult with and advise the
Company, and to assist the Company with the solicitation of subscriptions and
purchase orders for Securities, in connection with the Company's sale of Common
Stock in the Subscription and Community Offering and the Syndicated Community
Offering. On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, Sandler O'Neill
accepts such appointment and agrees to use its best efforts to assist the
Company with the solicitation of subscriptions and purchase orders for
Securities in accordance with this Agreement; provided, however, that the Agent
shall not be obligated to take any action which is inconsistent with any
applicable laws, regulations, decisions or orders. The services to be rendered
by Sandler O'Neill pursuant to this appointment include the following: (i)
consulting as to the securities marketing implications of any aspect of the Plan
or related corporate documents; (ii) reviewing with the Board of Directors the
independent appraiser's appraisal of the common stock; (iii) reviewing all
offering documents, including the Prospectus, stock order form and related
offering materials (it being understood that preparation and filing of such
documents is the sole responsibility of the Company and Mercer Mutual and their
counsel); (iv) assisting in the design and implementation of a marketing
strategy for the Offerings; (v) assisting the Company and Mercer Mutual in
obtaining all requisite regulatory approvals; (vi) assisting management in
preparing for meetings with potential investors and broker-dealers; and (vii)
providing such other general advice and assistance as may be requested to
promote the successful completion of the Offerings.
The appointment of the Agent hereunder shall terminate upon
the earlier to occur of (a) forty-five (45) days after the last day of the
Subscription and Community Offering, unless the Company and the Agent agree in
writing to extend such period, or (b) the receipt and acceptance of
subscriptions and purchase orders for all of the Securities, or (c) the
completion of the Syndicated Community Offering.
If any of the Securities remain available after the expiration
of the Subscription and Community Offering, at the request of the Company and
Mercer Mutual, Sandler O'Neill will seek to form a syndicate of registered
brokers or dealers ("Selected Dealers") to assist in the solicitation of
purchase orders of such Securities on a best efforts basis, subject to the terms
and conditions set forth in a selected dealers' agreement (the "Selected
Dealers' Agreement"), substantially in the form set forth in Exhibit A to this
Agreement. Sandler O'Neill will endeavor to limit the aggregate fees to be paid
by the Company and Mercer Mutual under any such Selected Dealers' Agreement to
an amount competitive with gross underwriting discounts charged at such time for
underwritings of comparable amounts of stock sold at a comparable price per
share in a similar market environment; provided, however, that the aggregate
fees payable to Sander O'Neill and Selected Dealers shall not exceed 7% of the
aggregate Purchase Price of the Securities sold by such Selected Dealers. Sander
-11-
<PAGE> 12
O'Neill will endeavor to distribute the Securities among the Selected Dealers in
a fashion which best meets the distribution objective of the Company and the
requirements of the Plan, which may result in limiting the allocation of stock
to certain Selected Dealers. It is understood that in no event shall Sandler
O'Neill be obligated to act as a Selected Dealer or to take or purchase any
Securities.
In the event the Company is unable to sell at least the total
minimum of the Securities, as set forth on the cover page of the Prospectus,
within the period herein provided, this Agreement shall terminate and the
Company shall refund to any persons who have subscribed for any of the
Securities the full amount which it may have received from them, without
interest, and no party to this Agreement shall have any obligation to the others
hereunder, except for the obligations of the Company and Mercer Mutual as set
forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent as
provided in Sections 6(b) and 7 hereof. Arrangements for placing the funds
received from subscriptions for Securities or other offers to purchase
Securities in a separate escrow account with First Union National Bank until all
Securities are sold and paid for were made prior to the commencement of the
Subscription Offering, with provision for refund to the purchasers as set forth
above, or for delivery to the Company if all Securities are sold.
If at least the total minimum of Securities, as set forth on
the cover page of the Prospectus, are sold, the Company agrees to issue or have
issued the Securities sold and to release for delivery certificates for such
Securities at the Closing Time against payment therefor by release of funds from
the escrow account referred to above. The closing shall be held at the
__________ offices of _________________________, at 10:00 a.m., local time, or
at such other place and time as shall be agreed upon by the parties hereto, on a
business day to be agreed upon by the parties hereto. The Company shall notify
the Agent by telephone, confirmed in writing, when funds shall have been
received for all the Securities. Certificates for Securities shall be delivered
directly to the purchasers thereof in accordance with their directions.
Notwithstanding the foregoing, certificates for Securities purchased through
Selected Dealers shall be made available to the Agent for inspection at least 48
hours prior to the Closing Time at such office as the Agent shall designate. The
hour and date upon which the Company shall release for delivery all of the
Securities, in accordance with the terms hereof, is herein called the "Closing
Time."
The Company will pay any stock issue and transfer taxes which
may be payable with respect to the sale of the Securities.
In addition to reimbursement of the expenses specified in
Section 4 hereof, the Agent will receive the following compensation for its
services hereunder:
(a) two percent (2%) of the aggregate Purchase Price of the
Securities sold in the Subscription and Community Offering, excluding in each
case shares purchased by (i) any employee benefit plan of the Company or Mercer
Mutual established for the benefit of their respective directors, officers and
employees, and (ii) any director, officer or employee of the Company or Mercer
Mutual or members of their immediate families (which term shall mean parents,
grandparents, spouse, siblings, children and grandchildren); and
(b) with respect to any Securities sold by an NASD member firm
(other than Sandler O'Neill) under the Selected Dealers' Agreement in the
Syndicated Community Offering, (i)
-12-
<PAGE> 13
the compensation payable to Selected Dealers under any Selected Dealers'
Agreement, (ii) any sponsoring dealer's fees; and (iii) a management fee to
Sandler O'Neill of one and one-half percent (1.5%). Any fees payable to Sandler
O'Neill for Securities sold by Sandler O'Neill under any such agreement shall be
limited to an aggregate of two percent (2%) of the Aggregate Purchase Price of
such Securities, and the aggregate fees payable to Sandler O'Neill and the
selected and sponsoring dealers will not exceed seven percent (7%) of the
aggregate Purchase Price for such Securities.
If this Agreement is terminated by the Agent in accordance
with the provisions of Section 9(a) hereof or the Conversion is terminated by
the Company, no fee shall be payable by the Company to Sandler O'Neill; however,
the Company shall reimburse the Agent for all of its reasonable out-of-pocket
expenses incurred prior to termination, including the reasonable fees and
disbursements of counsel for the Agent in accordance with the provisions of
Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in
immediately available funds at Closing Time, or upon the termination of this
Agreement, as the case may be. In recognition of the long lead times involved in
the conversion process, Mercer Mutual has made advance payments to the Agent in
the aggregate amount of $25,000, which shall be credited against any fees or
reimbursement of expenses payable hereunder.
SECTION 3. COVENANTS OF THE COMPANY. The Company and Mercer Mutual covenant with
the Agent as follows:
(a) The Company and Mercer Mutual will prepare and file such
amendments or supplements to the Registration Statement, the Prospectus, the
Conversion Application and the Proxy Statement as may hereafter be required by
the Securities Act Regulations or the Conversion Act or as may hereafter be
requested by the Agent. Following completion of the Offerings, the Company and
Mercer Mutual will promptly prepare and file with the Commission a
post-effective amendment to the Registration Statement relating to the results
of the updated valuation of Mercer Mutual prepared by Alex Sheshunoff & Co. The
Company and Mercer Mutual will notify the Agent immediately, and confirm the
notice in writing, (i) of the effectiveness of any post-effective amendment of
the Registration Statement, the filing of any supplement to the Prospectus and
the filing of any amendment to the Conversion Application, (ii) of the receipt
of any comments from the Department or the Commission with respect to the
transactions contemplated by this Agreement or the Plan, (iii) of any request by
the Commission or the Department for any amendment to the Registration Statement
or the Conversion Application or any amendment or supplement to the Prospectus
or for additional information, (iv) of the issuance by the Department of any
order suspending the Offerings or the use of the Prospectus or the initiation of
any proceedings for that purpose, (v) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, and (vi) of the receipt of any
notice with respect to the suspension of any qualification of the Securities for
offering or sale in any jurisdiction. The Company and Mercer Mutual will make
every reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) The Company and Mercer Mutual will give the Agent notice
of its intention to file or prepare any amendment to the Conversion Application
or Registration Statement (including
-13-
<PAGE> 14
any post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use in
connection with the Syndicated Community Offering of the Securities which
differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Securities Act
Regulations), will furnish the Agent with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement or use any
such prospectus to which the Agent or counsel for the Agent may object.
(c) The Company and Mercer Mutual will deliver to the Agent as
many signed copies and as many conformed copies of the Conversion Application
and the Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) as the
Agent may reasonably request, and from time to time such number of copies of the
Prospectus as the Agent may reasonably request.
(d) During the period when the Prospectus is required to be
delivered, the Company and Mercer Mutual will comply, at their own expense, with
all requirements imposed upon them by the Department, by the ConversionAct, as
from time to time in force, and by the Securities Act, the Securities Act
Regulations, the Exchange Act, and the rules and regulations of the Commission
promulgated thereunder, including, without limitation, Regulation M under the
Exchange Act, so far as necessary to permit the continuance of sales or dealing
in shares of Common Stock during such period in accordance with the provisions
hereof and the Prospectus.
(e) If any event or circumstance shall occur as a result of
which it is necessary, in the opinion of counsel for the Agent, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
the Company and Mercer Mutual will forthwith amend or supplement the Prospectus
(in form and substance satisfactory to counsel for the Agent) so that, as so
amended or supplemented, the Prospectus will not include an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time it is
delivered to a purchaser, not misleading, and the Company and Mercer Mutual will
furnish to the Agent a reasonable number of copies of such amendment or
supplement. For the purpose of this subsection, the Company and Mercer Mutual
will each furnish such information with respect to itself as the Agent may from
time to time reasonably request.
(f) The Company and Mercer Mutual will take all necessary
action, in cooperation with the Agent, to qualify the Securities for offering
and sale under the applicable securities laws of such states of the United
States and other jurisdictions as may be required and as the Agent and the
Company have agreed; provided, however, that the Company and Mercer Mutual shall
not be obligated to file any general consent to service of process or to qualify
as a foreign corporation in any jurisdiction in which it is not so qualified. In
each jurisdiction in which the Securities have been so qualified, the Company
and Mercer Mutual will file such statements and reports as may be required by
the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the Registration
Statement.
-14-
<PAGE> 15
(g) The Company authorizes Sandler O'Neill and any Selected
Dealers to act as agent of the Company in distributing the Prospectus to persons
entitled to receive subscription rights and other persons to be offered
Securities having record addresses in the states or jurisdictions set forth in a
survey of the securities or "blue sky" laws of the various jurisdictions in
which the Offerings will be made (the "Blue Sky Survey").
(h) The Company will make generally available to its security
holders as soon as practicable, but not later than 60 days after the close of
the period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the Securities Act Regulations) covering a twelve
month period beginning not later than the first day of the Company's fiscal
quarter next following the "effective date" (as defined in said Rule 158) of the
Registration Statement.
(i) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to its shareholders as soon
as practicable after the end of each such fiscal year an annual report
(including consolidated statements of financial condition and consolidated
statements of income, shareholders' equity and cash flows, certified by
independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and the Mercer
Companies for such quarter in reasonable detail. In addition, such annual report
and quarterly consolidated summary financial information shall be made public
through the issuance of appropriate press releases at the same time or prior to
the time of the furnishing thereof to shareholders of the Company.
(j) During the period ending on the third anniversary of the
expiration of the fiscal year during which the closing of the transactions
contemplated hereby occurs, the Company will furnish to the Agent (i) as soon as
publicly available, a copy of each report or other document of the Company
furnished generally to shareholders of the Company or furnished to or filed with
the Commission under the Exchange Act or any national securities exchange or
system on which any class of securities of the Company is listed, and (ii) from
time to time, such other information concerning the Company as the Agent may
reasonably request.
(k) The Company and Mercer Mutual will conduct the Conversion
in all material respects in accordance with the Plan, the Conversion Act and all
other applicable regulations, decisions and orders, including all applicable
terms, requirements and conditions precedent to the Conversion imposed upon the
Company or Mercer Mutual by the Department.
(l) The Company and Mercer Mutual will use the net proceeds
received from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds."
(m) The Company will file with the Commission such reports on
Form SR as may be required pursuant to Rule 463 of the Securities Act
Regulations, if such report or substantially similar report is required by the
SEC.
-15-
<PAGE> 16
(n) The Company will file with the Nasdaq Stock Market all
documents and notices required by the Nasdaq Stock Market of companies that have
issued securities that are traded in the over-the-counter market and quotations
for which are reported by the Nasdaq Stock Market.
(o) The Company and Mercer Mutual will take such actions and
furnish such information as are reasonably requested by the Agent in order for
the Agent to ensure compliance with the National Association of Securities
Dealers, Inc.'s "Interpretation Relating to Free-Riding and Withholding."
(p) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the prior
written consent of the Agent, sell or issue, contract to sell or otherwise
dispose of, any shares of Common Stock other than the Securities for a period of
180 days following the Closing Time.
(q) During the period beginning on the date hereof and ending
on the later of the third anniversary of the Closing Time or the date on which
the Agent receives full payment in satisfaction of any claim for indemnification
or contribution to which it may be entitled pursuant to Sections 6 or 7,
respectively, neither the Company nor Mercer Mutual shall, without the prior
written consent of the Agent, which consent shall not be unreasonably withheld,
take or permit to be taken any action that could result in Mercer Common Stock
becoming subject to any security interest, mortgage, pledge, lien or
encumbrance.
(r) The Company and Mercer Mutual will comply with any
conditions imposed by or agreed to with the Department in connection with their
approval of the Plan.
(s) The Company shall not deliver the Securities until the
Company and Mercer Mutual have satisfied each condition set forth in Section 5
hereof, unless such condition is waived by the Agent.
(t) The Company or Mercer Mutual will furnish to Sandler
O'Neill as early as practicable prior to the delivery of the letters to be
furnished by KPMG Peat Marwick LLP pursuant to subsections (e) and (f) of
Section 5 hereof, but no later than two (2) full business days prior thereto, a
copy of the latest available unaudited interim consolidated financial statements
of Mercer Mutual and the Subsidiaries which have been read by KPMG Peat Marwick
LLP, as stated in their letters to be furnished pursuant to subsections (e) and
(f) of Section 5 hereof.
SECTION 4. PAYMENT OF EXPENSES.
The Company and Mercer Mutual jointly and severally agree to pay all
expenses incident to the performance of their obligations under this Agreement,
including but not limited to (i) the cost of obtaining all securities and
insurance regulatory approvals, (ii) the printing and filing of the Registration
Statement as originally filed and of each amendment thereto, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
purchasers in the Offerings, (iv) the fees and disbursements of the Company's
and Mercer Mutual's counsel, accountants, appraiser and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the fees and
disbursements of counsel in
-16-
<PAGE> 17
connection therewith and in connection with the preparation of the Blue Sky
Survey, (vi) the printing and delivery to the Agent of copies of the
Registration Statement as originally filed and of each amendment thereto and the
printing and delivery of the Prospectus and any amendments or supplements
thereto to the purchasers in the Offerings and the Agent, (vii) the printing and
delivery to the Agent of copies of a Blue Sky Survey, and (viii) the fees and
expenses incurred in connection with the listing of the Securities on the Nasdaq
Stock Market. In the event the Agent incurs any such fees and expenses on behalf
of Mercer Mutual or the Company, Mercer Mutual will reimburse the Agent for such
fees and expenses whether or not the Conversion is consummated; provided,
however, that the Agent shall not incur any substantial expenses on behalf of
Mercer Mutual or the Company pursuant to this Section without the prior approval
of Mercer Mutual.
The Company and Mercer Mutual jointly and severally agree to
pay certain expenses incident to the performance of the Agent's obligations
under this Agreement, regardless of whether the Conversion is consummated,
including (i) the filing fees paid or incurred by the Agent in connection with
all filings with the National Association of Securities Dealers, Inc., and (ii)
all reasonable out of pocket expenses incurred by the Agent relating to the
Offerings, including, without limitation, advertising, promotional, syndication
and travel expenses and fees and expenses of the Agent's counsel, up to a
maximum amount of $75,000. All fees and expenses to which the Agent is entitled
to reimbursement under this paragraph of this Section 4 shall be due and payable
upon receipt by the Company or Mercer Mutual of a written accounting therefor
setting forth in reasonable detail the expenses incurred by the Agent.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS.
The Company, Mercer Mutual and the Agent agree that the issuance and
the sale of Securities and all obligations of the Agent hereunder are subject to
the accuracy of the representations and warranties of the Company and Mercer
Mutual herein contained as of the date hereof and the Closing Time, to the
accuracy of the statements of officers and directors of the Company and Mercer
Mutual made pursuant to the provisions hereof, to the performance by the Company
and Mercer Mutual of their obligations hereunder, and to the following further
conditions:
(a) No stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Securities Act or
proceedings therefor initiated or threatened by the Commission, no order
suspending the Conversion shall have been issued or proceedings therefor
initiated or threatened by the Department, and no order suspending the sale of
the Securities in any jurisdiction shall have been issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time,
of Stevens & Lee, counsel for the Company and Mercer Mutual, in form
and substance satisfactory to counsel for the Agent, to the effect
that:
(i) The Company has been duly incorporated and
is validly existing as a corporation in good standing under
the laws of the State of Pennsylvania with full corporate
power and authority to own, lease and operate its properties
and
-17-
<PAGE> 18
to conduct its business as described in the Registration
Statement and Prospectus and to enter into and perform its
obligations under this Agreement; and the Company is duly
qualified as a foreign corporation to transact business and is
in good standing in each other jurisdiction in which such
qualification is required whether by reason of the ownership
or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material
adverse effect upon the financial condition, results of
operations or business affairs of the Company and the Mercer
Companies, considered as one enterprise.
(ii) An opinion to the same general effect as
subsection 5(b)(1)(i) in respect of each of the Mercer
Companies.
(iii) Mercer Mutual has all requisite power and
authority to carry on an insurance business pursuant to and to
the extent of the certificates of authority issued under the
laws of the States of Pennsylvania and New Jersey; MIC has all
requisite power and authority to carry on an insurance
business pursuant to and to the extent of the certificates of
authority issued under the laws of the State of New Jersey;
the Company and each of the Mercer Companies has obtained all
licenses, permits and other governmental authorizations
currently required for the conduct of their respective
businesses.
(iv) The Securities have been duly and validly
authorized for issuance and sale and, when issued and
delivered by the Company pursuant to the Plan against payment
of the consideration calculated as set forth in the Plan, will
be duly and validly issued and fully paid and non-assessable;
and all corporate actions required to be taken for the
authorization, issue and sale of the Securities have been
validly and sufficiently taken.
(v) The issuance of the Securities is not
subject to preemptive or other similar rights arising by
operation of law or, to the best of their knowledge and
information, otherwise.
(vi) Upon consummation of the Conversion, the
authorized, issued and outstanding capital stock of the
Company will be as set forth in the Prospectus under
"Capitalization" and no shares of Common Stock have been or
will be issued and outstanding prior to the Closing Time.
(vii) All of the issued and outstanding capital
stock of each of QHC and MIC has been duly authorized and
validly issued and, to such counsel's best knowledge, is fully
paid and non-assessable and is owned by Mercer Mutual,
directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
(viii) Upon consummation of the Conversion, all
of the issued and outstanding capital stock of Mercer Mutual
when issued and delivered pursuant to the Plan against payment
of consideration as set forth in the Plan and set forth in the
-18-
<PAGE> 19
Prospectus, will be duly authorized and validly issued and
fully paid and nonassessable, and all such capital stock will
be owned beneficially and of record by the Company free and
clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.
(ix) The execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby, including without limitation the
Conversion, have been duly and validly authorized by all
necessary action on the part of each of the Company and Mercer
Mutual, and this Agreement constitutes the legal, valid and
binding agreement of each of the Company and Mercer Mutual,
enforceable in accordance with its terms, except as rights to
indemnity and contribution hereunder may be limited under
applicable law (it being understood that such counsel may
avail itself of customary exceptions concerning the effect of
bankruptcy, insolvency or similar laws and the availability of
equitable remedies); the execution and delivery of this
Agreement, the incurrence of the obligations herein set forth
and the consummation of the transactions contemplated herein,
including without limitation the Conversion, will not result
in any violation of the provisions of the charter or by-laws
of the Company or any of the Mercer Companies; and, to the
best of such counsel's knowledge, the execution and delivery
of this Agreement, the incurrence of the obligations herein
set forth and the consummation of the transactions
contemplated herein, including without limitation the
Conversion, will not conflict with or constitute a breach of,
or default under, and no event has occurred which, with notice
or lapse of time or both, would constitute a default under, or
result in the creation or imposition of any lien, charge or
encumbrance, that, individually or in the aggregate, would
have a material adverse effect on the financial condition,
results of operations or business affairs of the Company and
the Mercer Companies considered as one enterprise, upon any
property or assets of the Company or any of the Mercer
Companies pursuant to any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the
Company or any of the Mercer Companies is a party or by which
any of them may be bound, or to which any of the property or
assets of the Company or any of the Mercer Companies is
subject.
(x) The Registration Statement is effective
under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement has been issued
under the Securities Act or, to the best of such counsel's
knowledge, proceedings therefor initiated or threatened by the
Commission.
(xi) No further approval, authorization,
consent or other order of any public board or body is required
in connection with the execution and delivery of this
Agreement, the issuance of the Securities and the consummation
of the Conversion, except as may be required under the
securities or Blue Sky laws of various jurisdictions as to
which no opinion need be rendered.
(xii) At the time the Registration Statement
became effective, the Registration Statement (other than the
financial statements and statistical data included therein, as
to which no opinion need be rendered) complied as to form in
all
-19-
<PAGE> 20
material respects with the requirements of the Securities Act
and the Securities Act Regulations and the Conversion Act.
(xiii) The Common Stock conforms to the
description thereof contained in the Prospectus, and the form
of certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable statutory
requirements.
(xiv) To the best of such counsel's knowledge,
there are no legal or governmental proceedings pending or
threatened against or affecting the Company or any of the
Mercer Companies which are required, individually or in the
aggregate, to be disclosed in the Registration Statement and
Prospectus, other than those disclosed therein, and all
pending legal or governmental proceedings to which the Company
or any of the Mercer Companies is a party or to which any of
their property is subject which are not described in the
Registration Statement, including ordinary routine litigation
incidental to the business, are, considered in the aggregate,
not material.
(xv) The information in the Prospectus under
"Business-- Regulation," "The Conversion--Effect of Conversion
on Policyholders," "The Conversion--Tax Effects," "Certain
Restrictions on Acquisition of the Company" and "Description
of Capital Stock," to the extent that it constitutes matters
of law, summaries of legal matters, documents or proceedings,
or legal conclusions, has been reviewed by them and is
complete and accurate in all material respects.
(xvi) To the best of such counsel's knowledge,
there are no contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments required to be
described or referred to in the Registration Statement or to
be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto, the
descriptions thereof or references thereto are correct, and no
default exists, and no event has occurred which, with notice
or lapse of time or both, would constitute a default, in the
due performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument so
described, referred to or filed.
(xvii) The Conversion Application complies with
the applicable requirements of the Conversion Act, includes
all documents required to be filed as exhibits thereto, and
is, to the best of such counsel's knowledge and information,
truthful, accurate and complete. The Plan has been duly
authorized by all necessary actions, and all necessary
consents thereto and approvals thereof have been obtained and
the Conversion has been consummated; Mercer Mutual's charter
has been amended to authorize the issuance of permanent
capital stock; to the best of such counsel's knowledge, the
Company and Mercer Mutual have conducted the Conversion in all
material respects in accordance with applicable requirements
of the Conversion Act, the Plan and all other applicable
regulations, decisions and orders thereunder, including all
material applicable terms, conditions, requirements and
-20-
<PAGE> 21
conditions precedent to the Conversion imposed upon the
Company or Mercer Mutual by the Department and, to the best of
such counsel's knowledge, no order has been issued by the
Department to suspend the Conversion and no action for such
purpose has been instituted or threatened by the Department;
and, to the best of such counsel's knowledge, no person has
sought to obtain review of the final action of the Department
in approving the Plan.
(xviii) Neither the Company nor any of the Mercer
Companies is in violation of its charter (and Mercer Mutual
will not be in violation of its charter upon consummation of
the Conversion) or, to the best of such counsel's knowledge,
in default (nor has any event occurred which, with notice or
lapse of time or both, would constitute a default) in the
performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to
which the Company or any of the Mercer Companies is a party or
by which the Company or any of the Mercer Companies or any of
their property may be bound.
(xix) The Company is not required to be
registered as an investment company under the Investment
Company Act of 1940.
(2) The favorable opinion, dated as of Closing Time, of Lord,
Bissell & Brook, counsel for the Agent, with respect to such matters as
the Agent may reasonably require.
(3) In giving their opinions required by subsections (b)(l)
and (b)(2), respectively, of this Section, Stevens & Lee and Lord,
Bissell & Brook shall each additionally state that nothing has come to
their attention that would lead them to believe that the Registration
Statement (except for financial statements and schedules and other
financial or statistical data included therein, as to which counsel
need make no statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (except for financial
statements and schedules and other financial or statistical data
included therein, as to which counsel need make no statement), at the
time the Registration Statement became effective or at Closing Time,
included an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
In giving their opinions, Stevens & Lee and Lord, Bissell & Brook may
rely as to matters of fact on certificates of officers and directors of
the Company and Mercer Mutual and certificates of public officials,
which opinions shall be in form and substance satisfactory to counsel
for the Agent, and Lord, Bissell & Brook may also rely on the opinion
of Stevens & Lee regarding matters of Pennsylvania law.
(c) At Closing Time referred to in Section 2, the Plan shall
have been approved by the policyholders of Mercer Mutual and Mercer
Mutual shall have completed in all material respects the conditions
precedent to the Conversion in accordance with the Plan, the Conversion
Act and all other applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions precedent
to the Conversion imposed upon
-21-
<PAGE> 22
the Company or Mercer Mutual by the Department, or any other regulatory
authority, other than those which the Department permits to be competed
after the Conversion.
(d) At Closing Time, there shall not have been, since the date
hereof or since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change in the financial condition, results of operations or business
affairs of the Company and the Mercer Companies considered as one
enterprise, whether or not arising in the ordinary course of business,
and the Agent shall have received a certificate of the Chief Executive
Officer of the Company and of Mercer Mutual, the President of the
Company and Mercer Mutual and the chief financial or chief accounting
officer of the Company and of Mercer Mutual, dated as of Closing Time,
to the effect that (i) there has been no such material adverse change,
(ii) there shall have been no material transaction entered into by the
Company or Mercer Mutual from the latest date as of which the financial
condition of the Company or Mercer Mutual as set forth in the
Registration Statement and the Prospectus other than transactions
referred to or contemplated therein and transactions in the ordinary
cause of business, (iii) neither the Company nor Mercer Mutual shall
have received from the Department any direction (oral or written) to
make any material change in the method of conducting its business with
which it has not complied (which direction, if any, shall have been
disclosed to the Agent) or which materially and adversely would affect
the business, financial condition or results of operations of the
Company or Mercer Mutual, (iv) the representations and warranties in
Section 1 hereof are true and correct with the same force and effect as
though expressly made at and as of the Closing Time, (v) the Company
and Mercer Mutual have complied with all agreements and satisfied all
conditions on their part to be performed or satisfied at or prior to
Closing Time, (vi) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been initiated or threatened by the Commission and (vii)
no order suspending any of the Offerings or the authorization for final
use of the Prospectus has been issued and no proceedings for that
purpose have been initiated or threatened by the Department and no
person has sought to obtain regulatory or judicial review of the action
of the Department in approving the Plan in accordance with the
Conversion Act.
(e) At the time of the execution of this Agreement, the Agent
shall have received from KPMG Peat Marwick LLP a letter dated such
date, in form and substance satisfactory to the Agent, to the effect
that (i) they are independent public accountants with respect to the
Company and the Mercer Companies within the meaning of the Code of
Ethics of the American Institute of Certified Public Accountants, the
Securities Act and the Securities Act Regulations and the Conversion
Act; (ii) it is their opinion that the consolidated financial
statements and supporting schedules included in the Registration
Statement and covered by their opinions therein comply as to form in
all material respects with the applicable accounting requirements of
the Securities Act and the Securities Act Regulations; (iii) based upon
limited procedures as agreed upon by the Agent and KPMG Peat Marwick
set forth in detail in such letter, nothing has come to their attention
which causes them to believe that (A) the unaudited financial
statements and supporting schedules of the Mercer Companies included in
the Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the Securities
Act, the Securities Act Regulations
-22-
<PAGE> 23
and the Conversion Act or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement and the Prospectus, (B) the
unaudited pro forma consolidated financial data of the Company included
in the Registration Statement is not fairly presented on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement, or that such unaudited pro
forma consolidated financial data has not been properly compiled on the
pro forma basis described therein, or that the pro forma adjustments
were not properly applied to the applicable historical combined
financial statements, (C) at a specified date not more than five days
prior to the date of this Agreement, there has been any increase in the
consolidated long term or short term debt of the Mercer Companies or
any decrease in consolidated total assets or net worth of the Mercer
Companies, in each case as compared with the amounts shown in the
December 31, 1996 balance sheet included in the Registration Statement
or, (D) during the period from the date of such balance sheet to a
specified date not more than five days prior to the date of this
Agreement, there were any decreases, as compared with the corresponding
period in the preceding year, in consolidated net income of the Mercer
Companies, except in all instances for increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may
occur; and (iv) in addition to the examination referred to in their
opinions and the limited procedures referred to in clause (iii) above,
they have carried out certain specified procedures, not constituting an
audit, with respect to certain amounts, percentages and financial
information which are included in the Registration Statement and
Prospectus and which are specified by the Agent, and have found such
amounts, percentages and financial information to be in agreement with
the relevant accounting, financial and other records of the Company and
the Mercer Companies identified in such letter.
(f) At Closing Time, the Agent shall have received from KPMG
Peat Marwick LLP a letter, dated as of Closing Time, to the effect that
they reaffirm the statements made in the letter furnished pursuant to
subsection (d) of this Section, except that the specified date referred
to shall be a date not more than five days prior to Closing Time.
(g) At Closing Time, the Securities shall have been approved
for listing on the Nasdaq Stock Market upon notice of issuance.
(h) At Closing Time, the Agent shall have received a letter
from Alex Sheshunoff & Company, dated as of the Closing Time,
confirming its appraisal.
(i) At Closing Time, counsel for the Agent shall have been
furnished with such documents and opinions as they may require for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated and related proceedings, or in order
to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and
sale of the Securities as herein contemplated shall be satisfactory in
form and substance to the Agent and counsel for the Agent.
-23-
<PAGE> 24
(j) The Internal Revenue Service shall have provided a private
letter ruling, or Stevens & Lee shall have provided an opinion, to the
Insurance Companies, in each case, as described under the caption "The
Conversion -- Tax Effects" in the Prospectus.
(k) At any time prior to Closing Time, (i) there shall not
have occurred any material adverse change in the financial markets in
the United States or elsewhere or any outbreak of hostilities or
escalation thereof or other calamity or crisis the effect of which it,
in the judgment of the Agent, are so material and adverse as to make it
impracticable to market the Securities or to enforce contracts,
including subscriptions or orders, for the sale of the Securities, and
(ii) trading generally on either the American Stock Exchange or the New
York Stock Exchange shall not have been suspended, and minimum or
maximum prices for trading shall not have been fixed, or maximum ranges
for prices for securities have been required, by either of said
Exchanges or by order of the Commission or any other governmental
authority, and a banking moratorium shall not have been declared by
either Federal or New York authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company and Mercer Mutual, jointly and severally,
agree to indemnify and hold harmless the Agent, each person, if any, who
controls the Agent, within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, and its respective partners, directors,
officers, employees and agents as follows:
(i) from and against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, related to or
arising out of the Conversion or any action taken by the Agent where
acting as agent of the Company or Mercer Mutual or otherwise as
described in Section 2 hereof; provided, however, that this indemnity
agreement shall not apply to any loss, liability, claim, damage or
expense found in a final judgment by a court of competent jurisdiction
to have resulted primarily from the bad faith, willful misconduct or
gross negligence of the Agent seeking indemnification hereunder.
(ii) from and against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, based upon or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Prospectus
(or any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(iii) from and against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever described in
clauses (i) or (ii) above,
-24-
<PAGE> 25
if such settlement is effected with the written consent of the Company
or Mercer Mutual, which consent shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as
incurred (including, subject to Section 6(c) hereof, the fees and
disbursements of counsel chosen by the Agent), reasonably incurred in
investigating, preparing for or defending against any litigation, or
any investigation, proceeding or inquiry by any governmental agency or
body, commenced or threatened, or any claim whatsoever described in
clauses (i) or (ii) above, to the extent that any such expense is not
paid under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (or any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading which was made in reliance upon and in conformity with the Agent
Information furnished to the Company or Mercer Mutual by the Agent expressly for
use in the Prospectus (or any amendment or supplement thereto).
(b) The Agent agrees to indemnify and hold harmless the
Company, Mercer Mutual, their directors and trustees, each of their officers who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, of a material fact made in the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with the
Agent Information.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of any such action. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to no more than one
local counsel in each separate jurisdiction in which any action or proceeding is
commenced) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
(d) The Company and Mercer Mutual also agree that the Agent
shall not have any liability (whether direct or indirect, in contract or tort or
otherwise) to Mercer Mutual, the Company, its security holders or Mercer
Mutual's or the Company's creditors relating to or arising out of the engagement
of the Agent pursuant to, or the performance by the Agent of the services
contemplated by, this Agreement, except to the extent that any loss, claim,
damage or liability is found in a final judgment by a court of competent
jurisdiction to have resulted primarily from the Agent's bad faith, willful
misconduct or gross negligence.
-25-
<PAGE> 26
(e) In addition to, and without limiting, the provisions of
Section (6)(a)(iv) hereof, in the event that any Agent, any person, if any, who
controls the Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act or any of its partners, directors, officers,
employees or agents is requested or required to appear as a witness or otherwise
gives testimony in any action, proceeding, investigation or inquiry brought by
or on behalf of or against the Company, Mercer Mutual, the Agent or any of its
respective affiliates or any participant in the transactions contemplated hereby
in which the Agent or such person or agent is not named as a defendant, the
Company and Mercer Mutual jointly and severally agree to reimburse the Agent for
all reasonable and necessary out-of-pocket expenses incurred by it in connection
with preparing or appearing as a witness or otherwise giving testimony and to
compensate the Agent in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION.
In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in Section 6 hereof
is for any reason held to be unenforceable by the indemnified parties although
applicable in accordance with its terms, the Company, Mercer Mutual and the
Agent shall contribute to the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by said indemnity agreement incurred by the
Company or Mercer Mutual and the Agent, as incurred, in such proportions (i)
that the Agent is responsible for that portion represented by the percentage
that the maximum aggregate marketing fees appearing on the cover page of the
Prospectus bears to the maximum aggregate gross proceeds appearing thereon and
the Company and Mercer Mutual are jointly and severally responsible for the
balance or (ii) if, but only if, the allocation provided for in clause (i) is
for any reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits to the Company and Mercer Mutual on the
one hand and the Agent on the other, as reflected in clause (i), but also the
relative fault of the Company and Mercer Mutual on the one hand and the Agent on
the other, as well as any other relevant equitable considerations; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls the Agent within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act shall have the same rights to contribution as the
Agent, and each director of the Company, each trustee of Mercer Mutual, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company or Mercer Mutual within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act shall have the same
rights to contribution as the Company and Mercer Mutual. Notwithstanding
anything to the contrary set forth herein, to the extent permitted by applicable
law, in no event shall the Agent be required to contribute an aggregate amount
in excess of the aggregate marketing fees to which the Agent is entitled and
actually paid pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this
Agreement, or contained in certificates of officers of the Company or Mercer
Mutual submitted pursuant hereto, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of any
-26-
<PAGE> 27
Agent or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the
Company, at any time at or prior to Closing Time (i) if there has been, since
the date of this Agreement or since the respective dates as of which information
is given in the Registration Statement, any material adverse change in the
financial condition, results of operations or business affairs of the Company or
Mercer Mutual, or the Company and the Mercer Companies considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States or elsewhere or any outbreak of hostilities or escalation
thereof or other calamity or crisis the effect of which, in the judgment of the
Agent, are so material and adverse as to make it impracticable to market the
Securities or to enforce contracts, including subscriptions or orders, for the
sale of the Securities, (iii) or if trading generally on either the American
Stock Exchange or the New York Stock Exchange has been suspended, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of said Exchanges or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal or New York authorities, (iv) if any condition
specified in Section 5 shall not have been fulfilled when and as required to be
fulfilled; (v) if there shall have been such material adverse change in the
condition or prospects of the Company or Mercer Mutual or the prospective market
for the Company's securities as in the Agent's good faith opinion would make it
inadvisable to proceed with the offering, sale or delivery of the Securities;
(vi) if in the Agent's good faith opinion, the price for the Securities
established by Alex Sheshunoff & Co. is not reasonable or equitable under then
prevailing market conditions, or (vii) if the Conversion is not consummated on
or prior to ____________________, 1998.
(b) If this Agreement is terminated pursuant to this Section
9, such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof relating to the reimbursement of expenses
and except that the provisions of Sections 6 and 7 hereof shall survive any
termination of this Agreement.
SECTION 10. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Agent shall be directed to the Agent
at Two World Trade Center, 104th Floor, New York, New York 10048, attention of
Catherine A. Lawton, Principal (with a copy to John S. Chapman, Esq., Lord,
Bissell & Brook, 115 S. LaSalle Street, Chicago, Illinois 60603); notices to the
Company and Mercer Mutual shall be directed to either of them at 10 North
Highway 31, Pennington, New Jersey 08534, attention of William C. Hart,
President (with a copy to Jeffrey P. Waldron, Esq., Stevens & Lee, 1275 Drummers
Lane, Wayne, Pennsylvania 19087).
-27-
<PAGE> 28
SECTION 11. PARTIES.
This Agreement shall inure to the benefit of and be binding upon the
Agent, the Company and Mercer Mutual and their respective successors. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person, firm or corporation, other than the Agent, the Company and
Mercer Mutual and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein or therein contained. This
Agreement and all conditions and provisions hereof and thereof are intended to
be for the sole and exclusive benefit of the Agent, the Company and Mercer
Mutual and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT.
This Agreement represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and supersedes any
and all other oral or written agreements heretofore made, except for the
engagement letter dated October 23, 1997, by and between the Agent and the
Company and Mercer Mutual, relating to the Agent's providing conversion agent
services to the Company and Mercer Mutual in connection with the Conversion. No
waiver, amendment or other modification of this Agreement shall be effective
unless in writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed in said State without regard to the conflicts of laws provisions
thereof. Unless otherwise noted, specified times of day refer to Eastern time.
SECTION 14. SEVERABILITY.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
SECTION 15. HEADINGS.
Sections headings are not to be considered part of this Agreement, are
for convenience and reference only, and are not to be deemed to be full or
accurate descriptions of the contents of any paragraph or subparagraph.
-28-
<PAGE> 29
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Agent, the Company and Mercer Mutual in accordance with
its terms.
Very truly yours,
MERCER INSURANCE GROUP, INC.
By:__________________________________________
Title:_______________________________________
MERCER MUTUAL INSURANCE COMPANY
By:__________________________________________
Title:_______________________________________
CONFIRMED AND ACCEPTED,
as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:_______________________________
Title:____________________________
-29-
<PAGE> 1
EXHIBIT 4.1
NUMBER SHARES
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE COMMONWEALTH OF PENNSYLVANIA CERTAIN DEFINITIONS
MERCER INSURANCE GROUP, INC.
CUSIP 587902 10 7
- --------------------------------------------------------------------------------
THIS CERTIFIES that
is the owner of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
NO PAR VALUE PER SHARE, OF
========================= MERCER INSURANCE GROUP, INC. =========================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
CERTIFICATE OF STOCK
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and
the facsimile signatures of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
REGISTRAR AND TRANSFER COMPANY /s/ William J. Hart
(Cranford, New Jersey) President
TRANSFER AGENT /s/ Andrew R. Speaker
AND REGISTRAR Treasurer
BY
AUTHORIZED OFFICER
----------------------------
MERCER INSURANCE GROUP, INC.
CORPORATE SEAL
----
1997
----
PENNSYLVANIA
----------------------------
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of
the Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or the
transfer agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as
tenants in common
UNIF GIFT MIN ACT- __________ Custodian _____________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________
(State)
UNIF TRAN MIN ACT- __________ Custodian _____________
(Cust) (Minor)
under Uniform Transfers to Minors
Act ______________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________________
_________________________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH
NOTICE: THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT
TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED
OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A
CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 5
August 7, 1998
Board of Directors
Mercer Insurance Group, Inc.
10 North Highway 31
Pennington, New Jersey 08534
Re: Registration Statement on Form S-1 (SEC File No. 333-41497)
Gentlemen:
In connection with the proposed offering by Mercer Insurance Group,
Inc. (the "Company") of up to 3,769,444 shares of the Company's common stock,
no par value per share (the "Common Stock"), covered by the Company's
Registration Statement on Form S-1 (No. 333-41497) (the "Registration
Statement"), we, as counsel to the Company, have reviewed:
1. the Articles of Incorporation of the Company;
2. the Bylaws of the Company;
3. a subsistence certificate with respect to the Company issued
by the Pennsylvania Department of State on August 7, 1998;
4. the minute books of the Company;
5. the Registration Statement, including the prospectus (the
"Prospectus") contained therein; and
<PAGE> 2
Board of Directors
Mercer Insurance Group, Inc.
August 7, 1998
Page 2
6. the form of the certificates representing shares of the
Common Stock.
Based upon our review of such documents, it is our opinion that:
1. The Company has been duly incorporated under the laws of the
Commonwealth of Pennsylvania and is validly existing and in
good standing under the laws of such Commonwealth.
2. The 3,769,444 shares of Common Stock covered by the
Registration Statement have been duly authorized and, when
issued and sold against payment therefor, pursuant to the
terms described in the Registration Statement, will be legally
issued by the Company and fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to us under the heading "Legal
Opinions" in the Prospectus. In giving this consent, we do not thereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
STEVENS & LEE
/s/ Stevens & Lee
<PAGE> 1
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
Exhibit 23.2
August 6, 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 June 4, 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/ James E. Magee
Alex Sheshunoff & Co.
Investment Banking
98 SAN JACINTO BOULEVARD * SUITE 1925 * AUSTIN, TEXAS 78701
PHONE 512-479-8200 * FAX 512-472-8953
<PAGE> 1
CONVERSION VALUATION UPDATE REPORT
Prepared for
MERCER MUTUAL INSURANCE COMPANY
and
MERCER INSURANCE GROUP, INC.
Pennington, New Jersey
Dated
June 4, 1998
Alex Sheshunoff & Company
Investment Banking
Nineteenth Floor
98 San Jacinto Boulevard
Austin, Texas 78701
(800) 279-2241
<PAGE> 2
Alex Sheshunoff & Co.
Investment Banking
June 4, 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 update as of March 3, 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. 2 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,
98 San Jacinto Boulevard Suite 1925 Austin, Texas 78701
Phone 512-479-8200 Fax 512-472-8953
<PAGE> 3
Mercer Mutual Insurance Company
June 4, 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 a the Corporation's Registration Statement on Form S-1 and a draft of
pre-effective Amendment No. 2 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 March 31, 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
June 4, 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 report(s).
It is our opinion, pursuant to the instructions contained in the Plan that as of
June 4, 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,
[sig]
Alex Sheshunoff & Co. Investment Banking
<PAGE> 5
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
June 4, 1998
RECENT FINANCIAL PERFORMANCE OF THE COMPANY
Overall, the trends discussed in our Appraisal and updated appraisal continued
during the first quarter of 1998. Mercer reported net income of $696,000 for the
three months ended March 31, 1998, a significant improvement over the three
month period during the prior year. The Company continued to experience
catastrophe losses below historic norms during the quarter. The loss and loss
adjustment expense of $2.8 million during 1997 was 54.3% of net premiums earned
for the three months ended March 31, 1998 compared to 66.3% for the three months
ended March 31, 1997.
The combined ratio during the quarter was 96.0% (compared to 103.6% during the
first quarter of 1997) and the underwriting gain was $209,000 compared to an
underwriting loss of $158,000 during the first quarter 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 34.3% to $2.2 million for the first quarter
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 three months ended March 31, 1998 increased by
10.9% to $7.1 million compared to the first quarter of 1997. Commercial lines
premiums increased the largest by 731,000, or 25.8% as a result of the
introduction of the religious institution program and a commercial automobile
program in 1997. Commercial lines now represent slightly more than 50% of the
total direct writings of Mercer.
Ceded premiums written decreased by $2.6 million or 75.7% during the first
quarter 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 $3.4
million or 109% to $6.4 million during the first quarter of 1998.
Net investment income decreased 9.9% to $553,000. The Company's principal
investment is taxable fixed income securities, which produced a yield of 6.55%
during the period compared to a yield of 6.67% during the first quarter of 1997.
In addition, investment income from equity securities decreased by $17,000.
<PAGE> 6
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
June 4, 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.
RECENT STOCK MARKET CONDITIONS
Insurance stocks, like much of the market, have been under pressure recently.
The dominate event in the industry was the merger announcement by Travelers and
Citicorp as merger activity in the financial services industry drove insurance
stocks higher overall. While the first four months of 1998 produced impressive
stock gains, May and early June were decidely down months for the market.
Through April, the Property Casualty Sector, as measured by the Firemark index,
rose 8.7% from year-end and 15.8% since our original appraisal. The index fell
1.6% during the month of May and 0.2% during the month of April, continuing to
make this sector the poorest performer.
COMMON STOCK COMPARISONS WITH THE COMPARATIVE GROUP
Table 1 presents (as detailed in Exhibit I) the common stock comparisons of the
comparative group as of June 3, 1998. Overall, the comparative group experienced
an 11% median price increase since our updated appraisal and a 19% median
increase since our Appraisal. However, there was a wide range of market
performance, with three companies experiencing losses while five companies
experienced price appreciation greater than 20%. Importantly, Old Guard, the
most recent conversion, experienced a 13.1% price increase since our Appraisal
and a 10.8% price increase since our update.
<PAGE> 7
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
June 4, 1998
Page 3
TABLE 1
Mercer Mutual Comparative Group Price Performance
<TABLE>
Price Price Price Change Change Change P/B P/LTM P/ Est '98
Comparative Group 11-Nov 25-Feb 3-Jun 11/11 - 02/25 11/11 - 06/03 02/25 - 06/03 3-Jun 3-Jun 3-Jun
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Farm Family 30.38 34.19 39.38 12.6% 29.6% 15.2% 1.55 11.2 13.0
Motor Club of America 13.00 16.00 15.63 23.1% 20.2% -2.3% 1.36 9.2 7.0
Allied Group 29.96 31.94 46.19 6.6% 54.2% 44.6% 2.97 22.3 21.0
Alfa 16.94 17.75 19.00 4.8% 12.2% 7.0% 1.86 14.0 14.1
State Auto 27.00 31.50 32.13 16.7% 19.0% 2.0% 2.51 16.7 17.0
Selective Insurance 27.69 27.31 25.25 -1.4% -8 .8% -7.6% 1.25 11.3 11.0
Harleysville 26.00 24.38 23.00 -6.3% -11 .5% -5.6% 1.42 11.7 12.4
Donegal 20.50 21.75 26.50 6.1% 29.3% 21.8% 1.68 14.2 13.6
Old Guard 17.63 18.00 19.94 2.1% 13.1% 10.8% 1.00 19.6 20.8
Merchants 19.50 20.81 24.69 6.7% 26.6% 18.6% 1.04 14.4 13.5
Meridian 18.00 17.63 19.63 -2.1% 9 .0% 11.3% 0.95 14.3 13.0
Average 6.3% 17.5% 10.5% 1.60 14.45 14.22
Median 6.1% 19.0% 10.8% 1.42 14.20 13.50
</TABLE>
The same relationship between size and price remained evident, with smaller
companies valued at lower price/book measures. The sole exception of Motor Club
is explainable by the leveraged nature of its balance sheet relative to the
industry overall and the remaining members of its peer group. In our Appraisal,
we concluded that the most appropriate benchmark for pricing purposes was the
small, capitalized companies and should be valued at a discount to this subset.
Excluding Motor Club of America (for the reasons discussed above), the
price/book ratios of Meridian, Old Guard, and Merchants were 95%, 1.00%, and
1.04%, respectively.
VALUATION CONCLUSION
The improved market prices of the comparative group and the recent financial
performance of Mercer leads us to believe an increase in the pro forma market
value of Mercer is necessary. The three small companies discussed above,
Meridan, Old Guard, and Merchants, provide a good basis for determining the
extent of increase necessary. Since our
<PAGE> 8
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
June 4, 1998
Page 4
Appraisal, these three companies have seen their stock price rise by 9.0%,
13.1%, and 26.6%. Old Guard, the only recent conversion within the group,
increased by 13.1%. An increase of 13% to $19.5 million (rounded) is within the
range of these companies and we believe appropriate at this time.
CONCLUSION
Based upon the following, we believe the estimated pro forma market value of
Mercer pursuant to the Reorganization was $29,500,000, or an increase of 13.5%
to represent the market price movement of the comparative companies and the
overall insurance market.. The resulting range was $25,075,000 at the minimum
and $33,925,000 at the maximum. Exhibit II displays the pro forma analysis of
the Bank's valuation range.
<PAGE> 9
- --------------------------------------------------------------------------------
TABLE 1
Mercer Mutual Comparative Group Price Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price Price P/B P/LTM P/ Est '98
Comparative Group 11-Nov 25-Feb Change 25-Feb 25-Feb 25-Feb
<S> <C> <C> <C> <C> <C> <C>
Farm Family 30.38 34.19 12.6% 1.44 11.2 12.7
Motor Club of America 13.00 16.00 23.1% 1.54 5.2 9.4
Allied Group 29.96 31.94 6.6% 2.38 11.2 14.1
Alfa 16.94 17.75 4.8% 1.94 13.1 13.1
State Auto 27.00 31.50 16.7% 2.60 20.6 17.5
Selective Insurance 27.69 27.31 -1.4% 1.41 6.3 11.6
Harleysville 26.00 24.38 -6.3% 1.57 17.2 12.8
Donegal 20.50 21.75 6.1% 1.46 12.9 8.4
Old Guard 17.63 18.00 2.1% 0.95 NM 20.0
Merchants 19.50 20.81 6.7% 0.90 14.8 9.9
Meridian 18.00 17.63 -2.1% 0.89 14.7 9.0
Average 6.3% 1.55 11.56 12.60
Median 6.1% 1.46 13.00 12.66
</TABLE>
<PAGE> 10
- --------------------------------------------------------------------------------
TABLE 2
Mercer Mutual Comparative Group Price Performance - Sorted by Size
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price Price P/B P/LTM P/ Est '98
Comparative Group 11-Nov 25-Feb Change 25-Feb 25-Feb 25-Feb
<S> <C> <C> <C> <C> <C> <C>
Allied Group 29.96 31.94 6.6% 2.38 11.2 14.1
Selective Insurance 27.69 27.31 -1.4% 1.41 6.3 11.6
Harleysville 26.00 24.38 -6.3% 1.57 17.2 12.8
Alfa 16.94 17.75 4.8% 1.94 13.1 13.1
State Auto 27.00 31.50 16.7% 2.60 20.6 17.5
Farm Family 30.38 34.19 12.6% 1.44 11.2 12.7
Donegal 20.50 21.75 6.1% 1.46 12.9 8.4
Meridian 18.00 17.63 -2.1% 0.89 14.7 9.0
Old Guard 17.63 18.00 2.1% 0.95 NM 20.0
Merchants 19.50 20.81 6.7% 0.90 14.8 9.9
Motor Club of America 13.00 16.00 23.1% 1.54 5.2 9.4
</TABLE>
<PAGE> 11
EXHIBITS
<PAGE> 12
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS
FOR THE YEARS ENDING DECEMBER 31, 1993-1997 & LAST
TWELVE MONTHS ENDING MARCH 31, 1998
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE
GROUP, ALFA
INC. CORPORATION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK PRICE $
3-JUN-98 19
Twelve Month - High 20.38
Twelve Month - Low 12.75
Last to High 86%
COMMON SHARES OUTSTANDING 40,810,112
$ $
MARKET CAPITALIZATION 775
BOOK VALUE PER SHARE @ 3/31/98 $ 9.89
BOOK VALUE PER SHARE @ 12/31/97 $ 9.39
PRICE TO MOST RECENT BOOK VALUE 186%
PRICE TO LTM EARNINGS 14.0
PRICE TO 1998 ESTIMATED EARNINGS 14.1
FULLY DILUTED EARNINGS PER SHARE: $ $
- ---------------------------------
1998 Estimated 1.35
LTM 31-Mar-98 1.36
31-Dec-97 1.29
31-Dec-96 0.79
31-Dec-95 0.55
31-Dec-94 0.81
31-Dec-93 1.04
CGR 1993 - LTM 1997 5.5%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 45.0%
$ $
Current Indicated 0.11
31-Dec-97 0.40
31-Dec-96 0.39
31-Dec-95 0.38
31-Dec-94 0.34
31-Dec-93 0.28
CGR 1993-1997 9.2%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ALLIED DONEGAL FARM
GROUP, GROUP, FAMILY
INC. INC. HOLDINGS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK PRICE
3-JUN-98 46 3/16 26 1/2 39 3/8
Twelve Month - High 46.19 30.38 42.50
Twelve Month - Low 25.25 18.25 26.88
Last to High 97% 90% 95%
COMMON SHARES OUTSTANDING 32,400,686 6,057,732 5,253,813
$ $ $
MARKET CAPITALIZATION 1,415 161 207
BOOK VALUE PER SHARE @ 3/31/98 13.97 $ 15.75 25.33
BOOK VALUE PER SHARE @ 12/31/97 13.44 $ 15.19 24.73
PRICE TO MOST RECENT BOOK VALUE 297% 168% 155%
PRICE TO LTM EARNINGS 22.3 14.2 11.2
PRICE TO 1998 ESTIMATED EARNINGS 21.0 13.6 13.0
FULLY DILUTED EARNINGS PER SHARE: $ $ $
- ---------------------------------
1998 Estimated 2.20 1.95 3.03
LTM 31-Mar-98 2.07 1.87 3.53
31-Dec-97 2.01 1.77 3.51
31-Dec-96 1.51 1.45 1.74
31-Dec-95 1.54 1.73 3.20
31-Dec-94 1.40 0.90 1.18
31-Dec-93 1.17 1.44 2.53
CGR 1993 - LTM 1997 14.5% 5.3% 8.5%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 52.0% 44.0% 0.0%
$ $ $
Current Indicated 0.13 0.11 0.00
31-Dec-97 0.46 0.39 0.00
31-Dec-96 0.39 0.33 0.00
31-Dec-95 0.30 0.30 0.00
31-Dec-94 0.27 0.33 0.00
31-Dec-93 0.23 0.18 0.00
CGR 1993-1997 19.3% 21.3% 0.0%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MERIDIAN
HARLEYSVILLE MERCHANTS INSURANCE
GROUP, GROUP, GROUP,
INC. INC. INC.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK PRICE
3-JUN-98 23 24 11/16 19 5/8
Twelve Month - High 28.22 26.25 19.75
Twelve Month - Low 18.31 17.38 14.75
Last to High 81% 96% 100%
COMMON SHARES OUTSTANDING 28,967,604 2,908,852 6,641,519
$ $ $
MARKET CAPITALIZATION 667 72 130
BOOK VALUE PER SHARE @ 3/31/98 16.16 $ 23.70 $ 20.74
BOOK VALUE PER SHARE @ 12/31/97 15.49 $ 23.21 $ 19.90
PRICE TO MOST RECENT BOOK VALUE 142% 104% 95%
PRICE TO LTM EARNINGS 11.7 14.4 14.3
PRICE TO 1998 ESTIMATED EARNINGS 12.4 13.5 13.0
FULLY DILUTED EARNINGS PER SHARE: $ $ $
- ---------------------------------
1998 Estimated 1.86 1.83 1.51
LTM 31-Mar-98 1.96 1.71 1.37
31-Dec-97 1.86 1.41 1.03
31-Dec-96 1.02 (0.36) 0.85
31-Dec-95 1.51 (1.19) 1.71
31-Dec-94 0.69 0.36 1.35
31-Dec-93 1.22 2.12 1.53
CGR 1993 - LTM 1997 11.1% -9.7% -9.4%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 46.0% 20.0% 32.0%
$ $ $
Current Indicated 0.12 0.05 0.08
31-Dec-97 0.44 0.20 0.32
31-Dec-96 0.40 0.20 0.32
31-Dec-95 0.36 0.20 0.28
31-Dec-94 0.33 0.20 0.24
31-Dec-93 0.30 0.10 0.24
CGR 1993-1997 10.0% 18.9% 7.5%
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MOTOR OLD
CLUB GUARD SELECTIVE
OF GROUP, INSURANCE
AMERICA INC. GROUP
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK PRICE
3-JUN-98 15 5/8 19 15/16 25 1/4
Twelve Month - High 17.63 21.25 28.63
Twelve Month - Low 11.88 14.38 22.31
Last to High 86% 95% 91%
COMMON SHARES OUTSTANDING 2,099,679 4,106,265 29,540,304
$ $ $
MARKET CAPITALIZATION 33 84 746
BOOK VALUE PER SHARE @ 3/31/98 11.46 $ 20.71 $ 20.13
BOOK VALUE PER SHARE @ 12/31/97 10.98 $ 20.01 $ 19.32
PRICE TO MOST RECENT BOOK VALUE 136% 100% 125%
PRICE TO LTM EARNINGS 9.2 19.6 11.3
PRICE TO 1998 ESTIMATED EARNINGS 7.0 20.8 11.0
FULLY DILUTED EARNINGS PER SHARE: $ $ $
- ---------------------------------
1998 Estimated 2.23 0.96 2.30
LTM 31-Mar-98 1.70 1.02 2.23
31-Dec-97 1.66 N/A 2.27
31-Dec-96 2.56 (0.46) 1.83
31-Dec-95 1.17 (0.16) 1.81
31-Dec-94 2.46 0.03 1.29
31-Dec-93 1.60 0.81 0.81
CGR 1993 - LTM 1997 0.9% NM 29.4%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 0.0% 10.0% 56.0%
$ $ $
Current Indicated 0.00 0.03 0.14
31-Dec-97 0.00 0.05 0.56
31-Dec-96 0.00 0.00 0.56
31-Dec-95 0.00 0.00 0.56
31-Dec-94 0.00 0.00 0.56
31-Dec-93 0.00 0.00 0.56
CGR 1993-1997 NA NM 0.0%
<CAPTION>
- ------------------------------------------------------------------------------------------
STATE
AUTO
FINANCIAL
CORPORATION
- ------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK PRICE
3-JUN-98 32 1/8
Twelve Month - High 39.75
Twelve Month - Low 19.00
Last to High 80%
COMMON SHARES OUTSTANDING 18,350,632
$
MARKET CAPITALIZATION 590
BOOK VALUE PER SHARE @ 3/31/98 $ 12.78
BOOK VALUE PER SHARE @ 12/31/97 $ 12.29
PRICE TO MOST RECENT BOOK VALUE 251%
PRICE TO LTM EARNINGS 16.7
PRICE TO 1998 ESTIMATED EARNINGS 17.0
FULLY DILUTED EARNINGS PER SHARE: $
- ---------------------------------
1998 Estimated 1.89
LTM 31-Mar-98 1.93
31-Dec-97 1.82
31-Dec-96 1.23
31-Dec-95 1.41
31-Dec-94 0.82
31-Dec-93 0.77
CGR 1993 - LTM 1997 24.0%
DIVIDENDS PER COMMON SHARE:
Indicated Dividend Yield 18.0%
$
Current Indicated 0.05
31-Dec-97 0.17
31-Dec-96 0.15
31-Dec-95 0.14
31-Dec-94 0.13
31-Dec-93 0.11
CGR 1993-1997 10.7%
</TABLE>
<PAGE> 13
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS
FOR THE YEARS ENDING DECEMBER 31, 1993-1997 & LAST
TWELVE MONTHS ENDING MARCH 31, 1998
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE
GROUP, ALFA
INC. CORPORATION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME: $ $
- -----------
LTM 31-Mar-98 2,558 55,799
31-Dec-97 2,217 52,793
31-Dec-96 640 32,189
31-Dec-95 1,138 22,318
31-Dec-94 (1,374) 32,867
31-Dec-93 799 44,960
CGR 1993-1997 29.1% 4.1%
NET INVESTMENT INCOME (excluding net realized gains/losses) $
- -----------------------
LTM 31-Mar-98 2,289 59,049
31-Dec-97 2,350 57,529
31-Dec-96 2,289 54,194
31-Dec-95 2,132 50,923
31-Dec-94 1,804 45,554
31-Dec-93 2,196 44,902
CGR 1993-1997 1.7% 6.4%
NET REALIZED GAINS (LOSSES): $ $
- ----------------------------
LTM 31-Mar-98 711 2,679
31-Dec-97 589 3,356
31-Dec-96 596 2,808
31-Dec-95 53 1,106
31-Dec-94 277 572
31-Dec-93 509 4,890
CGR 1993-1997 3.7% -9.0%
EARNINGS BEFORE TAXES $ $
- ---------------------
LTM 31-Mar-98 3,652 81,270
31-Dec-97 3,218 76,799
31-Dec-96 811 45,854
31-Dec-95 1,508 30,993
31-Dec-94 (2,055) 47,832
31-Dec-93 963 63,314
CGR 1993-1997 35.2% 4.9%
ASSETS $ $
- ------
LTM 31-Mar-98 74,697 1,202,676
31-Dec-97 74,085 1,170,065
31-Dec-96 74,074 1,019,330
31-Dec-95 77,523 965,433
31-Dec-94 71,750 847,870
31-Dec-93 71,110 766,077
CGR 1993-1997 1.0% 11.2%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ALLIED DONEGAL FARM
GROUP, GROUP, FAMILY
INC. INC. HOLDINGS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME: $ $ $
- -----------
LTM 31-Mar-98 67,418 11,396 18,656
31-Dec-97 65,436 10,641 18,504
31-Dec-96 51,084 8,558 6,924
31-Dec-95 52,377 9,858 9,606
31-Dec-94 47,625 5,040 3,526
31-Dec-93 39,922 6,382 7,584
CGR 1993-1997 13.1% 13.6% 25.0%
NET INVESTMENT INCOME (excluding net realized gains/losses) $ $ $
- -----------------------
LTM 31-Mar-98 51,735 11,507 18,428
31-Dec-97 51,124 11,507 18,077
31-Dec-96 49,222 10,799 15,952
31-Dec-95 47,242 9,270 14,326
31-Dec-94 41,070 7,778 13,190
31-Dec-93 39,030 6,478 13,861
CGR 1993-1997 7.0% 15.4% 6.9%
NET REALIZED GAINS (LOSSES): $ $ $
- ----------------------------
LTM 31-Mar-98 456 588 5,622
31-Dec-97 391 314 5,406
31-Dec-96 49 173 (640)
31-Dec-95 505 399 912
31-Dec-94 2,888 34 1,340
31-Dec-93 1,396 845 (174)
CGR 1993-1997 -27.3% -21.9% NM
EARNINGS BEFORE TAXES $ $ $
- ---------------------
LTM 31-Mar-98 94,240 15,465 28,083
31-Dec-97 91,912 14,173 28,251
31-Dec-96 71,311 10,737 12,143
31-Dec-95 73,848 12,647 14,590
31-Dec-94 66,699 7,103 4,973
31-Dec-93 56,757 8,519 10,666
CGR 1993-1997 12.8% 13.6% 27.6%
ASSETS $ $ $
- ------
LTM 31-Mar-98 1,287,063 303,331 380,739
31-Dec-97 1,201,233 304,104 368,278
31-Dec-96 1,077,659 287,991 319,412
31-Dec-95 1,010,598 235,704 278,288
31-Dec-94 892,751 207,721 243,107
31-Dec-93 855,525 169,461 244,141
CGR 1993-1997 8.9% 15.7% 10.8%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MERIDIAN
HARLEYSVILLE MERCHANTS INSURANCE
GROUP, GROUP, GROUP,
INC. INC. INC.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME: $ $ $
- -----------
LTM 31-Mar-98 57,142 5,063 9,128
31-Dec-97 54,072 4,198 6,921
31-Dec-96 28,680 (1,148) 5,800
31-Dec-95 41,331 (3,819) 11,617
31-Dec-94 18,454 1,131 9,121
31-Dec-93 31,940 5,909 9,410
CGR 1993-1997 14.1% -8.2% -7.4%
NET INVESTMENT INCOME (excluding net realized gains/losses) $ $ $
- -----------------------
LTM 31-Mar-98 82,427 13,031 16,675
31-Dec-97 81,783 12,770 16,372
31-Dec-96 78,008 11,724 14,908
31-Dec-95 68,445 10,368 14,564
31-Dec-94 64,366 9,849 13,996
31-Dec-93 59,198 9,155 13,569
CGR 1993-1997 8.4% 8.7% 4.8%
NET REALIZED GAINS (LOSSES): $ $ $
- ----------------------------
LTM 31-Mar-98 9,723 5 4,465
31-Dec-97 6,541 112 4,477
31-Dec-96 3,182 996 3,794
31-Dec-95 2,245 (832) 1,538
31-Dec-94 3,367 20 286
31-Dec-93 2,721 1,467 890
CGR 1993-1997 24.5% -47.4% 49.8%
EARNINGS BEFORE TAXES $ $ $
- ---------------------
LTM 31-Mar-98 71,746 6,651 10,709
31-Dec-97 67,281 5,422 7,128
31-Dec-96 31,375 (3,033) 5,950
31-Dec-95 52,642 (6,818) 15,722
31-Dec-94 16,832 236 11,536
31-Dec-93 38,572 7,330 11,649
CGR 1993-1997 14.9% -7.3% -11.6%
ASSETS $ $ $
- ------
LTM 31-Mar-98 1,860,537 283,405 417,752
31-Dec-97 1,801,195 273,974 413,586
31-Dec-96 1,622,612 262,123 397,798
31-Dec-95 1,378,341 252,808 322,588
31-Dec-94 1,241,072 222,407 291,406
31-Dec-93 1,180,389 221,556 285,937
CGR 1993-1997 11.1% 5.5% 9.7%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MOTOR OLD
CLUB GUARD SELECTIVE
OF GROUP, INSURANCE
AMERICA INC. GROUP
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME: $ $ $
- -----------
LTM 31-Mar-98 3,585 3,933 68,863
31-Dec-97 3,482 3,485 69,608
31-Dec-96 5,330 (1,920) 55,551
31-Dec-95 2,417 (684) 53,042
31-Dec-94 5,035 144 38,276
31-Dec-93 3,260 3,388 22,678
CGR 1993-1997 1.7% 0.7% 32.4%
NET INVESTMENT INCOME (excluding net realized gains/losses) $ $ $
- -----------------------
LTM 31-Mar-98 3,785.00 6,007 101,206
31-Dec-97 3,595 5,877 100,530
31-Dec-96 3,087 4,495 96,952
31-Dec-95 2,764 4,458 91,640
31-Dec-94 2,730 3,932 80,657
31-Dec-93 2,784 3,928 77,326
CGR 1993-1997 6.6% 10.6% 6.8%
NET REALIZED GAINS (LOSSES): $ $ $
- ----------------------------
LTM 31-Mar-98 26 2,666 6,124
31-Dec-97 - 2,326 6,021
31-Dec-96 6 1,385 2,786
31-Dec-95 57 1,011 900
31-Dec-94 (43) 476 4,230
31-Dec-93 288 1,758 4,528
CGR 1993-1997 NM 7.3% 7.4%
EARNINGS BEFORE TAXES $ $ $
- ---------------------
LTM 31-Mar-98 4,853 6,210 89,430
31-Dec-97 4,630 5,488 91,020
31-Dec-96 3,297 (3,347) 69,089
31-Dec-95 2,455 (1,368) 64,898
31-Dec-94 5,039 (388) 43,408
31-Dec-93 3,827 3,771 21,352
CGR 1993-1997 4.9% 9.8% 43.7%
ASSETS $ $ $
- ------
LTM 31-Mar-98 102,296 179,296 2,353,090
31-Dec-97 101,347 175,399 2,306,191
31-Dec-96 95,533 137,462 2,189,737
31-Dec-95 81,959 134,853 2,113,077
31-Dec-94 79,172 127,831 1,866,680
31-Dec-93 86,670 140,213 1,721,850
CGR 1993-1997 4.0% 5.8% 7.6%
<CAPTION>
- ------------------------------------------------------------------------------------------
STATE
AUTO
FINANCIAL
CORPORATION
- ------------------------------------------------------------------------------------------
<S> <C>
NET INCOME: $
- -----------
LTM 31-Mar-98 36,191
31-Dec-97 33,959
31-Dec-96 22,602
31-Dec-95 25,542
31-Dec-94 14,662
31-Dec-93 13,729
CGR 1993-1997 25.4%
NET INVESTMENT INCOME (excluding net realized gains/losses) $
- -----------------------
LTM 31-Mar-98 25,371
31-Dec-97 25,078
31-Dec-96 23,879
31-Dec-95 22,617
31-Dec-94 17,756
31-Dec-93 17,222
CGR 1993-1997 9.9%
NET REALIZED GAINS (LOSSES): $
- ----------------------------
LTM 31-Mar-98 594
31-Dec-97 543
31-Dec-96 1,401
31-Dec-95 1,201
31-Dec-94 1,506
31-Dec-93 718
CGR 1993-1997 -6.7%
EARNINGS BEFORE TAXES $
- ---------------------
LTM 31-Mar-98 50,215
31-Dec-97 47,084
31-Dec-96 30,148
31-Dec-95 35,339
31-Dec-94 19,105
31-Dec-93 16,849
CGR 1993-1997 29.3%
ASSETS $
- ------
LTM 31-Mar-98 529,595
31-Dec-97 493,151
31-Dec-96 453,120
31-Dec-95 434,496
31-Dec-94 334,796
31-Dec-93 320,203
CGR 1993-1997 11.4%
</TABLE>
<PAGE> 14
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS
FOR THE YEARS ENDING DECEMBER 31, 1993-1997 & LAST
TWELVE MONTHS ENDING MARCH 31, 1998
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE
GROUP, ALFA
INC. CORPORATION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LOSS & LAE RESERVES $ $
- -------------------
LTM 31-Mar-98 31,190 136,078
31-Dec-97 31,872 132,086
31-Dec-96 35,221 117,672
31-Dec-95 36,176 108,303
31-Dec-94 35,531 88,208
31-Dec-93 33,308 77,169
CGR 1993-1997 -1.1% 14.4%
STOCKHOLDERS' EQUITY $ $
- --------------------
LTM 31-Mar-98 24,535 403,600
31-Dec-97 23,236 382,931
31-Dec-96 19,282 323,312
31-Dec-95 18,963 308,610
31-Dec-94 14,203 254,985
31-Dec-93 17,641 260,986
CGR 1993-1997 7.1% 10.1%
COMBINED RATIO % %
- --------------
LTM 31-Mar-98 96.0 N/A
31-Dec-97 99.4 91.5
31-Dec-96 110.8 100.7
31-Dec-95 104.1 103.9
31-Dec-94 123.6 95.0
31-Dec-93 110.4 90.7
LOSS & LAE RATIO % %
- ----------------
LTM 31-Mar-98 54.3 N/A
31-Dec-97 58.9 65.0
31-Dec-96 71.7 67.0
31-Dec-95 63.9 63.6
31-Dec-94 75.5 64.9
31-Dec-93 63.8 64.0
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ALLIED DONEGAL FARM
GROUP, GROUP, FAMILY
INC. INC. HOLDINGS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOSS & LAE RESERVES $ $ $
- -------------------
LTM 31-Mar-98 382,641 119,121 163,498
31-Dec-97 378,026 118,112 156,622
31-Dec-96 362,191 114,622 141,220
31-Dec-95 341,864 97,734 137,978
31-Dec-94 310,996 87,744 127,954
31-Dec-93 279,856 69,442 123,477
CGR 1993-1997 7.8% 14.2% 6.1%
STOCKHOLDERS' EQUITY $ $ $
- --------------------
LTM 31-Mar-98 447,415 95,743 133,102
31-Dec-97 430,084 91,597 129,927
31-Dec-96 370,591 81,599 110,741
31-Dec-95 351,586 72,283 74,164
31-Dec-94 281,881 60,565 52,977
31-Dec-93 259,641 57,346 60,512
CGR 1993-1997 13.4% 12.4% 21.0%
COMBINED RATIO % % %
- --------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 94.8 97.6 97.2
31-Dec-96 97.9 100.4 101.8
31-Dec-95 95.8 97.3 100.9
31-Dec-94 97.5 101.7 109.9
31-Dec-93 99.8 99.1 103.4
LOSS & LAE RATIO % % %
- ----------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 69.6 63.0 69.2
31-Dec-96 72.0 66.6 72.6
31-Dec-95 69.4 64.2 71.1
31-Dec-94 69.4 68.9 81.5
31-Dec-93 70.3 68.9 75.7
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MERIDIAN
HARLEYSVILLE MERCHANTS INSURANCE
GROUP, GROUP, GROUP,
INC. INC. INC.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOSS & LAE RESERVES $ $ $
- -------------------
LTM 31-Mar-98 893,417 140,645 168,458
31-Dec-97 868,393 141,205 169,801
31-Dec-96 796,820 133,479 161,309
31-Dec-95 645,941 119,722 123,577
31-Dec-94 603,088 104,015 123,755
31-Dec-93 560,811 93,896 119,764
CGR 1993-1997 11.6% 10.7% 9.1%
STOCKHOLDERS' EQUITY $ $ $
- --------------------
LTM 31-Mar-98 468,215 68,930 137,774
31-Dec-97 446,515 67,462 131,894
31-Dec-96 370,245 65,029 122,174
31-Dec-95 345,009 69,970 118,242
31-Dec-94 276,924 67,279 94,253
31-Dec-93 267,749 75,083 94,447
CGR 1993-1997 13.6% -2.6% 8.7%
COMBINED RATIO % % %
- --------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 103.6 108.0 107.6
31-Dec-96 108.4 116.6 108.0
31-Dec-95 104.0 117.5 100.2
31-Dec-94 111.5 111.3 101.8
31-Dec-93 106.7 104.6 101.8
LOSS & LAE RATIO % % %
- ----------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 N/A 74.6 76.7
31-Dec-96 76.2 83.1 77.8
31-Dec-95 70.3 82.5 69.2
31-Dec-94 77.9 77.9 69.8
31-Dec-93 77.9 70.8 69.4
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MOTOR OLD
CLUB GUARD SELECTIVE
OF GROUP, INSURANCE
AMERICA INC. GROUP
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOSS & LAE RESERVES $ $ $
- -------------------
LTM 31-Mar-98 51,619 47,586 1,174,914
31-Dec-97 50,247 48,719 1,161,169
31-Dec-96 47,667 55,371 1,189,793
31-Dec-95 39,824 52,091 1,120,052
31-Dec-94 41,665 51,309 999,404
31-Dec-93 45,818 59,057 917,691
CGR 1993-1997 2.3% -4.7% 6.1%
STOCKHOLDERS' EQUITY $ $ $
- --------------------
LTM 31-Mar-98 24,066 81,805 594,728
31-Dec-97 23,001 78,654 565,316
31-Dec-96 18,786 39,011 474,299
31-Dec-95 14,081 40,897 436,749
31-Dec-94 10,546 36,531 329,164
31-Dec-93 7,168 39,854 322,807
CGR 1993-1997 33.8% 18.5% 15.0%
COMBINED RATIO % % %
- --------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 98.4 100.8 100.3
31-Dec-96 102.4 117.1 102.9
31-Dec-95 102.6 110.7 102.3
31-Dec-94 94.1 108.0 105.1
31-Dec-93 99.8 103.5 109.1
LOSS & LAE RATIO % % %
- ----------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 65.1 61.7 N/A
31-Dec-96 64.5 82.8 71.3
31-Dec-95 58.7 75.8 71.2
31-Dec-94 54.8 73.2 71.7
31-Dec-93 54.1 69.1 71.8
<CAPTION>
- ------------------------------------------------------------------------------------------
STATE
AUTO
FINANCIAL
CORPORATION
- ------------------------------------------------------------------------------------------
<S> <C>
LOSS & LAE RESERVES $
- -------------------
LTM 31-Mar-98 178,803
31-Dec-97 162,446
31-Dec-96 165,875
31-Dec-95 170,575
31-Dec-94 133,750
31-Dec-93 130,556
CGR 1993-1997 5.6%
STOCKHOLDERS' EQUITY $
- --------------------
LTM 31-Mar-98 234,483
31-Dec-97 225,479
31-Dec-96 186,461
31-Dec-95 168,252
31-Dec-94 130,186
31-Dec-93 124,332
CGR 1993-1997 16.0%
COMBINED RATIO %
- --------------
LTM 31-Mar-98 N/A
31-Dec-97 94.2
31-Dec-96 100.3
31-Dec-95 97.4
31-Dec-94 101.0
31-Dec-93 102.1
LOSS & LAE RATIO %
- ----------------
LTM 31-Mar-98 N/A
31-Dec-97 65.1
31-Dec-96 72.2
31-Dec-95 68.2
31-Dec-94 75.1
31-Dec-93 73.0
</TABLE>
<PAGE> 15
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS
FOR THE YEARS ENDING DECEMBER 31, 1993-1997 & LAST
TWELVE MONTHS ENDING MARCH 31, 1998
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE
GROUP, ALFA
INC. CORPORATION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXPENSE RATIO % %
- -------------
LTM 31-Mar-98 41.7 N/A
31-Dec-97 40.5 26.5
31-Dec-96 39.1 33.7
31-Dec-95 40.2 40.3
31-Dec-94 48.1 30.1
31-Dec-93 46.6 26.7
RETURN ON EQUITY % %
- ----------------
LTM 31-Mar-98 10.43 15.25
31-Dec-97 9.54 14.95
31-Dec-96 3.32 10.19
31-Dec-95 6.00 7.92
31-Dec-94 -9.67 12.74
31-Dec-93 4.53 18.52
NET REALIZED GAIN ( LOSS) / EBT % %
- -------------------------------
LTM 31-Mar-98 19.47 NA
31-Dec-97 18.30 4.37
31-Dec-96 73.49 6.12
31-Dec-95 3.51 3.57
31-Dec-94 -13.48 1.20
31-Dec-93 52.86 7.72
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ALLIED DONEGAL FARM
GROUP, GROUP, FAMILY
INC. INC. HOLDINGS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSE RATIO % % %
- -------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 25.2 34.6 28.0
31-Dec-96 25.9 31.2 29.2
31-Dec-95 26.4 31.8 29.8
31-Dec-94 28.1 30.7 28.4
31-Dec-93 29.5 30.2 27.7
RETURN ON EQUITY % % %
- ----------------
LTM 31-Mar-98 16.57 12.77 15.11
31-Dec-97 16.35 12.29 15.38
31-Dec-96 14.37 11.12 7.49
31-Dec-95 16.54 14.84 15.11
31-Dec-94 17.59 8.55 NA
31-Dec-93 18.33 13.61 NA
NET REALIZED GAIN ( LOSS) / EBT % % %
- -------------------------------
LTM 31-Mar-98 0.48 3.80 20.02
31-Dec-97 0.43 2.22 19.14
31-Dec-96 0.07 1.61 -5.27
31-Dec-95 0.68 3.15 6.25
31-Dec-94 4.33 0.48 NA
31-Dec-93 2.46 9.92 NA
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MERIDIAN
HARLEYSVILLE MERCHANTS INSURANCE
GROUP, GROUP, GROUP,
INC. INC. INC.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSE RATIO % % %
- -------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 N/A 33.4 30.9
31-Dec-96 32.3 33.5 30.2
31-Dec-95 33.7 35.0 31.0
31-Dec-94 33.6 33.4 32.0
31-Dec-93 28.5 33.8 32.4
RETURN ON EQUITY % % %
- ----------------
LTM 31-Mar-98 13.45 7.65 7.05
31-Dec-97 13.24 6.34 5.45
31-Dec-96 8.02 -1.70 4.93
31-Dec-95 13.29 -5.57 10.93
31-Dec-94 6.78 1.59 9.67
31-Dec-93 12.65 9.21 11.69
NET REALIZED GAIN ( LOSS) / EBT % % %
- -------------------------------
LTM 31-Mar-98 13.55 0.08 41.69
31-Dec-97 9.72 2.07 62.81
31-Dec-96 10.14 -32.84 63.76
31-Dec-95 4.26 12.20 9.78
31-Dec-94 20.00 8.47 2.48
31-Dec-93 7.05 20.01 7.64
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MOTOR OLD
CLUB GUARD SELECTIVE
OF GROUP, INSURANCE
AMERICA INC. GROUP
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSE RATIO % % %
- -------------
LTM 31-Mar-98 N/A N/A N/A
31-Dec-97 33.3 39.1 N/A
31-Dec-96 37.9 34.3 31.6
31-Dec-95 43.9 34.9 31.1
31-Dec-94 39.3 34.8 33.4
31-Dec-93 45.7 34.4 37.3
RETURN ON EQUITY % % %
- ----------------
LTM 31-Mar-98 16.50 5.03 12.69
31-Dec-97 16.67 5.92 13.39
31-Dec-96 32.43 -4.81 12.19
31-Dec-95 19.63 -1.81 13.85
31-Dec-94 56.85 NA 11.74
31-Dec-93 45.52 NA 7.15
NET REALIZED GAIN ( LOSS) / EBT % % %
- -------------------------------
LTM 31-Mar-98 0.54 42.93 6.85
31-Dec-97 0.00 42.38 6.62
31-Dec-96 0.18 -41.38 4.03
31-Dec-95 2.32 -73.90 1.39
31-Dec-94 -0.85 NA 9.74
31-Dec-93 7.53 NA 21.21
<CAPTION>
- ------------------------------------------------------------------------------------------
STATE
AUTO
FINANCIAL
CORPORATION
- ------------------------------------------------------------------------------------------
<S> <C>
EXPENSE RATIO %
- -------------
LTM 31-Mar-98 N/A
31-Dec-97 29.1
31-Dec-96 28.1
31-Dec-95 29.2
31-Dec-94 25.9
31-Dec-93 29.1
RETURN ON EQUITY %
- ----------------
LTM 31-Mar-98 16.98
31-Dec-97 16.49
31-Dec-96 12.74
31-Dec-95 17.12
31-Dec-94 11.52
31-Dec-93 11.95
NET REALIZED GAIN ( LOSS) / EBT %
- -------------------------------
LTM 31-Mar-98 1.18
31-Dec-97 1.15
31-Dec-96 4.65
31-Dec-95 3.40
31-Dec-94 7.88
31-Dec-93 4.26
</TABLE>
<PAGE> 16
Exhibit II
MERCER MUTUAL PRO FORMA CALCULATIONS
<TABLE>
<CAPTION>
Minimum Midpoint Maximum Adj. Maximum
<S> <C> <C> <C> <C>
Gross Proceeds 25,075 29,500 33,925 37,694
Estimated net expenses (1,866) (1,946) (2,025) (2,093)
--------- --------- --------- ---------
Net Proceeds 23,209 27,554 31,900 35,601
Less: ESOP (2,508) (2,950) (3,393) (3,769)
Less: MRP (1,003) (1,180) (1,357) (1,508)
--------- --------- --------- ---------
Net Reinvestable Proceeds 19,699 23,424 27,151 30,324
Book Value 23,506 23,507 23,506 23,507
Net Proceeds 23,209 27,554 31,900 35,601
Less: MRP (c) (1,003) (1,180) (1,357) (1,508)
Less: ESOP (d) (2,508) (2,950) (3,393) (3,769)
--------- --------- --------- ---------
Pro Forma Book Value 43,205 46,931 50,657 53,831
Book Value without Unrealized Gains 20,963 20,963 20,964 20,965
Net Proceeds 23,209 27,554 31,900 35,601
Less: MRP (1,003) (1,180) (1,357) (1,508)
Less: ESOP (2,508) (2,950) (3,393) (3,769)
--------- --------- --------- ---------
Pro Forma Book Value w/o gains 40,662 44,387 48,115 51,289
Net Income - Fiscal year ended 12/31/97 2,217 2,217 2,217 2,218
Income on Proceeds (h) 758 901 1,045 1,167
Less: MRP (i) (132) (156) (179) (199)
Less: ESOP (j) (165) (195) (224) (249)
--------- --------- --------- ---------
Pro Forma Net Income 2,677 2,768 2,859 2,937
Net Income - Fiscal year ended 12/31/97 2,217 2,217 2,217 2,217
Loss Experience Adjustment (k) (500) (500) (500) (500)
Income on Proceeds (h) 758 901 1,045 1,167
Less: MRP (i) (132) (156) (179) (199)
Less: ESOP (j) (165) (195) (224) (249)
--------- --------- --------- ---------
Pro Forma Net Income 2,177 2,268 2,359 2,436
Net Income - 3 mths ended 03\31\98, ann. 2,784 2,784 2,784 2,784
Loss Experience Adjustment (k) (500) (500) (500) (500)
Income on Proceeds (h) 758 901 1,045 1,167
Less: MRP (i) (132) (156) (179) (199)
Less: ESOP (j) (165) (195) (224) (249)
--------- --------- --------- ---------
Pro Forma Net Income 2,744 2,835 2,926 3,003
Price/Book 0.58 0.63 0.67 0.70
Price/Book w/o gains 0.62 0.66 0.71 0.73
Price/Earnings 1997 9.4 10.7 11.9 12.8
Price/Earnings 1997 adj for loss experience 11.5 13.0 14.4 15.5
Price/Earnings 1998 adj for loss experience 9.1 10.4 11.6 12.6
</TABLE>
(a) Underwriting expenses per Prospectus Draft of 11/19/97.
(b) Other expenses were assumed to be $1.0 million.
(c) The MRP was assumed to be 4.0% of gross proceeds over 5 years.
(d) The ESOP was assumed to be 10.0% of gross proceeds.
(e) JUA expense of $410,000 pre-tax and a tax rate of 34% is removed.
(f) $190,000 additional pre-tax income on savings from re-insurance program and
34% tax rate.
(g) New Jersey retaliatory tax of $200,000 assumed and a 34% tax rate.
(h) Net income on proceeds was assumed to be 5.83% before taxes and taxes were
assumed to be 34%.
(i) The MRP was amortized over 5 years and tax effected at 34%.
(j) The ESOP adjusted was calculated based upon level principal payment over 7
with an 8.5% pre-tax interest cost and tax effected at 34%.
(k) Assumes an additional $500 after-tax loss to level loss experience during
the prior five years.
<PAGE> 17
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction 4
I. Analysis of Mercer Mutual Insurance Company 8
Overview of Mercer 8
Insurance Industry Overview 31
Conclusion 40
II. Comparable Company Analysis 42
III. Valuation Conclusion 52
Valuations Considerations Relative to the Comparative Group 52
Market Considerations 57
Market Conditions Facing the Corporation's Offering 62
Other Valuation Methods Not Relied Upon 64
Valuation Derivation 66
Valuation Conclusion 67
</TABLE>
2
<PAGE> 18
LIST OF EXHIBITS
This appraisal incorporates by reference the financial information contained in
the Registration Statement as filed with the Securities Exchange Commission on
form S-1, and the accompanying "Amended and Restated Plan of Conversion for
Mutual to Stock Organization" as filed with the Insurance Department of the
state of Pennsylvania.
I. Qualifications of Alex Sheshunoff & Co. Investment Banking
II. AS & Co. Common Stock Comparison
III. Firemark Statistical Review
IV. Mutual to Stock Conversions
3
<PAGE> 19
INTRODUCTION
THE APPRAISAL
This report presents our independent appraisal (the "Appraisal") of the
estimated pro forma market value 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"). References
herein to the Corporation or the Company shall include its current form and
post-Reorganization as indicated by the context.
Upon the Company's Reorganization and conversion, the Corporation will own 100%
of the Company's shares of common stock. The Corporation will simultaneously at
the time of the conversion of the Company, offer for sale to policyholders of
record on October 17, 1997, in a non-transferable subscription rights offering,
the Corporation's common stock at the total price of the Company's capital stock
equal to the estimated pro forma market value of the Company. In the event the
Common Stock is not fully subscribed by policyholders, remaining shares may be
sold in a public offering or private placement. Upon completion of the Offering,
the Corporation will have shares of Common Stock issued and outstanding to the
Corporation's employee stock ownership and management recognition plans,
policyholders of the Company, directors, officers and employees of the Company
and, if the shares are not fully-subscribed, to members of the general public.
The Corporation's business will consist of its ownership in the Company and the
investment of the net proceeds of the Offering retained by the Corporation.
This Appraisal was prepared and provided to the Company in accordance with the
Plan and conversion requirements, regulations and practices of the Insurance
Department of the State of Pennsylvania (the "Department"). Except for the fee
that it will receive for preparing 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.
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
4
<PAGE> 20
currently available estimates and judgments of management of the Company and
assumes 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 Company. We have assumed that the reserves established
by the Company are adequate to meet future losses of the Company. The Appraisal
also utilized information obtained from other publicly available sources which
Sheshunoff believes to be accurate, to which we cannot attest to the accuracy of
such information.
Concurrent with the preparation of this Appraisal, Sheshunoff: (i.) reviewed a
draft of the Corporation's Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission ("SEC"); (ii.) reviewed the Company's
"Amended and Restated Plan of Conversion from Mutual to Stock Organization"
adopted October 17, 1997, as amended and restated on November 12, 1997; (iii.)
reviewed financial statements and other financial and operating data concerning
the Company prepared by its management; (iv) reviewed the audited financial
statements for the three years ending December 31, 1996 and the unaudited
statements for the nine months ending September 30, 1997; (v.) reviewed certain
financial information and projections of the Company as prepared by its
management; (v.) 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; (vii.) compared the
Company to other property/casualty companies we deemed appropriate; (viii.)
compared the Company to certain publicly available industry averages and
aggregates as provided by authoritative industry sources; and (ix.) performed
such studies, business and financial investigations we deemed appropriate.
This 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 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 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 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 pursuant to the Reorganization will be
detailed in our Updated Appraisal Report(s), which will consider developments in
general stock market
5
<PAGE> 21
conditions, the initial public offering and mutual to stock conversion markets,
the results of the subscription offering, and the Company's financial condition.
VALUATION SUMMARY
It is our opinion, pursuant to the instructions contained in the Plan that as of
November 26, 1997, the estimated pro forma market value of the Mercer as a
subsidiary of the Corporation is $26.0 million at the mid-point. Based upon a
range 15% above and below the midpoint, the estimated pro forma range is $22.1
million at the minimum and $29.9 million at the maximum.
ALEX SHESHUNOFF & CO. INVESTMENT BANKING
Alex Sheshunoff & Co. Investment Banking ("Sheshunoff"), is an independent
financial institutions consulting firm recognized for its expertise in the
financial services industry. Sheshunoff employs approximately 80 persons 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 issues of business
and financial strategy, mergers & acquisitions, fairness opinions, evaluation of
capital adequacy and efficiency, finance, capital structure, initial public
offerings, primary share offerings, mutual to stock conversion valuations,
dividend and capital policies and fair market valuations. Consultative services
provided by Alex Sheshunoff Management Services, Inc. include line of business
profitability, organizational, operational, management, policy, process,
procedures, risk management, distribution, products, services, marketing and
technology issues, for de novo and established financial institutions. An
affiliation program administered by Alex Sheshunoff Management Services, Inc.
facilitates executive peer group management forums on a semi-annual basis to
banking industry executives to discuss management issues. The Program has among
its participants over 700 chief executives, 300 senior credit officers and 200
finance, technology and operations managers.
VALUATION METHODOLOGY
In deriving our estimate of the pro forma market value of Mercer as a subsidiary
of the Corporation pursuant to the Reorganization, we primarily utilized the
market valuation approach. The market valuation approach estimates a value by
examining the relevant market pricing characteristics of securities of similar
companies which are publicly traded. This produces a market value of a company
as if its securities were exchanged in the open market on a minority interest
basis, or a "freely-traded" value. We selected a group of regional comparative
insurance companies (the "guideline companies") which we believe investors would
likely compare to the Company when making a decision to purchase the
Corporation's common stock. We also considered relative adjustments to
freely-traded value due to the "new issue discount" and other factors discussed
herein.
6
<PAGE> 22
DUE DILIGENCE
In conducting our business investigations the following were major areas of
inquiry: documentation and information examined; persons interviewed; facilities
visited; and access to information and personnel.
DOCUMENTATION AND INFORMATION EXAMINED
Appended hereto is an information request checklist that, in combination with
our on-site due diligence visit, provided a portion of the information necessary
to value the Company. Our information request included certain materials that
would facilitate the due diligence and valuation process. Additional information
that we reviewed during our on-site visit to the Company, included: (i.) report
on loss and loss adjustment expense reserves as prepared by the Company's
consulting actuary; (ii.) the Company's current and anticipated reinsurance
programs which detailed its catastrophic excess of loss and pro rata program
among others; and (iii.) expense exhibits detailing experience by line.
PERSONS INTERVIEWED
We interviewed the principal officers of the Company in order to obtain
information for forming an opinion assessment of the Company, its management and
operations.
FACILITIES AND ACCESS TO INFORMATION AND PERSONNEL
We visited the Company's corporate headquarters in Pennington, New Jersey to
conduct on-site due diligence and tour Mercer's operations.
We were provided with access to all material requested, and personnel necessary,
in our opinion, to formulate our valuation opinion.
7
<PAGE> 23
I. ANALYSIS OF MERCER MUTUAL INSURANCE COMPANY
Mercer Insurance Group (the "Corporation") is an insurance holding company based
in Pennington, New Jersey which is redomesticating its charter to the state of
Pennsylvania for the purpose of converting from mutual to stock. To that
purpose, the Corporation was created to issue stock to current policyholders and
other investors, and a portion of the proceeds of which are to be used to
purchase all of the common shares of the Company's which will demutualize to a
stock form pursuant to Mercer Mutual Group's Plan of conversion, approved as of
November 26, 1997 by the Department.
A brief description of Mercer Mutual Group (the "Company" or "Mercer") of
insurance companies follows:
Mercer Mutual Insurance Company ("MMIC") This mutual company was founded in 1844
in the state of New Jersey as Mercer County Fire Insurance Company. Its present
name was adopted in 1959. MMIC is licensed to write business only in the states
of New Jersey and Pennsylvania. MMIC is the group's leading carrier, and
underwrites all of the homeowners and most of the commercial insurance,
excluding workers compensation insurance. For the calendar year 1996, MMIC
underwrote $19.0 million in net premiums, and had a policyholders surplus of
$16.1 million.
Queenstown Holding Company ("QHC") is a downstream holding company which holds
all of the stock of Mercer Insurance Company. MMIC owns 100% of QHC and through
it 100% of MIC.
Mercer Insurance Company ("MIC") is a stockholder owned company organized in
1981 and licensed solely in the state of New Jersey. MIC underwrites only one
line of insurance business - that of MMIC's workers compensation insurance. For
the calendar year 1996, MIC underwrote $1.1 million in Workers compensation net
premiums, and had capital and surplus of $3.5 million.
OVERVIEW OF MERCER
Mercer's culture and financial characteristics reflect the rationale of its
founders a century ago, that of providing rural homeowners and farm owners with
affordable mutual fire insurance. Over the years simple fire insurance evolved
into homeowners multi-peril package policies, and its once rural markets have
become highly developed suburban communities. Nonetheless, the Company has
remained loyal to many of its original founding principles with respect to the
lines of insurance it offers and geographical market areas in which it
underwrites.
This description and analysis of Mercer makes reference exclusively to the
Company's statutory financial information as filed with New Jersey's Department
of Banking and Insurance. This approach was utilized because the Company's
statutory financial
8
<PAGE> 24
information was more readily available in far greater detail than was its
generally accepted financial information (or "GAAP"). GAAP financial data
prepared for the Corporation's registration statement and conversion application
contain less detail and is available for a period of approximately three years.
Also, in the following "Industry Overview" section we make certain comparisons
between the Insurance Industry and Mercer. Comparisons such as composite
industry financial information are only available on a "statutory reporting
basis". However, in the "Comparative Methodology" section, we compare financial
and market information on a GAAP reporting basis for Mercer to that of other
comparable publicly held property casualty insurance companies.
The following table provides a summary of the Company's size, financial
strength, and underwriting commitments.
Summary Financial Data
(Statutory data, dollars in thousands)
<TABLE>
<CAPTION>
Year Admitted Policyholders' Net Premiums
Assets Surplus Written
($) ($) ($)
<S> <C> <C> <C> <C>
1992 49,333 12,328 18,653
1993 47,272 12,979 18,964
1994 45,473 11,133 19,377
1995 51,147 14,938 21,245
1996 52,596 16,087 20,124
1992-96 Growth Rates 1.6% 6.9% 1.9%
</TABLE>
Mercer is still a small insurer which over the last five years has exhibited
only modest growth of assets surplus and net premiums written. The more robust
increase in policyholders' surplus can be attributed to capital gains reflecting
ebullient fixed income and equities markets over this time period.
PRODUCT LINES
Mercer's principal line of insurance is Homeowners Multi-peril Insurance which
in 1996 accounted for 50.2% of total Net Premiums Written. In addition, the
Company underwrites complementary fire and allied lines policies which account
for another 12.4% of total Net Premiums Written. Approximately 99% of the
Company's 1996 Net Premiums Written was derived from the state of New Jersey;
the balance written in Pennsylvania. In the future, Mercer anticipates
increasing its business in eastern Pennsylvania, either through acquisition or
its own marketing effort.
Mercer underwrites standard and preferred homeowners risks throughout New
Jersey. Currently, about 75% of the business is rated standard and 25% of the
homeowners book is preferred business. A unique feature of Mercer's homeowners
business is that for reasons of prudent risk dispersion and management,
additional protection from weather
9
<PAGE> 25
related catastrophes, and possible attendant reduction of the Company's
policyholders surplus, the Company from 1973 through December 31, 1996, "pooled"
all of its homeowners business with that of two other, independent, mutual
insurance companies, the Franklin Mutual Insurance Company, Branchville, New
Jersey, and Cumberland Mutual Fire Insurance Company, Bridgeton, New Jersey
through participation in a New Jersey Homeowners' Reinsurance Pool. The pooled
business combined underwriting experience was shared among these three companies
according to their respective pooling percentages, that is Mercer Mutual
Insurance Company 24.3%, Franklin Mutual Insurance Company 37.7% and Cumberland
Mutual Fire 38.0%. This pooling arrangement was discontinued as of December 31,
1996 and the Company now utilizes a comprehensive reinsurance program to protect
itself against a high level of unexpected losses, and catastrophes.
In commercial markets, the Company underwrites a standard Commercial Multi-peril
policy, together with Other Liability and Workers' Compensation coverage. These
commercial lines account for $7.7 million, or 38.3% of total Net Premiums
Written. These commercial lines products are principally sold to mercantile,
proprietors, business owners, light manufacturing, selected farm risks,
artisans, small contractors and religious institutions. The Company seeks to
underwrite standard rather than rated business and most of its premium rates are
promulgated by the Mutual Service Office ("MSO"), a mutual company rating
agency. The Company's own underwriting experience is not significant, or
credible enough, statistically to be able to create its own premium rates.
Another unique feature of the Company is that Mercer has elected to underwrite
all of its Workers' Compensation insurance in the Mercer Insurance Company a
wholly owned stock subsidiary, and the subsidiary's only line of insurance
underwritten. The Workers' Compensation business is processed by the Garden
State Re-insurance Association which is an insurance pool providing for the
sharing of workers' compensation losses under an excess of loss re-insurance
treaty. Based on its historically low loss experience in this line of business,
the Company has elected to withdraw from this pool effective December 31, 1997.
The table on the following page provides a summary of the Company's major
premium lines of business.
10
<PAGE> 26
1996 Distribution of Premiums by Line of Business
( dollars in thousands)
<TABLE>
<CAPTION>
Line of Net Premiums Net Premiums as Percentage
Insurance Written of Total Net Premiums
($) (%)
<S> <C> <C>
Homeowners 10,129 50.2
Allied lines 1,598 8.0
Commercial multi-peril 3,052 15.4
Other liability 2,696 13.4
Workers' Compensation 1,157 6.0
Miscellaneous 562 2.5
Total 20,124 100.0
</TABLE>
Although Mercer Mutual Insurance Company is licensed to write business in both
the states of New Jersey and Pennsylvania, less than 0.9% of total Direct
Premiums Written was written in Pennsylvania. To evaluate the business prospects
of the Company from a jurisdictional perspective it suffices to look at the
underwriting and pricing environment in New Jersey, as the Company's efforts to
write increasing amounts of business from Pennsylvania will take time to become
significant.
New Jersey relative to insurance pricing, profitability and the regulatory
environment as compared to that of most other states, is not considered very
attractive. On November 11, 1997, Allstate Insurance Company, the state's
largest auto insurer, announced it was terminating its six year effort to
abandon New Jersey and will instead, form a separate company to handle only the
state of New Jersey.
MARKETING AND SALES
As of November, 1997, the Company sells its products exclusively through an
organization of approximately 198 independent insurance agents located
throughout New Jersey. These insurance agents uniformly-represent New Jersey's
northern, central and southern regions. The Company reflects modest premium
concentrations in some of New Jersey's fastest growing and wealthiest counties,
i.e. Ocean, Monmouth, Burlington and Middlesex counties.
11
<PAGE> 27
The following table provides a summary of the Company's Agents in its top ten
counties and Union and Bergen counties, as ranked by percentage premiums paid.
Number of Agents in Major Counties
(dollars in thousands, except average premiums paid)
<TABLE>
<CAPTION>
Total
Policy Percentage Average Premiums Total
County Agents Count of Policies Premium Paid Paid Premiums
(%) ($) ($) (%)
<S> <C> <C> <C> <C> <C> <C>
Ocean 12 3,051 14.97 459.28 1,401 14.04
Monmouth 19 1,776 8.71 517.94 919 9.22
Burlington 21 1,869 9.17 446.61 834 8.36
Middlesex 15 1,412 6.93 502.36 709 7.11
Atlantic 12 1,465 7.19 458.56 672 6.73
Mercer 12 1,315 6.45 491.01 646 6.47
Camden 13 1,532 7.51 409.04 627 6.28
Cape May 5 921 4.52 498.66 459 4.60
Essex 9 791 3.88 577.68 457 4.58
Hudson 5 822 4.03 541.67 445 4.46
Union 18 717 3.57 543.51 390 3.91
Bergen 14 401 1.97 615.42 247 2.47
Total for Co. 198
</TABLE>
The Company recently appointed agents in Union and Bergen counties who have not
to date sold a significant number of policies.
The Company's agency agreements are fairly standard in terms of commissions,
over-rides and allowances to agents for both personal and commercial lines. On
its homeowners direct premiums written, the Company pays a sales commission of
15% on preferred business and 20% on standard business. The normal commission
for commercial lines varies by line of insurance, but approximates 10% of
workers' compensation, 15% of liability, and 20% of commercial multi-peril
premiums. A contingent commission agreement is also in place which allows for
additional agent compensation based on a favorable loss experience and a minimum
threshold of premium production.
The number of agents representing the Company has not changed dramatically over
the last five years. Mercer has had an active agent recruitment program over
this time period. However, over the last three year period the Company has been
active in pruning its agents, who have historically produced business with
unacceptably high loss ratios. Accordingly, the Company has been active in
replacing its number of discontinued agents, in order to maintain the over-all
number of agents representing the Company.
12
<PAGE> 28
Therefore, the level and growth of the Company's premium writings reflects the
activities both in agent recruitment and agent termination. With the agents
population having been appropriately reviewed and pruned, future agent recruits
are likely to have a more direct and significant growth in the number of agents
representing the Company, and premium growth.
The following table provides a summary of the company's agents, direct premiums
written and corresponding annual percentage change of DPW to the prior year.
Number of Agents and Direct Premiums Written
(dollars in thousands)
<TABLE>
<CAPTION>
Direct Written Change of DPW
Year Agents Premiums to Prior Year
($) (%)
<S> <C> <C> <C>
1992 162 22,829 2.2
1993 170 23,349 2.3
1994 178 24,355 4.3
1995 190 24,699 1.4
1996 185 24,958 1.0
</TABLE>
Separately, the Company's underwriting department re-underwrote its book of
business, effectively by raising premiums through a reduction in its discounts
to rates authorized by the Insurance Department, which also had the effect of
reducing the number of policies in force.
LOSS EXPERIENCE AND UNDERWRITING RESULTS
The Company's geographic location, its historic tendency to write business in
its communities which are not distant from coastal weather exposures, and the
limited size of the Company's operations, creates a book of business where the
concentration of its writings are exposed to catastrophic weather events.
13
<PAGE> 29
The following table provides a summary of the Company's statutory Loss & LAE,
Expense, and Combined Ratios experience for the period 1992-96.
Statutory Loss & LAE, Expense and Combined Ratios
<TABLE>
<CAPTION>
Year Loss & LAE Expense Combined Ratio
(%) (%) (%)
<S> <C> <C> <C>
1992 65.9 43.6 109.5
1993 64.0 46.7 110.7
1994 75.6 46.9 122.6
1995 64.0 39.0 103.0
1996 71.8 38.7 110.5
</TABLE>
Generally, companies strive to have an underwriting profit, which is
characterized by a combined ratio of 100%, or less. Also, rating bureaus such as
the Mutual Service Office (the "MSO") usually file rates at a level so that a
company will be able to achieve combined ratios under 100%. The fact that Mercer
has not been able to achieve a combined ratio of under 100% in any of the past
five years reflects the competitive nature of New Jersey's insurance markets, as
well as, the relative regulatory environment of New Jersey's insurance market.
While it has been difficult for any company in the insurance industry to achieve
an underwriting profit in its currently competitive environment, Mercer has
several specific issues that have affected its underwriting performance which
are discussed below.
COASTAL EXPOSURES
Mercer has a large exposure to adverse coastal weather resulting in periodic,
adverse reductions in underwriting profit due to catastrophic losses.
The table on the following page provides a summary of the Company's underwriting
profit or loss as a whole and separately for its direct homeowners business. It
also shows the effect on all lines underwriting losses net after re-insurance
from windstorms, snowstorms, hailstorms and other natural weather related
catastrophes for the period 1992-96.
14
<PAGE> 30
Underwriting Profits
(dollars in thousands)
<TABLE>
<CAPTION>
Year Total Company Homeowners Catastrophic Losses
($) ($) ($)
<S> <C> <C> <C>
1992 (1,736) (1,963) 731
1993 (2,290) (1,455) 1,066
1994 (4,542) (3,840) 2,420
1995 ( 785) (1,998) (61)
1996 (1,970) (2,302) 1,007
</TABLE>
During the period, Mercer suffered catastrophic losses of $7.5 million before
re-insurance recoveries. Catastrophic re-insurance reduced the Company's losses
by $2.4 million to $5.1 million. In 1994, the Company experienced its largest
catastrophic losses; however, because of a large number of relatively small
losses, Mercer received no catastrophic loss relief form its re-insurers.
JUA ASSESSMENTS
Mercer was required by New Jersey Insurance Department to pay inordinately large
assessments due to the insolvency of the State's Joint Underwriting Association
(the "JUA") which was related to the underwriting of personal automobile
policies. Mercer did not then and does not now currently write personal
automobile insurance policies. These assessments were tantamount to an
expropriation of the Company's surplus. These assessments totaled $3.9 million
from 1990 through 1997. Relative to the Company's 1990 surplus of $10.2 million,
these assessments had a dramatic impact on the Company's ability to maintain its
financial profitability, capital adequacy, A.M. Best's rating and foster growth.
15
<PAGE> 31
The following table provides a summary of the Company's JUA Assessments to its
net income and statutory surplus.
State of New Jersey JUA Assessments
(dollars in thousands)
<TABLE>
<CAPTION>
Year JUA Assessment Statutory Surplus Net Income
($) ($) ($)
<S> <C> <C> <C>
1990 615.4 10,175 (204)
1991 605.0 11,381 220
1992 511.0 12,328 1,098
1993 437.3 12,979 551
1994 454.3 11,133 (1,454)
1995 445.5 14,938 1,219
1996 420.3 16,087 809
1997 409.7 --- ---
</TABLE>
It is anticipated 1997 will be the last year that an assessment will be made for
the defunct automobile JUA, with the expected assessment of $409,708 for the
year. Clearly, reflecting the fact that Mercer did not write automobile policies
and that the Company itself is relatively small, these assessments were
substantial. Not only did these assessments have a dramatic adverse effect on
the Company's net income each year, but in some years the assessments were
approximately the size of the Company's net income. Were it not for the
unanticipated, significant capital gains through this period which added to the
Company's surplus, the Department which is responsible for maintaining and
safeguarding the solvency of insurance companies domiciled in the State of New
Jersey and ensuring that companies can deliver on their contractual promises to
policyholders, would have in fact, been responsible for the Company's near
demise. The Company has filed a litigation seeking recovery of these amounts and
makes no representation as to the litigation's potential success.
HOMEOWNERS POOLING AGREEMENTS
Mercer's homeowners pooling agreements with Franklin and Cumberland Mutual
increased and diversified its exposure in the state. These two companies wrote
their business exclusively in New Jersey with the Franklin writing more business
in the northern part of the state and Cumberland in the southern part of the
state. Therefore, the business mix of the three pooled insurance companies of
Mercer, Cumberland and Franklin, can be viewed as being somewhat complementary.
However, since all three companies operate predominately in New Jersey there
still was some concern due to the geographical concentration of its risks to one
state. Again, this pooling arrangement is of historical interest only, as Mercer
elected to terminate its participation in the pool as of December 31, 1996. The
pooling agreement served a good purpose in its time, but now
16
<PAGE> 32
with competitively priced re-insurance available, Mercer stands to enhance its
operating income while at the same time it reduces further its exposure to
catastrophes.
OTHER LINES
Mercer's other major lines of insurance include commercial multi-peril, other
liability, fire, allied lines and workers' compensation. Each line's relative
importance to the Company's overall earnings contribution can be seen from a
review and comparison of the 1996 statutory underwriting profit, and income
after investment gains of Mercer Mutual Insurance Company as reported in the
Company's Insurance Expense Exhibit filing with the New Jersey Department of
Banking and Insurance. For an additional comparison, we also include these
results for the Homeowners line.
The following table provides a summary of the Company's profits by major lines
of insurance.
Profits by Major Lines of Insurance for 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Line of Insurance Underwriting Profit Total Profit
($) ($)
<S> <C> <C>
Fire 663 805
Allies 51 129
Homeowners (2,302) (1,138)
Commercial Multi-peril 187 455
Workers Compensation 589 685
Other Liability (1,297) (562)
</TABLE>
In reviewing underwriting and total profit results for these lines of insurance
over a period of years, a familiar, repetitive pattern emerges. Generally, fire
insurance generates a considerable profit that is disproportionate to its
premium volume. Fire insurance is priced far less competitively than the
homeowners line and therefore, produces fairly dependable and considerable
profits when compared to the Company's all lines profits. Allied lines also in
most years produces profits disproportionate to its premium volume. However,
this line of insurance is exposed to catastrophic events and therefore, it does
produce losses in some years.
Commercial multi-peril is a line of growing importance to the Company, as it is
the line that Mercer is focusing upon to grow in the future. This line, while
very competitive in the industry on a price basis, has generally been profitable
for Mercer. Indeed, relative to its premium volume, CMP also produces a
disproportionately large profit to Mercer when compared to other lines of
insurance. It is no doubt Mercer's focus on small commercial enterprises, in
territories and categories long familiar to the Company's underwriters that
helps it to produce a profit in what is considered for the whole insurance
industry a very
17
<PAGE> 33
difficult line in which to be profitable. Also, of some importance is that
Mercer has relatively little exposure in this line of insurance from the coastal
areas of New Jersey.
Workers' Compensation is a line of insurance that is pooled with that of other
small regional mutual companies into the Garden State Re-insurance Pool. This
pool is managed by a third party administrator - Balis & Company. This line of
insurance has been consistently profitable to Mercer and because of their own
very favorable loss experience, Mercer will terminate its participation in this
pool effective December 31, 1997. This can be considered another line of
insurance that produces very favorable financial results for the Company.
Other liability insurance has been a line of insurance that has generated the
highest Combined Ratios and therefore, the highest dollar amount of underwriting
loss per dollar of premium. However, the large amount of loss reserves set aside
for this line also contributes a large amount of investment income, usually
producing an overall profit in this line for the industry. Mercer, every year in
the last five, has produced underwriting losses and only in 1994 produced a
profit when investment gains were included.
Finally, we review how the Company's largest line of insurance, Homeowners, fits
in with Mercer's other lines of insurance. Homeowners has produced the Company's
largest underwriting losses and losses even after the inclusion of investment
gains. Thus viewed from an analytical perspective, it is correct to conclude
that Mercer's largest line of business is, at the moment, the least profitable.
RE-INSURANCE
To compensate for its discontinuance in the pooling participation, Mercer
reduces it risks to geographic concentration and coastal exposure to
catastrophic losses by the extensive use of treaty reinsurance programs, and
specific catastrophic reinsurance coverage. We can best see the effect of the
historic pooling transactions by first viewing the amounts of premium volume
that the Company assumes and cedes through its pooling agreement.
18
<PAGE> 34
The effect of the Company's treaty reinsurance is harder to discern, but it is
well reflected in the following summary by the amount of business ceded during
the first nine months of 1997.
Written Premiums
(dollars in thousands)
<TABLE>
<CAPTION>
Year Direct Re-insurance Re-insurance Net
Premiums Assumed Ceded ($)
($) ($) ($)
<S> <C> <C> <C> <C>
1992 22,829 11,544 15,720 18,653
1993 23,349 12,485 16,871 18,964
1994 24,355 12,539 17,517 19,377
1995 24,699 8,622 12,076 21,245
1996 24,958 5,013 9,848 20,124
September 1997 21,504 425 9,026 12,903
</TABLE>
What is important is Mercer's Net Premiums Written in 1996 were 19.4% less than
the Company wrote directly and only 67.1% of the total of its Direct Written and
Re-insurance Assumed Written Premiums. This reflects well upon the Company's
conservatism in managing or containing its underwriting exposure.
A significant issue with respect to re-insurance for many companies historically
has been the ability to collect ceded re-insurance losses which directly
reflects on the solidity of the reinsurer. Mercer's largest re-insurers other
than the former pooling companies, are Munich Re, Chartwell Re, Security Re,
Gerling Global, and Skandia among others. These are known to be larger, solid
re-insurers, adding comfort to Mercer's re-insurance program.
The largest net aggregate amount retained on any homeowners risk underwritten by
the Company is $75,000. It should be noted that the average size of the
Company's homeowners risk is nearly twice that amount, signifying that treaty
re-insurance covers almost every property risk that the Company underwrites. The
first layer of reinsurance is a $25,000 excess above the Company's retention. A
second layer covers $150,000 above the first $100,000. The third layer provides
another $150,000 above the $250,000 level. An additional quota share treaty
covers 20% of losses to $500,000 from the first dollar of loss, to a maximum
single loss event occurrence limit of $10.5 million.
On non-homeowners property risks there is the same $75,000 retention, with a
$25,000 excess layer above the retention limit. The second layer is a $150,000
multi-line excess over $100,000. The next layer is first surplus reinsurance
providing $1,500,000 protection above $250,000. Finally, there is facultative
coverage above $1.75 million purchased by the Company as required by the size of
the underwritten risk.
19
<PAGE> 35
Catastrophic coverage is divided among five different loss levels as most
reinsurers tend to select and price a single layer on which to provide loss
protection, but combined they provide protection to a level of $45 million.
As noted previously, Mercer's re-insurers are all companies of size, reputation,
and financial substance affording comfort to the Company with respect to
recoverable losses on reinsurance ceded. And, the Company contemplates
modification of these agreements upon the issuance of new equity in the
conversion that will reduce costs.
On casualty coverage, the Company retains the first $100,000 of exposure. The
next layer provides a multi-line treaty coverage of $150,000 above $100,000.
Above this $250,000 loss level the is a second casualty reinsurance coverage
providing $950,000 of protection. Above this $1.2 million of coverage there are
two additional layers of coverage that provide protection to a total of $4.2
million.
We can surmise, that the Company's solid selection of reinsurers, its prior
pooling and re-distribution of risks from its two pooling company partners, its
low level of Net Premiums Written relative to that of its Direct Premiums
Written, and its relatively low risk retention on any single risk relative to
its Policyholder Surplus, all indicate that the Company has taken a prudent,
cautious approach to its unique risk exposure, geographical and regulatory
environment.
LOSS RESERVES
One issue plaguing almost every insurance company at some point in time has been
that of accurately setting its Loss and Loss Adjustment Expense Reserves. This
has been particularly difficult in periods of rising economic inflation,
increased propensity of policyholders to sue and rising settlement expectations
nurtured by plaintiff attorneys. Fortunately, rising economic inflation has
abated and is no longer a serious consideration. In addition, it is much easier
to set reserves for claims of short duration, such as homeowner claims, when
compared to that of Workers' Compensation or certain longer duration liability
coverage.
20
<PAGE> 36
The following table provides a summary of the Company's Reserves for Loss & LAE,
Net Premiums Earned and compares it to Policyholders' Surplus.
Loss & LEA Reserves, Premiums Earned, Policyholders' Surplus
(dollars in thousands)
<TABLE>
<CAPTION>
Year Loss & LEA Premiums Ratio Policyholders' Ratio
Reserves Earned Surplus
($) ($) ($)
<S> <C> <C> <C> <C> <C>
1992 20,363 18,733 1.087 12,328 1.652
1993 18,995 18,225 1.042 12,979 1.463
1994 18,298 18,681 0.979 11,133 1.643
1995 19,357 20,817 0.930 14,938 1.296
1996 20,074 20,634 0.972 16,087 1.248
</TABLE>
The modest by declining ratio of Loss & LAE Reserves to Premiums Earned between
1992-1996 suggests, the Company is setting up fewer dollars of Reserves per each
dollar of Premium Earned, a trend that could become a concern. However, the
Company's auditors KPMG Peat Marwick LLP have observed consistently that, the
Company has been and is adequately reserved to dispose of all claims.
Additionally, the ratio of Loss & LAE Reserves to Policyholders Surplus between
1992-1996 shows a strengthening trend: it shows that for every dollar of
liabilities, particularly after the 1995 and 1996 years in which the Company
added to its surplus significantly from realized and unrealized capital gains
(see Assets and Investment Income), the ratio has declined as Mercer's
Policyholders' Surplus has grown. These considerations gives considerable
comfort with respect to the Company's solidity, and integrity in setting its
loss reserves and reporting its net income accurately.
Another strong indicator of Mercer's commitment in setting conservative levels
of Loss and LAE Reserves, is to compare the Company's initial Loss and LAE
Reserve estimates with that of the ultimate claims dollars paid out to settle
all the claims of a specific calendar year.
21
<PAGE> 37
The following table provides a summary of the Company's relationship among
initial and ultimate developed claims.
Initial Loss & LEA Reserves, Developed Claims
(dollars in thousands)
<TABLE>
<CAPTION>
Year Initial Reserves Developed Claims (Excess)/Shortage
($) ($) ($)
<S> <C> <C> <C>
1990 16,178 13,540 (2,638)
1991 17,922 14,755 (3,149)
1992 19,535 15,902 (3,633)
1993 18,130 16,240 (1,890)
1994 17,387 16,205 (1,182)
1995 18,566 17,055 (1,511)
1996 19,272 19,272 --
</TABLE>
The preceding table demonstrates that Mercer has steadfastly and consistently
set conservative levels of reserves to dispose of its claims, such that with the
hindsight of time it is certain that such loss reserve amount proved to be
redundant. In addition, the Company has retained an actuary from the Company's
auditing firm KPMG Peat Marwick LLP, to provide a full loss and loss adjustment
expenses reserve analysis. This detailed report provides a range of acceptable
reserve values, and stated that Mercer Group made reasonable provision for the
Company's unpaid loss and loss expense obligations.
ASSETS AND INVESTMENTS
The Company's relatively steady state level of Net Premiums Written and Loss &
LAE Reserves suggests that its Total Admitted Assets and Total Invested Assets
also should not have changed dramatically over this time period.
22
<PAGE> 38
The following table provides a summary of the Company's Total Admitted Assets
and Invested Assets.
Total Admitted Assets, Invested Assets, and Net Amounts
(dollars in thousands)
<TABLE>
<CAPTION>
Year Admitted Assets Invested Assets Net Amounts
($) ($) ($)
<S> <C> <C> <C>
1992 49,333 40,650 8,683
1993 47,272 40,878 6,394
1994 45,473 38,708 6,756
1995 51,147 44,317 6,830
1996 52,596 46,613 5,983
</TABLE>
The Total Admitted Assets of Mercer cannot be invested because the Company does
not have possession of all of its assets. For example, of the $5.983 million
difference between total and invested assets in 1996, $2.961 million is
represented by agents and premium balances in course of collection and $1.076
million, is represented by re-insurance recoverable amounts.
Invested assets are usually allocated by category in conjunction with an
investment committee policy that stipulates, reflecting the Company's unique
circumstances and risk characteristics as to what category of investment
specific proportion of funds should be allocated.
The following table provides a summary of the Company's Investment Categories.
Total Invested Assets and Asset Allocation
(dollars in thousands)
<TABLE>
<CAPTION>
Long Term Common & Cash &
Year Total Invested Assets Bonds Preferred Other Other
($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
1992 40,650 24,712 11,126 4,189 623
1993 40,878 27,009 9,106 4,103 660
1994 38,708 29,103 7,131 1,904 660
1995 44,317 33,241 6,837 3,467 772
1996 46,613 35,447 7,795 2,541 534
</TABLE>
Total Invested Assets have grown moderately over the 1992-1996 period (at a 3.5%
annual compounded rate), there has been a dramatic investment allocation away
from equity investments toward fixed income. Thus, while long term bonds in 1992
represented 60.8% of Total Invested Assets by 1996 bonds had grown to represent
23
<PAGE> 39
76.04% of that category. Contrariwise, the Company's allocation to equities in
1992 of 27.3%, had dwindled down to 16.7% by 1996. In effect, the Company was
re-deploying its capital gains from both its fixed income and equities portfolio
and re-investing the proceeds in a more conservative, more predominantly fixed
income portfolio. This occurred as AM Best had previously expressed concerns
about the level of the Company's investment in equity and mortgage pass through
securities.
Because underwriting profitability in its major line of insurance, homeowners,
and other lines has been elusive, the Mercer Group must focus for a dependable
source of profits elsewhere. Accordingly, the Company must depend on its
investment income to generate an operating profit in its insurance business. The
level of investment income that a company generates is dependent, among other
factors, on the amount invested, and the rate of investment return. These
elements, in turn, are dependent on the amount of a company's Policyholders
Surplus and Loss and LAE Reserves, and the length of the maturity of its
investment portfolio.
The Company's heavy exposure to its homeowners insurance has implications for
its investment income and investment performance. Homeowners insurance claims
are discovered and settled quickly resulting in Loss and LAE Reserves not
remaining on the Company's books for any extended period, as compared to long
discovery and long settlement time horizons for certain kinds of liability or
Workers' Compensation insurance. Therefore, prudent investment policy dictates
that in matching the Company's assets and liabilities, it invests more of its
assets in shorter term as opposed to longer term maturities. Given, that
normally investment yields are lower for shorter term maturities than longer
term maturities, the Company has a relative investment disadvantage due to its
large homeowners book of business, resulting in lesser amounts of investment
income generated than that of a company that has a more standard distribution of
business.
Nonetheless, the Company's management has generated a level of investment income
from its investment portfolio, that in years which have not experienced major
weather related catastrophes have been sufficient to offset underwriting losses
and including investment income and investment gains, the Company has been able
to report operating profits.
24
<PAGE> 40
The following table provides a Summary of the Company's investment income and
gains off-setting its underwriting losses.
Underwriting Investment and Net Income
(dollars in thousands)
<TABLE>
<CAPTION>
Year Underwriting Income Investment Gain (1) Net Income (2)
($) ($) ($)
<S> <C> <C> <C>
1992 -1,736 3,264 1,098
1993 -2,290 2,802 551
1994 -4,542 2,285 -1,454
1995 -785 2,282 1,219
1996 -1,970 2,973 809
</TABLE>
(1) Investment income including capital gains.
(2) Columns are not additive because of FIT.
Over the last decade investment yields have generally been declining. This has
created the beneficial effect of increasing bond portfolio values and capital
gains opportunities, but it has also created a problem of re-investing new
funds, or proceeds of sold or called securities at comparably attractive yield
rates.
The following table summarizes the Company's net investment income and yield,
and capital gains.
Net Investment Income and Yield, and Capital Gains
(dollars in thousands)
<TABLE>
<CAPTION>
Year Investment Income Yield Capital Gains
($) (%) ($)
<S> <C> <C> <C>
1992 2,620 6.5 644
1993 2,298 5.6 504
1994 2,006 5.0 279
1995 2,229 5.3 53
1996 2,381 5.2 592
</TABLE>
In addition to realized capital gains shown in the preceding table, the Company
experienced un-realized capital gains of $2.49 and $.393 million in 1995 and
1996, both of which added substantially to the Company's policyholders' surplus.
Approximately $.87 million of 1995 unrealized gain was the result of the
demutualization of the Excess Mutual Reinsurance Company, which was recorded as
an unrealized capital gain in that year. A member and sponsor of the former
mutual, Mercer continues to hold shares of this demutualized company which
serves to provide excess re-insurance coverage to regional mutual insurance
companies. As of September 30, 1997 the Company has a
25
<PAGE> 41
total of $3.2 million unrealized gain in its equity portfolio and a $0.6 million
unrealized loss in its bond portfolio.
The Company has shown conservatism in its approach to selecting investments for
its bond portfolio. While the Company's investment policy as approved by its
board of directors provides some latitude in selecting its fixed income
investments, the Company has heavily, almost exclusively, invested in bonds of
government agencies, or bonds guaranteed by a government agency. The Company's
investment policy has been executed by President and CEO, William C. Hart. Mr.
Hart has been a member on the board of directors, and a member of its investment
committee since 1970, and has been responsible for investment policy execution
since becoming a full time employee in 1985. Fixed income securities are
primarily held by Smith Barney, and equity securities are held by U.S. Clearing
Corporation.
The following table summarizes the Company's Bond Portfolio.
Allocations of Total Bond Investments*
(dollars in thousands)
<TABLE>
<CAPTION>
Agencies
U.S. & Special Corporate and
Total Government Revenue Bonds Other
Year ($) ($) ($) ($)
<S> <C> <C> <C> <C>
1992 24,712 60 18,565 6,087
1993 27,009 20 23,251 3,738
1994 29,013 3,468 23,421 2,124
1995 33,241 1,634 30,642 966
1996 35,447 1,975 33,337 135
</TABLE>
* Mercer Mutual and Mercer Insurance Companies only.
The preceding table demonstrates that the Company has increasingly chosen to
invest in bonds of U.S. government and its various agency securities.
Specifically, it has invested heavily in Federal Home Loan Banks (FHLBB),
Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage
Association (FNMA) and some special revenue securities.
Such a portfolio would be expected to be of high quality with respect to
investment grade ratings, as indeed it is.
26
<PAGE> 42
The following table summarizes the Company's bonds by investment rating.
Bond Allocation by Investment Rating
<TABLE>
<CAPTION>
Percentage of Portfolio
Security Rating (%)
<S> <C>
US Govt. & Agencies 73.6
AAA 23.0
AA 2.2
A 0.9
BBB 0.3
100
</TABLE>
One last consideration needs to be reviewed with respect to the Company's bond
portfolio, that of its duration relative to that of its liabilities. The Company
does not, as most companies of its size, strictly calculate the duration of its
assets and invest in securities such as to match them against the duration of
its liabilities. Nonetheless, the Company does have its portfolio concentrated
in investments of under ten years maturities.
The following table summarizes the maturity distribution of the Bond Portfolio.
Maturity Distribution
<TABLE>
<CAPTION>
Percentage
Maturity (%)
<S> <C>
1 year or less 3.1
1-5 years 11.8
5-10 years 74.3
10-20 years 10.8
Over 20 years 0.0
</TABLE>
This maturity distribution of investments may actually be somewhat longer than
that of its liabilities; however, a slight mismatch allows the Company to earn a
somewhat higher yield on its fixed income investments. As of September 30, 1997,
the Company has invested the equivalent of only 61.7% of its policyholders'
surplus in equities, the slightly longer maturities appear justified.
SURPLUS AND UNDERWRITING LEVERAGE
There are various ways for insurance companies to show overall corporate
aggressiveness or lack of conservatism; one of which is to be highly leveraged.
The Company has
27
<PAGE> 43
demonstrated moderation through its limited lines of underwriting, comprehensive
re-insurance programs, the adequacy of its loss reserves and its conservative
investment portfolio.
The following table summarizes the Company's leverage as measured by comparing
its Net Premiums Written to Statutory policyholders' surplus.
Underwriting Leverage
(dollars in thousands)
<TABLE>
<CAPTION>
Year Net Premiums Written Policyholders' Surplus Leverage Ratio
($) ($) (X)
<C> <C> <C> <C>
1992 18,653 12,328 1.51
1993 18,964 12,979 1.46
1994 19,377 11,133 1.74
1995 21,245 14,938 1.42
1996 20,124 16,087 1.25
</TABLE>
Net Premiums Written to policyholders surplus of 1.25X in 1996 reflects a low
level of underwriting leverage, as the standard accepted leverage in the
industry has long been a 3.0X ratio. The confluence of lower inflation driven
values to be insured, together with capital gains driven surplus increases has
dramatically reduced the underwriting leverage of the whole insurance industry.
For the Company, leverage is another measure by which the Company is confirmed
to be acting conservatively.
UNDERWRITING DEPARTMENT, AND POLICY PROCESSING
The Company's underwriting department is logically divided between personal and
commercial lines underwriters. The personal lines has a manager, a supervisor,
three underwriters, and an assistant underwriter. These underwriters are
territorially assigned to agents. Due to the Company's very low employee
turnover rate, agents get to know their underwriters and accordingly, they get
excellent service from home office.
The Company has specific operational goals, but they are not focused on premium
growth, but rather on underwriting profitable business. This has caused the
Company to focus on attempting to write more of its business inland New Jersey,
or in Pennsylvania. Agents have been provided with a rating disk and therefore,
agents can quote the customer rates accurately and quickly. As the Company has
professional underwriters, the Company rarely utilizes its re-insurance partners
for any help to underwrite its personal lines business. Also, since the
preponderance of underwritten risks are small, they generate on average only a
premium in the $300.00 - $400.00 range.
28
<PAGE> 44
The Company operates in a service bureau environment, as it does not own nor has
any data processing hardware at its home office. Insurance Data Processing
("IDP") has all of the hardware necessary for the Company, and has capacity to
expand its business by many multiples of its present size. The software that is
utilized was specifically written for the Mutual Service Office member
companies. With the hardware off-site, the Company has keyboards and monitors
with which they can underwrite and enter necessary policy data. The software
system was designed so as to provide some electronic underwriting by screening
out those cases which will require individual underwriter attention.
Accordingly, the long experience of the Company in underwriting these risks
demonstrates that they have enough professionals to handle the Company's
underwriting load.
The Company's commercial underwriting section consists of four teams. Each has
an all lines underwriter and an assistant underwriter, who is assigned to handle
the business of specifically assigned agents. These four teams are directed by a
supervisor, and the vice president in charge of commercial lines. This business
is focused on standard, main street business, where the premiums generally
produced per policy are under $5,000. The Company has recently focused on
producing more commercial business, while managing the present size of their
personal lines book. As an example of their new focus on commercial business, in
1997 the Company started a targeted commercial program for religious
institutions, churches and synagogues. This program has been very successful as
Mercer now underwrites approximately 500 of the 2,500 religious institutions in
the state of New Jersey.
As a means of managing their risk exposure on a conservative basis, Mercer has
certain underwriting rules. For example, the Company has very little coastal
commercial lines exposure, as they will not write any risks within four miles of
the coast. In other lines, such as Workers' Compensation, the Company will not
underwrite any risk as mono-line coverage, while they will write it as a part of
a complete commercial lines package. In addition, in Workers' Compensation
Mercer will not underwrite any class of risks that can be characterized by
employees who must climb on ladders in order to perform their work. Similar to
that of personal lines, IDP provides the software and hardware for Mercer to
underwrite and create a policy file.
CLAIMS DEPARTMENT
The Mercer Group's claims department consists of seven people which is comprised
of the claims manager, an assistant claims manager, three claims supervisors, a
processor/adjuster, and a secretary. With its claims staff the Company handles
approximately 40% of all claims internally. The other 60% is handled by a group
of 15 small claims adjusting firms. It is the Company's belief that it receives
more focused attention from the smaller adjusting firms, rather than that which
they would receive from larger claims adjusting firms. As an example of this
strategy's efficacy, the Company notes that in 1992, the year in which it
received 3,000 claims in a period of three months as a result of catastrophic
losses,(when compared to a normal year in which it might
29
<PAGE> 45
receive 3,000 claims over a twelve month period) their team of home office
claims people, together with their outside claims adjusters, quickly and
satisfactorily responded to all claimants. It should also be noted that with the
Company's size, and spread of business over the state, management has found that
it is not efficient for them to have their own, on the road, adjusters.
The Company has in place some automatic reserving procedures for claims in each
line of business. Once particulars of a case are determined, an estimated case
reserve is set by the claims department. Claim reserves are reviewed anytime
that new information is obtained on a claim. In addition, any reserve increases
of more than $10,000 are reported weekly for possible review, and any reserve
increases of more than $25,000 are required a memorandum describing the
circumstances. The Company's claim system, the Vision MIS, allows for reserves
or reserve changes to be entered into the system such that a complete record of
payments and reserves is available on every claim. This system then provides for
the reserve increase computation necessary in interim financial reporting. The
Company's Incurred But Not Reported (IBNR) reserves are estimated by the
Company's executive vice-president. Total reserves are reviewed by the Company's
retained actuary twice a year, in September and December.
HOME OFFICE AND EMPLOYEES
The Company owns it own 13,000 square foot building which was built on 5.6 acres
of land and occupied in 1980, and is quite adequate for its 45 employees. In
addition, the Company owns 3.7 acres of adjoining land which can be considered a
real estate investment property. The September 30, 1997 appraisal value of the
land and building is $1.97 million. The building was constructed on its site
with potential for future expansion as a consideration. Accordingly, the Company
could add to its present configuration, if and when that option would become
necessary to consider. At present, a portion of the building, 1,200 square feet,
is leased to the Pennington Insurance Agency, with which the Company has had a
cordial relationship for many years. As the agency is growing, its need for
space may prompt them to choose space elsewhere, providing more space for the
Company, even without any building additions.
The Company had a pension plan for all of its employees, which was terminated as
of December 31, 1996 and replaced by a money purchase plan. The pension plan as
of the date of termination was over-funded, and there were no un-funded
liabilities related to the pension plan.
The Company's employee turnover rate is extremely low. In 1996, the workforce of
46 employees had 25 employees with 4-9 years of service with the Company, and
twelve employees with ten or more years of service.
30
<PAGE> 46
INSURANCE INDUSTRY OVERVIEW
The property casualty industry in the United States is large and well developed,
and is comprised of over two thousand individual companies. The industry's
largest collector of statistical information A.M. Best. & Co., aggregates data
on 2,418 individual companies which represents 1138 different insurance groups.
While it is safe to say that A. M. Best does not collect information on every
insurance company in the country, Best collects data on all but the very
smallest or in-active insurance companies, and their data is likely reflective
of more that 99% of the property casualty insurance industry.
Of the total $268.7 billion of premiums written by the insurance industry, 49.4%
were written in personal lines, and 37.7 % were written in commercial lines,
with the balance being reinsurance and other specialty lines. Mercer Insurance
Group's premium mix, in some ways appeared similar -- for example 50.2 % of the
company's premiums were written in the homeowners line, and 38.3% were written
in their commercial multi peril line. Yet, of course, Mercer's mix was quite
different, because it wrote no personal lines automobile coverage, which was the
industry's largest line of insurance accounting for 40.1% of the industry's
total premium volume. Nonetheless, in seeking to make industry comparisons to
Mercer, we have chosen to use total industry data, rather than some of the
segmentation that is available, which in our view is no more illuminating. Where
appropriate, we do make specific comparisons to lines of insurance, or other
subsets of the total industry data. This analysis, comparable to earlier
sections is based on statutory financial information, as generally accepted
accounting information for the industry does not exist.
PREMIUM GROWTH
Over the last five years, the growth of industry premium volume has been slowing
for a number of reasons. First, as inflation has dramatically abated from that
of the 1980's, and no longer caused insurable values to increase rapidly,
pressure on premium growth lessened. Second, as attendant investment yield rates
declined from double digit rates, bond and equity portfolios soared in value
creating capital gains of gigantic proportions. These capital gains, whether
realized or unrealized, served to dramatically increase shareholder or
policyholder surplus, and emboldened the industry to become increasingly more
rate competitive. Indeed, the industry's current phenomenally strong capital
position, and continued low levels of economic inflation suggests that
prospective premium growth rates for the whole industry are likely to remain
anemic.
31
<PAGE> 47
The following table summarizes industry and company premiums and premium growth.
Comparison to Industry Premium Growth
(dollars in millions)
<TABLE>
<CAPTION>
Mercer's
Year Industry Premiums Premiums Industry Growth Mercer's Growth
($) ($) (%) (%)
<S> <C> <C> <C> <C>
1992 227,822 18.7 2.4 2.2
1993 241,237 19.0 5.9 1.7
1994 250,362 19.4 3.8 2.2
1995 259,227 21.2 3.5 9.6
1996 268,730 20.1 3.7 -5.3
</TABLE>
With this comparison of premiums and premium growth, we first must provide some
perspective. Mercer is a small company; however, it will help for comparisons to
recognize that the 200 largest ranked insurer is approximately eleven times that
of the Company. The 1992-1996 compounded annual premium growth rate of the
insurance industry was 4.3%, which compares to 1.9% for that of the Company.
However, Mercer's capability to grow more rapidly than the industry from its
small base over the next several years is comparably greater.
The following table summarizes on comparisons of premium growth in Mercer's
major lines of business to that of the industry.
Selected Lines Growth Rates
(percentage)
<TABLE>
<CAPTION>
Year Homeowners Homeowners Commercial Multi-peril Commercial Multi-peril
Industry Mercer Industry Mercer
(%) (%) (%) (%)
<S> <C> <C> <C> <C>
1992 6.1 1.8 -3.5 -12.5
1993 5.2 2.3 5.3 -9.2
1994 4.7 8.4 2.8 -14.7
1995 6.3 12.7 5.9 14.0
1996 6.0 -6.5 0.4 13.3
</TABLE>
The industry's growth is more steady and predictable, even if not high, when
compared to the Company. The Company's prior pooling agreements, changes in
negotiated re-insurance coverage, loss of business from large individual
agencies or re-underwriting all
32
<PAGE> 48
have had the effect of creating a more variable and less predictable growth rate
of premiums.
COMBINED RATIOS
Due to the aforementioned high level of rate competition, and the industry's
embrace of cash flow underwriting, whereby a company intentionally writes risks
on an underwriting loss basis expecting to make a profit from the investment
income of the cash flow -- the insurance industry as a whole has not registered
an underwriting profit since 1979. Because of the strong insurance industry
surplus position, we anticipate that the industry will continue to operate at an
underwriting loss in the future. Of course, there continue to be some select or
highly specialized insurance companies that strictly adhere to an underwriting
profit goal, and have been successful in achieving their goals most years.
The following table summarizes the overall combined ratio of the insurance
industry and the Company.
Combined Ratios
(percentage)
<TABLE>
<CAPTION>
Year Industry Mercer
<C> <C> <C>
1992 115.6 109.5
1993 106.8 110.7
1994 108.3 122.6
1995 106.3 103.0
1996 105.8 110.5
</TABLE>
The industry's combined ratio has stabilized in recent years in the 106% area,
but the Company due to its proportionately larger exposure to individual
catastrophes is more vulnerable to larger underwriting loss fluctuations. In
addition, smaller companies have significantly higher expense ratios due to
their fixed overhead and a lack of efficiency of scale which favors companies
writing greater amounts of premium volume over which they can spread fixed
expenses.
33
<PAGE> 49
The following table summarizes the importance of Homeowners and the Commercial
Multi Peril policies to the Company and compares their respective combined
ratios in these two lines of insurance.
Combined Ratios
(percentage)
<TABLE>
<CAPTION>
Year Homeowners Homeowners Commercial Commercial
Industry Mercer Multi-peril Multi-peril
Industry Mercer
<S> <C> <C> <C> <C>
1992 158.4 125.2 126.8 79.7
1993 113.6 117.3 115.6 97.2
1994 118.4 147.4 118.8 124.7
1995 112.7 120.2 112.5 73.3
1996 121.7 123.8 118.3 101.4
</TABLE>
Homeowners and Commercial Multi-peril lines of insurance, when compared to the
industry's all lines underwriting, are far more competitive, and more volatile
due to catastrophes. Also, these lines of insurance have lost money even when
investment income is included. For the Company to be profitable, it needs to
remain in its familiar territory, keep its long term policyholders, remain
diligent in re-underwriting and pricing, reduce coastal exposures prone to
catastrophes, and keep expenses to a minimum. These industry statistics imply,
also, that simple geographical expansion at favorable combined ratios will be
difficult to achieve.
SURPLUS AND LEVERAGE
We have already noted that the insurance industry has reason to feel confident,
with respect to its solidity and its capital position.
The following table summarizes the industry's surplus and leverage to premiums
written.
Industry Surplus and Underwriting Leverage
(dollars in billions)
<TABLE>
<CAPTION>
Year Net Premiums Premiums to
Written Surplus Surplus Ratio
($) ($) (X)
<S> <C> <C> <C>
1985 144,860 75,511 1.92
1990 218,100 138,401 1.58
1995 259,803 230,001 1.13
1996 268,730 255,527 1.05
</TABLE>
34
<PAGE> 50
The magnitude of the capital gains windfall can be gauged considering that
between 1992-1996 the industry had realized capital gains of $35.5 billion and
accumulated an additional $35.3 billion in capital gains that had not yet been
realized. Thus, about 27.8% of the industry's 1996 surplus was related to the
last five year capital gains. A final element that has given management ever
more confidence with respect to capital adequacy is its demonstrated ability to
raise surplus in Wall Street's capital markets. In the 1992-1996 period, some
$26.4 billion of new capital was added to the insurance industry.
By comparison, between 1992-1996, The Company realized capital gains of $2.1
million and unrealized gains of $2.2 million, the sum of which represents 26.6%
of 1996 surplus. Actually, proportionally the Company had lesser capital gains
benefits than the industry, but due to New Jersey's $3.9 million in JUA
assessments reducing its surplus, the proportional benefit of capital gains
seems larger. Nonetheless, the growth of Mercer's surplus position is
impressive. As of year end 1996 both the insurance industry and Mercer had
comparable percentage of invested assets in equities, i.e. 16.5% for the
industry as compared to 16.3% for Mercer.
INVESTMENT INCOME
The insurance industry has not been producing any underwriting profit, however,
investment income has been able to offset this loss and create positive
operating income.
The following table summarizes the beneficial effects of investment income to
the industry.
Underwriting Loss and Investment Income
(dollars in millions)
<TABLE>
<CAPTION>
Year Industry Industry Mercer Mercer
Underwriting Losses Investment Income Underwriting Losses Investment Income
($) ($) ($) ($)
<S> <C> <C> <C> <C>
1992 -35,697 33,468 -1.7 2.6
1993 -17,654 32,635 -2.2 2.3
1994 -21,999 33,552 -4.5 2.0
1995 -17,561 36,235 -0.8 2.2
1996 -16,723 37,962 -2.0 2.4
</TABLE>
The pattern in clear for the insurance industry; investment income offsets
underwriting losses. For the Company, excluding extraordinary catastrophic loss
years, investment income also offsets underwriting loss. The insurance industry,
by virtue of writing more lines of insurance, and representing insurance written
in all 50 states, is less prone to have its investment income completely offset
by catastrophic losses than the Company. Catastrophes simply do not occur in all
states and all lines in any one year. Mercer's
35
<PAGE> 51
management is acutely aware of the problem of writing risks pre-dominantly in
one geographic location and writing in only a few limited lines of insurance,
and is working diligently to solve it .
There are several measures net investment yield and net investment income to net
premium earned ("NIY and NII/NPE") of investment return that one considers to
demonstrate investment performance, and the positive effect on investment income
derived from writing longer tail lines on which greater amounts of investment
income can be earned.
The following summarizes these results for Mercer when compared to the industry.
Net Investment Yield, Net Investment Income/Net Premiums Earned Ratios
(percentage)
<TABLE>
<CAPTION>
Year NIY NIY NII/NPE NPE
Industry Mercer Industry Industry
(%) (%) (%) (%)
<S> <C> <C> <C> <C>
1992 6.6 6.5 14.8 14.0
1993 6.0 5.6 13.9 12.6
1994 5.8 5.0 13.8 10.7
1995 5.9 5.3 14.3 10.7
1996 5.7 5.2 14.4 11.5
</TABLE>
Since 1992 investment yield rates in the industry have declined. In addition,
companies of larger size generally have better investment opportunities
presented to them for consideration, while smaller companies have to be
satisfied with what is offered to them. Also, The Company's lower yield rate
reflects their investment policy to invest in higher grade, shorter maturity
investments. The ratio of Net Investment Income to Net Premiums Earned simply
demonstrates that the industry is able to generate a higher level of investment
income because its greater proportion of long tail lines creates larger reserves
of longer duration which generate more investment income.
LOSS RESERVES
Adding to the industry's comfort for a currently competitive stance, is its
experience with respect to loss and loss adjustment expense reserve size,
additions, and development. In the 1980's during a period of high inflation the
industry was plagued by inadequate loss reserve provisions. In addition, risks
not foreseen, and in some cases not even included in policy contracts,
nonetheless had to be defended, reserved for and ultimately paid. The confluence
of these events required massive loss reserve additions, which otherwise might
have been reported as profit, and enhanced surplus. More recently, with
abatement of inflation, it now appears that prior reserve additions may have
been too large, with the
36
<PAGE> 52
result that prior year reserves are now being appropriately reduced to the
enhancement of reported earnings.
The following table displays Industry Reserves and Reserve Development since
1987.
Industry Reserves and Reserve Development
(dollars in billions)
<TABLE>
<CAPTION>
Year Original Developed Through 1996
($) ($) ($)
<S> <C> <C> <C>
1987 212.4 257.6 45.2
1988 239.1 274.2 35.1
1989 263.7 295.3 31.5
1990 285.0 309.0 24.0
1991 303.1 317.7 14.6
1992 325.1 325.1 0.0
1993 336.9 328.4 -8.5
1994 347.0 341.3 -5.7
1995 358.0 351.4 -6.6
1996 362.9 362.9 --
</TABLE>
Between 1987-1991, the insurance industry found itself underestimating loss and
loss adjustment expense reserves by a total of $150.4 billion, and added that
amount to the balance sheet, to the detriment of earnings. However, between
1992-1996, the industry actually released loss reserves of $20.8 billion which
enhanced earnings. The psychological shift between these two periods should not
be underestimated. The former period created uncertainty and management
embarrassment, while the later period creates confidence and financial strength.
Therefore, this consideration in addition to those previously noted, will add to
a period in the industry which will be characterized by low premium growth, high
levels of competition, and low returns on shareholder equity. It will also
foster a period in which it will be financially more astute to acquire books of
business, or whole companies, as opposed to trying to grow into new lines or
territories by offering policies at a lower premium rate.
Mercer's loss and loss adjustment expense reserve history is more favorable than
that of the insurance industry as a whole. Focusing more on "short tail" lines
than the industry the Company was in a better position to estimate its loss
liabilities more accurately. Indeed, our analysis of Mercer's loss reserve
developments confirms that the Company has not had to strengthen reserves in
this decade due to adverse reserve developments. This is a respectable
achievement.
37
<PAGE> 53
IMPROVED CONSUMER VALUE AND UNDERWRITING EXPENSES.
There have been many points of focus for insurance industry management in
seeking to improve the profitability of their respective companies, but the most
enduring focus has been on reducing expenses and the expense ratio. Over time
insurance has become a better consumer value because less of the premium dollar
goes for commissions, underwriting, and other general expenses, while more of
the premium dollar has gone to actual payment of losses. Adding to this shift is
the industry's creeping acquiescence to underwriting losses, in effect sharing
some of the net investment income with the policyholder, insurance has improved
substantially as a consumer product.
The following table summarizes the Loss, Expense and Combined ratios for stock
companies.
Loss, Expense and Combined Ratios
(percentage)
<TABLE>
<CAPTION>
Year Loss Ratio Expense Ratio Combined Ratio
(%) (%) (%)
<S> <C> <C> <C>
1942 55.3 40.8 96.1
1962 64.5 34.5 99.0
1982 78.6 30.1 108.7
1992 89.7 28.7 118.4
1996 78.0 27.8 105.7
</TABLE>
It may appear absurd, at first, to review the insurance industry's experience so
far back into the past. However there are several important points to be made
with respect to these comparisons, and one is particularly important for an
analysis of the Mercer Insurance Group. First, there has been an unmistakable
trend for more of the premium dollar to be paid out in losses, making insurance
a better consumer value. Second, the insurance industry has reduced its expense
ratio by becoming more efficient. And third, that the days of combined ratios of
under 100 are mostly available in historical reviews.
38
<PAGE> 54
The following table summarizes the Industry's and Company's Expense Ratios.
Expense Ratio Comparison
(percentage)
<TABLE>
<CAPTION>
Year Industry Mercer
(%) (%)
<S> <C> <C>
1992 26.3 43.6
1993 26.2 46.7
1994 26.0 46.9
1995 26.1 39.0
1996 26.3 38.7
</TABLE>
With modest exaggeration, we can compare Mercer's expense ratios in the 1990's
with that of the insurance industry of previous decades. It is an exaggeration
because Mercer's major lines of insurance, homeowners and commercial multi peril
lines of insurance for the industry also have expense ratios that are higher
than that of the overall industry expense ratio. But still the comparison is
indicative of expense ratios of smaller companies in general, and of Mercer in
particular.
In order to make a more appropriate comparison of such expenses, the following
table compares the expense ratios of these two lines of insurance for Mercer and
the insurance industry.
Expense Ratios Comparisons
<TABLE>
<CAPTION>
Year Homeowners Homeowners Commercial Commercial
Industry Mercer Multi-peril Industry Multi-peril Mercer
(%) (%) (%) (%)
<S> <C> <C> <C> <C>
1992 30.9 47.8 37.2 37.5
1993 31.0 50.7 36.4 43.4
1994 30.8 48.4 36.3 53.5
1995 30.8 41.4 35.6 38.9
1996 29.8 38.4 35.7 42.1
</TABLE>
It is evident that Mercer's expense ratio for a commodity type product like
homeowners, is much higher than that of the industry. This ratio is high not so
much because the Company is inefficient, but because the Company's fixed
expenses are spread over a small premium base. Thus, to the degree that Mercer
writes substantially more business in the future, or acquires a block of
business, the marginal costs of processing this additional business will be
lower, bringing the expense ratio down to the benefit of income. In Commercial
Multi-peril Mercer's expense ratio is also higher than that of the
39
<PAGE> 55
industry. Mercer underwrites simpler CMP risks than many larger companies; in
fact, its CMP line also may be considered as a commodity type product. As such,
there is also plenty of opportunity for improved expenses ratios on a larger
base of business.
CONCLUSION
Major industry trends will tend to affect every constituent company in that
industry in some way, and to some extent. But it would be inappropriate, and
incorrect, to cast Mercer Insurance Group as small microcosm of the giant
insurance industry. Consistent with industry trends, Mercer has shown modest
premium growth over the last five years. It has also shared the industry's
experience of realizing substantial capital gains in its investment portfolio.
Accordingly, it is now in a position where for its size of premium writings, it
has adequate surplus. Mercer, like the industry, has suffered from significant
catastrophes, i.e. losses from which it cannot be totally insulated, even with
an excellent reinsurance program.
However, Mercer's operations are very distinct from the overall industry, by
virtue of the fact that it has never written any personal lines automobile
coverage, which is the industry's largest line of business. Mercer, consistent
with other smaller companies, has not engaged in writing large nor complicated
commercial coverage, or trendy liability coverage. It has largely remained in
its historic operating territory, and has provided service and insurance to its
customers in lines of insurance that it understands, has confidence in
underwriting, and many years of experience. Due to its mix of business which
makes it easier to estimate loss reserves accurately, Mercer has been more
consistent in setting its loss reserves accurately than the industry.
In the near future, Mercer will share the industry's experience of unremitting
competition based on quality, service and price. Moreover, in order for Mercer
to become more efficient, it will require the company to write significantly
more business. Mercer will need to reach a size in which efficiencies of scale
are possible. Simply said, its expense ratio must decline. Given that the
insurance industry has plenty of capital, we can expect continuing price
competition, slow premium growth, and low returns on surplus. In this
environment, Mercer can grow somewhat, and more easily simply because of its
small size. However, growth by adding new lines, or new geographical
territories, are likely to generate sporadic growth of variable profitability,
or loss. It may be more fruitful for the company to help solve these same
problems of other small stock or mutual companies through merger or acquisition.
In this way, one gets a book of business which has been re-underwritten over a
period of time, and has generated a history of financial results, making it more
desirable than a book of new risks.
Remaining the same size, and continuing to do that which it has done over the
last decades remains less and less viable as an option today. The company's
conversion to a stock company seems desirable and appears to provide several
positive elements. The amount of estimated additional surplus that the company
may raise through its conversion process, will make it financially strong, with
many financial and operational options. It
40
<PAGE> 56
can expand its operations, hire more professional people, buy modern data
processing systems, make acquisitions and so on. But, equally as important to
Mercer is that a conversion to a stock company form will engender a stricter,
higher level of accountability that every organization has as a publicly owned
shareholder company. Management will be held accountable for the execution of
strategies that must result in shareholder profit, and an attractive return on
shareholder equity. The history of converted companies, or those who have formed
public downstream holding companies, is that they focus more keenly on cogent
profit making goals, are motivated through profit participation to execute their
plans well, remain tenacious in goal achievement -- all to the benefit of
management, employees, policyholders, shareholders, and regulators. Therefore, a
conversion of Mercer from a mutual to a stock company form would certainly help
it achieve its longer range strategic goals.
41
<PAGE> 57
II. COMPARABLE COMPANY ANALYSIS
Integral to the valuation of the Corporation's to be issued and outstanding
Common Stock is the selection of an appropriate group of publicly-held and
traded institutions. This set of companies, often referred to as the "comparable
peer group" or "guideline companies", provides a benchmark for determining the
Corporation's fair market value as if the common shares were "freely traded" in
the public marketplace. This section identifies the comparable companies,
parameters used in the selection. The related exhibits display each
institution's market valuation, aggregate market capitalization, earnings,
dividends, expenses, assets, reserves and equity, profitability, capitalization
or leverage, loss reserve adequacy, etc. The next edition discusses and applies
conclusions regarding the market value of the Corporation relative to the
comparative group and discounts/premiums we believe are necessary to achieve a
full subscription of shares in the Offering.
COMPANY PEER GROUP ANALYSIS
The property/casualty insurance industry is to consist of over two thousand
underwriting companies, most of which are rated by A.M. Best Company in its
Best's Insurance Reports Compendium. It may be expected that the number of
comparable companies to select from would be very large. However, the actual
number of comparable companies is limited. One constraint is the primary
division between stock and mutual companies. In addition, most stock and mutual
insurance companies are structured as groups, so that a single group may consist
of ten or more distinct underwriting companies.
In the selection of a "peer group" of comparable companies, the most important
criteria is the publicly traded stock. This group consists of approximately two
hundred companies, but must be further stratified into sub-groups distinguishing
among multi-line, life insurance, asset accumulation, health providers,
commercial lines property/casualty, personal lines property/casualty,
re-insurers, excess and surplus lines carriers, financial guarantors,
multi-national and other off-shore companies, insurance brokers, and insurance
service provider companies. As a result, the universe of publicly traded
personal lines insurance companies that may be used as a basis of comparison to
the Corporation, predominantly a personal lines property/casualty underwriter,
is limited.
Finally, among this limited group of potential comparable companies there are
further distinctions that must be taken into account. There is a notable
difference in market valuation utilizing price/earnings and price/book value
multiples as related to company size and returns on equity. Therefore, ideally
comparable companies must be chosen of approximately the same size, and
allowances must be made in the valuation for companies with differing levels of
growth and profitability. Generally, there are fewer small companies, i.e.
companies having less than $100 million in market capitalization, that may be
used as a "peer group" because of an active acquisition market that tends to
deplete smaller and usually lower valued companies. Also, among personal lines
42
<PAGE> 58
insurance companies, there are differences in growth and financial performance
between those that write standard as compared to non-standard lines of
insurance, and between companies that use independent insurance agents and
direct writers, or captive marketers. Finally, differing state jurisdictions
provide different opportunities for profitable operation as companies in prior
approval and file and use states generally have different financial results.
COMPARATIVE PEER GROUP OVERVIEW
Sheshunoff selected a twelve company "peer group" for a basis of comparative
product and financial performance. This group consisted of: Alfa Corporation
ALFA; Allied Group, Inc.; Donegal Group, Inc.; Farm Family Holdings, Inc.;
Harleysville Group, Inc.; Home State Holdings, Inc.; Merchants Group, Inc.;
Meridian Insurance Group Inc.; Motor Club of America; Old Guard Group; Inc.,
State Auto Financial Corp., and Selective Insurance Group, Inc.. Financial data
is as of June 30, 1997 and market capitalization as of November 11, 1997.
Additional analysis for commercial and personal lines market valuations as of
November 10, 1997 is provided in a related exhibit for all companies followed by
The Firemark Group, Morristown, New Jersey.
Primary to selection of the peer group were the following criteria: (1) actively
traded in the public market; (2) principally engaged as a property and casualty
company; (3) size, since most publicly traded property and casualty companies
are much larger than Mercer; (4) profitability; and (5) availability of
information. The peer group, overall, provides a meaningful basis for making
value judgements for Mercer. However, no single company or group of companies is
identical to Mercer, making the appraiser's judgement essential in determining
value.
The following discussion provides a brief summary of each of the companies we
selected and their structural, territorial and size characteristics. Many of the
"peer group companies" share a common heritage in a mutual past and are in
transition to a stock oriented management culture.
ALFA Corporation ("ALFA"), Montgomery, Alabama having aggregate net premiums
written, assets, loss and LAE reserves, stockholders' equity, market
capitalization and latest twelve month net income of approximately $354, $1,077,
$477, $348, $690 and $48 million, respectively, is a regional southeastern
personal lines property/casualty carrier. The company's last public offering of
common stock was dated April, 1988. ALFA is a downstream stock subsidiary of a
mutual operating company. The parent mutual group of companies led by ALFA
Mutual Insurance Company together owning 51% of ALFA's outstanding shares, was
sponsored by the Alabama Farmers Federation and writes over 90% of its
automobile, homeowners and farm-owners business in that state. ALFA also writes
whole, universal and term life policies, and provides consumer financing,
leasing real-estate investments, residential and commercial construction, and
real estate sales. ALFA's mix of business, geographic concentration, and
exposure to severe weather is comparable to that of the Corporation. ALFA is one
of the major
43
<PAGE> 59
writers of personal lines in Alabama, with net premiums written exceeding $500
million and policyholders' surplus of nearly $1 billion.
ALLIED Group, Inc. ("GRP") Des Moines, Iowa having aggregate net premiums
written, assets, loss and LAE reserves, stockholders' equity, market
capitalization and latest twelve month net income of approximately $521, $1,140,
$376, $391, $913 and $61 million, respectively, is a regional personal lines
carrier that writes a significant part of its business in the Midwest and is
licensed in Pennsylvania. The company's last public offerings of common stock
were dated October, 1985 and February, 1992. Allied is a downstream stock
subsidiary of a mutual operating company. The parent mutual group of companies
led by Allied Mutual Insurance Company together owning 18% of GRP's voting
shares, the Allied ESOP owning 29% of GRP's voting shares and the public owning
96.8% of the common stock and 52.9% of the voting stock. Allied through its
subsidiaries, underwrites personal lines and small commercial lines property and
casualty insurance. The company primarily writes private passenger automobile
and homeowners insurance, but also writes multiple-peril, workers' compensation,
inland marine, and other lines of business. GRP while substantially larger than
the Corporation, can still be comparable to the Corporation.
Donegal Group, Inc. ("DGIC") Marietta, Pennsylvania having aggregate net
premiums written, assets, loss and LAE reserves, stockholders' equity, market
capitalization and latest twelve month net income of approximately $101, $290,
$114, $86, $123 and $10 million, respectively, is a regional personal and
commercial lines carrier that writes a significant part of its business in
Pennsylvania and states contiguous thereto, but not New Jersey. The company's
last public offering of common stock was in 1986. Donegal is a downstream stock
subsidiary of a mutual operating company. The parent mutual group of companies
led by Donegal Mutual Insurance Company controls 58% of DGIC's shares. Donegal
through its subsidiaries, underwrites personal lines and small commercial lines
property and casualty insurance. DGIC is a well suited comparable to the
Corporation.
Farm Family Holdings, Inc. ("FFH") Glenmont, New York having aggregate net
premiums written, assets, loss and LAE reserves, stockholders' equity, market
capitalization and latest twelve month net income of approximately $137, $344,
$146, $117, $161 and $15 million, respectively, is a regional personal and
commercial lines carrier that writes a significant part of its business in New
York and New Jersey. The company's last public offering of common stock was in
July, 1996 when it "de-mutualized" giving shares of common stock to current
policyholders in lieu of their "policyholders' interests" and concurrently sold
additional shares of common stock in a non-transferable rights offering and firm
commitment underwritten offering. Farm Family underwrites property and casualty
insurance to agribusiness and residents of rural and suburban communities
including automobile, business owners, homeowners and other various insurance
products.
44
<PAGE> 60
Harleysville Group, Inc. ("HGIC") Harleysville, Pennsylvania having aggregate
net premiums written, assets, loss and LAE reserves, stockholders' equity,
market capitalization and latest twelve month net income of approximately $626,
$1,676, $831, $402, $744 and $40 million, respectively, is a regional personal
40% and commercial 60% lines carrier that writes a significant part of its
business in Pennsylvania and states contiguous thereto, including New Jersey.
The company's last public offerings of common stock were in May, 1986 and April,
1992. HGIC is a downstream stock subsidiary of a mutual operating company. The
parent mutual group of companies led by Harleysville Mutual Insurance Company
controls 56% of HGIC's shares. Harleysville through its subsidiaries,
underwrites personal lines and small commercial lines property and casualty
insurance.
Home State Holdings, Inc. ("HOMS"), Delaware having as of December 31, 1996
aggregate net premiums written, assets, loss and LAE reserves, stockholders'
equity, and annual net income of approximately $101, $344, $180, $20 and $(21)
million, respectively, is a company that mostly writes private passenger and
commercial automobile policies in the eastern states. Its inclusion in the
comparable companies list is based on a number of considerations. It is a New
Jersey domiciled insurance company (with a Delaware based holding company),
which derives 67% of its business form the state of New Jersey and, therefore,
Home State was exposed to the same regulatory environment as Mercer. It is a
company that by size, and most financial measures, up until mid year 1996, was
comparable to Mercer, and appeared as an attractive insurance growth company. It
is a company that, like Mercer, utilized a pooling of risks with other
affiliated companies. The one dissimilarity in its operations is that Home State
does not write much homeowners business, but instead writes automobile
coverages. We have included in our statistical comparison, which depicts the
data on individual companies, data on Home State. However, this apparently solid
and growing company started to report significant losses during 1996, and in
1997 appears to be headed toward liquidation. The reason for its dramatic losses
were ascribed to unfavorable loss reserve development, and to the winter of 1996
catastrophic losses (another similarity to Mercer). Because the company appears
to be in liquidation, we have not included its financials, ratios, or rates of
return in any summary pages of the comparable companies. Home State's value
stems from it being a real, small, distressed, New Jersey domiciled company,
which can serve as an example that a conservative approach in a risk business is
always warranted.
Merchant Group, Inc. ("MGP") Buffalo, New York having aggregate net premiums
written, assets, loss and LAE reserves, stockholders' equity, market
capitalization and latest twelve month net income of approximately $91, $273,
$136, $65, $57 and $(1) million, respectively, is a regional that writes
proportionally more commercial lines business than the Corporation. Its focus of
underwriting is in smaller upstate cities of New York state which comprises
nearly 60% of its total premiums written. The company writes a balanced book of
personal and commercial lines the most significant part of which is done in New
York (64%), while New Jersey (14%) is its second largest market. The company's
last public offering of common stock was in November, 1986. The parent
45
<PAGE> 61
mutual group of companies led by Merchants Mutual Insurance Company controls 8%
of MGP's shares.
Meridian Insurance Group, Inc. ("MIGI") Indianapolis, Indiana having aggregate
net premiums written, assets, loss and LAE reserves, stockholders' equity,
market capitalization and latest twelve month net income of approximately $188,
$403, $164, $124, $122 and $6 million, respectively, is a regional personal and
commercial lines carrier that writes a significant part of its business in the
Midwest but not including Pennsylvania; or New Jersey. The company's last public
offering of common stock was in March, 1987. MIGI is a downstream stock
subsidiary of a mutual operating company. The parent mutual group of companies
led by Meridian Mutual Insurance Company controls 47% of MIGI's shares.
Motor Club of America ("MOTR") Paramus, New Jersey having aggregate net premiums
written, assets, loss and LAE reserves, stockholders' equity, market
capitalization and latest twelve month net income of approximately $50, $95,
$46, $21, $27 and $6 million, respectively, writes automobile, homeowners, and
small commercial multiple peril package policies exclusively in the state of New
Jersey. MOTR is a 1989 successor company of MCA Insurance, a financially
troubled insurer, which pursuant to a reinsurance and administrative agreement
transferred its assets and liabilities to the MOTR. In 1992 losses from
Hurricane Andrew caused losses which exceeded its policyholders' surplus. Also,
similar to Mercer, MCA insurance had been under substantial financial pressure
resulting from the state of New Jersey's assessments under its JUA automobile
pool. Given its financially troubled circumstances, this burden has now been
reduced by various forms of relief granted by the New Jersey Department of
Insurance. By contrast to the overall insurance industry, MOTR remains
leveraged, as measured by net premiums written to shareholders' equity, by more
than a factor of two times.
Old Guard Group, Inc. ("OGGI") Lancaster, Pennsylvania having aggregate net
premiums written, assets, loss and LAE reserves, stockholders' equity, and
market capitalization of approximately $57, $180, $55, $76 and $74 million,
respectively, is a regional that writes a well diversified book of personal
lines, farm owners coverage and basic commercial coverage. Virtually all of the
company's writings are in Pennsylvania and predominately in rural and suburban
communities in eastern and central Pennsylvania. The company's initial public
offering of common stock was completed in February, 1997. OGGI is the only
recently "converted" insurance company in the group.
Selective Insurance Group, Inc. ("SIGI") Branchville, New Jersey having
aggregate net premiums written, assets, loss and LAE reserves, stockholders'
equity, market capitalization and latest twelve month net income of
approximately $682, $2,253, $1,171, $518, $812 and $64 million, respectively, is
New Jersey's leading regional property and casualty company that writes personal
insurance products to individuals and families (30%) and commercial insurance
products directed to small to medium sized service
46
<PAGE> 62
oriented businesses, government entities (70%). The majority of the company's
net premiums written are in New Jersey.
State Auto Financial Corporation ("STFC") Columbus, Ohio having aggregate net
premiums written, assets, loss and LAE reserves, stockholders' equity, market
capitalization and latest twelve month net income of approximately $249, $470,
$167, $202, $491 and $27 million, respectively, is a personal and casualty
insurance holding company that writes personal and commercial automobile,
homeowners, commercial multi-peril, worker's compensation and fire insurance in
the Midwest and eastern half of the nation; including Pennsylvania. The
company's last public offering of common stock was in June, 1991. STFC is a
downstream stock subsidiary of a mutual operating company. The parent mutual
group of companies led by State Automobile Mutual Insurance Company controls 66%
of STFC's shares.
ANALYSIS OF MERCER RELATIVE TO THE COMPARATIVE COMPANIES
Our analysis of Mercer relative to the peer group of companies commences with
establishing Mercer's statistical profile, and its fit from a perspective of
size to the overall peer group. In this context we compare net written premiums,
assets, shareholders' equity and several other key financial size measures to
gauge Mercer's place in the peer group. It would be quite reasonable to assume
that a company converting from a mutual to a stock form, or a private stock
company going public could be larger than the average or median of our peer
companies. However, Mercer is much smaller than the average of our peer
companies. Indeed, by most measures, it is smaller than the smallest company in
our peer group.
Also, each individual company in the peer group was analyzed from a financial
performance point of view. The results of key performance measures, ratios,
margins, or returns were compiled, and statistical ranges, averages and medians
were computed. Peer group performance information for loss ratios, expense
ratios, and combined ratios are compared to Mercer. The comparison also depicts
Mercer's leverage as a multiple of net premiums written to surplus and compares
it to its peer group and the industry average. These key performance results
were compared to Mercer, to ascertain Mercer's relative financial performance
were compared to the peer group.
This comparison gives only an initial impression of Mercer's financial
performance as compared to the peer group. The next step in the comparison
separated the peer group into two sub-groups - as larger and smaller
institutions. This is a meaningful division because, within the twelve company
peer group, there is a significant difference in market valuation. Thus, by
separating our overall peer group we are able to compare how the financial
performance of the larger companies sub group compares to that of the smaller
companies, and how this difference in financial performance is reflected in
relative market valuation.
47
<PAGE> 63
The comparative group historical analysis for the years ended December 31,
1993-96 and six months ended June 30, 1996-97, is shown below and in its
entirety in Exhibit II with income statement and balance sheet financial data,
operating ratios, capital profitability ratios and growth rates:
Stock Comparison Analysis Summary
All Comparable Companies
Data as of June 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
FINANCIAL INFORMATION Mercer Low Average Median High
- --------------------- ------ --- ------- ------ ----
<S> <C> <C> <C> <C> <C>
Net Premiums Written 18,155 50,787 290,042 190,912 716,471
Net Premiums Earned 18,847 50,407 278,288 188,818 682,022
Net Investment Income 2,359 3,308 33,945 17,375 98,284
Net Income 1,574 -1,412 25,632 15,261 64,895
Assets 72,534 94,607 745,818 403,123 2,253,547
Loss & LAE Reserves 33,618 46,376 335,152 164,411 1,171,315
Shareholders Equity 20,714 20,591 213,956 124,113 518,037
RATIOS
- ------
Loss Ratio 62.3 63.6 68.9 68.6 77.2
Expense Ratio 41.6 25.2 30.9 30.3 37.8
Combined Ratio 103.9 92.7 99.8 98.9 109.3
NPW/Sh. Equity 0.88 0.94 1.41 1.38 2.47
Loss & LAE Res./NPE 1.78 0.67 1.11 1.06 1.72
RETURN ON SHAREHOLDER'S EQUITY
- ------------------------------
LTM 1997 7.6% -2.2% 11.6% 12.5% 30.3%
YE 1996 4.5% -4.9% 9.0% 10.0% 28.4%
NET INCOME/NET PREMIUMS EARNED
- ------------------------------
LTM 1997 8.4% -1.6% 8.5% 11.1% 13.6%
YE 1996 3.1% -3.6% 6.0% 8.9% 11.5%
GROWTH RATES
- ------------
Net Premiums Written -1.2% 2.0% 14.2% 12.5% 17.7%
Net Investment Income 2.1% 3.9% 12.1% 7.4% 15.9%
Net Income 21.4% -33.6% 8.1% 13.0% 35.0%
Assets 0.6% 2.5% 13.4% 10.3% 16.6%
Shareholder's Equity 4.7% -3.9% 12.1% 12.4% 35.2%
Dividends NA 0.0% 9.7% 9.2% 21.9%
MARKET CAPITALIZATION NA 27,189 383,442 161,534 912,706
- ---------------------
DIVIDEND YIELD NA 0.0% 1.2% 1.5% 2.3%
- --------------
</TABLE>
Mercer on the basis of income statement and balance sheet comparisons is
approximately one tenth and two tenths of the group median, its (operating
ratios) loss ratio is comparable to the group median, while its expense ratio of
41.6% is substantially greater than the group median of 30.3% reflecting the
absence of economies of scale inherent in the Company's limited scale of
operations. Net premiums written to surplus of 88% is significantly lower than
the peer average of 138%, again reflecting the limited scope of operations. Loss
and LAE Reserves to Net Premiums Written of 178% as compared to a group median
of 106%, however, reflect a conservative underwriting posture by management. The
Company's return on surplus or equity of 7.6% is substantially below
48
<PAGE> 64
that of the peer median of 12.5%. The infusion of substantial amounts of new
common equity in the conversion will make this comparisons unfavorable for
several years as management employs this excess capital. Aside from net income,
all categories of growth rates are substantially below peers.
This analysis demonstrates and confirms that on the basis of size and financial
performance, we must make a distinction between the larger and smaller companies
in our peer group. We first review the financial performance and growth
characteristics of the larger companies sub group.
The table below summarizes data for the Peer Group's Large Comparable Companies.
Stock Comparison Analysis Summary
Large Comparable Companies
Data as of June 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
FINANCIAL INFORMATION Mercer Low Average Median High
- --------------------- ------ --- ------- ------ ----
<S> <C> <C> <C> <C> <C>
Net Premiums Written 18,155 279,380 502,012 556,606 716,471
Net Premiums Earned 18,847 249,566 486,813 521,284 682,022
Net Investment Income 2,359 24,513 61,852 55,637 98,284
Net Income 1,574 27,795 48,428 48,197 64,895
Assets 72,534 470,637 1,323,557 1,140,504 2,253,547
Loss & LAE Reserves 33,618 167,079 604,595 477,047 1,171,315
Shareholders Equity 20,714 202,002 372,585 391,991 518,037
RATIOS
- ------
Loss Ratio 62.3 66.2 68.5 68.6 72.1
Expense Ratio 41.6 25.2 28.7 29.5 32.3
Combined Ratio 103.9 92.7 97.2 95.8 104.3
NPW/Sh. Equity (X) 0.88 0.94 1.34 1.38 1.56
Loss & LAE Res./NPE (X) 1.78 0.67 1.16 1.33 1.72
RETURN ON SHAREHOLDER'S EQUITY
- ------------------------------
LTM 1997 7.6% 10.0% 13.1% 13.8% 15.6%
YE 1996 4.5% 7.7% 11.1% 11.7% 13.8%
NET INCOME/NET PREMIUMS EARNED
- ------------------------------
LTM 1997 8.4% 6.4% 10.5% 11.1% 13.6%
YE 1996 3.1% 4.7% 8.4% 9.4% 10.4%
GROWTH RATES
- ------------
Net Premiums Written -1.2% 4.8% 12.6% 14.2% 16.9%
Net Investment Income 2.1% 6.3% 8.2% 7.7% 10.6%
Net Income 21.4% 2.0% 15.8% 13.0% 35.0%
Assets 0.6% 8.0% 9.8% 10.2% 11.6%
Shareholder's Equity 4.7% 8.6% 12.6% 12.5% 14.9%
Dividends NA 0.0% 12.0% 13.0% 21.9%
MARKET CAPITALIZATION NA 491,550 730,346 744,515 912,706
- ---------------------
DIVIDEND YIELD NA 0.7% 1.6% 1.7% 2.3%
- --------------
</TABLE>
Mercer, on the basis of income statement and balance sheet comparisons, is
approximately three percent of the large group median. Its' (operating ratios)
loss ratio is
49
<PAGE> 65
comparable to the group median, while its expense ratio of 41.6% is
substantially greater than the group median of 29.5%, reflecting the absence of
economies of scale inherent in the Company's limited scale of operations. Net
premiums written to surplus of 88% is significantly lower than the peer average
of 138%, again reflected the limited scope of operations. Loss and LAE Reserves
to Net Premiums Written of 178% as compared to a group median of 133%, however,
reflect a conservative underwriting posture by management. The Company's return
on surplus or equity of 7.6% is substantially below that of the peer median of
13.8%. Aside from net income, all categories of growth rates are substantially
below peers.
The table below summarizes data for the Peer Group's Small Comparable Companies.
Stock Comparison Analysis Summary
Small Comparable Companies
Data as of June 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
FINANCIAL INFORMATION Mercer Low Average Median High
- --------------------- ------ --- ------- ------ ----
<S> <C> <C> <C> <C> <C>
Net Premiums Written 18,155 50,787 113,400 100,103 190,912
Net Premiums Earned 18,847 50,407 104,516 96,216 188,818
Net Investment Income 2,359 3,308 10,689 11,596 17,375
Net Income 1,574 -1,412 6,636 6,428 15,261
Assets 72,534 94,607 264,369 281,745 403,123
Loss & LAE Reserves 33,618 46,376 110,616 125,662 164,411
Shareholders Equity 20,714 20,591 81,764 81,472 124,113
RATIOS
- ------
Loss Ratio 62.3 63.6 69.3 67.5 77.2
Expense Ratio 41.6 28.6 32.8 33.1 37.8
Combined Ratio 103.9 97.4 102.1 100.2 109.3
NPW/Sh. Equity 0.88 1.19 1.47 1.23 2.47
Loss & LAE Res./NPE 1.78 0.87 1.07 1.01 1.50
RETURN ON SHAREHOLDER'S EQUITY
- ------------------------------
LTM 1997 7.6% -2.2% 10.3% 8.5% 30.3%
YE 1996 4.5% -4.9% 7.3% 5.5% 28.4%
NET INCOME/NET PREMIUMS EARNED
- ------------------------------
LTM 1997 8.4% -1.6% 6.8% 7.6% 12.4%
YE 1996 3.1% -3.6% 4.1% 4.4% 11.5%
GROWTH RATES
- ------------
Net Premiums Written -1.2% 2.0% 9.7% 10.3% 17.7%
Net Investment Income 2.1% 3.9% 7.7% 6.2% 15.9%
Net Income 21.4% -33.6% 1.8% 5.6% 22.1%
Assets 0.6% 2.5% 8.9% 8.9% 16.6%
Shareholder's Equity 4.7% -3.9% 15.5% 16.3% 35.2%
Dividends NA 0.0% 7.4% 6.6% 21.9%
MARKET CAPITALIZATION NA 177 94,356 98,067 161,534
- ---------------------
DIVIDEND YIELD NA 0.0% 0.8% 0.8% 1.8%
- --------------
</TABLE>
50
<PAGE> 66
Mercer, on the basis of income statement and balance sheet comparisons, is
approximately two tenths and one quarter of the group median, its (operating
ratios) loss ratio are very comparable to the group median, while its expense
ratio of 41.6% is moderately higher than the group median of 33.1% reflecting
the absence of economies of scale inherent in the Company's and smaller company
group's limited scale of operations. Net premiums written to surplus of 88% is
still significantly lower than the peer average of 123%, again reflected the
limited scope of operations. Loss and LAE Reserves to Net Premiums Written of
178% as compared to a group median of 101%, however, reflect a conservative
underwriting posture by management. The Company's return on surplus or equity of
7.6% is substantially comparable to the peer median of 8.5%, suggesting the
entire group suffers from the same business circumstances or malaise. Aside for
net income, all categories of growth rates are substantially below peers. Peers
reflect moderate growth of net premiums written, assets and equity.
We have noted previously that for a number of reasons discussed in our
"Comparative Peer Group Overview" that Home State Holdings, Inc. deserves to be
viewed as a comparable company. However, due to its recent financial demise, and
the lack of any share price quotes in the marketplace, that it was not
appropriate to include its financials in the peer group statistical average and
median comparisons for growth and profitability.
Particular note should be given to Home State Holdings, Inc. which illustrates
the dangers associated with rapid growth in specific lines of business or
greater geographic market shares. Through-out its history, Home State was
aggressively adding premiums and financed growth through the sale of shares of
common stock, until 1996 when its poor underwriting standards visited upon the
company significant losses resulting in a Loss & LEA Ratio of 113%. Earnings,
reserves and capital appear inadequate to resolve the company's problems and it
has been de-listed and may be deemed insolvent. This is an example of the
reasons why smaller companies, which determine to grow more rapidly and expand
into new territories or lines of business should, for the purposes of a market
valuation, be given a discount relative to larger, financially proven and more
stable companies.
51
<PAGE> 67
III. VALUATION CONCLUSION
In valuing Mercer as a subsidiary of the Corporation, we principally relied upon
a market approach. The market approach estimates value by examining the relevant
market pricing characteristics of securities of comparable companies which are
publicly traded. This produces a market value as if the securities were
exchanged in the open market on a minority interest basis, or a "freely traded
value". We selected a group of property and casualty insurance companies as
discussed in the previous section which we believe investors would likely
compare to the Company when making a decision to purchase the Company's Common
Stock. We also considered adjustments to the freely traded value due to the "new
issue discount" and other factors discussed herein. These adjustments are
significant and impact, in some way, all initial public offerings. The market
approach is favored for valuation of initial public offerings since it provides
the most reliable indicator of value for the issuance of stock by examining the
market valuation characteristics of similar companies and offerings. As
discussed more fully below, we did not rely upon the income approach (discounted
cash flow) or net asset valuation approach.
VALUATION CONSIDERATIONS RELATIVE TO THE COMPARATIVE GROUP
The comparative companies group provides a starting point from which to
determine Mercer's value as a subsidiary of the Corporation pursuant to the
Reorganization. However, a number of important differences need to be noted.
These differences, and the major valuation issues are discussed separately.
OVERALL GROWTH, SIZE, AND RELATIVE PERFORMANCE
In Section II, Comparable Company Analysis, we reviewed separately the broad
size and performance statistics of: 1) the overall comparative group, 2) the
larger company group, and 3) the smaller company group. In order that we may
utilize this large group of statistics, we have distilled these performance
statistics into a condensed summary that can help give us a focused view of
Mercer's relative performance to this comparable company group.
By reviewing both the larger and smaller company group performance, we concluded
that overall, the smaller company splinter group had growth and financial
performance more representative and comparable to Mercer than that of the larger
company sub grouping. For example, the smaller company group of the comparable
companies experienced more sporadic and unpredictable changes in premium and net
income growth than larger companies. As discussed further in this report, the
market valuation of these two sub groups showed notable differences. The table
that summarizes Mercer's relative growth and financial performance is depicted
on the following page.
52
<PAGE> 68
Stock Comparison Analysis Summary
Valuation Parameters
<TABLE>
<CAPTION>
MEDIANS
------------------------------------
MERCER SMALLER COS. LARGER COS.
------ ------------ -----------
GROWTH RATES
- ------------
<S> <C> <C> <C>
Net Premiums Written -1.2% 10.3% 14.2%
Net Investment Income 2.1% 6.2% 7.7%
Net Income 21.4% 5.6% 13.0%
Shareholder Dividends 0.0% 6.6% 13.0%
Assets 0.6% 8.9% 10.2%
Shareholder's Equity 4.7% 16.3% 12.5%
RETURN ON SHAREHOLDER'S EQUITY
- ------------------------------
LTM 1997 7.6% 8.5% 13.8%
YE 1996 4.5% 5.5% 11.7%
NET INCOME/NET PREMIUMS EARNED
- ------------------------------
LTM 1997 8.4% 7.6% 11.1%
YE 1996 3.1% 4.4% 9.4%
MARKET VALUATION
- ----------------
Price/1998 Projected Income - 9.0 13.0
Price/1997 Projected Income - 10.4 14.8
Price/June 30, 1997 Book Value - 114% 213%
MARKET CAPITALIZATION ($000) - 98,067 744,515
- ----------------------------
</TABLE>
The performance statistics seen here are fairly consistent across many different
performance measures. They demonstrate that the larger companies in the stock
comparison group overall had faster premium, investment income, net income,
shareholder dividend, asset growth, and higher return on shareholder equity than
the smaller companies in the group. This smaller company group, just as
consistently had better growth and financial performance statistics than Mercer.
Thus as a beginning concept for valuation, it is appropriate that Mercer, as a
result of its poorer relative growth and financial performance to these two
groups, deserves market valuation multiples that are lower than those of the
comparable companies in general, and specifically lower than the smaller company
valuation parameters.
53
<PAGE> 69
PRODUCT AND GEOGRAPHIC CONCENTRATION
The Company almost exclusively writes policies in New Jersey with a modest
number of policies in effect in Pennsylvania. As previously discussed, New
Jersey insurance companies are highly regulated. And the state, as a coastal
northeastern state, has suffered from adverse weather conditions in four of the
prior six years. While the Company seeks to diversify its underwriting risks,
reduce its coastal exposure and expand geographically, it remains a small
company with limited management and other resources which will for some time be
subject to the regulatory, economic, and weather conditions of a limited part of
the country. The comparable companies, due to their larger size and publicly
traded characteristics, are more diversified than Mercer.
As discussed in Section II, the Company has been less profitable than its peers
overall and reports a higher operating expense ratio and underwriting losses. In
fact, Mercer has under-performed relative to both the large and small company
peer group in every measure, except net income growth. This measure for Mercer
is distorted because its base business year was depressed due to catastrophic
weather losses, while 1997 has disproportionately benefited from the absence of
severe weather losses. Thus this measure, which shows Mercer outperforming the
comparable companies is a statistical distortion.
Similar to most companies in the insurance industry, the Company relies upon its
investment income for net profits, reporting a combined ratio of greater than
100% during the previous five years. Like many insurance companies of its size,
the Company's investment portfolio is principally composed of fixed income
securities, which are dependent upon interest rates. The Company's earnings
during 1997 to date are the largest ever reported, principally due to an
abnormally low loss experience because of a mild winter and few coastal storms.
Even in this low loss year the Company's recent return on equity at less than 8%
is still below other comparable companies performance. The added surplus from
the conversion guarantees that Mercer's return on equity likely will remain even
lower for some time after the Reorganization. As such, the Company's value
should be discounted relative to more profitable, faster growing peer companies.
RETURN ON EQUITY CONSIDERATIONS
Return on equity is the single most important measure of a company's financial
performance, because it measures the rate of investment return. It is generally
true across all industries that companies with low returns on equity are
accorded lower price/book value ratios in the market than higher return on
equity companies. The chart on the following page indicates actual market
differences in valuations between less and more profitable peer companies. After
conversion, the Company's return on equity due to the large anticipated infusion
of capital will remain low. It is confirmed by our analysis that in the
insurance industry, low return on equity companies are more likely to be priced
at or below book value.
54
<PAGE> 70
<TABLE>
<CAPTION>
6/30/97 11/11/97
COMPANY ROE PRICE/BOOK(%)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Farm Family Holdings 17.5% 1.37
Motor Club of America 17.4% 1.32
Allied Group, Inc. 16.1% 2.44
State Auto Financial Corporation 15.5% 2.43
Alfa Corporation 15.4% 2.13
Selective Insurance Group 13.1% 1.69
Harleysville Group, Inc. 11.9% 1.84
Donegal Group, Inc. 11.5% 1.42
Old Guard Group, Inc. 5.4% 0.96
Merchants Group, Inc. 4.7% 0.89
Meridian Insurance Group, Inc. 3.4% 0.96
Home State Holdings, Inc. NA 0.01
</TABLE>
SIZE CONSIDERATIONS
Among the comparative group of companies, Mercer ranks among the lowest, if not
the lowest, on all key size aspects -- assets, surplus and pro forma surplus,
net premiums written, and revenues. The market generally distinguishes among
smaller and lower capitalized companies and larger companies for many reasons.
These reasons include geographic and product diversity (as previously
discussed), institutional investor interest, management depth, stock liquidity,
among others. According to Ibottson's Stock, Bonds, Bills and Inflation Yearbook
1997, the required market return of small capitalization companies (less than
$197 million) is 250 basis points greater than the required return on larger
capitalization companies.
Therefore, an important distinction should be made between the market valuation
characteristics of smaller market capitalized companies and larger market
capitalized companies. This same valuation dependence on size relationship is
evident among the comparative companies. The following page presents the
price/book ratio for each comparative company ranked by market capitalization.
55
<PAGE> 71
<TABLE>
<CAPTION>
Market 11/11/97
Capitalization Price/Book
Company ($millions) (%)
<S> <C> <C>
Allied Group, Inc. 913 244
Selective Insurance Group 812 169
Harleysville Group 745 184
Alfa Corporation 691 213
State Auto Financial Corporation 492 243
Farm Family Holdings 162 136
Donegal Group, Inc. 123 142
Meridian Insurance Group, Inc. 122 96
Old Guard Group, Inc. 74 96
Merchants Insurance Group, Inc. 58 89
Motor Club of America 27 132
</TABLE>
This data demonstrates that, generally, larger companies tend to have a higher
price/book value multiple in the marketplace than smaller companies. Our data
shows that the larger companies had higher growth and return on equity than the
smaller companies. Therefore, it is this reason that drives the larger company
higher valuations. As an exception, Motor Club by virtue of significant tax
benefit (related to prior losses and a diminished shareholder equity) generated
an artificially high return on equity figure. These computations have also
helped the company attain a high price/book value multiple.
When the data is separated between our universe of smaller and larger companies,
that difference in valuation multiples is more pronounced. In addition, we
observe that there is also a difference between the larger and smaller company
valuation multiples as it relates to the price/earnings multiple. The summary of
this data is shown in the following table.
Market Valuations
(medians)
<TABLE>
<CAPTION>
Small Small Large
Company Large Company Company Company
Market Valuation Medians Medians Averages Averages
<S> <C> <C> <C> <C>
Price/1998 9.0X 13.0X 10.7X 12.7X
Price/1997 10.4X 14.8X 12.2X 14.8X
Price/Book Value Per Share 114% 213% 115% 211%
</TABLE>
Constituent group members for the large company group include: Alfa, Allied,
Harleysville, State Auto and Selective, while the smaller company group
includes: Home
<PAGE> 72
State, Donegal, Farm Family, Merchants, Motor Club of America, Meridian and Old
Guard.
Three of the smaller companies trade at a premium to book value and three trade
at a discount. The three premium companies are Donegal, Farm Family and Motor
Club of America which trade at 142%, 136% and 132% of book value per share,
respectively. These three companies had the highest compound rate of net income
growth when compared to the three which are valued under book value. In
addition, they were among the fastest growing companies as measured by Net
Premiums Written. The three premium companies' return on equity was also
superior to that of the remaining three discount companies. Motor Club attained
its higher return due a very significant tax benefit, and with greater
underwriting leverage stemming from a former shortage of surplus.
The three discount companies, Merchants, Meridian and Old Guard, trade at 89%,
96% and 96% of book value per share, respectively. Each of these companies has
experienced losses or a negative growth rate of Net Income over the 1992 - June
30, 1997 period. Merchants and Old Guard have recorded low premium growth rates.
Meridian had an attractive 12.3% Net Written Premium growth rate, but recorded a
decline in earnings from the 1992 period. The three discount companies' return
on equity was also less than that of the three premium performers with only
nominal returns, i.e. returns similar to Mercer's pre-conversion return on
equity.
These smaller companies have been publicly traded companies a shorter time
period, and as such have had less time to prove themselves to investors in the
marketplace. They have also been Securities and Exchange Commission ("SEC")
reporting companies for a shorter time period, and have not come to the
attention of a large number of investors. A new stock issue is often accompanied
by management's presentation to investors in selected cities, commonly called a
"road show." Such management presentations over a period of time help establish
the company's credibility and emphasize its performance record. Thus, as a
company has a longer exposure to investors as a SEC reporting company, its
acceptance in the marketplace is accompanied by a generally increasing market
valuation.
MARKET CONSIDERATIONS
Several other considerations are material in deriving the pro forma market value
of Mercer pursuant to the Reorganization.
NEW ISSUE DISCOUNT
Conversion valuations typically incorporate a "new issue discount" and
additional discounts arising from the evaluation of the issuer's specific
strengths or weaknesses. A new issue discount reflects the price received by an
issuer as compared to the value of a security on a fully distributed basis. The
new issue discount is needed to entice investors
57
<PAGE> 73
in an offering of new shares with no current market and uncertainty regarding
post-offering price and liquidity. The new issue discount can be measured by the
post offering price appreciation for initial public offerings which have ranged
on average (30 days after offering) from a current low of 13% as of November 10,
1997 to a high of 29% between 1995 and 1997, while mutual to stock conversions
post offering price appreciation have ranged from a current high of 41% as of
November 10, 1997 to a low of 15% during the same time period. Refer to Exhibit
IV for details on all Mutual to Stock Conversions from November 1996 to November
10, 1997.
The first and only mutual to stock conversion of a Pennsylvania mutual insurance
company under the conversion laws of the State of Pennsylvania was perfected by
Old Guard Insurance Group, Inc. on January 15, 1997. The prospectus and
subscription rights offering circular provided for the sale of up to 4.4 million
shares of common stock including 3.86 million shares to policyholders in a
non-transferable subscription rights offering, 386 thousand shares to an
Employee Stock Ownership Plan (the "ESOP") and an additional 150 thousand shares
upon the conversion of certain American Re Surplus Notes. The prospectus
indicated a valuation range of $28.5 million to $38.6 million and 46% and 55%
gross proceeds to total stockholders' equity pro forma as of September 30, 1996,
minimum and maximum, respectively, with a mid-point valuation of $33.6 million,
or approximately 51% of pro forma book value (gross proceeds to pro forma
stockholders' equity).
Old Guard's initial public offering was for 3,955,000 shares at $10.00 per share
on February 19, 1997. Shares of Old Guard common stock were first quoted at
approximately $14.00 per share, or 75% of pro forma book value per share. The
stock traded within a narrow range for a period of time while investors
considered Old Guard's offering and its future market potential. Old Guard's
stock price was quoted on November 10, 1997 at $17 5/8, representing 96% to
stated book value per share (June 30, 1997). Old Guard's stock price performance
is charted below.
OLD GUARD GROUP, INC. STOCK PRICE
<TABLE>
<CAPTION>
DATE PRICE PROFORMA BOOK
---- ----- -------------
<S> <C> <C>
02/21/97 14.125 18.23
02/28/97 13.625 18.23
03/07/97 14.062 18.23
03/14/97 14.875 18.23
03/21/97 14.5 18.23
03/28/97 13.875 18.23
04/04/97 14.125 18.23
04/11/97 13.875 18.23
04/18/97 14 18.23
04/25/97 13.875 18.23
05/02/97 14 18.23
05/09/97 14.062 18.23
05/16/97 14.625 18.23
05/23/97 14.5 18.23
05/30/97 14.5 18.23
06/06/97 14.5 18.23
06/13/97 14.75 18.23
06/20/97 14.75 18.23
06/27/97 14.75 18.23
07/04/97 15 18.23
07/11/97 15.5 18.23
07/18/97 15.125 18.23
07/25/97 16.125 18.23
08/01/97 16.875 18.23
08/08/97 17.25 18.23
08/15/97 18.312 18.23
08/22/97 19.125 18.23
08/29/97 18.5 18.23
09/05/97 18.75 18.23
09/12/97 18.625 18.23
09/19/97 18.875 18.23
09/26/97 18.5 18.23
10/03/97 18.5 18.23
10/10/97 19 18.23
10/17/97 18.375 18.23
10/24/97 18.5 18.23
10/31/97 17.625 18.23
11/07/97 17.375 18.23
</TABLE>
58
<PAGE> 74
As is typical of heavily subscribed mutual to stock conversions, a substantial
number of Old Guard shares were traded during its first few days in the market.
Subsequently, the volume of shares traded moderated, again following the typical
pattern in over-subscribed offerings and other new issues. Old Guard's shares
and percentage shares traded to shares outstanding is charted below.
OLD GUARD SHARE VOLUME AS A PERCENT OF SHARES OUTSTANDING
Outstanding Shares: 4204910
<TABLE>
<CAPTION>
PROFORMA % SHARES TRADED
DATE CLOSE VOLUME BOOK TO OUTSTANDING
---- ----- ------ ---- --------------
<S> <C> <C> <C> <C>
02/21/97 14.125 98300 18.23 2.34%
02/28/97 13.625 86900 18.23 2.07%
03/07/97 14.062 51700 18.23 1.23%
03/14/97 14.875 24500 18.23 0.58%
03/21/97 14.5 16100 18.23 0.38%
03/28/97 13.875 4700 18.23 0.11%
04/04/97 14.125 9600 18.23 0.23%
04/11/97 13.875 3000 18.23 0.07%
04/18/97 14 4500 18.23 0.11%
04/25/97 13.875 4400 18.23 0.10%
05/02/97 14 3900 18.23 0.09%
05/09/97 14.062 6100 18.23 0.15%
05/16/97 14.625 9100 18.23 0.22%
05/23/97 14.5 4800 18.23 0.11%
05/30/97 14.5 9600 18.23 0.23%
06/06/97 14.5 7200 18.23 0.17%
06/13/97 14.75 4100 18.23 0.10%
06/20/97 14.75 4700 18.23 0.11%
06/27/97 14.75 4900 18.23 0.12%
07/04/97 15 4800 18.23 0.11%
07/11/97 15.5 5800 18.23 0.14%
07/18/97 15.125 3600 18.23 0.09%
07/25/97 16.125 6800 18.23 0.16%
08/01/97 16.875 13500 18.23 0.32%
08/08/97 17.25 4800 18.23 0.11%
08/15/97 18.312 8300 18.23 0.20%
08/22/97 19.125 9000 18.23 0.21%
08/29/97 18.5 4200 18.23 0.10%
09/05/97 18.75 800 18.23 0.02%
09/12/97 18.625 800 18.23 0.02%
09/19/97 18.875 11800 18.23 0.28%
09/26/97 18.5 2000 18.23 0.05%
10/03/97 18.5 3100 18.23 0.07%
10/10/97 19 2800 18.23 0.07%
10/17/97 18.375 3400 18.23 0.08%
10/24/97 18.5 3500 18.23 0.08%
10/31/97 17.625 6000 18.23 0.14%
11/07/97 17.375 6300 18.23 0.15%
</TABLE>
Farm Family Holdings, Albany, New York perfected its demutualization in July,
1996 with the distribution of its surplus and concurrent offering of additional
shares of common stock to policyholders in a non-transferable subscription
rights offering and then investors. Policyholders were offered 3,000,000 shares
of additional common stock and purchased a mere 214,174 shares, or 7.14%, the
remaining shares being offered in a firm commitment underwriting dated July 22,
1996.
Farm Family's prospectus indicates a price to public, stated book value (before
offering) per share and pro forma book value (calculated) per share of $16.00,
$23.70 and $19.48 per share, respectively. The issue price to pro forma book
value per share was 82%.
59
<PAGE> 75
Shares of Farm Family common stock were first quoted at approximately $17.25 per
share and 89% of "pro forma common equity". Thirty days subsequent to offering,
Farm Family common stock was quoted at approximately $18.25 per share,
representing price appreciation of 14% over the issue price of $16.00 per share
and 6% over the initial day's market value of $17.25 per share. It's not known
when the underwriters terminated the syndicate's price stabilization efforts,
i.e. the syndicate buys shares if they decline in value below the initial
offering price. According to The Firemark Review data as of October, 1997, Farm
Family was quoted on November 10, 1997 at $30 3/8, representing 12.7X and 11.3X
estimated 1997 and 1998 earnings respectively, and 136% Stock Price compared to
stated Book Value (June 30, 1997) on a per share basis. Farm Family's stock
price performance is charted below.
FARM FAMILY HOLDINGS STOCK PRICE PERFORMANCE
<TABLE>
<CAPTION>
DATE PRICE PROFORMA BOOK
---- ----- -------------
<S> <C> <C>
07/26/96 17.25 19.49
08/02/96 17.625 19.49
08/09/96 19.125 19.49
08/16/96 18.25 19.49
08/23/96 18 19.49
08/30/96 18.25 19.49
09/06/96 18.25 19.49
09/13/96 18.625 19.49
09/20/96 18.375 19.49
09/27/96 18.375 19.49
10/04/96 18.375 19.49
10/11/96 18.25 19.49
10/18/96 18.5 19.49
10/25/96 18.75 19.49
11/01/96 20 19.49
11/08/96 20 19.49
11/15/96 19.75 19.49
11/22/96 19.75 19.49
11/29/96 19.625 19.49
12/06/96 19.75 19.49
12/13/96 19.375 19.49
12/20/96 19.25 19.49
12/27/96 19.875 19.49
01/03/97 20 19.49
01/10/97 21.125 19.49
01/17/97 21.875 19.49
01/24/97 22.625 19.49
01/31/97 23 19.49
02/07/97 22.875 19.49
02/14/97 23.625 19.49
02/21/97 22.625 19.49
02/28/97 23.625 19.49
03/07/97 23.375 19.49
03/14/97 22.875 19.49
03/21/97 22.5 19.49
03/28/97 22.375 19.49
04/04/97 22.125 19.49
04/11/97 22.75 19.49
04/18/97 22.375 19.49
04/25/97 23.625 19.49
05/02/97 24.625 19.49
05/09/97 25 19.49
05/16/97 25.375 19.49
05/23/97 26.625 19.49
05/30/97 26.75 19.49
06/06/97 27.375 19.49
06/13/97 27.375 19.49
06/20/97 27.625 19.49
06/27/97 27.875 19.49
07/04/97 27.875 19.49
07/11/97 28.25 19.49
07/18/97 28.312 19.49
07/25/97 29.313 19.49
08/01/97 30.063 19.49
08/08/97 29.937 19.49
08/15/97 29.437 19.49
08/22/97 29.125 19.49
08/29/97 29.125 19.49
09/05/97 29.062 19.49
09/12/97 29.938 19.49
09/19/97 30.375 19.49
09/26/97 31.687 19.49
10/03/97 31.75 19.49
10/10/97 32 19.49
10/17/97 31.875 19.49
10/24/97 30.812 19.49
10/31/97 31 19.49
11/07/97 30.562 19.49
</TABLE>
A substantial number of Farm Family shares of common stock were traded during
the initial several days and weeks of trading. During the first four weeks, or
thirty trading days, 8.0 million shares of common stock or approximately 167% of
shares issued and outstanding traded Over the Counter. Subsequently, the volume
of shares traded has moderated and Farm Family currently trades 4,200 shares on
an "average" weekly basis. Farm Family's shares and percentage shares traded to
shares outstanding is charted on the following page.
60
<PAGE> 76
FARM FAMILY VOLUME AS A PERCENT OF SHARES OUTSTANDING
Shares Outstanding: 5253813
<TABLE>
<CAPTION>
PROFORMA PERCENT OF
DATE CLOSE VOLUME BOOK SHARES OUTSTANDING
---- ----- ------ ---- ------------------
<S> <C> <C> <C> <C>
07/26/96 17.25 43300 19.49 0.82%
08/02/96 17.625 17900 19.49 0.34%
08/09/96 19.125 10900 19.49 0.21%
08/16/96 18.25 3700 19.49 0.07%
08/23/96 18 1200 19.49 0.02%
08/30/96 18.25 2900 19.49 0.06%
09/06/96 18.25 600 19.49 0.01%
09/13/96 18.625 3600 19.49 0.07%
09/20/96 18.375 1300 19.49 0.02%
09/27/96 18.375 2600 19.49 0.05%
10/04/96 18.375 2700 19.49 0.05%
10/11/96 18.25 2000 19.49 0.04%
10/18/96 18.5 3300 19.49 0.06%
10/25/96 18.75 1800 19.49 0.03%
11/01/96 20 6600 19.49 0.13%
11/08/96 20 14900 19.49 0.28%
11/15/96 19.75 1800 19.49 0.03%
11/22/96 19.75 700 19.49 0.01%
11/29/96 19.625 200 19.49 0.00%
12/06/96 19.75 9500 19.49 0.18%
12/13/96 19.375 1700 19.49 0.03%
12/20/96 19.25 1200 19.49 0.02%
12/27/96 19.875 500 19.49 0.01%
01/03/97 20 800 19.49 0.02%
01/10/97 21.125 6100 19.49 0.12%
01/17/97 21.875 3800 19.49 0.07%
01/24/97 22.625 3800 19.49 0.07%
01/31/97 23 3800 19.49 0.07%
02/07/97 22.875 800 19.49 0.02%
02/14/97 23.625 1900 19.49 0.04%
02/21/97 22.625 4000 19.49 0.08%
02/28/97 23.625 42200 19.49 0.80%
03/07/97 23.375 900 19.49 0.02%
03/14/97 22.875 1000 19.49 0.02%
03/21/97 22.5 18000 19.49 0.34%
03/28/97 22.375 600 19.49 0.01%
04/04/97 22.125 700 19.49 0.01%
04/11/97 22.75 3000 19.49 0.06%
04/18/97 22.375 3700 19.49 0.07%
04/25/97 23.625 1600 19.49 0.03%
05/02/97 24.625 2300 19.49 0.04%
05/09/97 25 1700 19.49 0.03%
05/16/97 25.375 1300 19.49 0.02%
05/23/97 26.625 1900 19.49 0.04%
05/30/97 26.75 600 19.49 0.01%
06/06/97 27.375 1000 19.49 0.02%
06/13/97 27.375 500 19.49 0.01%
06/20/97 27.625 300 19.49 0.01%
06/27/97 27.875 500 19.49 0.01%
07/04/97 27.875 1100 19.49 0.02%
07/11/97 28.25 900 19.49 0.02%
07/18/97 28.312 500 19.49 0.01%
07/25/97 29.313 800 19.49 0.02%
08/01/97 30.063 4100 19.49 0.08%
08/08/97 29.937 2400 19.49 0.05%
08/15/97 29.437 500 19.49 0.01%
08/22/97 29.125 6300 19.49 0.12%
08/29/97 29.125 3100 19.49 0.06%
09/05/97 29.062 900 19.49 0.02%
09/12/97 29.938 7700 19.49 0.15%
09/19/97 30.375 1400 19.49 0.03%
09/26/97 31.687 1600 19.49 0.03%
10/03/97 31.75 4100 19.49 0.08%
10/10/97 32 2200 19.49 0.04%
10/17/97 31.875 400 19.49 0.01%
10/24/97 30.812 1100 19.49 0.02%
10/31/97 31 3400 19.49 0.06%
11/07/97 30.562 1000 19.49 0.02%
</TABLE>
Also, the large number of depository institution conversions, their substantial
dollar value of common stock issued and long history of many conversions being
completed via non-transferable subscription offerings provide evidence of a need
for a new issue discount. The typical recent conversion of a depository
institution takes place in the mid to low 70% of price to pro forma book value.
Historical evidence indicates that pricings above this range, at least for
depository institutions, are met with investor reluctance.
POST-OFFERING MARKET FOR THE CORPORATION'S COMMON STOCK
Because Mercer is offering a new issue of common stock, there is no currently
active market, and the nature and liquidity of market that develops after
conversion is uncertain. Accordingly, the Corporation has had no prior
securities' market exposure, and its stock may be affected by the lack of
investor familiarity with the issuer, the security or the conversion process.
There may also be an inadequate number of market makers in the shares which
generally reduces liquidity and increases the bid / ask spread, negatively
affecting the market price of such securities. While we believe an active market
will develop for Mercer's common stock over time, the current uncertainty over
the pricing levels and liquidity is an additional factor to consider in pricing
Mercer's initial public offering.
ANTICIPATED SUBSCRIPTION RESPONSE
The Corporation will issue its stock through a non-transferable subscription
rights offering to policyholders, and if not fully subscribed, in a community
and underwritten offering through its subscription rights agent and underwriter
- - Sandler O'Neil & Partners, New York, New York. Old Guard's conversion provides
some guidance as to the market's reception of the conversion shares. Old Guard
received a full subscription for shares of common stock offered in the
conversion from its policyholders, and an
61
<PAGE> 77
overwhelming response in the "community" offering. We anticipate a similar
policyholder response and as the Plan defines the "Local Community" to be the
states of New Jersey and Pennsylvania, a similarly strong community response.
Mitigating this overwhelming response will be the higher mid-point value this
appraisal contemplates.
PENNSYLVANIA'S MUTUAL TO STOCK CONVERSION LAW
Pennsylvania's conversion law requires the adoption of a plan of conversion by
the affirmative vote of not less than two thirds of the converting company's
Board of Directors and of the votes cast by eligible members, respectively, as
well as approval of the Plan by the Department. The Plan, including an
independent valuation of the pro forma market value of the company must address:
(1) the reasons for the conversion; (2) the effect of conversion upon existing
policies; (3) the eligible members' subscription rights and allocation of rights
to members; (4) allocation of shares of common stock in the event of
over-subscription; (5) the sale of shares not purchased in the subscription
offering in either a registered public offering or private placement; and (6) a
uniform offering price per share.
The Plan must also prohibit for three years, officers and directors from
directly acquiring additional shares from the issuer, without prior approvals,
and prohibits repurchases outside of certain limitations. The Plan must also
prohibit insiders from selling shares acquired in the conversion within one
year. Directors and officers may not acquire in the offering shares of common
stock representing 35% of the outstanding if the company's assets are less than
$50 million, or 25% if assets exceed $500 million. Tax qualified employee
benefit plans may purchase 10% of the converted company's stock. Policyholders
must have the right to purchase 100% of the shares of common stock being issued,
subject to certain provisions for employee stock ownership plans. The Plan must
also set the "total price of the capital stock equal to the estimated pro forma
market value of the converted stock company based upon an independent
evaluation, i.e. that value necessary to attract a full subscription for the
shares (offered)."
Pennsylvania's mutual to stock legislation, despite the Old Guard experience,
remains untested and it is not possible to determine if policyholders alone will
purchase all shares of common stock in the conversion. Based upon Old Guard's
experience, however, it's probable all shares of the Corporation's stock will be
sold within the policyholder and community offerings.
MARKET CONDITIONS FACING THE CORPORATION'S OFFERING
The mutual form of corporate organization is unique to the banking and insurance
sectors. Mutual to stock conversions differ materially from typical initial
public offerings as the mutual surplus exists for the benefit of the mutual
entity and its constituents. Conversion from mutual to stock is often achieved
with the sale of shares common stock via a non-transferable subscription rights
offering to policyholders on a priority basis. In as much as the existing
surplus belongs to the entity, shares sold in the conversion are typically
62
<PAGE> 78
sold at values equivalent to existing surplus and discounts to pro forma
surplus, adjusting surplus for investor contributions to capital in the
conversion. This results in the accretion or increase of per share book value as
the existing surplus inures to the benefit of purchasers of the common stock in
the non-transferable subscription rights offering. Mutual to stock conversions
have also not been treated as a liquidation for corporate purposes, but rather
have been treated as reorganizations as the entity amends its form of
organization from mutual to stock upon completion. These attributes make the
mutual to stock conversion process unique among capital raising vehicles.
PREVAILING STOCK MARKET CONDITIONS FOR INITIAL PUBLIC OFFERINGS
Despite the stock market's recent October 27, 1997 setback, The Wall Street
Journal reports in "IPO Markets Shrugs Off October Stock Sell-off with $2.4
Billion in New Deals Since Plunge," November 10, 1997, robust demand for Initial
Public Offerings. The Journal reports, "33 deals valued at $2.4 billion" having
been priced since Oct. 27, 1997. CommScan, a leading provider of securities
offering statistics indicates, "October had the highest IPO filings for any
month this year, with 104 deals registering ... yielding around $3.4 billion".
The market's recent volatility has not shut the IPO opportunity window. In fact,
six issuers went public the day after the Dow Jones Index fell 554 points or
7.18%. MMC Networks Inc. issued at $11 a share and closed on November 7, 1997 at
$22 5/8, or +105% price change. Several concurrent offerings have shown more
moderate price appreciation or even moderate declines including Transcoastal
+46%, Bayard Drilling +12%, American Skiing -10%. Of particular note to new
issuers, new companies especially smaller less-seasoned companies are likely to
be unable to command the price they originally expected if the market continues
to be as choppy.
More recently, The Wall Street Journal reports in "IPO Market Still Cooking, But
With a Lack of Sizzle," November 17, 1997, continued strong demand but less post
offering price appreciation. "Since Labor Day 161 companies valued at $19.1
billion... have come to market, 48... since October's sell off." "The backlog
has ballooned to historically bloated levels, i.e. 200 companies. Underwriters
are finding it harder and harder to get the prices they originally sought for
shares, and once they start trading they are turning in weaker performances. IPO
performance is key, because part of the appeal of IPOs is their historical
tendency to pop up in trading in the first days. Even the strongest deals lacked
the normal IPO sizzle." In fact, "87% of last week's deals were priced within or
below their originally targeted price ranges."
During the last twelve months, the conversion market had approximately 29 mutual
to stock conversions in non-transferable subscription rights offerings, 28 of
which were among depository institutions. All were fully subscribed. The average
issue price to pro forma book value ranged from a low of 64% to a high of 106%
(in the case of a mutual holding company offering) and averaged 75% (calculated
on the basis of gross proceeds to pro forma book value). Subsequent price
appreciation was 41% from the depositors offering price in the first month after
offering.
63
<PAGE> 79
INSURANCE SECTOR STOCK MARKET PERFORMANCE
The Firemark Group, Morristown, New Jersey, is a widely recognized firm whose
analysts closely follow the insurance industry. Its Firemark Insurance Review,
November, 1997 provides a summary of the insurance market's most recent monthly
performance. "In view of the recent market break, the S&P 500 and Dow fell 3.4%
and 6.3%, respectively while the Firemark index has slipped a mere 2.6% since
October, 1997. The property casualty sector declined 2.0% and commercial lines
were essentially flat. The trend in the insurance sector followed other interest
rate cyclical stocks with little to no international exposure -- that is, they
have fallen only modestly from the record highs posted earlier in the year."
Refer to Exhibit III for a listing of commercial lines, personal lines and
demutualized insurance companies.
Insurance industry analysts suggest that commercial lines pricing remains under
pressure, and that there will be a steady rise in concentration of market share
in personal lines towards larger firms, and that over capacity is limiting
premium growth. Personal lines must achieve economies of scale, and there will
be a steady concentration of market share among the top ten insurers. The
predominate "Investment Thesis" is focused upon "specialty focus, restructures,
the `overlooked' and merger candidates" (Merrill Lynch, September 8, 1997). The
greatest concerns, "a negative correlation with short term interest rates, and
shares prices of the property universe" (Stephens Inc., Third Quarter Insurance
Review, 1997).
The table below provides a summary of each sector's median pricing as of
November 10, 1997.
Summary of Sector Median Pricing
<TABLE>
<CAPTION>
Sector Price Earnings Price Earnings Price Earnings Price Book
1996 1997 1998 Per Share
(X) (X) (X) (%)
<S> <C> <C> <C> <C>
Commercial 17.4 14.2 12.8 175
Personal Lines 19.2 14.8 13.0 190
Demutualized 17.5 16.2 13.6 136
</TABLE>
The constituent companies in this larger sample of nearly 115 companies includes
many specialty companies that are not comparable to Mercer. However, this table
does serve to provide a broad measure of current insurance company stock pricing
or market valuation that is consistent with our comparable companies peer group.
OTHER VALUATION METHODS NOT RELIED UPON
In addition to the use of comparable company trading data, two other widely used
valuation methods exist: (1) discount cash flow or income approach, and (2) net
asset value approach. We did not rely upon these approaches for the reasons
discussed below.
64
<PAGE> 80
DISCOUNTED CASH FLOW ANALYSIS
One valuation approach to consider is a discounted cash flow ("DCF") valuation
model. This methodology assumes that the value of an enterprise is equal to the
present value of all future net cash flows. This approach would require a
projection of such cash flows for all future years, and therefore is not
extremely practical as its resultant present value is dependent on the accurate
projection of these future cash flows. A more practical approach utilizes such
projections for a given time period, say five or ten years. First, the annual
cash flows are discounted to the present at an appropriate interest rate. At the
end of the explicit projected period, a market multiple is selected (generally,
price/earnings or price/book value) and applied to the terminal years cash flow
(or book value) to create a terminal value, or range of multiples, and this
value also is discounted to the present at a selected rate of interest. The sum
of these two computations then determines a present value of the business for a
specific set of assumptions at a selected discount rate. A range of values
derived by varied terminal multiple assumptions, when added to the present value
of future cash flows creates a grid of values, which with judgment can be
utilized to determine an appropriate valuation range for the subject company.
In the insurance industry, available cash flows are determined by the level of
statutory earnings. The terminal price/earnings and price/book value multiples,
based on generally accepted accounting principles, are chosen from an
appropriate range implied by the market value of comparable insurance companies,
or peer group.
There are a number of reasons why excluding the discounted cash flow valuation
approach is appropriate in this specific case. The discounted cash flow model
works best when the statutory earnings of a company are predictable. The
Company's unpredictable, even volatile, historical financial results give little
comfort for predicting future results or projections. In the case of the
Company, an infusion of new capital also creates a point of discontinuity with
respect to their traditional approach to business. It is not likely that the
Company will be able to utilize all of its new surplus to support premium
writings immediately, but rather it will take a number of years. This is
particularly true given the insurance industry's currently competitive rate
environment. The Company's stated objective to diversify its lines of business
poses additional risks, for few companies start new lines of business on a
predictable or profitable basis. Mercer's plan to diversify geographically poses
the same non-quantifiable risks. Their stated interest to grow also by
acquisition, potentially creates new points of discontinuity with attendant
non-quantifiable changes in earnings and cash flows. The Company's last six year
history is full of earnings surprises, most of them negative, as related to
severe weather events. The exception has been 1997, which due to an absence of
catastrophes, will produce record earnings for the Company. But given the
Company's historical financial record, a severe weather event could easily
reduce the Company's earnings by $1 million or more. Mercer's expected
renegotiation and changes in its reinsurance agreements also create
unpredictable changes to future earnings. Finally, management does not at
present have
65
<PAGE> 81
sophisticated management information systems to prepare financial projections.
For these reasons, a discounted cash flow valuation approach is not appropriate.
NET ASSET VALUE APPROACH
The net asset approach derives a value of the Company by considering the fair
market value in use of its individual assets and liabilities. As such, it is
best utilized in determining the liquidation value of a company and not
typically utilized in valuing the issuance of securities of a going-concern such
as Mercer. Also, it is highly dependent upon assumptions impacting the market
value of assets such as the time period under which a sale would take place, the
market and value for illiquid assets, tax consequences, and others. Since Mercer
does not anticipate a liquidation and this method is not useful for valuing
initial public offerings, we have not relied upon the net asset method.
VALUATION DERIVATION
In deriving the estimated market value of Mercer pursuant to the Reorganization,
we focused primarily on Mercer's relative size, growth, profit margins, return
on equity and risk exposure, and distilled these relative comparisons to an
adjustment (discount) to the comparable company price/earnings and price/book
ratios. Due to the large variability of earnings within the industry, the
price/book ratio continues to be a primary valuation method and focus among
investors in property-casualty insurance companies. This is particularly useful
in valuing Mercer since its recent earnings performance is the result of an
abnormally low loss year, the highest net income reported by the Company, and
its future earnings are not readily subject to projection. We also utilize the
price/earnings methodology as well, adjusting the Company's earnings for
non-recurring items and assuming a level of losses which are consistent with
prior trends. This valuation approach also takes into account our previously
demonstrated correlation between returns on equity, market capitalization and
price/book value.
As discussed earlier, we believe the appropriate comparison for pricing purposes
is the small-sized companies within the comparative group. We believe Mercer, on
a "freely traded basis" should be valued at a discount to even the small-sized
comparatives. Accordingly, we believe that as a "freely-traded" company, Mercer
should be valued at 85% of book value. This represents a discount of 25% to the
median of the small companies indicated earlier. However, this only represents a
modest discount to several members of the small company group which are trading
below book value.
We then applied a discount of 20% as a new issue discount, and an additional 10%
discount for the relative growth and financial performance considerations
discussed above. Recently, initial public offerings have been discounted by
approximately 13% to freely-traded market value. For Mercer, we believe a
modestly higher discount at the midpoint of the valuation range is appropriate
for several reasons: (1) if Mercer's offering has strong demand and is sold out
in the subscription, this discount provides an opportunity for a potential
pricing 15% above the midpoint; (2) this is only the second
66
<PAGE> 82
conversion under the Pennsylvania statute, as such demand for such conversion
offerings can not be correctly estimated; (3) subsequent to the Asian currency
crisis, the overall equities and initial public offerings market has been
volatile; and (4) the more recent lowering of prices of initial public offerings
as the number of such deals remains strong but the after-market price
appreciation has softened.
The additional 10% discount considers the impact of the following factors: (1)
the relative size of Mercer and its market capitalization after conversion; (2)
the possibility of significantly lower earnings next year, relative to those
currently projected, if catastrophic weather conditions and the resulting loss
experience returns to the average of the last six years; (3) the limited product
and geographic diversity of Mercer's business; (4) Mercer's growth prospects,
overall financial performance, and very low return on equity in the near-term
after conversion.
The following table summarizes our valuation of gross proceeds to pro forma
stockholders' equity.
Price/Book Value Conclusion
<TABLE>
<S> <C> <C>
Freely-traded Price/Book based upon
the Market Approach 85%
Discount for New Issue 20%
-----
Value after new issue discount 68%
Discount for Other Factors
discussed above 10%
-----
Value after new additional discounts 61%
=====
</TABLE>
VALUATION CONCLUSION
It is our opinion that the midpoint of the value range of the pro forma market
value of Mercer pursuant to the Reorganization should be placed at 61% of pro
forma book value resulting in a gross valuation of $26 million. The resulting
range was $22.1 million at the minimum and $29.9 million at the maximum. Page 70
displays the assumptions and calculations of the price/book and price/earnings
ratios at our minimum, midpoint, and maximum of the valuation range.
<PAGE> 83
REASONABLENESS OF CONCLUSION
We examined the price/earnings and price/book ratios in testing the
appropriateness of our valuation conclusion. In doing so, we adjusted Mercer's
projected 1997 earnings and pro forma earnings and pro forma book value for a
number of factors as displayed on page 70. These include:
Deduction of estimated underwriting and fixed conversion expenses; Impact
of the Employee Stock Ownership and Management Recognition Plans;
Elimination of the Joint Underwriting Association assessment; Reduction of
reinsurance expense from raising the risk retention limit; The imposition
of a New Jersey Retaliatory Tax decreasing pro forma earnings; and Net
income on proceeds increasing pro forma earnings.
The following table summarizes the market valuation multiples comparison of
Mercer at the midpoint value to that of our peer group and the Firemark broader,
less selective market multiples.
Comparison of Midpoint Average and Firemark Medians
<TABLE>
<CAPTION>
Mercer AS&Co. Firemark
Pro- AS&Co. Small Large Firemark Personal Firemark
Market Valuation forma Peers Peers Commercial Lines Lines Demutualized
<S> <C> <C> <C> <C> <C> <C>
P/1998 10.7X 12.7X 12.8X 13.0X 13.6X
P/1997 10.6X 12.2X 14.8X 14.2X 14.8X 16.2X
P/BV 62% 115% 211% 175% 190% 136%
</TABLE>
As previously discussed, Mercer's current and projected 1997 earnings were
favorably impacted by the relatively mild weather in the region, and reflect the
highest earnings the Company has ever reported. As a sensitivity test of the
resulting price/earnings ratios, we also adjusted Mercer's pro forma earnings
down by $500,000 to bring estimated 1997 earnings closer to the Company's
historic loss experience. The resulting pro forma price/earnings ratio at the
midpoint after this adjustment was 13.3X, which is comparable to overall peer
measures and supports the discount relative to the price/book value ratio.
68
<PAGE> 84
The following table provides the relative pricing range of Mercer.
Relative Pricing Range of Mercer
<TABLE>
<CAPTION>
Category Minimum Midpoint Maximum
<S> <C> <C> <C>
Gross Proceeds $22.1 $26.0 $29.9
Price/Book 57% 62% 66%
Price/Book without unrealized gains 60% 65% 69%
Price/Earnings 9.2X 10.6X 12.0X
Price/Adjusted Earnings 11.6X 13.3X 15.0X
</TABLE>
69
<PAGE> 85
MERCER MUTUAL PRO FORMA CALCULATIONS
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
<S> <C> <C> <C>
Gross Proceeds 22,100.0 26,000.0 29,900.0
Underwriting Expenses (a) (989.6) (1,157.3) (1,325.0)
Other Expenses (b) (1,002.0) (1,002.0) (1,002.0)
----------- ---------- ----------
Net Proceeds 20,108.4 23,840.7 27,573.0
Less: ESOP (2,210.0) (2,600.0) (2,990.0)
Less: MRP (884.0) (1,040.0) (1,196.0)
----------- ---------- ----------
Net Reinvestable Proceeds 17,014.4 20,200.7 23,387.0
Book Value 21,946.0 21,946.0 21,946.0
Net Proceeds 20,108.4 23,840.7 27,573.0
Less: MRP (c) (884.0) (1,040.0) (1,196.0)
Less: ESOP (d) (2,210.0) (2,600.0) (2,990.0)
----------- ---------- ----------
Pro Forma Book Value 38,960.4 42,146.7 45,333.0
Book Value without Unrealized Gains 19,991.0 19,991.0 19,991.0
Net Proceeds 20,108.4 23,840.7 27,573.0
Less: MRP (884.0) (1,040.0) (1,196.0)
Less: ESOP (2,210.0) (2,600.0) (2,990.0)
----------- ---------- ----------
Pro Forma Book Value w/o gains 37,005.4 40,191.7 43,378.0
Net Income - 1997 Estimate 1,942.0 1,942.0 1,942.0
Plus: JUA Expense (e) 270.6 270.6 270.6
Plus: Risk adjustment (f) 125.4 125.4 125.4
Less: NJ Retaliatory Tax (g) (132.0) (132.0) (132.0)
Income on Proceeds (h) 654.7 777.3 899.9
Less: MRP (i) (116.7) (137.3) (157.9)
Less: ESOP (j) (332.4) (391.0) (449.7)
----------- ---------- ----------
Pro Forma Net Income 2,411.6 2,455.0 2,498.4
Net Income - 1997 Estimate 1,942.0 1,942.0 1,942.0
Loss Experience Adjustment (k) (500.0) (500.0) (500.0)
Plus: JUA Expense (e) 270.6 270.6 270.6
Plus: Risk adjustment (f) 125.4 125.4 125.4
Less: NJ Retaliatory Tax (g) (132.0) (132.0) (132.0)
Income on Proceeds (h) 654.7 777.3 899.9
Less: MRP (i) (116.7) (137.3) (157.9)
Less: ESOP (j) (332.4) (391.0) (449.7)
----------- ---------- ----------
Pro Forma Net Income 1,911.6 1,955.0 1,998.4
Price/Book 0.57 0.62 0.66
Price/Book w/o gains 0.60 0.65 0.69
Price/Earnings 9.2 10.6 12.0
Price/Earnings adjusted for loss experience 11.6 13.3 15.0
</TABLE>
(a) Underwriting expenses per Prospectus Draft of 11/19/97.
(b) Other expenses were assumed to be $1.0 million.
(c) The MRP was assumed to be 4.0% of gross proceeds over 5 years.
(d) The ESOP was assumed to be 10.0% of gross proceeds.
(e) JUA expense of $410,000 pre-tax and a tax rate of 34% is removed.
(f) $190,000 additional pre-tax income on savings from re-insurance program
and 34% tax rate.
(g) New Jersey retaliatory tax of $200,000 assumed and a 34% tax rate.
(h) Net income on proceeds was assumed to be 5.83% before taxes and taxes
were assumed to be 34%.
(i) The MRP was amortized over 5 years and tax effected at 34%.
(j) The ESOP adjusted was calculated based upon level principal payment
over 7 with an 8.5% pre-tax interest cost and tax effected at 34%.
(k) Assumes an additional $500 after-tax loss to level loss experience
during the prior five years.
70
<PAGE> 86
EXHIBITS
<PAGE> 87
LIST OF EXHIBITS
This appraisal incorporates by reference the financial information contained in
the Registration Statement as filed with the Securities Exchange Commission on
form S-1, and the accompanying "Amended and Restated Plan of Conversion for
Mutual to Stock Organization" as filed with the Insurance Department of the
state of Pennsylvania.
I. Qualifications of Alex Sheshunoff & Co. Investment Banking
II. AS & Co. Common Stock Comparison
III. Firemark Statistical Review
IV. Mutual to Stock Conversions
2
<PAGE> 88
EXHIBIT I
QUALIFICATIONS OF ALEX SHESHUNOFF & CO. INVESTMENT BANKING
3
<PAGE> 89
ALEX SHESHUNOFF & CO. INVESTMENT BANKING
98 SAN JACINTO BLVD., SUITE 1925 - AUSTIN, TEXAS 78701
PHONE (512) 479-8200 - FACSIMILE (512) 472-8953
Alex Sheshunoff & Co. Investment Banking ("Alex Sheshunoff & Co."),
Austin, Texas, founded by Alex and Gabrielle Sheshunoff in 1971, is known for
its high ethical standards, industry expertise, commitment and continuity of
service to the banking sector, and leading merger and acquisition advisory role
among regional and community banks and thrifts. The Company and its affiliates
employ in excess of 80 persons engaged in merger and acquisition advisory
services, valuations, consulting and executive peer group forums.
INVESTMENT BANKING SERVICES include advice on issues of business
strategy and tactics, mergers & acquisitions, fairness opinions, evaluation of
capital adequacy and efficiency, finance, capitalization structure, securities
issuance, dividend and capital policies, passive, control and market valuations,
investor / shareholder relations and corporate governance; ( i.e., defense from
hostile take-overs). INVESTMENT BANKING is also active in providing securities
valuations for "SEC" securities registrations and regulatory applications and
for mutual organizations converting from mutual to stock form of corporate
organization.
Alex Sheshunoff & Co. offers clients a unique combination of
services unencumbered by the inherent "conflicts-of-interest" arising from
proprietary stock dealings and increasingly conflicted relationships among
providers of investment banking services to the Nation's largest acquirers. We
are able to offer our clients A TRADITION OF INDEPENDENT, OBJECTIVE AND
IMPARTIAL COUNSEL IN TODAY'S RAPIDLY EVOLVING ENVIRONMENT.
OVERVIEW OF INVESTMENT BANKING SERVICES
Banking continues to experience unprecedented change and
consolidation arising from pernicious competition from traditional and
non-traditional financial intermediaries, innovations in financial markets and
technology. More recently, the predatorial behavior of competitors, speculators
and equity investors, as reported in the USBANKER, "BANKING'S TOUGHEST OWNERS,"
has made this task increasingly more difficult for management and Boards of
Directors.
As a result, many financial institutions irrespective of size will
be confronted with:
- Bank merger & acquisition decisions
- Responding to solicited or unsolicited acquisition offers
- Situations requiring investment banking services
Alex Sheshunoff & Co.'s investment banking services provide senior
managers and their Boards of Directors with the knowledge and wherewithal to
RESPOND ON AN INFORMED BASIS TO TODAY'S CHALLENGING ENVIRONMENT.
4
<PAGE> 90
INVESTMENT BANKING LEADERSHIP
Alex Sheshunoff & Co. is the recognized merger & acquisitions
leader among regional and community banks and thrifts, providing clients with
the following services:
- - Strategic counseling - Tactical implementation
- - Responding to solicited and - Analysis of merger & acquisition
unsolicited acquisition offers opportunities
- - Negotiation support of mergers & - Fairness Opinions
acquisitions
Over the past eleven years, Alex Sheshunoff & Co. has become
banking's recognized merger & acquisition leader among regional and community
banks and thrifts, by completing 330 merger and acquisition transactions, and
3,283 stock valuations. During 1996, the company served as financial advisor for
32 completed merger and acquisition transactions with a total value of $788.6
MILLION.
COMPLETED M & A TRANSACTIONS FOR BANKS/THRIFTS
<TABLE>
<CAPTION>
FIVE-YEAR
Advisors 1992 1993 1994 1995 1996 TOTAL
- -------- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
ALEX SHESHUNOFF & CO 23 41 40 23 32 159
Goldman Sachs 12 14 13 6 11 56
Merrill Lynch 9 12 10 7 14 52
Lehman Bros 7 9 3 3 4 26
Salomon 6 5 7 4 2 24
Morgan Stanley 3 3 2 6 8 22
CS First Boston Corp. 7 7 2 3 2 21
</TABLE>
Source: "United States Banker"
VALUATION EXPERTISE
Bank Stock Valuations
Alex Sheshunoff & Co.'s bank stock valuation expertise is
continually used in rendering securities valuation opinions on banks and thrifts
nationwide for the following purposes:
- Employee Stock Ownership Plans - Exchange Ratio Determinations
- Tax and Estate Planning - Reverse Stock Splits
- Private Placements - Fairness Opinions
- Buy / Sell Agreements - Public Offerings
- Dissenters' Rights Proceedings - Mergers & Acquisitions
5
<PAGE> 91
CUMULATIVE BANK STOCK VALUATIONS
BY
ALEX SHESHUNOFF & CO. INVESTMENT BANKING
<TABLE>
<S> <C>
1986 168
1987 339
1988 572
1989 830
1990 1132
1991 1491
1992 1852
1993 2215
1994 2683
1995 3030
1996 3283
</TABLE>
In addition, Alex Sheshunoff & Co. is recognized as a "Valuation
Expert" by the Internal Revenue Service, various state and federal courts, and
bank regulatory agencies (FDIC, OCC, FRB, OTS).
Mutual to Stock Conversions
Alex Sheshunoff & Co. provides strategic and tactical advice, and
stock valuations, to mutual organizations considering their form of organization
and possible issuance of shares of Common Stock or other securities, in a mutual
to stock conversion; including the creation of mutual holding companies. In
responding to this opportunity, Alex Sheshunoff & Co. has marshaled the
appropriate resources necessary to insure that the initial public offering is
properly structured and appropriately priced to insure regulatory approval,
market acceptance and, most importantly, post-offering stock market acceptance.
Because our professionals have industry, conversion valuation and underwriting
experience, the firm is able to assist its clients through the initial
conversion process and thereafter, in ancillary areas such as drafting of the
Offering Circular, Prospectus, Registration Statement, Investor Presentations
(Road Shows), selections of underwriter(s), registrar, and transfer,
subscription and information agents. We are also prepared to assist the client
in the preparation of "Business Plans" for both corporate and regulatory
purposes.
AFFILIATED SERVICES
Other high quality professional services that focus on the banking
industry are offered through the company's affiliate, Alex Sheshunoff Management
Services, Inc., as follows:
The AFFILIATION PROGRAM facilitates executive peer group forums on a semi-annual
basis, to discuss bank management issues. The Program has among its participants
over 600 chief executives, 200 senior lenders and 150 senior technology and
operations managers.
CONSULTATIVE SERVICES provided include line of business profitability,
organizational, operational, management, policy, process, procedures, risk
management, distribution, products, services, marketing and technology issues,
for de novo and established financial institutions faced with institutional and
industry change.
6
<PAGE> 92
CONCLUSION
THERE ARE FOUR REASONS FOR OUR CONTINUING SUCCESS:
FIRST, referrals from clients;
SECOND, our reputation for high quality, cost effective
professional service;
THIRD, our focus on maximizing long-term stakeholder
value, not necessarily pursuing a particular
transaction, and
FOURTH, we always carefully analyze the Client
Institution's opportunities for increased earnings and
growth as an integral part of assisting the Institution
make the decision as to whether the shareholders,
"Should, or should not, seriously consider selling ".
If you would like more information about our services, or would
simply like to visit with us as a confidential sounding board, please contact:
CHARLES I. MILLER, MANAGING DIRECTOR, AUSTIN, TEXAS AT
(512) 479-8200,
JOHN ONCKEN, DIRECTOR, AUSTIN, TEXAS AT (512) 479-8200,
GERARD FEIL, DIRECTOR, AUSTIN, TEXAS AT (512) 479-8200,
RICHARD A. VADER, DIRECTOR, METROPOLITAN NEW YORK AREA
AT (212) 587-8895.
7
<PAGE> 93
GERARD A. FEIL
DIRECTOR - VALUATION SERVICES
Mr. Feil directs the firm's bank valuations for litigation support, employee
stock ownership plans, dissenters' rights proceedings, trust and estate
planning, private placements, buy/sell agreements, collateral valuation
purposes, exchange ratio determinations, reverse stock splits, public offerings,
mergers and acquisitions, and other market determinations. Mr. Feil has
performed several hundred stock and portfolio valuations in his fourteen years
of investment banking experience. Mr. Feil, through his legal education, assists
the firm in performing valuations that meet applicable statutory requirements
and judicial precedents. Mr. Feil also directs the firm's litigation support
and expert testimony services.
EDUCATION
B.A. in Mathematics -- St. John's University, New York, New York, 1978
J.D. Degree - Cornell Law School, Ithaca, New York, 1982
M.B.A. Degree - Johnson School of Management, Cornell University, Ithaca,
New York, 1982
Banking Law School -- George Mason Law School, Arlington, Va., 1991
EMPLOYMENT
Kaplan Smith & Associates -- 1982-1990. Kaplan Smith & Associates was a bank
valuation and merger and acquisition consulting firm where Mr. Feil was a Vice
President
First Boston Corporation -- 1990-1994. First Boston is a major Wall Street firm
where Mr. Feil was a Vice President.
Kaplan & Associates -- 1994-1996. Kaplan & Associates is a bank valuation and
merger and acquisition firm where Mr. Feil was a Principal.
Alex Sheshunoff & Co. Investment Banking -- 1996 to present. Alex Sheshunoff &
Co. Investment Banking is a specialized bank valuation and mergers and
acquisitions consulting firm where Mr. Feil directs the valuation practice and
participates in merger and acquisition transactions.
8
<PAGE> 94
GERARD A. FEIL
DIRECTOR - VALUATION SERVICES
RECENT VALUATION EXPERIENCE
Valuation of a Holding Company with subsidiaries active in servicing insured
multi-family loans, certificate investments.
Valuation of merger-of-equals forming Affiliated Bancorp, and rendering of
fairness opinion.
Portfolio valuation of industrial revenue bonds for the Resolution Trust
Cooperation underwritten by Franklin Savings Associate, Ottawa, Kansas, for
litigation support.
Valuation of secondary offering of Common and Preferred Stock in conjunction
with a recapitalization of a capital deficient bank - Eurobank, Hato Rey, Puerto
Rico.
Dissenters' rights valuations for banks and thrifts.
Valuations for reverse stock split, phantom bank, cash-out merger transactions.
Valuations of banks under Subchapter S provisions.
ESOP valuations.
Valuations of banks for Estate and Gift Tax fillings.
Valuation of branch transactions.
Valuation of Family Limited Partnerships and Limited Partnership interests.
Provides advice to Boards of Directors on capital management alternatives.
Valuations of Initial Public Offerings:
Old Guard Group, Inc., Lancaster, Pennsylvania - valuation of $37.5 million
offering.
Roslyn Savings Bank, Roslyn, NY - valuation of $450 million offering.
Flushing Savings Bank, Flushing, NY - valuation of $99.2 million offering.
Statewide Savings Bank, Jersey City, NJ - valuation of $52.7 million offering
Trenton Savings Bank, Princeton, NJ - valuation of $31.2 million offering
CCF Holding Corp, Jonesboro, Georgia - valuation of $11.9 million offering
First Southern Bancorp, Florence, Alabama - valuation of 68.7 million offering.
First Federal Bancshares, Eau Claire, Wisconsin - valuation of $72.2 million
offering.
Life Bancorp, Norfolk, VA - valuation of $74.7 million offering.
Standard Financial, Inc., Chicago, Illinois - valuation of $186.3 million
offering.
9
<PAGE> 95
GERARD A. FEIL
DIRECTOR - VALUATION SERVICES
LITIGATION SUPPORT
Performed Within the Last Twelve Months
Jordan vs. Jordan, Murray, Kentucky: Valuation of an ownership interest in three
banks in Kentucky for a divorce proceeding. Engaged by Ms. Jordan's counsel and
provided expert testimony services.
Adams vs. Adams, Morristown, New Jersey: Valuation of an ownership interest in a
bank in Austin, Texas and Boston, Massachusetts for a divorce proceeding.
Engaged by Mr. Adams and provided expert testimony services.
In re Anderson Carter Bankruptcy, Las Cruces, New Mexico: Valuation of an
ownership interest in a bank in Las Cruces, New Mexico for bankruptcy valuation
proceedings. Engaged by Western Commerce Bancshares' counsel and provided expert
testimony services.
Anderson Carter et al v. Western Commerce Bancshares, Inc., et al: Valuation of
an ownership interest in three banks in New Mexico for enforcement of a buy/sell
agreement. Represented Western Commerce Bancshares and provided valuation
services and engaged as an expert witness.
Wenzel v. Wenzel, Panora, Illinois: Valuation of an ownership interest in three
banks in Illinois for a divorce proceeding. Engaged by Ms. Wenzel's counsel and
provided valuation services in support of litigation.
Security Federal Savings Bank of Florida v. U.S., Panama City, Florida: Estimate
of damages relating to breach of contract for failure to continue to allow
deferred loan losses as regulatory capital ("goodwill" case). Engaged by counsel
for former owners of the bank and providing economic damages estimates and
expert testimony.
In re Estate of Alice Rhea Thompson, Dallas, Texas: Valuation of an
ownership interest in Central Bancorporation, Inc. for estate tax
proceedings. Provided valuation for use by IRS.
Other litigation experience
Trustees of the USGI Employee Stock Ownership Plan v. McGladdrey & Pullen,
Stanford, Connecticut: Valuation of ESOP ownership of common shares for an ERISA
and negligence claim. Represented USGI and provided valuation services in
support of litigation. Provided annual valuation of USGI and subsidiaries for
use by USGI.
RTC v. Franklin Federal Savings and Loan Association, Ottawa, Kansas: valuation
of industrial revenue financing in connection with the RTC's litigation against
Franklin's former officers and directors. Provided review and valuation of bonds
for use by RTC.
10
<PAGE> 96
Exhibit II
AS & Co. Common Stock Comparison
11
<PAGE> 97
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING DECEMBER 31,
1993-1996 & SIX MONTHS ENDING JUNE 30, 1996 & 1997
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM
GROUP, ALFA GROUP, GROUP, FAMILY
INC. CORPORATION INC. INC. HOLDINGS
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
COMMON STOCK SYMBOL ALFA GRP DGIC FFH
3:2 pending 11/28/97 pre-split 4:3 Adj.
<S> <C> <C> <C> <C> <C>
COMMON STOCK PRICE $ $ $ $ $
11-NOV-97 16 15/16 44 15/16 20 1/2 30 3/8
Twelve Month - High 17.25 53.63 22.25 32.50
Twelve Month - Low 10.75 27.00 13.88 19.25
Last to High 98% 84% 92% 93%
COMMON SHARES OUTSTANDING 40,787 20,311 6,022 5,318
$ $ $ $ $
MARKET CAPITALIZATION 690,830 912,706 123,448 161,534
BOOK VALUE PER SHARE @ 6/30/97 $ 7.96 $ 18.45 $ 14.42 $ 22.39
PRICE TO BOOK VALUE 213% 244% 142% 136%
PRICE TO LTM EARNINGS 14.2 15.8 12.1 10.0
PRICE TO 1997 ESTIMATED EARNINGS 14.7 15.2 10.5 12.7
PRICE TO 1998 ESTIMATED EARNINGS 13.0 13.4 7.9 11.3
FULLY DILUTED EARNINGS PER SHARE: $ $ $ $ $
- ---------------------------------
1998 Estimated 1.30 3.35 2.60 2.70
1997 Estimated 1.15 2.95 1.95 2.40
LTM 30-Jun-97 1.19 2.84 1.69 3.05
YTD 6/30/1997 0.66 1.47 0.83 1.96
YTD 6/30/1996 0.26 0.94 0.65 0.65
31-Dec-96 0.79 2.31 1.51 1.74
31-Dec-95 0.55 2.35 1.73 3.20
31-Dec-94 0.81 2.12 0.90 1.18
31-Dec-93 1.10 1.74 1.44 2.53
CGR 1993 - LTM 1997 2.2% 15.0% 4.6% 5.5%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 2.3% 1.5% 1.5% 0.0%
$ $ $ $ $
Current Indicated 0.39 0.68 0.30 0.00
31-Dec-96 0.39 0.59 0.33 0.00
31-Dec-95 0.38 0.45 0.30 0.00
31-Dec-94 0.34 0.40 0.27 0.00
31-Dec-93 0.28 0.34 0.24 0.00
CGR 1993- Indicated 1997 9.9% 21.9% 6.6% 0.0%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
HOME MERIDIAN MOTOR
HARLEYSVILLE STATE MERCHANTS INSURANCE CLUB
GROUP, HOLDINGS, GROUP, GROUP, OF
INC. INC.* INC. INC. AMERICA
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
COMMON STOCK SYMBOL HGIC HOMS MGP MIGI MOTR
2:1 Adj.
<S> <C> <C> <C> <C> <C>
COMMON STOCK PRICE $ $ $ $ $
11-NOV-97 26 1/32 19 1/2 18 13
Twelve Month - High 27.50 8.50 20.50 19.25 14.50
Twelve Month - Low 13.75 0.02 17.25 13.13 8.13
Last to High 95% 0% 95% 94% 90%
COMMON SHARES OUTSTANDING 28,635 5,660 2,966 6,779 2,091
$ $ $ $ $
MARKET CAPITALIZATION 744,515 177 57,831 122,022 27,189
BOOK VALUE PER SHARE @ 6/30/97 $ 14.11 $ 3.52 $ 21.82 $ 18.74 $ 9.85
PRICE TO BOOK VALUE 184% 1% 89% 96% 132%
PRICE TO LTM EARNINGS 18.3 NM NM 15.0 4.3
PRICE TO 1997 ESTIMATED EARNINGS 14.9 0.03 9.3 10.3 8.7
PRICE TO 1998 ESTIMATED EARNINGS 10.0 NA 8.9 9.2 7.6
FULLY DILUTED EARNINGS PER SHARE: $ $ $ $ $
- ---------------------------------
1998 Estimated 2.60 NE 2.20 1.95 1.70
1997 Estimated 1.75 1.20 2.10 1.75 1.50
LTM 30-Jun-97 1.42 NA (0.41) 1.20 3.05
YTD 6/30/1997 0.85 NA 0.51 0.31 0.87
YTD 6/30/1996 0.46 (0.81) 0.56 0.19 0.43
31-Dec-96 1.03 (3.66) (0.36) 1.08 2.61
31-Dec-95 1.53 1.08 (1.19) 1.72 1.18
31-Dec-94 0.70 0.79 0.36 1.35 2.46
31-Dec-93 1.24 1.00 2.24 1.53 1.60
CGR 1993 - LTM 1997 3.9% -35.1% -38.4% -6.7% 20.2%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 1.7% 0.0% 1.0% 1.8% 0.0%
$ $ $ $ $
Current Indicated 0.46 - 0.20 0.32 0.00
31-Dec-96 0.40 0.00 0.20 0.30 0.00
31-Dec-95 0.36 0.00 0.20 0.28 0.00
31-Dec-94 0.33 0.00 0.20 0.24 0.00
31-Dec-93 0.30 0.00 0.10 0.24 0.00
CGR 1993- Indicated 1997 13.0% 0.0% 21.9% 8.6% 0.0%
<CAPTION>
- ------------------------------------------------------------------------------------------------
OLD STATE
GUARD SELECTIVE AUTO
GROUP, INSURANCE FINANCIAL
INC. GROUP CORPORATION
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
COMMON STOCK SYMBOL OGGI SIGI STFC
2:1 pending 12/1/97 pre-split
<S> <C> <C> <C> <C>
COMMON STOCK PRICE $ $ $
11-NOV-97 17 5/8 55 3/8 27
Twelve Month - High 19.63 55.75 29.50
Twelve Month - Low 13.38 33.25 14.00
Last to High 90% 99% 92%
COMMON SHARES OUTSTANDING 4,205 14,666 18,206
$ $ $
MARKET CAPITALIZATION 74,112 812,130 491,550
BOOK VALUE PER SHARE @ 6/30/97 $ 18.39 $ 32.71 $ 11.10
PRICE TO BOOK VALUE 96% 169% 243%
PRICE TO LTM EARNINGS 246.2 12.8 17.6
PRICE TO 1997 ESTIMATED EARNINGS 22.0 12.7 16.4
PRICE TO 1998 ESTIMATED EARNINGS 19.6 12.2 15.0
FULLY DILUTED EARNINGS PER SHARE: $ $ $
- ---------------------------------
1998 Estimated 0.90 4.55 1.80
1997 Estimated 0.80 4.35 1.65
LTM 30-Jun-97 0.07 4.33 1.53
YTD 6/30/1997 0.49 2.25 0.86
YTD 6/30/1996 (0.04) 1.64 0.58
31-Dec-96 (0.46) 3.72 1.25
31-Dec-95 (0.16) 3.61 1.42
31-Dec-94 0.03 2.66 0.82
31-Dec-93 0.81 3.82 0.77
CGR 1993 - LTM 1997 -49.9% 3.6% 21.7%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 0.6% 2.0% 0.7%
$ $ $
Current Indicated 0.10 1.12 0.18
31-Dec-96 0.00 1.12 0.15
31-Dec-95 0.00 1.12 0.14
31-Dec-94 0.00 1.12 0.13
31-Dec-93 0.00 1.12 0.11
CGR 1993- Indicated 1997 NC 0.0% 15.1%
</TABLE>
Alex Sheshunoff & Co.
Investment Banking
12
<PAGE> 98
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING DECEMBER 31,
1993-1996 & SIX MONTHS ENDING JUNE 30, 1996 & 1997
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM
GROUP, ALFA GROUP, GROUP, FAMILY
INC. CORPORATION INC. INC. HOLDINGS
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
NET INCOME: $ $ $ $ $
- -----------
LTM 30-Jun-97 1,574 48,197 61,185 10,015 15,261
30-Jun-97 840 26,747 31,597 4,963 10,276
30-Jun-96 (94) 10,739 21,496 3,844 1,939
31-Dec-96 640 32,189 51,084 8,896 6,924
31-Dec-95 1,138 22,318 52,377 9,858 9,606
31-Dec-94 (1,374) 32,867 47,625 5,040 3,526
31-Dec-93 799 44,960 39,922 6,382 7,584
CGR 1993- LTM 1997 21.4% 2.0% 13.0% 13.7% 22.1%
NET PREMIUMS EARNED: $ $ $ $ $
- --------------------
LTM 30-Jun-97 18,847 354,221 521,284 101,395 137,648
30-Jun-97 8,691 182,724 267,743 53,228 70,734
30-Jun-96 10,478 165,689 239,984 51,815 63,866
31-Dec-96 20,634 337,186 493,525 99,982 130,780
31-Dec-95 20,817 308,089 455,499 86,278 116,936
31-Dec-94 18,681 247,131 412,518 77,233 101,466
31-Dec-93 18,225 219,913 368,336 69,416 96,672
CGR 1993- LTM 1997 1.0% 14.6% 10.4% 11.4% 10.6%
NET INVESTMENT INCOME $ $ $ $
(excluding net realized gains/losses)
- -----------------------
LTM 30-Jun-97 2,359 55,637 50,585 10,855 17,375
30-Jun-97 1,213 27,917 25,526 5,728 8,926
30-Jun-96 11,443 26,474 24,163 5,189 7,503
31-Dec-96 2,289 54,194 49,222 10,316 15,952
31-Dec-95 2,132 50,923 47,242 9,270 14,326
31-Dec-94 1,804 45,554 41,070 7,778 13,190
31-Dec-93 2,196 44,902 39,030 6,478 13,861
CGR 1993- LTM 1997 2.1% 6.3% 7.7% 15.9% 6.7%
NET REALIZED GAINS (LOSSES): $ $ $ $ $
- ----------------------------
LTM 30-Jun-97 558 5,177 10 (49) 4,821
30-Jun-97 300 5,218 - 73 5,461
30-Jun-96 338 2,849 39 295 0
31-Dec-96 596 2,808 49 173 (640)
31-Dec-95 53 1,106 505 399 912
31-Dec-94 277 572 2,888 34 1,340
31-Dec-93 509 4,890 1,396 845 (174)
CGR 1993- LTM 1997 2.7% 1.6% -75.6% -55.7% 158.3%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
HOME MERIDIAN MOTOR
HARLEYSVILLE STATE MERCHANTS INSURANCE CLUB
GROUP, HOLDINGS, GROUP, GROUP, OF
INC. INC.* INC. INC. AMERICA
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
NET INCOME: $ $ $ $ $
- -----------
LTM 30-Jun-97 40,068 NA (1,412) 6,615 6,240
30-Jun-97 23,996 NA 1,540 2,112 1,791
30-Jun-96 12,608 (4,612) 1,804 1,297 881
31-Dec-96 28,680 (20,736) (1,148) 5,800 5,330
31-Dec-95 41,331 6,123 (3,819) 11,617 2,417
31-Dec-94 18,454 4,497 1,131 9,121 5,035
31-Dec-93 31,940 4,666 5,909 9,411 3,260
CGR 1993- LTM 1997 6.7% NM -33.6% -9.6% 20.4%
NET PREMIUMS EARNED: $ $ $ $ $
- --------------------
LTM 30-Jun-97 626,972 NA 91,037 188,818 50,407
30-Jun-97 311,632 NA 43,158 96,941 25,579
30-Jun-96 299,857 49,023 47,873 75,428 21,697
31-Dec-96 615,197 101,680 95,752 167,305 46,525
31-Dec-95 477,042 58,915 94,749 143,866 36,703
31-Dec-94 447,731 29,895 90,845 135,002 29,471
31-Dec-93 388,541 22,375 88,181 125,902 31,695
CGR 1993- LTM 1997 14.7% 65.6% 0.9% 12.3% 14.2%
NET INVESTMENT INCOME $ $ $ $ $
(excluding net realized gains/losses)
- -----------------------
LTM 30-Jun-97 80,243 NA 12,336 15,489 3,308
30-Jun-97 40,782 NA 6,219 8,108 1,707
30-Jun-96 38,547 2,086 5,607 7,527 1,486
31-Dec-96 78,008 4,647 11,724 14,908 3,087
31-Dec-95 68,445 3,459 10,368 14,564 2,764
31-Dec-94 64,366 1,935 9,849 13,996 2,730
31-Dec-93 59,198 1,174 9,155 13,569 2,784
CGR 1993- LTM 1997 9.1% 58.2% 8.9% 3.9% 5.1%
NET REALIZED GAINS (LOSSES): $ $ $ $ $
- ----------------------------
LTM 30-Jun-97 1,654 NA 157 1,964 -
30-Jun-97 998 NA 103 1,762 -
30-Jun-96 2,526 (2) 942 3,592 5
31-Dec-96 3,182 5 996 3,794 5
31-Dec-95 2,245 269 (832) 1,538 57
31-Dec-94 3,367 (99) 20 286 (43)
31-Dec-93 1,001 293 1,467 890 288
CGR 1993- LTM 1997 15.4% -74.3% -47.2% 25.4% -100.0%
<CAPTION>
- ------------------------------------------------------------------------------------------------
OLD STATE
GUARD SELECTIVE AUTO
GROUP, INSURANCE FINANCIAL
INC. GROUP CORPORATION
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET INCOME: $ $ $
- -----------
LTM 30-Jun-97 3,094 64,895 27,795
30-Jun-97 2,053 33,804 15,650
30-Jun-96 (2,961) 24,460 10,457
31-Dec-96 (1,920) 55,551 22,602
31-Dec-95 (684) 53,042 25,542
31-Dec-94 144 38,276 14,662
31-Dec-93 3,388 22,678 13,729
CGR 1993- LTM 1997 -2.6% 35.0% 22.3%
NET PREMIUMS EARNED: $ $ $
- --------------------
LTM 30-Jun-97 57,794 682,022 249,566
30-Jun-97 30,508 339,836 126,017
30-Jun-96 26,306 352,761 116,796
31-Dec-96 53,592 694,947 240,345
31-Dec-95 66,663 742,817 232,524
31-Dec-94 63,465 680,270 175,587
31-Dec-93 60,986 594,919 169,610
CGR 1993- LTM 1997 -1.5% 4.0% 11.7%
NET INVESTMENT INCOME $ $ $
(excluding net realized gains/losses)
- -----------------------
LTM 30-Jun-97 4,773 98,284 24,513
30-Jun-97 2,934 49,126 12,501
30-Jun-96 2,482 47,794 11,867
31-Dec-96 4,321 96,952 23,879
31-Dec-95 4,458 91,640 22,617
31-Dec-94 3,932 80,657 17,756
31-Dec-93 3,928 77,326 17,222
CGR 1993- LTM 1997 5.7% 7.1% 10.6%
NET REALIZED GAINS (LOSSES): $ $ $
- ----------------------------
LTM 30-Jun-97 1,573 3,392 685
30-Jun-97 883 1,969 321
30-Jun-96 695 1,363 1,037
31-Dec-96 1,385 2,786 1,401
31-Dec-95 1,011 900 1,201
31-Dec-94 476 4,230 1,506
31-Dec-93 1,758 4,528 718
CGR 1993- LTM 1997 -3.1% -7.9% -1.3%
</TABLE>
Alex Sheshunoff & Co.
Investment Banking
13
<PAGE> 99
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING DECEMBER 31,
1993-1996 & SIX MONTHS ENDING JUNE 30, 1996 & 1997
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM
GROUP, ALFA GROUP, GROUP, FAMILY
INC. CORPORATION INC. INC. HOLDINGS
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS BEFORE TAXES $ $ $ $ $
- ---------------------
LTM 30-Jun-97 2,307 69,924 85,448 13,115 22,693
30-Jun-97 1,275 38,765 44,462 6,429 15,525
30-Jun-96 (221) 14,695 30,325 4,560 4,975
31-Dec-96 811 45,854 71,311 11,246 12,143
31-Dec-95 1,508 30,993 73,848 12,646 14,590
31-Dec-94 (2,055) 47,832 66,699 7,103 4,973
31-Dec-93 963 63,315 56,757 8,520 10,666
CGR 1993- LTM 1997 28.4% 2.9% 12.4% 13.1% 24.1%
ASSETS $ $ $ $ $
- ------
30-Jun-97 72,534 1,077,051 1,140,504 290,450 344,614
30-Jun-96 76,468 966,173 1,033,772 288,011 281,280
31-Dec-96 74,074 1,019,330 1,077,659 273,129 319,412
31-Dec-95 77,523 965,433 1,010,598 235,704 278,288
31-Dec-94 71,750 847,870 892,751 141,000 243,107
31-Dec-93 71,110 766,077 855,525 169,460 244,141
CGR 1993-6/30/1997 0.6% 10.2% 8.6% 16.6% 10.3%
LOSS & LAE RESERVES $ $ $ $ $
- -------------------
30-Jun-97 33,618 477,047 376,444 114,909 146,239
30-Jun-96 35,760 421,447 350,154 114,642 138,322
31-Dec-96 35,221 442,879 362,191 110,023 141,220
31-Dec-95 36,176 402,353 341,864 97,734 137,978
31-Dec-94 35,531 350,504 310,996 87,744 127,954
31-Dec-93 33,308 308,071 279,856 79,955 123,477
CGR 1993-6/30/1997 0.3% 13.3% 8.8% 10.9% 5.0%
STOCKHOLDERS' EQUITY $ $ $ $ $
- --------------------
30-Jun-97 20,714 348,242 391,991 86,405 117,651
30-Jun-96 18,230 299,924 348,312 81,599 70,996
31-Dec-96 14,282 323,312 370,591 81,277 110,741
31-Dec-95 18,963 308,610 351,586 72,283 74,164
31-Dec-94 14,203 254,985 281,881 61,017 52,977
31-Dec-93 17,641 260,986 259,641 57,956 60,512
CGR 1993-6/30/1997 4.7% 8.6% 12.5% 12.1% 20.9%
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
HOME MERIDIAN MOTOR
HARLEYSVILLE STATE MERCHANTS INSURANCE CLUB
GROUP, HOLDINGS, GROUP, GROUP, OF
INC. INC.* INC. INC. AMERICA
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
EARNINGS BEFORE TAXES $ $ $ $ $
- ---------------------
LTM 30-Jun-97 46,876 NA (3,344) 6,600 4,770
30-Jun-97 29,077 NA 2,012 1,505 2,377
30-Jun-96 13,576 (8,696) 2,323 855 904
31-Dec-96 31,375 (35,146) (3,033) 5,950 3,297
31-Dec-95 52,642 8,188 (6,818) 15,722 2,455
31-Dec-94 16,832 7,054 236 11,536 5,039
31-Dec-93 38,572 7,127 7,330 11,650 3,827
CGR 1993- LTM 1997 5.7% NM -20.1% -15.0% 6.5%
ASSETS $ $ $ $ $
- ------
30-Jun-97 1,676,046 NA 273,039 403,123 94,607
30-Jun-96 1,549,441 310,027 262,761 331,305 86,552
31-Dec-96 1,622,612 343,580 262,123 397,798 95,533
31-Dec-95 1,378,341 240,521 252,808 322,588 81,959
31-Dec-94 1,241,072 133,189 227,750 291,406 79,172
31-Dec-93 1,180,389 87,221 221,556 285,936 86,669
CGR 1993-6/30/1997 10.5% 57.9% 6.2% 10.3% 2.5%
LOSS & LAE RESERVES $ $ $ $ $
- -------------------
30-Jun-97 831,088 NA 136,414 164,411 46,376
30-Jun-96 774,060 128,413 123,244 129,947 46,436
31-Dec-96 796,820 179,955 133,479 161,309 47,667
31-Dec-95 645,941 95,790 119,722 123,577 39,824
31-Dec-94 603,088 44,957 104,015 123,755 41,665
31-Dec-93 560,811 24,417 93,896 119,764 45,818
CGR 1993-6/30/1997 11.9% 94.6% 11.3% 9.5% 0.3%
STOCKHOLDERS' EQUITY $ $ $ $ $
- --------------------
30-Jun-97 402,653 NA 65,287 124,113 20,591
30-Jun-96 344,537 34,540 69,416 116,116 13,655
31-Dec-96 370,245 19,913 65,029 122,174 18,786
31-Dec-95 345,009 39,052 69,970 118,243 14,081
31-Dec-94 276,924 32,724 67,279 94,252 10,546
31-Dec-93 267,749 28,009 75,083 94,447 7,168
CGR 1993-6/30/1997 12.4% -10.7% -3.9% 8.1% 35.2%
<CAPTION>
- ------------------------------------------------------------------------------------------------
OLD STATE
GUARD SELECTIVE AUTO
GROUP, INSURANCE FINANCIAL
INC. GROUP CORPORATION
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
EARNINGS BEFORE TAXES $ $ $
- ---------------------
LTM 30-Jun-97 4,564 83,580 37,423
30-Jun-97 3,307 43,879 21,623
30-Jun-96 (4,604) 29,388 14,348
31-Dec-96 (3,347) 69,089 30,148
31-Dec-95 (1,368) 64,898 35,339
31-Dec-94 (388) 43,408 19,105
31-Dec-93 3,771 21,352 16,849
CGR 1993- LTM 1997 5.6% 47.7% 25.6%
ASSETS $ $ $
- ------
30-Jun-97 180,383 2,253,547 470,637
30-Jun-96 137,760 2,143,824 438,716
31-Dec-96 137,462 2,183,639 453,120
31-Dec-95 134,853 2,113,077 434,496
31-Dec-94 127,831 1,866,680 334,796
31-Dec-93 140,213 1,721,850 320,203
CGR 1993-6/30/1997 7.5% 8.0% 11.6%
LOSS & LAE RESERVES $ $ $
- -------------------
30-Jun-97 55,348 1,171,315 167,079
30-Jun-96 58,941 1,158,819 167,482
31-Dec-96 55,371 1,189,793 165,875
31-Dec-95 52,091 1,120,052 170,575
31-Dec-94 51,309 999,404 133,750
31-Dec-93 59,057 917,691 130,556
CGR 1993-6/30/1997 -1.8% 7.2% 7.3%
STOCKHOLDERS' EQUITY $ $ $
- --------------------
30-Jun-97 76,539 518,037 202,002
30-Jun-96 37,041 439,870 172,007
31-Dec-96 39,011 474,299 186,461
31-Dec-95 40,897 436,749 168,252
31-Dec-94 36,531 329,164 130,186
31-Dec-93 39,854 322,807 124,332
CGR 1993-6/30/1997 20.5% 14.5% 14.9%
</TABLE>
Alex Sheshunoff & Co.
Investment Banking
14
<PAGE> 100
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING DECEMBER 31,
1993-1996 & SIX MONTHS ENDING JUNE 30, 1996 & 1997
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM
GROUP, ALFA GROUP, GROUP, FAMILY
INC. CORPORATION INC. INC. HOLDINGS
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
COMBINED RATIO % % % % %
- --------------
30-Jun-97 103.9 92.7 93.8 97.4 98.9
30-Jun-96 117.1 94.5 99.4 97.4 104.4
31-Dec-96 110.8 100.7 96.5 97.8 101.8
31-Dec-95 104.1 103.9 95.4 96.0 100.9
31-Dec-94 123.6 95.0 96.5 99.6 109.9
31-Dec-93 110.4 90.7 98.9 99.1 103.4
LOSS & LAE RATIO % % % % %
- ----------------
30-Jun-97 62.3 66.2 69.0 64.6 70.3
30-Jun-96 80.2 67.7 73.7 66.5 76.3
31-Dec-96 71.7 67.0 71.5 66.6 72.6
31-Dec-95 63.9 63.6 69.8 64.2 71.1
31-Dec-94 75.5 64.9 69.6 68.9 81.5
31-Dec-93 63.8 64.0 70.3 68.9 75.7
EXPENSE RATIO % % % % %
- -------------
30-Jun-97 41.6 26.5 24.8 32.8 28.6
30-Jun-96 36.9 26.8 25.7 30.9 28.1
31-Dec-96 39.1 33.7 24.9 31.2 29.2
31-Dec-95 40.2 40.3 25.6 31.8 29.8
31-Dec-94 48.1 30.1 27.0 30.7 28.4
31-Dec-93 46.6 26.7 28.6 30.2 27.7
NET PREMIUMS WRITTEN $ $ $ $ $
- --------------------
LTM 30-Jun-97 18,155 328,287 556,606 102,486 144,647
30-Jun-97 8,017 182,724 412,100 53,276 79,700
30-Jun-96 9,986 165,689 372,100 55,460 68,897
31-Dec-96 20,124 311,252 516,606 104,670 133,844
31-Dec-95 21,245 286,484 471,444 91,671 120,834
31-Dec-94 19,377 234,393 430,092 76,410 105,614
31-Dec-93 18,964 189,934 370,218 75,594 98,478
CGR 1993 - LTM 6/30/97 -1.2% 16.9% 12.4% 9.1% 11.6%
WRITTEN PREMIUM TO STOCKHOLDERS' EQUITY X X X X X
- ---------------------------------------
LTM 30-Jun-97 0.88 0.94 1.42 1.19 1.23
30-Jun-96 0.55 0.55 1.07 0.68 0.97
31-Dec-96 1.10 0.96 1.39 1.29 1.21
31-Dec-95 1.12 0.93 1.34 1.27 1.63
31-Dec-94 1.36 0.92 1.53 1.25 1.99
31-Dec-93 1.07 0.73 1.43 1.30 NA
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
HOME MERIDIAN MOTOR
HARLEYSVILLE STATE MERCHANTS INSURANCE CLUB
GROUP, HOLDINGS, GROUP, GROUP, OF
INC. INC.* INC. INC. AMERICA
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
COMBINED RATIO % % % % %
- --------------
30-Jun-97 104.3 NA 109.3 107.5 97.8
30-Jun-96 109.3 125.0 108.9 113.4 101.1
31-Dec-96 108.4 138.0 115.9 99.9 102.4
31-Dec-95 104.0 93.0 116.9 91.4 102.6
31-Dec-94 111.5 88.0 110.9 101.4 94.8
31-Dec-93 106.4 80.0 104.9 90.3 102.2
LOSS & LAE RATIO % % % % %
- ----------------
30-Jun-97 72.1 NA 75.6 77.2 64.5
30-Jun-96 77.1 101.0 76.0 82.6 63.8
31-Dec-96 76.2 113.0 83.1 68.9 64.5
31-Dec-95 70.3 76.0 82.5 60.2 58.7
31-Dec-94 77.9 67.0 77.9 69.6 55.5
31-Dec-93 77.9 66.0 70.8 68.8 56.5
EXPENSE RATIO % % % % %
- -------------
30-Jun-97 32.3 NA 33.7 30.3 33.3
30-Jun-96 32.3 24.0 32.9 30.8 37.3
31-Dec-96 32.3 25.0 32.8 31.0 37.9
31-Dec-95 33.7 17.0 34.4 31.2 43.9
31-Dec-94 33.6 21.0 33.0 31.8 39.3
31-Dec-93 28.5 14.0 34.1 21.5 45.7
NET PREMIUMS WRITTEN $ $ $ $ $
- --------------------
LTM 30-Jun-97 629,316 NA 97,720 190,912 50,787
30-Jun-97 316,651 NA 48,763 100,492 24,739
30-Jun-96 348,078 34,895 47,665 78,775 21,289
31-Dec-96 660,743 89,960 96,622 169,195 47,337
31-Dec-95 505,478 67,027 97,577 144,256 38,073
31-Dec-94 449,357 31,246 90,187 135,002 33,375
31-Dec-93 395,163 27,436 91,192 125,902 28,732
CGR 1993 - LTM 6/30/97 14.2% 48.6% 2.0% 12.6% 17.7%
WRITTEN PREMIUM TO STOCKHOLDERS' EQUITY X X X X X
- ---------------------------------------
LTM 30-Jun-97 1.56 NA 1.19 1.51 2.47
30-Jun-96 1.01 1.01 0.69 0.68 1.56
31-Dec-96 1.78 4.52 1.49 2.60 2.52
31-Dec-95 1.47 1.72 1.39 1.22 2.70
31-Dec-94 1.62 0.95 1.34 1.43 3.16
31-Dec-93 1.48 0.98 1.21 1.33 4.01
<CAPTION>
- -------------------------------------------------------------------------------------------------
OLD STATE
GUARD SELECTIVE AUTO
GROUP, INSURANCE FINANCIAL
INC. GROUP CORPORATION
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
COMBINED RATIO % % %
- --------------
30-Jun-97 101.4 99.4 95.8
30-Jun-96 129.9 103.5 100.9
31-Dec-96 117.5 102.9 99.0
31-Dec-95 110.7 102.3 98.7
31-Dec-94 108.0 105.1 101.0
31-Dec-93 103.5 109.1 102.1
LOSS & LAE RATIO % % %
- ----------------
30-Jun-97 63.6 69.2 66.3
30-Jun-96 80.7 73.6 73.2
31-Dec-96 82.8 71.3 72.6
31-Dec-95 75.8 71.2 68.6
31-Dec-94 73.2 71.7 75.1
31-Dec-93 69.1 71.8 73.0
EXPENSE RATIO % % %
- -------------
30-Jun-97 37.8 30.2 29.5
30-Jun-96 49.2 29.9 27.7
31-Dec-96 34.7 31.6 26.4
31-Dec-95 34.9 31.1 30.1
31-Dec-94 34.8 33.4 25.9
31-Dec-93 34.4 37.3 29.1
NET PREMIUMS WRITTEN $ $ $
- --------------------
LTM 30-Jun-97 93,845 716,471 279,380
30-Jun-97 34,814 372,446 129,876
30-Jun-96 20,353 348,214 120,804
31-Dec-96 79,384 692,239 270,308
31-Dec-95 76,737 757,021 253,468
31-Dec-94 77,885 697,941 179,563
31-Dec-93 77,885 607,462 172,465
CGR 1993 - LTM 6/30/97 5.5% 4.8% 14.8%
WRITTEN PREMIUM TO STOCKHOLDERS' EQUITY X X X
- ---------------------------------------
LTM 30-Jun-97 1.23 1.38 1.38
30-Jun-96 0.55 0.79 0.70
31-Dec-96 2.03 1.46 1.45
31-Dec-95 1.88 1.73 1.51
31-Dec-94 2.13 2.12 1.38
31-Dec-93 1.95 1.88 1.39
</TABLE>
(calc. is Period end to Period or LTM Premiums earned)
Alex Sheshunoff & Co.
Investment Banking
15
<PAGE> 101
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING DECEMBER 31,
1993-1996 & SIX MONTHS ENDING JUNE 30, 1996 & 1997
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM
GROUP, ALFA GROUP, GROUP, FAMILY
INC. CORPORATION INC. INC. HOLDINGS
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
RESERVES TO NET PREMIUMS EARNED X X X X X
- -------------------------------
LTM 30-Jun-97 1.78 1.35 0.72 1.13 1.06
31-Dec-96 1.71 1.31 0.73 1.10 1.08
31-Dec-95 1.74 1.31 0.75 1.13 1.18
31-Dec-94 1.90 1.42 0.75 1.14 1.26
31-Dec-93 1.83 1.40 0.76 1.15 1.28
RETURN ON EQUITY % % % % %
- ----------------
LTM 30-Jun-97 7.6% 13.8% 15.6% 11.6% 13.0%
30-Jun-96 -1.0% 7.2% 12.3% 9.4% 5.5%
31-Dec-96 4.5% 10.0% 13.8% 10.9% 6.3%
31-Dec-95 6.0% 7.2% 14.9% 13.6% 13.0%
31-Dec-94 -9.7% 12.9% 16.9% 8.3% 6.7%
31-Dec-93 4.5% 17.2% 15.4% 11.0% 12.5%
NET INCOME/NET PREMIUMS EARNED % % % % %
- ------------------------------
LTM 30-Jun-97 8.4% 13.6% 11.7% 9.9% 11.1%
30-Jun-97 9.7% 14.6% 11.8% 9.3% 14.5%
30-Jun-96 -0.9% 6.5% 9.0% 7.4% 3.0%
31-Dec-96 3.1% 9.5% 10.4% 8.9% 5.3%
31-Dec-95 5.5% 7.2% 11.5% 11.4% 8.2%
31-Dec-94 -7.4% 13.3% 11.5% 6.5% 3.5%
31-Dec-93 4.4% 20.4% 10.8% 9.2% 7.8%
NET REALIZED GAIN (LOSS)/EBT % % % % %
- -------------------------------
30-Jun-97 23.5% 13.5% 0.0% 1.1% 35.2%
30-Jun-96 -152.9% 19.4% 0.1% 6.5% 0.0%
31-Dec-96 73.5% 6.1% 0.1% 1.5% -5.3%
31-Dec-95 3.5% 3.6% 0.7% 3.2% 6.3%
31-Dec-94 -13.5% 1.2% 4.3% 0.5% 26.9%
31-Dec-93 52.9% 7.7% 2.5% 9.9% -1.6%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
HOME MERIDIAN MOTOR
HARLEYSVILLE STATE MERCHANTS INSURANCE CLUB
GROUP, HOLDINGS, GROUP, GROUP, OF
INC. INC.* INC. INC. AMERICA
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
RESERVES TO NET PREMIUMS EARNED X X X X X
- -------------------------------
LTM 30-Jun-97 1.33 NA 1.50 0.87 0.92
31-Dec-96 1.30 1.77 1.39 0.96 1.02
31-Dec-95 1.35 1.63 1.26 0.86 1.09
31-Dec-94 1.35 1.50 1.14 0.92 1.41
31-Dec-93 1.44 1.09 1.06 0.95 1.45
RETURN ON EQUITY % % % % %
- ----------------
LTM 30-Jun-97 10.0% NA -2.2% 5.3% 30.3%
30-Jun-96 7.3% -26.7% 5.5% 2.2% 9.4%
31-Dec-96 7.7% -104.1% -1.8% 4.7% 28.4%
31-Dec-95 12.0% 15.7% -5.5% 9.8% 17.2%
31-Dec-94 6.7% 13.7% 1.7% 9.7% 47.7%
31-Dec-93 11.9% 16.7% 7.9% 10.0% 45.5%
NET INCOME/NET PREMIUMS EARNED % % % % %
- ------------------------------
LTM 30-Jun-97 6.4% NA -1.6% 3.5% 12.4%
30-Jun-97 7.7% NA 3.6% 2.2% 7.0%
30-Jun-96 4.2% -9.4% 3.8% 1.7% 4.1%
31-Dec-96 4.7% -20.4% -1.2% 3.5% 11.5%
31-Dec-95 8.7% 10.4% -4.0% 8.1% 6.6%
31-Dec-94 4.1% 15.0% 1.2% 6.8% 17.1%
31-Dec-93 8.2% 20.9% 6.7% 7.5% 10.3%
NET REALIZED GAIN (LOSS)/EBT % % % % %
- -------------------------------
30-Jun-97 3.4% NA 5.1% 117.1% 0.0%
30-Jun-96 18.6% 0.0% 40.6% 420.1% 0.6%
31-Dec-96 10.1% 0.0% -32.8% 63.8% 0.2%
31-Dec-95 4.3% 3.3% 12.2% 9.8% 2.3%
31-Dec-94 20.0% -1.4% 8.5% 2.5% -0.9%
31-Dec-93 2.6% 4.1% 20.0% 7.6% 7.5%
<CAPTION>
- ------------------------------------------------------------------------------------------------
OLD STATE
GUARD SELECTIVE AUTO
GROUP, INSURANCE FINANCIAL
INC. GROUP CORPORATION
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
RESERVES TO NET PREMIUMS EARNED X X X
- -------------------------------
LTM 30-Jun-97 0.96 1.72 0.67
31-Dec-96 1.03 1.71 0.69
31-Dec-95 0.78 1.51 0.73
31-Dec-94 0.81 1.47 0.76
31-Dec-93 0.97 1.54 0.77
RETURN ON EQUITY % % %
- ----------------
LTM 30-Jun-97 4.0% 12.5% 13.8%
30-Jun-96 -16.0% 11.1% 11.2%
31-Dec-96 -4.9% 11.7% 12.1%
31-Dec-95 -1.7% 12.1% 15.2%
31-Dec-94 0.4% 11.6% 11.3%
31-Dec-93 8.5% 7.0% 11.0%
NET INCOME/NET PREMIUMS EARNED % % %
- ------------------------------
LTM 30-Jun-97 5.4% 9.5% 11.1%
30-Jun-97 6.7% 9.9% 12.4%
30-Jun-96 -11.3% 6.9% 9.0%
31-Dec-96 -3.6% 8.0% 9.4%
31-Dec-95 -1.0% 7.1% 11.0%
31-Dec-94 0.2% 5.6% 8.4%
31-Dec-93 5.6% 3.8% 8.1%
NET REALIZED GAIN (LOSS)/EBT % % %
- -------------------------------
30-Jun-97 26.7% 4.5% 1.5%
30-Jun-96 -15.1% 4.6% 7.2%
31-Dec-96 -41.4% 4.0% 4.6%
31-Dec-95 -73.9% 1.4% 3.4%
31-Dec-94 -122.5% 9.7% 7.9%
31-Dec-93 46.6% 21.2% 4.3%
</TABLE>
*Note: Home State Holdings did not file 6/30/97 financials and they are not
available to the public. Growth rates are based upon 12/31/96 year end
financials, not 6/30/97.
Alex Sheshunoff & Co.
Investment Banking
16
<PAGE> 102
EXHIBIT III
FIREMARK STATISTICAL REVIEW
17
<PAGE> 103
FIREMARK STATISTICAL REVIEW
<TABLE>
<CAPTION>
52 - WEEK SHRS. MARKET
11/10/97 12/31/96 PRICE RANGE OUT. VALUE CASH
COMPANY SYMBOL PRICE PRICE HIGH LOW (MM) (MM) DIV. YIELD
- ---------------------------------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY INSURANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL
Accel International ACLE 3 3/4 2 3/4 4 1/4 2 3/4 8.6 $32 $0.00 0.0%
Acceptance Insurance Cos. AIF 22 5/8 19 3/4 28 5/8 17 3/4 15.5 $351 $0.00 0.0%
ACE Limited ACL 89 60 1/8 101 1/16 55 3/4 58.2 $5,177 $0.72 0.8%
ACMAT Corp. ACMTA 17 15/16 14 3/4 19 3/4 13 3/8 4.1 $74 $0.00 0.0%
Allcity Insurance ALCI 8 7 11 1/4 7 7.1 $57 $0.00 0.0%
Alleghany Corp. Y 266 3/4 212 285 3/4 202 15/16 7.2 $1,932 $0.00 0.0%
AMBAC Financial Group ABK 41 33 3/16 47 9/16 31 70.0 $2,870 $0.36 0.9%
American Eagle Group AEGP 4/89 4 3/4 3/16 1/64 7.1 $0 $0.00 0.0%
American Indemnity AIFC 12 10 1/4 15 1/2 9 1/2 2.0 $23 $0.30 2.0%
American States Financial ASX 47 26 1/2 47 23 1/4 60.1 $2,822 $0.84 1.8%
Amerin AMRN 23 3/8 25 3/4 33 3/8 17 1/2 22.4 $524 $0.00 0.0%
Amwest Insurance AMW 14 7/16 13 1/2 16 7/8 11 5/8 3.4 $49 $0.44 2.8%
Argonaut Group AGII 31 15/16 30 3/4 38 1/8 26 3/4 23.9 $762 $1.48 4.2%
Baldwin & Lyons BWINB 21 3/8 18 3/8 22 5/8 17 3/8 13.9 $297 $0.32 1.6%
Bancinsurance Corp. BCIS 4 1/2 3 7/8 5 1/8 3 9/16 5.8 $26 $0.00 0.0%
Berkley, W.R. Corp. BKLY 41 5/8 33 53/64 46 3/8 28 3/4 29.6 $1,232 $0.44 1.0%
Berkshire Hathaway BRK/A 44000 34100 48600 32200 1.2 $52,360 $0.00 0.0%
Capitol Transamerica CATA 24 1/2 20 1/2 28 1/8 17 1/8 11.2 $274 $0.27 1.0%
CapMAC KAP 30 13/16 33 1/8 36 1/4 22 1/2 16.5 $508 $0.00 0.0%
Capsure Holdings Corp. CSH 15 11 1/2 15 27/73 8 1/2 15.8 $236 $0.00 0.0%
Chubb Corp. CB 65 7/8 53 3/4 76 5/16 51 174.9 $11,522 $1.16 1.6%
Cincinnati Fin'l CINF 93 1/2 64 7/8 95 58 55.1 $5,152 $1.64 2.0%
CMAC Investment Corp. CMT 55 3/16 31 5/8 58 1/4 30 22.3 $1,228 $0.20 0.4%
Danielson Holding DHC 8 3/16 5 14 4 5/8 15.4 $126 $0.00 0.0%
EMC Ins. Group EMCI 13 3/4 12 15 10 3/4 11.2 $154 $0.60 4.4%
Executive Risk Inc. ER 64 37 72 3/4 33 7/8 11.2 $717 $0.08 0.1%
Exel Ltd. XL 62 9/16 37 7/8 64 3/16 36 1/2 94.0 $5,883 $1.60 2.7%
Exstar Financial Corp. EXTR 3 1/2 11/50 0 0.00 5.5 $19 $0.00 0.0%
Fidelity National Fin'l FNF 24 15 1/8 25 1/8 11 1/2 13.9 $334 $0.28 1.2%
Farm Family Holdings FFH 30 3/8 19 1/2 32 1/2 19 1/4 5.3 $159 $0.00 0.0%
Financial Security Assurance FSA 44 1/4 32 7/8 47 5/16 27 7/8 30.0 $1,328 $0.32 0.7%
First American Fin'l FAF 61 7/16 41 1/8 68 1/2 31 3/8 11.6 $713 $0.60 1.0%
First Central Fin'l FCC 9/16 3 7/8 4 7/8 5/16 6.0 $3 $0.12 32.0%
<CAPTION>
NI P/E RATIO 6/30/97
1996 OPERATING INCOME --------------------------- BOOK P/B
COMPANY EPS 1996 1997E 1998E 1996 '97E '98E VALUE RATIO
- -------------------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY INSURANCE (PRICE TO OPERATING INCOME)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL
Accel International $0.36 $0.29 NE NE 12.9 NA NA $3.70 1.01
Acceptance Insurance Cos. $1.96 $1.74 $2.10 $2.60 13.0 10.8 8.7 $14.66 1.54
ACE Limited $5.82 $4.71 $5.65 $6.10 18.9 15.8 14.6 $40.00 2.23
ACMAT Corp. $1.21 $1.17 $1.75 $1.85 15.3 10.3 9.7 $11.16 1.61
Allcity Insurance $0.37 $0.27 NE NE 29.6 NA NA $10.62 0.75
Alleghany Corp. $12.07 $11.55 NE NE 23.1 NA NA $200.44 1.33
AMBAC Financial Group $3.95 $4.14 $2.95 $3.35 9.9 13.9 12.2 $24.13 1.70
American Eagle Group ($6.30) ($6.29) $0.10 NE 0.0 0.5 NA $0.06 0.75
American Indemnity $1.00 $0.78 $1.30 $1.50 15.4 9.2 8.0 $20.62 0.58
American States Financial $3.03 $2.61 $2.85 $3.20 18.0 16.5 14.7 $23.60 1.99
Amerin $1.07 $1.07 $1.55 $2.00 21.8 15.1 11.7 $12.27 1.91
Amwest Insurance ($0.80) ($1.23) $1.35 $1.15 -11.7 10.7 12.6 $15.91 0.91
Argonaut Group ($3.92) ($4.51) $2.54 $2.90 -7.1 12.6 11.0 $29.41 1.09
Baldwin & Lyons $1.51 $1.18 $1.20 $1.30 18.1 17.8 16.4 $19.86 1.08
Bancinsurance Corp. $0.40 $0.37 NE NE 12.2 NA NA $2.75 1.64
Berkley, W.R. Corp. $2.56 $2.40 $2.90 $3.35 17.3 14.4 12.4 $26.41 1.58
Berkshire Hathaway $2,065 $1,199 NE NE 36.7 NA NA $19,631 2.24
Capitol Transamerica $0.50 $1.15 $1.40 $1.60 21.3 17.5 15.3 $11.71 2.09
CapMAC $1.89 $1.96 $2.20 $2.70 15.7 14.0 11.4 $19.39 1.59
Capsure Holdings Corp. $0.82 $0.91 $0.80 $0.90 16.5 18.8 16.7 $8.17 1.84
Chubb Corp. $2.90 $3.58 $4.05 $4.60 18.4 16.3 14.3 $21.15 3.11
Cincinnati Fin'l $3.92 $3.38 $4.20 $4.60 27.7 22.3 20.3 $66.60 1.40
CMAC Investment Corp. $2.55 $2.52 $2.80 $3.55 21.9 19.7 15.5 $17.40 3.17
Danielson Holding ($0.53) ($0.30) $0.25 $0.55 -27.3 32.8 14.9 $3.70 2.21
EMC Ins. Group $1.37 $1.26 $1.55 $1.75 10.9 8.9 7.9 $13.67 1.01
Executive Risk Inc. $2.67 $2.60 $3.20 $3.75 24.6 20.0 17.1 $16.80 3.81
Exel Ltd. $5.39 $3.14 $3.85 $4.40 19.9 16.3 14.2 $25.82 2.42
Exstar Financial Corp. $0.27 $0.31 NE NE 11.3 NA NA $2.73 1.28
Fidelity National Fin'l $1.47 $1.47 $1.60 NE 16.3 15.0 NA $8.93 2.69
Farm Family Holdings $1.74 $2.42 $2.40 $2.70 12.6 12.7 11.3 $22.39 1.36
Financial Security Assurance $2.64 $2.57 $2.90 $3.35 17.2 15.3 13.2 $26.90 1.64
First American Fin'l $4.68 $4.68 $4.45 NE 13.1 13.8 NA $30.54 2.01
First Central Fin'l ($2.19) ($2.40) $0.60 NE -0.2 0.9 NA $2.60 0.22
</TABLE>
18
<PAGE> 104
FIREMARK STATISTICAL REVIEW
<TABLE>
<CAPTION>
52 - WEEK SHRS. MARKET
11/10/97 12/31/96 PRICE RANGE OUT. VALUE CASH
COMPANY SYMBOL PRICE PRICE HIGH LOW (MM) (MM) DIV. YIELD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fremont General FMT 46 11/16 31 49 1/2 26 3/8 25.4 $1,186 $0.53 1.1%
Frontier Ins. Group FTR 36 9/16 19 1/8 39 1/4 18 1/8 29.4 $1,075 $0.28 0.7%
FPIC Insurance Group FPIC 27 3/4 13 1/2 30 3/4 11 3/4 9.0 $250 $0.00 0.0%
Gainsco, Inc. GNA 8 7/16 9 5/8 10 3/16 8 1/8 21.5 $182 $0.06 0.6%
Goran Capital GNCNF 33 19 1/8 40 17 5.6 $185 $0.00 0.0%
Gryphon Holdings, Inc. GRYP 16 1/8 14 1/8 17 3/4 12 1/2 6.6 $106 $0.00 0.0%
Guaranty National GNC 35 7/8 16 3/4 35 7/8 15 3/8 15.0 $537 $0.50 1.5%
HCC Insurance Holdings HCC 25 24 32 11/16 21 1/2 34.7 $867 $0.12 0.5%
Harleysville Group HGIC 26 30 1/2 27 1/2 13 3/4 14.3 $372 $0.92 2.2%
HSB Group HSB 51 3/4 46 3/8 56 11/16 42 7/8 20.0 $1,035 $1.28 2.3%
Highlands Insurance Group HIC 26 1/2 20 1/4 26 7/8 17 3/8 11.5 $303 $0.00 0.0%
Intercargo Corporation ICAR 13 5/8 8 9/16 14 1/4 7 3/4 7.7 $105 $0.36 2.6%
Investors Title ITIC 21 1/4 15 3/4 24 1/4 14 2.8 $60 $0.10 0.5%
Lawyers Title Corp. LTI 29 15/16 19 5/8 33 11/16 16 3/4 8.9 $266 $0.20 0.7%
Medical Assurance, Inc. MAI 27 13/16 15 63/64 30 1/2 15 1/8 20.6 $573 $0.00 0.0%
Markel Corp. MKL 154 90 161 1/8 83 5.4 $833 $0.00 0.0%
MBIA Inc. MBI 61 13/16 101 1/4 67 1/4 45 7/16 43.3 $2,676 $1.56 1.2%
McM Corp MCMC 2 5/8 5 1/4 5 3/4 2 5/8 4.7 $12 $0.00 0.0%
Meadowbrook MIG 23 5/8 21 26 5/8 18 1/2 8.7 $204 $0.08 0.3%
MGIC Investment Corp. MTG 62 5/8 38 63 7/16 34 15/16 117.8 $7,377 $0.20 0.3%
MMI Companies MMI 25 32 1/4 32 3/4 20 3/4 11.7 $293 $0.28 1.1%
Navigators Group NAVG 18 7/8 18 1/4 22 1/2 15 3/4 8.3 $157 $0.00 0.0%
Nobel Insurance NOBLF 14 1/8 12 9/16 15 3/8 11 3/8 5.8 $82 $0.20 1.4%
North East Ins Co. NEIC 3 2 1/4 3 1/2 1 9/16 3.0 $9 $0.00 0.0%
NYMAGIC, Inc. NYM 26 5/16 18 29 13/16 17 3/8 10.5 $276 $0.40 1.5%
Old Guard Group, Inc. OGGI 17 5/8 NA 19 5/8 13 3/8 4.0 $70 $0.10 0.5%
Old Republic Int'l ORI 35 13/16 26 3/4 40 3/16 24 5/8 86.5 $3,097 $0.52 1.3%
Orion Capital OC 44 3/4 30 9/16 51 28 15/16 27.5 $1,231 $0.64 1.4%
Penn-America Group, Inc. PAGI 19 1/8 10 3/4 21 3/4 10 5/16 9.8 $187 $0.16 0.8%
Philadelphia Consolidated Hldg PHLY 19 3/4 23 1/4 23 1/4 10 7/8 6.1 $120 $0.00 0.0%
PICO Holdings, Inc. PICO 6 1/16 4 1/8 6 3/4 3 1/4 6.1 $37 $0.00 0.0%
Professionals Insurance Co. PICM 34 1/2 22 40 19 3/4 3.5 $121 $0.00 0.0%
PMI Group PMA 62 3/8 55 3/8 63 13/16 47 3/4 35.0 $2,184 $0.20 0.3%
RLI Corp. RLI 41 7/16 33 3/8 46 1/4 28 7.6 $315 $0.62 1.4%
Reliance Group REL 12 3/4 9 1/8 15 1/8 8 3/8 113.3 $1,445 $0.32 2.4%
St. Paul Companies SPC 81 3/16 58 5/8 85 1/2 54 1/8 83.5 $6,779 $1.88 2.3%
SCPIE Holdings, Inc. SKP 29 NA 32 1/8 19 1/8 12.3 $357 $0.20 0.7%
<CAPTION>
NI P/E RATIO 6/30/97
1996 OPERATING INCOME --------------------------- BOOK P/B
COMPANY EPS 1996 1997E 1998E 1996 '97E '98E VALUE RATIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fremont General $2.73 $2.76 $3.00 $3.35 16.9 15.6 13.9 $21.11 2.21
Frontier Ins. Group $1.37 $1.33 $1.80 $2.25 27.5 20.3 16.3 $10.03 3.65
FPIC Insurance Group $1.53 $1.53 $1.65 $1.95 18.1 16.8 14.2 $11.54 2.40
Gainsco, Inc. $0.74 $0.73 $0.90 $1.00 11.6 9.4 8.4 $5.30 1.59
Goran Capital $5.28 $2.48 $3.10 NE 13.3 10.6 NA $9.82 3.36
Gryphon Holdings, Inc. $0.93 $0.81 $1.55 $1.80 19.9 10.4 9.0 $14.84 1.09
Guaranty National $1.84 $1.59 $1.60 $2.00 22.6 22.4 17.9 $17.32 2.07
HCC Insurance Holdings $1.21 $1.12 $1.40 $1.45 22.3 17.9 17.2 $7.07 3.54
Harleysville Group $2.06 $1.91 $3.50 $3.90 13.6 7.4 6.7 $28.21 0.92
HSB Group $2.65 $2.26 $3.05 $3.65 22.9 17.0 14.2 $17.55 2.95
Highlands Insurance Group ($0.47) ($0.54) $1.10 $1.70 -49.1 24.1 15.6 $22.96 1.15
Intercargo Corporation $0.84 $0.84 $1.25 NE 16.2 10.9 NA $6.65 2.05
Investors Title $1.39 $1.35 $1.50 NE 15.7 14.2 NA $9.52 2.23
Lawyers Title Corp. $4.11 $3.18 $2.15 $2.40 9.4 13.9 12.5 $30.33 0.99
Medical Assurance, Inc. $1.57 $1.52 $1.70 $1.90 18.3 16.4 14.6 $12.72 2.19
Markel Corp. $8.30 $6.03 $6.85 $6.75 25.5 22.5 22.8 $56.33 2.73
MBIA Inc. $7.43 $7.22 $8.00 $8.10 8.6 7.7 7.6 $60.40 1.02
McM Corp $0.17 $0.17 NE NE 15.4 NA NA $4.64 0.57
Meadowbrook $0.95 $0.95 $1.65 $1.85 24.9 14.3 12.8 $12.33 1.92
MGIC Investment Corp. $2.17 $2.16 $2.58 $3.05 29.0 24.3 20.5 $12.90 4.85
MMI Companies $1.95 $2.43 $2.40 $2.70 10.3 10.4 9.3 $22.59 1.11
Navigators Group $2.02 $1.98 $2.20 $2.35 9.5 8.6 8.0 $14.73 1.28
Nobel Insurance $0.92 $0.76 NE NE 18.6 NA NA $12.08 1.17
North East Ins Co. $1.13 $0.31 NE NE 9.7 NA NA $3.10 0.97
NYMAGIC, Inc. $2.15 $1.87 $1.95 $2.05 14.1 13.5 12.8 $18.67 1.41
Old Guard Group, Inc. NA NA $0.80 $0.90 NA 22.0 19.6 $18.39 0.96
Old Republic Int'l $2.39 $2.33 $2.65 $2.90 15.4 13.5 12.3 $23.23 1.54
Orion Capital $3.12 $2.63 $2.95 $3.40 17.0 15.2 13.2 $22.91 1.95
Penn-America Group, Inc. $1.05 $0.96 $1.10 $1.25 19.9 17.4 15.3 $9.28 2.06
Philadelphia Consolidated Hldg $1.88 $1.86 $2.25 $2.65 10.6 8.8 7.5 $15.88 1.24
PICO Holdings, Inc. $0.90 $0.86 NE NE 7.0 NA NA $3.63 1.67
Professionals Insurance Co. $2.75 $2.84 $2.75 NE 12.1 12.5 NA $26.62 1.30
PMI Group $4.51 $4.24 $4.90 $5.60 14.7 12.7 11.1 $30.35 2.06
RLI Corp. $3.25 $3.17 $3.10 $3.45 13.1 13.4 12.0 $29.34 1.41
Reliance Group $0.41 $0.14 $1.05 $1.20 91.1 12.1 10.6 $5.64 2.26
St. Paul Companies $4.93 $4.55 $5.50 $6.10 17.8 14.8 13.3 $46.51 1.75
SCPIE Holdings, Inc. $3.02 $2.40 NE NE 12.1 NA NA $26.25 1.10
</TABLE>
19
<PAGE> 105
FIREMARK STATISTICAL REVIEW
<TABLE>
<CAPTION>
52 - WEEK SHRS. MARKET
11/10/97 12/31/96 PRICE RANGE OUT. VALUE CASH
COMPANY SYMBOL PRICE PRICE HIGH LOW (MM) (MM) DIV. YIELD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seibels Bruce Group SBIG 7 1/2 8 1/4 9 3/4 5 7/8 6.2 $47 $0.00 0.0%
Selective Ins Group SIGI 55 3/8 38 55 3/4 33 1/2 14.6 $810 $1.12 2.2%
Stewart Info Svcs. STC 25 1/4 20 3/4 28 18 3/4 6.3 $159 $0.16 0.6%
Superior National SNTL 14 12 3/4 16 11 1/4 3.4 $48 $0.00 0.0%
TIG Holdings TIG 33 5/8 33 7/8 38 26 3/8 51.1 $1,718 $0.60 1.7%
Titan Holdings TH 21 16 1/2 25 13 7/8 9.5 $199 $0.32 1.5%
Travelers Property Casualty TAP 37 15/16 35 3/8 43 9/16 31 3/8 399.6 $15,160 $0.08 0.2%
Triad Guaranty Inc. TGIC 27 1/4 28 3/4 33 1/4 13 1/2 6.7 $181 $0.00 0.0%
Unico American UNAM 12 1/2 10 7/8 14 1/8 8 1/2 6.0 $75 $0.07 0.6%
United Fire & Casualty UFCS 39 1/2 35 1/4 43 1/2 29 3/4 11.7 $462 $0.60 1.5%
USF&G Corp FG 21 20 7/8 25 1/2 15 5/8 121.4 $2,549 $0.28 1.2%
Walshire Assurance Co. WALS 11 1/2 14 5/8 15 3/4 9 1/2 4.6 $53 $0.26 2.2%
Zenith National Ins. ZNT 27 9/16 27 3/8 28 3/4 24 5/8 17.7 $488 $1.00 3.5%
AVGS/TOTALS: COMMERCIAL
- ------------------------
High $44,000 $52,360 $1.88 32.0%
Low $0 $0 $0.00 0.0%
Average $564 $1,854 $0.34 1.3%
Median $26 $303 $0.20 0.7%
PERSONAL
ALFA Corp. ALFA 16 15/16 12 5/8 17 1/4 10 3/4 40.8 $691 $0.39 2.4%
ALLIED Group GRP 44 15/16 32 5/8 53 5/8 27 20.3 $912 $0.68 1.3%
Allstate Corp. ALL 82 3/8 57 7/8 86 54 7/8 447.2 $36,838 $0.85 1.1%
American Bankers ABI 38 9/16 25 9/16 40 23 3/16 41.0 $1,580 $0.44 1.2%
American Financial Group AFG 36 7/8 37 3/4 49 1/4 32 3/8 61.0 $2,251 $0.00 0.0%
Citizens Corp. CZC 29 7/16 22 1/2 31 9/16 20 3/8 35.3 $1,038 $0.20 0.7%
Commerce Group CGI 30 5/8 25 1/4 36 21 3/8 36.0 $1,103 $1.00 3.2%
Donegal Group DGIC 20 1/2 15 3/8 22 1/4 13 7/78 5.5 $113 $0.40 2.0%
Erie Indemnity Company ERIE 29 3/4 31 40 25 67.0 $1,994 $0.38 1.2%
Foremost Corp FOM 58 5/8 60 61 1/2 53 9.6 $563 $1.08 1.8%
Home State Holdings HOMSE 2/25 7 3/4 8 1/2 0.01 5.7 $0 $0.00 0.0%
Horace Mann Educ. Corp. HMN 57 1/16 40 3/8 59 7/16 36 1/4 22.6 $1,290 $0.54 1.0%
Integon Corp. IN 26 17 3/4 26 9 3/25 15.8 $411 $0.36 1.4%
Leucadia National Corp. LUK 34 5/8 26 3/4 36 5/8 23 7/8 60.8 $2,105 $0.13 0.4%
Merchants Group Inc. MGP 19 1/2 18 1/2 20 1/2 17 1/4 3.2 $62 $0.20 1.1%
Mercury General Corp. MCY 44 52 1/2 48 1/8 26 27.5 $1,210 $1.16 1.3%
<CAPTION>
NI P/E RATIO 6/30/97
1996 OPERATING INCOME --------------------------- BOOK P/B
COMPANY EPS 1996 1997E 1998E 1996 '97E '98E VALUE RATIO
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Seibels Bruce Group $1.16 $1.16 NE NE 6.5 NA NA $4.38 1.71
Selective Ins Group $3.72 $3.60 $4.35 $4.55 15.4 12.7 12.2 $32.71 1.69
Stewart Info Svcs. $2.15 $2.14 $2.00 $2.25 11.8 12.6 11.2 $31.14 0.81
Superior National $0.40 $0.39 $1.30 $1.60 35.9 10.8 8.8 $13.27 1.06
TIG Holdings $1.30 $2.45 $2.85 $3.10 13.7 11.8 10.8 $22.80 1.47
Titan Holdings $1.48 $1.42 $1.80 $2.00 14.8 11.7 10.5 $11.79 1.78
Travelers Property Casualty $1.05 $2.17 $2.80 $3.15 17.5 13.5 12.0 $15.86 2.39
Triad Guaranty Inc. $1.63 $1.64 $2.40 $3.05 16.6 11.4 8.9 $15.00 1.82
Unico American $0.83 $0.81 $1.05 $1.20 15.4 11.9 10.4 $6.18 2.02
United Fire & Casualty $2.04 $1.63 $2.75 NE 24.2 14.4 NA $21.85 1.81
USF&G Corp $1.93 $1.37 $1.60 $1.90 15.3 13.1 11.1 $14.43 1.46
Walshire Assurance Co. $0.31 $0.07 $1.20 NE 164.3 9.6 NA $8.69 1.32
Zenith National Ins. $2.11 $1.72 $2.10 $2.15 16.0 13.1 12.8 $19.53 1.41
AVGS/TOTALS: COMMERCIAL
- ------------------------
High $2,065.00 $1,199.00 $8.00 $8.10 164.3 32.8 22.8 $19,631.00 4.85
Low ($6.30) ($6.29) $0.10 $0.55 -49.1 0.5 6.7 $0.06 0.22
Average $27.11 $16.36 $2.40 $2.79 17.4 14.2 12.8 $256.67 1.75
Median $1.69 $1.64 $2.15 $2.60 15.7 13.8 12.5 $15.91 1.64
PERSONAL
ALFA Corp. $0.79 $0.74 $1.15 $1.30 22.9 14.7 13.0 $7.96 2.13
ALLIED Group $2.51 $2.30 $2.95 $3.35 19.5 15.2 13.4 $18.45 2.44
Allstate Corp. $4.63 $3.57 $4.85 $5.45 23.1 17.0 15.1 $30.24 2.72
American Bankers $2.16 $2.04 $2.30 $2.55 18.9 16.8 15.1 $15.51 2.49
American Financial Group $3.84 $2.15 $3.55 $3.85 17.2 10.4 9.6 $24.79 1.49
Citizens Corp. $2.37 $2.12 $2.10 $2.35 13.9 14.0 12.5 $22.72 1.30
Commerce Group $2.04 $2.18 $2.05 $2.40 14.0 14.9 12.8 $16.96 1.81
Donegal Group $1.51 $1.49 $1.95 $2.25 13.8 10.5 9.1 $19.23 1.07
Erie Indemnity Company $1.41 $1.35 $1.55 $1.75 22.0 19.2 17.0 $6.73 4.42
Foremost Corp $2.39 $2.15 $4.40 NE 27.3 13.3 NA $24.35 2.41
Home State Holdings ($3.66) ($3.66) $1.20 NE 0.0 0.1 NA $3.52 0.02
Horace Mann Educ. Corp. $2.75 $3.11 $3.60 $4.10 18.3 15.9 13.9 $20.62 2.77
Integon Corp. ($0.34) ($0.45) $0.90 $1.60 -57.8 28.9 16.3 $6.63 3.92
Leucadia National Corp. $0.80 $0.27 $1.50 NE 128.2 23.1 NA $18.20 1.90
Merchants Group Inc. ($0.36) ($0.16) $2.10 $2.20 -121.9 9.3 8.9 $21.82 0.89
Mercury General Corp. $3.86 $3.94 $4.50 $5.10 11.2 9.8 8.6 $23.84 1.85
</TABLE>
20
<PAGE> 106
FIREMARK STATISTICAL REVIEW
<TABLE>
<CAPTION>
52 - WEEK SHRS. MARKET
11/10/97 12/31/96 PRICE RANGE OUT. VALUE CASH
COMPANY SYMBOL PRICE PRICE HIGH LOW (MM) (MM) DIV. YIELD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Meridian Ins Group MIGI 18 14 3/4 19 1/4 13 1/8 6.8 $122 $0.32 1.8%
Midland Company MLA 60 38 1/2 65 1/8 33 3/4 3.1 $186 $0.70 1.2%
Mobile America Corp. MAME 12 3/4 10 1/2 14 3/4 7 11/16 6.3 $80 $0.35 3.6%
Motor Club of America MOTR 13 9 1/2 14 1/2 8 1/8 2.0 $26 $0.00 0.0%
National Ins Group NAIG 10 1/2 4 3/8 11 1/8 4 1/4 3.9 $41 $0.16 1.5%
National Security Group Inc. NSEC 19 1/2 13 1/8 24 12 3/4 2.3 $46 $0.64 3.9%
Ohio Casualty OCAS 45 35 1/2 51 32 34.1 $1,535 $1.68 3.6%
Omni Insurance Group OMGR 31 9 1/2 31 1/4 8 7/8 5.7 $177 $0.00 0.0%
Progressive Corp. PGR 103 3/4 67 3/8 116 3/4 61 1/2 72.2 $7,491 $0.24 0.2%
SAFECO Corp SAFC 47 3/8 39 7/16 55 3/8 34 1/2 126.3 $5,983 $1.16 2.2%
State Auto Financial Corp. STFC 27 18 29 1/2 14 18.2 $491 $0.18 0.8%
Symons International Group SIGC 20 1/4 16 3/4 24 12 3/8 10.5 $213 $0.00 0.0%
20th Century Ind. TW 24 5/8 16 7/8 26 1/4 14 3/4 51.5 $1,268 $0.00 0.0%
AVGS/TOTALS: PERSONAL
- ----------------------
High $104 $36,838 $1.68 3.9%
Low $0 $0 $0.00 0.0%
Average $35 $2,408 $0.46 1.3%
Median $30 $691 $0.36 1.2%
DEMUTUALIZED COMPANIES
Allmerica Financial Corp. AFC 48 3/16 33 1/2 49 7/8 29 7/8 50.1 $2,416 $0.20 0.5%
Equitable Cos. EQ 42 3/16 24 5/8 45 1/2 23 1/8 184.7 $7,790 $0.20 0.5%
Farm Family Holdings FFH 30 3/8 19 1/2 32 3/8 18 1/8 5.3 $159 $0.00 0.0%
Guarantee Life Cos. GUAR 26 1/4 18 1/2 31 18 9.6 $251 $0.28 1.0%
Old Guard Group, Inc. OGGI 17 5/8 NA 19 5/8 13 3/8 4.0 $70 $0.10 0.5%
UNUM Corp. UNM 48 36 1/8 51 5/16 32 9/16 143.6 $6,893 $1.14 2.5%
AVGS/TOTALS: DEMUTUALIZED COS.
- -------------------------------
High $7,790 $1.14 2.5%
Low $70 $0.00 0.0%
Average $2,930 $0.32 0.8%
Median $1,334 $0.20 0.5%
<CAPTION>
NI P/E RATIO 6/30/97
1996 OPERATING INCOME --------------------------- BOOK P/B
COMPANY EPS 1996 1997E 1998E 1996 '97E '98E VALUE RATIO
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Meridian Ins Group $0.86 $0.49 $1.75 $1.95 36.7 10.3 9.2 $18.74 0.96
Midland Company $0.35 $0.35 $3.00 NE 171.4 20.0 NA $56.04 1.07
Mobile America Corp. $1.21 $1.17 $1.25 $1.50 10.9 10.2 8.5 $4.85 2.63
Motor Club of America $2.61 $2.39 $1.50 $1.70 5.4 8.7 7.6 $9.85 1.32
National Ins Group $0.33 $0.33 $0.45 NE 31.8 23.3 NA $6.67 1.57
National Security Group Inc. $0.58 $0.06 NE NE 325.0 NA NA $17.47 1.12
Ohio Casualty $2.91 $1.85 $3.10 $3.50 24.3 14.5 12.9 $35.96 1.25
Omni Insurance Group $0.85 $0.85 $1.00 $1.05 36.5 31.0 29.5 $9.64 3.22
Progressive Corp. NA NA $4.55 $5.25 NA 22.8 19.8 $24.25 4.28
SAFECO Corp $3.48 $3.02 $3.25 $3.55 15.7 14.6 13.3 $34.59 1.37
State Auto Financial Corp. $1.25 $1.20 $1.65 $1.80 22.5 16.4 15.0 $11.10 2.43
Symons International Group $1.76 $2.17 $1.95 $2.35 9.3 10.4 8.6 $6.88 2.94
20th Century Ind. $0.92 $0.84 $1.25 $1.35 29.3 19.7 18.2 $5.81 4.24
AVGS/TOTALS: PERSONAL
- ----------------------
High $4.63 $3.94 $4.85 $5.45 325.0 31.0 29.5 $56.04 4.42
Low ($3.66) ($3.66) $0.45 $1.05 -121.9 0.1 7.6 $3.52 0.02
Average $1.56 $1.35 $2.33 $2.71 31.8 15.5 13.4 $18.05 2.14
Median $1.46 $1.42 $2.00 $2.35 19.2 14.8 13.0 $18.20 1.90
DEMUTUALIZED COMPANIES
Allmerica Financial Corp. $3.63 $2.75 $3.20 $3.80 17.5 15.1 12.7 $35.47 1.36
Equitable Cos. $0.36 $2.25 $2.55 $3.00 18.8 16.5 14.1 $21.55 1.96
Farm Family Holdings $1.74 $2.42 $2.40 $2.70 12.6 12.7 11.3 $22.39 1.36
Guarantee Life Cos. $1.51 $1.50 $1.65 $2.00 17.5 15.9 13.1 $20.24 1.30
Old Guard Group, Inc. NA NA $0.80 $0.90 NA 22.0 19.6 $18.39 0.96
UNUM Corp. $1.63 $2.07 $2.50 $2.90 23.2 19.2 16.6 $16.06 2.99
AVGS/TOTALS: DEMUTUALIZED COS.
- -------------------------------
High $3.63 $2.75 $3.20 $3.80 23.2 22.0 19.6 $35.47 2.99
Low $0.36 $1.50 $0.80 $0.90 12.6 12.7 11.3 $16.06 0.96
Average $1.77 $2.20 $2.18 $2.55 17.9 16.9 14.5 $22.35 1.65
Median $1.63 $2.25 $2.45 $2.80 17.5 16.2 13.6 $20.90 1.36
</TABLE>
21
<PAGE> 107
EXHIBIT IV
MUTUAL TO STOCK CONVERSIONS
22
<PAGE> 108
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CLOSED CONVERSIONS BY DATE
PRICE ONE PERCENTAGE
OFFERING SHARES DAY AFTER PRICE
PRICE ISSUED IPO PROCEEDS CONVERSION CHANGE
COMPANY NAME STATE IPO DATE ($) (000) ($000) ($) (%)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHS Bancorp Inc. PA 10/01/97 10.00 820 8,200 14.750 48%
Peoples Home Savings Bk (MHC) PA 07/10/97 10.00 1,242 12,420 14.000 40%
FirstSpartan Financial Corp. SC 07/09/97 20.00 4,430 88,608 36.688 83%
GSB Financial Corp. NY 07/09/97 10.00 2,248 22,483 14.625 46%
FirstBank Corp. ID 07/02/97 10.00 1,984 19,838 15.813 58%
Community First Banking Co. GA 07/01/97 20.00 2,414 48,271 31.875 59%
HCB Bancshares Inc. AR 05/07/97 10.00 2,645 26,450 12.625 26%
Peoples-Sidney Financial Corp. OH 04/28/97 10.00 1,785 17,854 12.563 26%
First Carnegie Deposit (MHC) PA 04/04/97 10.00 1,035 10,350 11.625 16%
Pulaski Savings Bank (MHC) NJ 04/03/97 10.00 952 9,522 11.500 15%
Hemlock Federal Financial Corp IL 04/02/97 10.00 2,076 20,763 12.875 29%
GS Financial Corp. LA 04/01/97 10.00 3,439 34,385 13.375 34%
Market Financial Corp. OH 03/27/97 10.00 1,336 13,357 12.938 29%
Empire Federal Bancorp Inc. MT 01/27/97 10.00 2,592 25,921 13.250 33%
FirstFed America Bancorp Inc. MA 01/15/97 10.00 8,713 87,126 13.625 36%
Roslyn Bancorp Inc. NY 01/13/97 10.00 42,371 423,714 15.000 50%
Advance Financial Bancorp WV 01/02/97 10.00 1,085 10,845 12.875 29%
Home City Financial Corp. OH 12/30/96 10.00 952 9,522 NA -100%
Century Bancorp Inc. NC 12/23/96 50.00 407 20,367 62.625 25%
Southern Community Bancshares AL 12/23/96 10.00 1,137 11,374 13.000 30%
Big Foot Financial Corp. IL 12/20/96 10.00 2,513 25,128 12.313 23%
River Valley Bancorp IN 12/20/96 10.00 1,190 11,903 13.688 37%
PS Financial Inc. IL 11/27/96 10.00 2,182 21,821 11.641 16%
Carolina Fincorp Inc. NC 11/25/96 10.00 1,852 18,515 13.000 30%
Delphos Citizens Bancorp Inc. OH 11/21/96 10.00 2,039 20,387 12.125 21%
First SecurityFed Financial IL 10/31/97 10.00 6,408,000 64,080 15.063 51%
Oregon Trail Financial Corp. OR 10/06/97 10.00 4,694,875 46,949 16.750 68%
Wilshire Financial Services OR 12/19/96 NA 0 NA 14.250 NA
High 423,714 83%
Low 8,200 -100%
Median 20,367 30%
Mode 9,522 29%
Simple Average 40,765 30%
CapWeighted Average
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CLOSED CONVERSIONS BY DATE LAST ISSUE PRICE /
PRICE ONE PERCENTAGE SALES PRO FORMA PRO FORMA CURRENT CURRENT
MONTH AFTER PRICE PRICE BOOK VALUE BOOK VALUE PRICE/ PRICE/
CONVERSION CHANGE 11/10/97 AT OFFERING AT OFFERING EARNINGS BOOK VALUE
COMPANY NAME ($) (%) ($) (%) ($) (X) (%)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHS Bancorp Inc. 16.000 60% 15.750 71% 14.14 NA NA
Peoples Home Savings Bk (MHC) 14.000 40% 18.500 106% 9.42 NA 181
FirstSpartan Financial Corp. 35.625 78% 37.750 73% 27.40 NA 129
GSB Financial Corp. 14.375 44% 15.375 73% 13.62 NA NA
FirstBank Corp. 17.750 78% 17.063 72% 13.90 NA NA
Community First Banking Co. 34.000 70% 38.250 73% 27.49 NA NA
HCB Bancshares Inc. 12.875 29% 13.875 72% 13.90 NA 97
Peoples-Sidney Financial Corp. 13.250 33% 17.625 71% 14.04 22.0 121
First Carnegie Deposit (MHC) 12.875 29% 18.625 99% 10.12 NA 177
Pulaski Savings Bank (MHC) 11.859 19% 20.500 103% 9.69 32.0 198
Hemlock Federal Financial Corp 13.000 30% 17.000 72% 13.96 19.3 113
GS Financial Corp. 14.000 40% 18.000 64% 15.69 26.5 109
Market Financial Corp. 12.625 26% 15.500 71% 14.07 29.8 105
Empire Federal Bancorp Inc. 13.750 38% 16.875 68% 14.69 24.8 108
FirstFed America Bancorp Inc. 14.875 49% 20.250 72% 13.88 23.0 130
Roslyn Bancorp Inc. 16.000 60% 21.438 72% 13.89 19.1 153
Advance Financial Bancorp 14.000 40% 17.750 71% 14.07 17.1 119
Home City Financial Corp. 13.500 35% 16.625 71% 14.04 16.6 111
Century Bancorp Inc. 65.125 30% 80.000 72% 69.34 17.0 108
Southern Community Bancshares 13.500 35% 18.000 74% 13.44 21.4 136
Big Foot Financial Corp. 13.875 39% 18.250 73% 13.76 28.5 127
River Valley Bancorp 15.000 50% 17.500 73% 13.71 14.6 120
PS Financial Inc. 12.500 25% 16.500 72% 13.90 19.6 113
Carolina Fincorp Inc. 13.625 36% 17.125 77% 12.99 22.5 125
Delphos Citizens Bancorp Inc. 12.063 21% 17.250 72% 13.85 18.0 118
First SecurityFed Financial NA NA 17.250 73% 13.62 NA NA
Oregon Trail Financial Corp. 16.125 61% 17.250 77% 13.05 NA NA
Wilshire Financial Services 16.625 NA 17.250 NA 0.00 12.5 362
High 78% 106% 198
Low 19% 64% 0
Median 38% 72% 118
Mode 40% #N/A
Simple Average 41% 75% 108
CapWeighted Average 53% 73%
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
PENDING CONVERSIONS SHARES PRICE TO
ISSUED BOOK VALUE
COMPANY NAME (000) %
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Landmark Financial Corp. NY 1,320 67.2%
HopFed Bancorp, Inc. KY 30,475 68.7%
Equality Bancorp MO 13,225 10.6%
Community National Corp. TN 29,994 77.4%
Timberland Bancorp WA 57,500 78.3%
Guaranty Federal Bancshares MO 37,950 88.1%
United Tennessee Bankshares TN 12,650 74.8%
High Country Bancorp CO 11,500 74.1%
Union Community Bancorp IN 26,450 70.4%
North Arkansas Bancshares AR 3,220 68.5%
</TABLE>
23
<PAGE> 1
[MERCER INSURANCE GROUP LOGO]
Subscription Offering Stock
Order Form
Office Use
------------------
MERCER MUTUAL INSURANCE COMPANY TERMINATION DATE
CONVERSION CENTER for Stock Order Forms:
10 North Highway 31 Day, Month XX, 199X
Pennington, NJ 08534 1:00 p.m., Eastern Time
(888) 303-9085
IMPORTANT-PLEASE NOTE: A properly completed original stock order form must be
used to subscribe for Common Stock. Copies of this form are not required to be
accepted. Please read the Stock Ownership Guide and Stock Order Form
Instructions as you complete this form.
- ------------------------------------------------------------------------------
The minimum number of shares that may be subscribed for is 25 and the maximum
number of shares that may be subscribed for in the Subscription and Community
Offering is 100,000 shares. See Stock Order Form Instructions items 1 and 2.
- ------------------------------------------------------------------------------
(1) NUMBER OF SHARES (2) TOTAL PAYMENT DUE
SUBSCRIPTION PRICE
- --------------------- X $10.00 = ----------------------------
- ------------------------------------------------------------------------------
/ / (3) EMPLOYEE/OFFICER/DIRECTOR INFORMATION
Check here if you are an employee, officer or director of Mercer Mutual
Insurance Company or a member of such person's immediate family living in
the same household.
- ------------------------------------------------------------------------------
(4) METHOD OF PAYMENT/CHECK Check Amount
Enclosed is a check, bank draft or money _________________________
order made payable to Mercer Insurance | |
Group, Inc. in the amount indicated in this | |
box. | |
|________________________|
- ------------------------------------------------------------------------------
(5) PAYMENT FOR SHARES MAY NOT BE MADE IN CASH. DO NOT MAIL CASH TO
PURCHASE STOCK.
- ------------------------------------------------------------------------------
(6) PURCHASER INFORMATION
a. / / Check here if you are an Eligible Policyholder as of Eligibility
Record Date October 17, 1997. List Policy information below.
b. / / Check here if you are an employee, officer or director of Mercer
Mutual Insurance Company.
- ------------------------------------------------------------------------------
Policy Title (Names on Policy) Policy Number(s) Office Use
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PLEASE NOTE: FAILURE TO LIST ALL YOUR POLICY INFORMATION MAY RESULT IN THE LOSS
OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS. IF ADDITIONAL SPACE IS NEEDED,
PLEASE UTILIZE THE BACK OF THIS STOCK ORDER FORM.
- ------------------------------------------------------------------------------
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP
/ / Individual / / Joint Tenants / / Tenants in Common
/ / Fiduciary (i.e. trust, estate, etc.) / / Company/Corp./Partnership
/ / Uniform Transfers to Minors Act
/ / IRA or other Qualified Plan - Beneficial Owners SS#
___________ - _____ - ________________
- ------------------------------------------------------------------------------
--------------------------------------- ---------------------------
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY) -
ADDING THE NAMES OF OTHER PERSON(S) WHO ARE NOT OWNERS OF YOUR
QUALIFYING POLICY(S) WILL RESULT IN YOUR ORDER BECOMING NULL AND
VOID.
Name(s) Social Security # or Tax ID
--------------------------------------- ---------------------------
Name(s) continued Social Security # or Tax ID
--------------------------------------- ---------------------------
Street Address County of Residence
--------------------------------------- ---------------------------
City State Zip Code
---------------------------------------
- ------------------------------------------------------------------------------
(9) TELEPHONE - Daytime ( ) Evening ( )
- ------------------------------------------------------------------------------
/ / (10) NASD AFFILIATION - Check here if you are a member of the National
Association of Securities Dealers, Inc. ("NASD"), a person associated with
an NASD member, a member of the immediate family of any such person to
whose support such person contributes, directly or indirectly, or the
holder of an account in which an NASD member or person associated with an
NASD member has a beneficial interest. To comply with conditions under
which an exemption from the NASD's Interpretation With Respect to
Free-Riding and Withholding is available, you agree, if you have checked
the NASD Affiliation box, (i) not to sell, transfer or hypothecate the
stock for a period of three months following issuance, and (ii) to report
this subscription in writing to the applicable NASD member within one day
of payment therefor.
- ------------------------------------------------------------------------------
/ / (11) AFFILIATES AND ASSOCIATES - ACTING IN CONCERT Check here, and
complete the reverse side of this form, if you or any affiliates and
associates (as defined on the reverse side of this form) or a group acting
in concert with you have submitted other orders for shares in the
Subscription and/or Community Offerings.
- ------------------------------------------------------------------------------
(12) ACKNOWLEDGMENT - To be effective, this Stock Order Form and
accompanying Certification Form must be properly completed and physically
received by Mercer Mutual Insurance Company no later than 1:00 p.m.,
Eastern time, on Day, Month Date, 199X, unless extended; otherwise this
Stock Order Form and all subscription rights will be void. The undersigned
agrees that after receipt by Mercer Mutual Insurance Company, this Stock
Order Form may not be modified, withdrawn or canceled without Mercer
Mutual's consent. Under penalty of perjury, I hereby certify that the
Social Security or Tax ID Number and the information provided on this Stock
Order Form is true, correct and complete, that I am not subject to back-up
withholding, and that I am purchasing solely for my own account and that
there is no agreement or understanding regarding the sale or transfer of
such shares, or my right to subscribe for shares herewith. It is understood
that this Stock Order Form will be accepted in accordance with, and subject
to, the terms and conditions of the Plan of Conversion of Mercer Mutual
described in the accompanying Prospectus. The undersigned hereby
acknowledges receipt of the Prospectus at least 48 hours prior to delivery
of this Stock Order Form to Mercer Mutual Insurance Company.
PENNSYLVANIA LAW PROHIBITS ANY PERSON FROM TRANSFERRING, OR ENTERING INTO
ANY AGREEMENT, DIRECTLY OR INDIRECTLY, TO TRANSFER THE LEGAL OR BENEFICIAL
OWNERSHIP OF SUBSCRIPTION RIGHTS OR THE UNDERLYING SECURITIES TO THE
ACCOUNT OF ANOTHER. MERCER MUTUAL INSURANCE COMPANY AND MERCER MUTUAL
INSURANCE GROUP, INC. WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES
IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND
WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE SUCH TRANSFER.
Signature Date
--------------------------------------------- -----------------------
Signature Date
--------------------------------------------- -----------------------
A SIGNED CERTIFICATION FORM MUST ACCOMPANY ALL STOCK ORDER FORMS
OFFICE USE OFFICE USE
------------- -------------
------------- -------------
------------- -------------
<PAGE> 2
ITEM (6)a
- -----------------------------------------------------
Policy Title (Names on Accounts) Policy Number(s)
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
Policy Title (Names on Accounts) Policy Number(s)
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
ITEM (11) - (CONTINUED)
List below all other orders submitted by you or
Affiliates and Associates (as defined) or by persons
acting in concert with you.
- -----------------------------------------------------
Name(s) listed on other Number of Shares
Stock Order Forms Ordered
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
"Affiliate" is defined as: With respect to a person, a person that, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with such person.
"Associate" is defined as (i) any corporation or organization (other than
Mercer Mutual, the Holding Company or any other entity that is a member of the
same consolidated group as Mercer Mutual or the Holding Company under generally
accepted accounting principles) of which such person is an officer or partner
or is, directly or indirectly the beneficial owner of 10% or more of any class
of equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as the
trustee or in a similar fiduciary capacity, except that such term shall not
include a Tax-Qualified Employee Stock Benefit Plan in which a person has a
substantial beneficial interest or serves as a trustee in a similar fiduciary
capacity; and (iii) any relative or spouse of such person, or any relative of
such spouse, who has the same home as such person.
- --------------------------------------------------------------------------------
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I further certify that, before purchasing the Common Stock, no par value per
share, of Mercer Insurance Group, Inc. (the "Company"), the proposed holding
company for Mercer Mutual Insurance Company, I received a Prospectus of the
Company dated _________, 199X relating to such offer of Common Stock.
The Prospectus that I received contains disclosure concerning the nature of the
Common Stock being offered by the Company and describes the risks involved in
the investment in this Common Stock, including but not limited to the:
1. Possible Adverse Impact of Catastrophe and Natural Peril Losses on
Financial Condition and Results of Operations (page )
2. Possible Adverse Impact Due to Geographic Concentration of
Business (page )
3. Possible Adverse Impact of Potential Litigation (page )
4. Possible Adverse Impact of Broad Valuation Range and Its Use to
Determine the Number of Shares of Common Stock Sold (page )
5. Possible Adverse Impact of New Jersey Tax Laws (page )
6. Possible Significant Fluctuations in Operating Results (page )
7. Possible Adverse Impact of Inadequate Loss Reserves on Financial
Condition and Results of Operation (page )
8. Possible Adverse or Inadequate Impact of Geographic Diversification
Strategy (page )
9. Highly Competitive Nature of Insurance Industry (page )
10. Possible Adverse Impact of Change in A.M. Best Rating (page )
11. Reliance on Key Agencies (page )
12. Possible Adverse Impact of Regulatory Changes (page )
13. Dependence upon Dividends from Insurance Companies (page )
14. Availability and Adequacy of Reinsurance (page )
15. Reliance on Existing Management (page )
16. Potential Benefits of Conversion to Management and Impact of
Purchases by Management and Stock Benefit Plans (page )
17. Requirement for Policyholder Approval (page )
18. Risk of Delayed Offering (page )
19. Dilutive Effect of Stock Options and MRP (page )
20. Articles of Incorporation, Bylaw and Statutory Provisions that
Could Discourage Hostile Acquisitions of the Company (page )
21. Possible Adverse Income Tax Consequences of the Distribution
of Subscription Rights (page )
22. Absence of Prior Market for the Common Stock (page )
THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK
- --------------------------------------- ---------------------------------------
SIGNATURE DATE SIGNATURE DATE
- --------------------------------------- ---------------------------------------
- --------------------------------------- ---------------------------------------
NAME (PLEASE PRINT) DATE NAME (PLEASE PRINT) DATE
- --------------------------------------- ---------------------------------------
<PAGE> 3
[MERCER INSURANCE GROUP]
Community Offering Stock
Order Form
MERCER MUTUAL INSURANCE COMPANY
CONVERSION CENTER
10 North Highway 31
Pennington, NJ 08534
(888) 303-9085
-----------------------
Office Use
-----------------------
TERMINATION DATE
for Stock Order Forms:
Day, Month XX, 199X
1:00 p.m., Eastern Time
-----------------------
IMPORTANT-PLEASE NOTE: A properly completed original stock order form must be
used to subscribe for Common Stock. Copies of this form are not required to be
accepted. Please read the Stock Ownership Guide and Stock Order Form
Instructions as you complete this form.
- ------------------------------------------------------------------------------
The minimum number of shares that may be subscribed for is 25 and the maximum
number of shares that may be subscribed for in the Subscription and Community
Offering is 100,000 shares. See Stock Order Form Instructions items 1 and 2.
- ------------------------------------------------------------------------------
(1) NUMBER OF SHARES (2) TOTAL PAYMENT DUE
SUBSCRIPTION PRICE
X $10.00 =
- ------------------------------------------------------------------------------
/ / (3) EMPLOYEE/OFFICER/DIRECTOR INFORMATION
Check here if you are an employee, officer or director of Mercer Mutual
Insurance Company or a member of such person's immediate family living in
the same household.
- ------------------------------------------------------------------------------
(4) METHOD OF PAYMENT/CHECK Check Amount
Enclosed is a check or money order made payable / /
to Mercer Insurance Group, Inc. in the amount
indicated in this box.
- ------------------------------------------------------------------------------
(6) PURCHASER INFORMATION
6-1 / / Natural Persons and trusts of natural persons who are permanent
residents of New Jersey and Pennsylvania.
6-2 / / Principals of Eligible Policyholders in the case of an Eligible
Policyholder that is not a natural person.
6-3 / / Licensed insurance agencies that have been appointed by Mercer
Mutual to market and distribute policies of insurance and their
owners.
6-4 / / Named insured under a policy of insurance issued by Mercer Mutual
after October 17, 1997.
6-5 / / Providers of goods and services to and identified by Mercer
Mutual.
- ------------------------------------------------------------------------------
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP
/ / Individual / / Company/Corp./Partnership
/ / Fiduciary (i.e., trust, estate, etc.) / / Tenants in Common
/ / Joint Tenants / / Uniform Transfers to
Minors Act
/ / IRA or other Qualified Plan - Beneficial Owners SS#
/ / / /-/ / /-/ / / / /
- ------------------------------------------------------------------------------
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY)-
Name(s) Social Security # or Tax ID
------------------------- ----------------
Name(s) continued Social Security # or Tax ID
------------------------- ----------------
Street Address County of Residence
------------------------- ----------------
City State Zip Code
------------------------- ----------------- ------------
- ------------------------------------------------------------------------------
(9) TELEPHONE - Daytime ( ) Evening ( )
- ------------------------------------------------------------------------------
/ / (10) CHECK HERE TO CONFIRM THE FOLLOWING NASD AFFILIATION DOES NOT APPLY.
NASD AFFILIATION - IF ANY OF THE FOLLOWING IS APPLICABLE, YOU MAY NOT
SUBMIT AN ORDER IN THE COMMUNITY OFFERING: (i) a member of the NASD, a
person associated with an NASD member, a member of the immediate family of
any such person, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest; (ii) a
senior officer of a bank, savings and loan institution, insurance company,
investment company, investment advisory firm or any other institutional
type account (including but not limited to hedge funds, investment clubs
and investment partnerships or corporations, domestic or foreign (except
companies registered under the Investment Company Act of 1940)), or a
person who is in the securities department of any such institution or is
employed by or who otherwise may influence or whose activities directly or
indirectly are related to the buying and/or selling of securities by any of
such institutions, or a person who is supported directly or indirectly, to
a material extent, by any such person; or (iii) a finder in respect to the
Offering or a person acting in a fiduciary capacity to Sandler O'Neill,
including, among others, attorneys, accountants and financial consultants,
or any person who is supported directly or indirectly, to a material
extent, by any such person.
- ------------------------------------------------------------------------------
/ / (11) AFFILIATES AND ASSOCIATES - ACTING IN CONCERT
Check here, and complete the reverse side of this form, if you or any
affiliates and associates (as defined on the reverse side of this form)
or a group acting in concert with you have submitted other orders for
shares in the Subscription and/or Community Offerings.
- ------------------------------------------------------------------------------
(12) ACKNOWLEDGMENT - To be effective, this Stock Order Form and accompanying
Certification Form must be properly completed and physically received by
Mercer Mutual Insurance Company no later than 1:00 p.m., Eastern time, on
Day, Month Date, 199X, unless extended; otherwise this Stock Order Form and
all subscription rights will be void. The undersigned agrees that after
receipt by Mercer Mutual Insurance Company, this Stock Order Form may not
be modified, withdrawn or canceled without Mercer Mutual's consent. Under
penalty of perjury, I hereby certify that the Social Security or Tax ID
Number and the information provided on this Stock Order Form is true,
correct and complete, that I am not subject to back-up withholding, and
that I am purchasing solely for my own account and that there is no
agreement or understanding regarding the sale or transfer of such shares,
or my right to subscribe for shares herewith. It is understood that this
Stock Order Form will be accepted in accordance with, and subject to, the
terms and conditions of the Plan of Conversion of Mercer Mutual described
in the accompanying Prospectus. The undersigned hereby acknowledges receipt
of the Prospectus at least 48 hours prior to delivery of this Stock Order
Form to Mercer Mutual Insurance Company.
PENNSYLVANIA LAW PROHIBITS ANY PERSON FROM TRANSFERRING, OR ENTERING INTO
ANY AGREEMENT, DIRECTLY OR INDIRECTLY, TO TRANSFER THE LEGAL OR BENEFICIAL
OWNERSHIP OF SUBSCRIPTION RIGHTS OR THE UNDERLYING SECURITIES TO THE
ACCOUNT OF ANOTHER. MERCER MUTUAL INSURANCE COMPANY AND MERCER MUTUAL
INSURANCE GROUP, INC. WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES
IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND
WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE SUCH TRANSFER.
SIGNATURE DATE SIGNATURE DATE
------------------------------- -----------------------------
A SIGNED CERTIFICATION FORM MUST ACCOMPANY ALL STOCK ORDER FORMS
OFFICE USE
OFFICE USE
<PAGE> 4
ITEM (11) - (CONTINUED)
List below all other orders submitted by you or Affiliates and Associates (as
defined) or by persons acting in concert with you.
- -------------------------------------------------------------------------------
Number of Shares
Name(s) listed on other Stock Order Forms Ordered
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
"Affiliate" is defined as: With respect to a person, a person that, directly or
indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with such person.
"Associate" is defined as (i) any corporation or organization (other than
Mercer Mutual, the Holding Company or any other entity that is a member of the
same consolidated group as Mercer Mutual or the Holding Company under generally
accepted accounting principles) of which such person is an officer or partner
or is, directly or indirectly the beneficial owner of 10% or more of any class
of equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as the
trustee or in a similar fiduciary capacity, except that such term shall not
include a Tax-Qualified Employee Stock Benefit Plan in which a person has a
substantial beneficial interest or serves as a trustee in a similar fiduciary
capacity; and (iii) any relative or spouse of such person, or any relative of
such spouse, who has the same home as such person.
- -------------------------------------------------------------------------------
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I further certify that, before purchasing the Common Stock, no par value per
share, of Mercer Insurance Group, Inc. (the "Company"), the proposed holding
company for Mercer Mutual Insurance Company, I received a Prospectus of the
Company dated _____________, 199X relating to such offer of Common Stock.
The Prospectus that I received contains disclosure concerning the nature of the
Common Stock being offered by the Company and describes the risks involved in
the investment in this Common Stock, including but not limited to the:
1. Possible Adverse Impact of Catastrophe and Natural Peril Losses
on Financial Condition and Results of Operations (page )
2. Possible Adverse Impact Due to Geographic Concentration of
Business (page )
3. Possible Adverse Impact of Potential Litigation (page )
4. Possible Adverse Impact of Broad Valuation Range and Its Use
to Determine the Number of Shares of Common Stock Sold (page )
5. Possible Adverse Impact of New Jersey Tax Laws (page )
6. Possible Significant Fluctuations in Operating Results (page )
7. Possible Adverse Impact of Inadequate Loss Reserves on Financial
Condition and Results of Operation
8. Possible Adverse or Inadequate Impact of Geographic
Diversification Strategy (page )
9. Highly Competitive Nature of Insurance Industry (page )
10. Possible Adverse Impact of Change in A.M. Best Rating (page )
11. Reliance on Key Agencies (page )
12. Possible Adverse Impact of Regulatory Changes (page )
13. Dependence upon Dividends from Insurance Companies (page )
14. Availability and Adequacy of Reinsurance (page )
15. Reliance on Existing Management (page )
16. Potential Benefits of Conversion to Management and Impact of
Purchases by Management and Stock Benefit Plans (page )
17. Requirement for Policyholder Approval (page )
18. Risk of Delayed Offering (page )
19. Dilutive Effect of Stock Options and MRP (page )
20. Articles of Incorporation, Bylaw and Statutory Provisions that
Could Discourage Hostile Acquisitions of the Company (page )
21. Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights (page )
22. Absence of Prior Market for the Common Stock (page )
THIS CERTIFICATION MUST BE SIGNED IN ORDER TO PURCHASE STOCK
- ------------------------------------- --------------------------------------
SIGNATURE DATE SIGNATURE DATE
- ------------------------------------- --------------------------------------
- ------------------------------------- --------------------------------------
NAME (PLEASE PRINT) DATE NAME (PLEASE PRINT) DATE
- ------------------------------------- --------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 5
[MERCER INSURANCE GROUP, INC. LOGO]
- -------------------------------------------------------------------------------
STOCK OWNERSHIP GUIDE
INDIVIDUAL
Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership rights,
such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
- -------------------------------------------------------------------------------
JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
- -------------------------------------------------------------------------------
TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or sale of shares
held by tenants in common.
- -------------------------------------------------------------------------------
UNIFORM TRANSFERS TO MINORS ACT ("UTMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Transfers to Minors Act of each state. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation for
Custodian is "CUST", while the Uniform Transfers to Minors Act is "UTMA".
Standard U.S. Postal Service state abbreviations should be used to describe the
appropriate state. For example, stock held by John Doe as custodian for Susan
Doe under the Pennsylvania Uniform Transfers to Minors Act will be abbreviated
John Doe, CUST Susan Doe UTMA, PA (use minor's social security number).
- -------------------------------------------------------------------------------
FIDUCIARIES
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
- The name(s) of the fiduciary. If an individual, list the first name,
middle initial and last name. If a corporation, list the full corporate
title (name). If an individual and a corporation, list the corporation's
title before the individual.
- The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
- A description of the document governing the fiduciary relationship,
such as a trust agreement or court order. Documentation establishing a
fiduciary relationship may be required to register your stock in a
fiduciary capacity.
- The date of the document governing the relationship, except that the
date of a trust created by a will need not be included in the
description.
- The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John Doe,
Trustee Under Agreement Dated 10-1-87 for Susan Doe.
- -------------------------------------------------------------------------------
STOCK ORDER FORM INSTRUCTIONS
ITEMS 1 AND 2-
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares by the
subscription price of $10.00 per share. The minimum purchase in the
Subscription and Community Offerings is 25 shares. In the Subscription Offering,
the maximum purchase by each Eligible Policyholder, employee, officer or
director together with associates and persons acting in concert is 100,000
shares ($1,000,000) and the maximum purchase in the Community Offering by any
person, together with Associates or persons acting in concert, is 100,000
shares ($1,000,000). However, no person, together with Associates or persons
acting in concert with such person, may purchase in the aggregate more than
100,000 shares offered. Mercer Mutual Insurance Company and Mercer Insurance
Group, Inc. have reserved the right to reject the subscription of any order
received in the Community Offering, in whole or in part.
- -------------------------------------------------------------------------------
ITEM 3-
Please check this box to indicate whether you are an employee, officer or
director of Mercer Mutual Insurance Company or of Mercer Insurance Group, Inc.
or a member of such person's immediate family living in the same household.
- -------------------------------------------------------------------------------
ITEM 4-
Payment for shares may be made by check or money order payable to Mercer
Insurance Group, Inc. Please insert the total payment amount in this box if
your method of payment is by check or money order.
- -------------------------------------------------------------------------------
ITEM 5-
PAYMENT FOR SHARES MAY NOT BE MADE IN CASH. DO NOT MAIL CASH TO PURCHASE STOCK.
- -------------------------------------------------------------------------------
ITEM 6- SUBSCRIPTION OFFERING STOCK ORDER FORM:
a. Please check this box is you are an Eligible Policyholder as of October 17,
1997.
Please list all name on the policy(s) and all policy number(s) of policies
you had at these dates in order to insure proper identification of your
purchase rights.
PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT IN THE LOSS OF
PART OR ALL OF YOUR SUBSCRIPTION RIGHTS.
b. Please check this box if you are an employee, officer or director of
Mercer Mutual Insurance Company.
ITEM 6- COMMUNITY OFFERING STOCK ORDER FORM:
6-1 through 6-5, please check whichever box is applicable.
- -------------------------------------------------------------------------------
ITEMS 7, 8 and 9-
The stock transfer industry has developed a uniform system of shareholder
registrations that will be used in the issuance of your Mercer Insurance Group,
Inc. Common Stock. Please complete items 7, 8 and 9 as fully and accurately as
possible, and be certain to supply your social security or Tax I.D. number(s)
and your daytime and evening telephone number(s). We will need to call you if
we cannot execute your order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Stock ownership
must be registered in one of the ways described above under "Stock Ownership
Guide". Adding the names of other persons who are not owners of your
qualifying policy(s) will result in your order becoming null and void.
- -------------------------------------------------------------------------------
ITEM 10-
Please check this box if you are a member of the NASD or if this item otherwise
applies to you.
- -------------------------------------------------------------------------------
ITEM 11-
Please check this box if you or any Associate (as defined on the reverse side
of the Stock Order Form) or person acting in concert with you has submitted
another order for shares and complete the reverse side of the Stock Order Form.
- -------------------------------------------------------------------------------
ITEM 12-
Please sign and date the Stock Order Form and Certification Form where
indicated. Before you sign, review the Stock Order Form, including the
acknowledgement, and the Certification Form.
- -------------------------------------------------------------------------------
You may mail your completed Stock Order Form and Certification Form in the ____
envelope that has been provided marked "STOCK ORDER RETURN", or you may deliver
your Stock Order Form and Certification Form. Your Stock Order Form and
Certification Form, properly completed, and payment in full at the subscription
price must be physically received by Mercer Mutual Insurance Company no later
than 1:00 p.m., Eastern time, on ___________, ______________ 199X or it will
become void. If you have any remaining questions, or if you would like
assistance in completing your Stock Order Form and Certification Form, you may
call our Conversion Center Monday through Friday from 10:00 a.m. to 4:00 p.m.
Please note that the Conversion Center will be closed from 12:00 noon Day,
Month X, through 12:00 noon Day, Month X, in observance of the _____________
holiday.
- -------------------------------------------------------------------------------
<PAGE> 1
PROXY QUESTIONS
AND ANSWERS
MUTUAL TO STOCK CONVERSION
Mercer Mutual Insurance Company has received approval from the Pennsylvania
Department of Insurance to convert from a mutual insurance company to a stock
insurance company subject to the approval of policyholders of Mercer. Mercer
Mutual is converting so that it may enhance policyholder protection and allow
Mercer Mutual to become stronger. It is necessary for Mercer Mutual to receive
at least two-thirds of the votes cast at the Special Meeting in favor of
Conversion, so YOUR VOTE IS VERY IMPORTANT. Please return your proxy in the
enclosed postage-paid envelope. YOUR BOARD OF DIRECTORS URGES YOU
TO VOTE "FOR" THE CONVERSION AND RETURN YOUR PROXY TODAY.
Q. WHAT IS MEANT BY CONVERSION?
A. Mercer Mutual presently operates as a mutual insurance company. It has no
stockholders. Under the proposed Conversion, Mercer Mutual's capital stock
will be purchased by a newly formed holding company, Mercer Insurance
Group, Inc., which will offer Common Stock to Mercer Mutual's Eligible
Policyholders, tax-qualified employee stock ownership plan, directors,
officers and employees in a Subscription Offering and then to certain
members of the general public in a Community Offering. Stock that is not
sold in the Subscription and Community Offering will be offered to the
general public in a Syndicated Community Offering. The Board of Directors
of Mutual Mercer has unanimously adopted the Plan of Conversion.
Q. WHO IS ELIGIBLE TO VOTE ON THE CONVERSION?
A. Policyholders as of October 17, 1997 are eligible to vote at the Special
Meeting of
<PAGE> 2
Eligible Policyholders to be held on 1998.
Q. AM I REQUIRED TO VOTE?
A. No. Policyholders are not required to vote. However, because the Conversion
will produce a fundamental change in Mercer Mutual's corporate structure,
the Board of Directors encourages all policyholders to vote.
Q. WHY DID I RECEIVE SEVERAL PROXIES?
A. If you have more than one policy you may have received more than one proxy
depending upon the ownership structure of your policies. Please vote and
sign all proxy cards that you received.
Q. HOW DO I VOTE?
A. You may vote by mailing your signed proxy card in the
postage-paid envelope provided. Should you choose to attend the Special
Meeting of Policyholders and decide to change your vote, you may do so by
revoking any previously executed proxy.
Q. WILL THE CONVERSION AFFECT MY INSURANCE COVERAGE WITH MERCER MUTUAL?
A. No. Existing insurance coverage under your policy will not undergo any
change as a result of the Conversion.
Q. DOES MY VOTE FOR CONVERSION MEAN THAT I MUST BUY COMMON STOCK OF MERCER
INSURANCE GROUP, INC.?
A. No. Voting for the Conversion does not obligate you to buy shares of Common
Stock of Mercer Insurance Group, Inc.
Q. WILL ANY POLICY I HOLD WITH MERCER MUTUAL BE CONVERTED INTO STOCK?
A. No. All policies remain as they were prior to the Conversion. As an
Eligible Policyholder,
<PAGE> 3
you receive priority over the general public in exercising your right to
subscribe for shares of Common Stock.
Q. I HAVE A POLICY IN JOINT NAMES. MUST BOTH PARTIES SIGN THE PROXY CARD?
A. Only one signature is required, but both parties should sign if possible.
Q. I AM THE EXECUTOR (ADMINISTRATOR) FOR A DECEASED POLICYHOLDER. CAN I SIGN
THE PROXY CARD?
A. Yes. Please indicate on the card the capacity in which you are signing the
card.
Q. HOW CAN I RECEIVE ADDITIONAL INFORMATION ABOUT THE CONVERSION?
A. The Proxy Statement describes the Conversion. Please read the Proxy
Statement carefully before voting. Additional information is available in
the Prospectus which you may obtain by returning a completed request card,
or you may call our Conversion Center at (XXX) XXX-XXXX, Monday through
Friday, between 10:00 A.M. and 4:00 P.M. [Please note, the Conversion
Center will be closed for the holiday, from 12:00 noon Day,
Month Date through 12:00 noon Day, Month Date.] TO ENSURE THAT EACH
PURCHASER RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION
DATE OF , 1998 IN ACCORDANCE WITH RULE 15c2-8 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, 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.
This is not an offer to sell or a solicitation of an offer to buy Common Stock.
The offer is made only by the Prospectus.
<PAGE> 4
STOCK OFFERING
QUESTIONS & ANSWERS
FACTS ABOUT THE CONVERSION
The Board of Directors of Mercer Mutual Insurance Company has unanimously
adopted a Plan of Conversion whereby Mercer Mutual will convert from a mutual
insurance company to a stock insurance company and at the same time become a
wholly-owned subsidiary of Mercer Insurance Group, Inc., a Pennsylvania
corporation formed by Mercer Mutual Insurance Company to own all the outstanding
stock of Mercer Mutual. The Common Stock of Mercer Insurance Group, Inc. will be
offered to Mercer Mutual's Eligible Policyholders, tax-qualified employee stock
ownership plan, directors, officers and employees in a Subscription Offering and
then to certain members of the general public in a Community Offering. Stock
that is not sold in the Subscription and Community Offerings will be offered to
the general public in a Syndicated Community Offering.
Investment in Common Stock involves certain risks. For a discussion of these
risks and other factors, investors are urged to read the accompanying
Prospectus.
Q. WHY IS MERCER MUTUAL CONVERTING TO STOCK
FORM?
A. 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. 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.
The Board of Directors of Mercer Mutual has
<PAGE> 5
determined that the fastest and most effective method to achieve its goal
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.
Q. WILL THE CONVERSION AFFECT MY INSURANCE COVERAGE WITH MERCER MUTUAL?
A. No. Existing insurance coverage under your policy will not undergo any
change as a result of the Conversion.
Q. WILL I RECEIVE A DISCOUNT ON THE PRICE OF THE STOCK?
A. No. Applicable law requires that the offering price of the stock be the
same for everyone: policyholders, directors, officers and employees of
Mercer Mutual, and the general public.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. Mercer Insurance Group, Inc. is offering up to 3,392,500 shares of Common
Stock at a subscription price of $10 per share through the Prospectus.
Q. WHAT ARE THE PRIORITIES OF PURCHASING THE
COMMON STOCK?
A. The Common Stock of Mercer Insurance Group, Inc. will be offered in the
following order to: Mercer Mutual's Eligible Policyholders, (policyholders
as of October 17, 1997), tax-qualified employee stock ownership plan,
directors, officers and employees in a Subscription Offering and then to
certain members of the general public in a Community Offering. Common Stock
that is not sold in the Subscription and Community Offer-
<PAGE> 6
ings will be offered to the general public in a Syndicated Community
Offering.
Q. HOW MUCH STOCK CAN I PURCHASE?
A. The minimum purchase is 25 shares; the maximum purchase by any person in
the Subscription Offering is $1,000,000 (100,000 shares); in the Community
Offering and Syndicated Community Offering, the maximum purchase by any
person, including purchases by Associates of such person or entity, is
$1,000,000 (100,000 shares); and the maximum purchase by any person,
including purchases by Associates of such person or entity in the
Subscription and Community Offerings is $1,000,000 (100,000 shares).
Q. HOW DO I ORDER STOCK?
A. You may subscribe for shares of Common Stock by completing and returning
the stock order form and certification form, together with your payment,
either in person to Mercer Mutual Insurance Company or by mail in the
postage-paid envelope that has been provided.
Q. HOW CAN I PAY FOR MY SHARES OF STOCK?
A. You can pay for the Common Stock by check or money order.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. An executed order form and certification form with the required full
payment must be physically received by Mercer Mutual by 1:00
p.m. time, on Day, Month Date, 1998.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY IRA/QUALIFIED PLAN?
A. Yes, if you have a "self-directed" trust account. Please call our
Conversion Center if you require additional information.
<PAGE> 7
Q. CAN I SUBSCRIBE FOR SHARES AND ADD SOMEONE ELSE WHO IS NOT ON MY POLICY TO
MY STOCK REGISTRATION?
A. No. Applicable law prohibits the transfer of subscription rights. Adding
the names of other persons who are not owners of your qualifying policy(s)
will result in your order becoming null and void.
Q. WILL PAYMENTS FOR STOCK EARN INTEREST UNTIL THE CONVERSION CLOSES?
A. No. Any payments made to subscribe for shares will not earn interest.
Q. WILL DIVIDENDS BE PAID ON THE STOCK?
A. No dividends are expected to be paid initially. Following the Conversion,
however, the Board of Directors of Mercer Insurance Group, Inc. may
consider a policy of paying cash dividends on the stock.
Q. WILL MY STOCK BE COVERED BY INSURANCE?
A. No. The Common Stock is not insured or guaranteed by any government agency
nor is it insured or guaranteed by Mercer Mutual Insurance Company or
Mercer Insurance Group, Inc.
Q. WHERE WILL THE STOCK BE TRADED?
A. Upon completion of the Conversion, Mercer Insurance Group, Inc. expects the
stock to be traded over-the-counter and to be quoted on the Nasdaq National
Market under the symbol "MRCR".
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After receipt by Mercer Mutual, your order may not be modified or
withdrawn.
<PAGE> 8
Q. WHAT IF I HAVE ADDITIONAL QUESTIONS OR REQUIRE MORE INFORMATION?
A. If you have any questions regarding the Conversion or need additional
information, please call our Conversion Center at (XXX) XXX-XXXX, Monday
through Friday, between 10:00 A.M. and 4:00 P.M. Please note, the
Conversion Center will be closed for the holiday, from 12:00
noon Day, Month Date through 12:00 noon Day, Month Date.
This is not an offer to sell or a solicitation of an offer to buy Common Stock.
The offer is made only by the Prospectus.
<PAGE> 9
MERCER MUTUAL INSURANCE COMPANY REQUEST FOR INFORMATION
ABOUT THE CONVERSION
<TABLE>
<S> <C> <C>
TELEPHONE INFORMATION
PLEASE SEND ME THE PROSPECTUS, A STOCK ORDER FORM AND
CERTIFICATION FORM. DAY: ( )
-------------------------------
EVENING: ( )
-------------------------------
</TABLE>
I UNDERSTAND THIS REQUEST FOR INFORMATION DOES NOT OBLIGATE ME TO PURCHASE ANY
SHARES OF MERCER INSURANCE GROUP, INC. COMMON STOCK.
PLEASE RETURN THIS CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
#8
<PAGE> 10
MERCER LOGO
MERCER MUTUAL INSURANCE COMPANY
PLEASE SUPPORT US
VOTE YOUR
PROXY CARD TODAY
IF YOU HAVE MORE THAN ONE POLICY, YOU MAY HAVE RECEIVED MORE THAN ONE PROXY
DEPENDING UPON THE OWNERSHIP STRUCTURE OF YOUR POLICY. PLEASE VOTE, SIGN AND
RETURN ALL PROXY CARDS THAT YOU RECEIVED.
#9
<PAGE> 1
[MERCER INSURANCE GROUP LOGO]
Dear Policyholder:
The Board of Directors of Mercer Mutual Insurance Company has voted unanimously
in favor of a plan to convert from a Pennsylvania mutual insurance company to a
Pennsylvania stock insurance company. As part of this plan, we have formed a
holding company, Mercer Insurance Group, Inc., which will become the parent
company of Mercer Mutual. We are converting so that Mercer Mutual may enhance
policyholder protection and allow Mercer Mutual to become stronger.
TO ACCOMPLISH THIS CONVERSION, YOUR PARTICIPATION IS EXTREMELY IMPORTANT. On
behalf of the Board, I ask that you help us meet our goal by reading the
enclosed Proxy Statement and Question and Answer Brochure and then CASTING YOUR
VOTE IN FAVOR OF THE PLAN OF CONVERSION, and mailing your signed proxy card
immediately in the postage-paid envelope provided. Should you
choose to attend the Special Meeting of eligible policyholders and wish to vote
in person, you may do so by giving written notice of revocation to secretary of
Mercer Mutual. If you and/or members of your family have multiple policies at
Mercer Mutual, you may receive more than one mailing. If you do receive more
than one proxy card, please vote, sign and return each one.
If the Plan of Conversion is approved let me assure you that:
- Existing insurance coverage under your policy will not undergo any change
as a result of the Conversion.
- Voting for approval will not obligate you to buy any shares of Common
Stock.
As an eligible policyholder, you may also take advantage of your nontransferable
rights to subscribe for shares of Mercer Insurance Group, Inc. Common Stock
without commission or fee on a priority basis, before the stock is offered to
the general public. If you are interested in subscribing for shares of Common
Stock, please complete the enclosed request card and return it to us in the
postage-paid envelope provided by , 199X, and we
will mail you a Prospectus, a stock order form and a certification form.
If you wish to subscribe for common stock using funds currently in an IRA please
be aware that federal law requires that such funds first be in a self-directed
IRA. Because the transfer of retirement funds to a new trustee takes time, it is
important that you make arrangements for such a transfer as soon as possible.
If you have any questions after reading the enclosed material, please call our
Conversion Center at (XXX) XXX-XXXX, Monday through Friday, between the hours of
10:00 a.m. and 4:00 p.m. Please note that the Conversion Center will be closed
from 12:00 noon Day, Month X, through 12:00 noon Day, Month X, in observance of
the holiday.
Sincerely,
Signature
Title
This is not an offer to sell or a solicitation of an offer to buy Common Stock.
The offer is made only by the Prospectus.
#1
<PAGE> 2
[MERCER INSURANCE GROUP LOGO]
Dear Policyholder:
The Board of Directors of Mercer Mutual Insurance Company has voted unanimously
in favor of a plan to convert from a Pennsylvania mutual insurance company to a
Pennsylvania stock insurance company. As part of this plan, we have formed a
holding company, Mercer Insurance Group, Inc., which will become the parent
company of Mercer Mutual. We are converting so that Mercer Mutual may enhance
policyholder protection and allow Mercer Mutual to become stronger.
TO ACCOMPLISH THIS CONVERSION, YOUR PARTICIPATION IS EXTREMELY IMPORTANT. On
behalf of the Board, I ask that you help us meet our goal by reading the
enclosed Proxy Statement and Question and Answer Brochure and then CASTING YOUR
VOTE IN FAVOR OF THE PLAN OF CONVERSION, and mailing your signed proxy card
immediately in the postage-paid envelope provided. Should you
choose to attend the Special Meeting of eligible policyholders and wish to vote
in person, you may do so by giving written notice of revocation to the secretary
of Mercer Mutual. If you and/or members of your family have multiple policies at
Mercer Mutual, you may receive more than one mailing. If you do receive more
than one proxy card, please vote, sign and return each one.
If the Plan of Conversion is approved let me assure you that:
- Existing insurance coverage under your policy will not undergo any change
as a result of the Conversion.
We regret that we are unable to offer you Common Stock in the Subscription
Offering, because the laws of your state or jurisdiction require us to register
either (1) the to-be-issued Common Stock of Mercer Insurance Group, Inc., or (2)
an agent of the Mercer Mutual to solicit the sale of such stock, and the number
of eligible subscribers in your state or jurisdiction does not justify the
expense of such registration.
If you have any questions after reading the enclosed material, please call our
Conversion Center at (XXX) XXX-XXXX, Monday through Friday, between the hours of
10:00 a.m. and 4:00 p.m. Please note that the Conversion Center will be closed
from 12:00 noon Day, Month Date through 12:00 noon Day, Month Date, in
observance of the holiday.
Sincerely,
Signature
Title
#2
<PAGE> 3
[MERCER INSURANCE GROUP LOGO]
Dear Potential Investor:
We are pleased to provide you with the enclosed material regarding the
conversion of Mercer Mutual Insurance Company from a mutual insurance company to
a stock insurance company.
This information packet includes the following:
PROSPECTUS: This document provides detailed information about Mercer
Mutual's operations and the proposed stock offering by Mercer Insurance
Group, Inc., a holding company formed by Mercer Mutual to become its parent
company upon completion of the Conversion. Please read it carefully prior
to making an investment decision.
STOCK QUESTION AND ANSWER BROCHURE: This answers commonly asked questions
about the stock offering.
STOCK ORDER AND CERTIFICATION FORMS: Use these forms to subscribe for stock
and return them together with your payment in the postage-paid envelope
provided. The deadline to subscribe for stock is 1:00 p.m.,
time on , 1998.
We are pleased to offer you this opportunity to become one of our charter
stockholders. If you have any questions regarding the conversion or the
Prospectus, please call our Conversion Center at (XXX) XXX-XXXX, Monday through
Friday, between the hours of 10:00 a.m. and 4:00 p.m. Please note that the
Conversion Center will be closed from 12:00 noon Day, Month Date through 12:00
noon Day, Month Date, in observance of the holiday.
Sincerely,
Signature
Title
This is not an offer to sell or a solicitation of an offer to buy Common Stock.
The offer is made only by the Prospectus.
#3
<PAGE> 4
[SANDLER O'NEILL & PARTNERS, L.P. LETTERHEAD]
TO COME
Dear Customer of Mercer Mutual Insurance Company:
At the request of Mercer Mutual Insurance Company and Mercer Insurance Group,
Inc., a holding company formed by Mercer Mutual to become its parent company, we
have enclosed material regarding the offering of Common Stock in connection with
the Conversion of Mercer Mutual from a mutual insurance company to a stock
insurance company. These materials include a Prospectus, and a stock order form
which offer you the opportunity to subscribe for shares of Common Stock of
Mercer Insurance Group, Inc.
We recommend that you study this material carefully. If you decide to subscribe
for shares, you must return the properly completed stock order and signed
certification form along with full payment for the shares no later than 1:00
p.m., time on , 1998 in the accompanying postage-paid
envelope. If you have any questions after reading the enclosed material, please
call the Conversion Center at (XXX) XXX-XXXX, Monday through Friday, between the
hours of 10:00 a.m. and 4:00 p.m. and ask for a Sandler O'Neill representative.
Please note that the Conversion Center will be closed from 12:00 noon Day, Month
Date through 12:00 noon Day, Month Date, in observance of the
holiday.
We have been asked to forward these documents to you in view of certain
requirements of the securities laws of your jurisdiction. By doing so, we are
not recommending or soliciting in any way any action by you with regard to the
enclosed materials.
Sincerely,
SANDLER O'NEILL & PARTNERS, L.P.
This is not an offer to sell or a solicitation of an offer to buy Common Stock.
The offer is made only by the Prospectus.
Enclosure
#4
<PAGE> 5
Mercer Logo
P R O X Y R E Q U E S T
WE NEED YOUR VOTE!
DEAR POLICYHOLDER:
YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT YET BEEN RECEIVED. YOUR VOTE IS VERY
IMPORTANT TO US. PLEASE VOTE AND MAIL THE ENCLOSED PROXY TODAY.
REMEMBER: VOTING FOR THE PLAN OF CONVERSION DOES NOT OBLIGATE YOU TO BUY STOCK.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PLAN OF CONVERSION AND
URGES YOU TO VOTE IN FAVOR OF IT. YOUR EXISTING INSURANCE COVERAGE UNDER YOUR
POLICY WILL NOT UNDERGO ANY CHANGE AS A RESULT OF THE CONVERSION.
A POSTAGE-PAID ENVELOPE IS ENCLOSED WITH THE PROXY FORM. IF YOU HAVE ANY
QUESTIONS, PLEASE CALL OUR CONVERSION CENTER AT (XXX) XXX-XXXX.
IF YOU HAVE MORE THAN ONE POLICY YOU MAY RECEIVE MORE THAN ONE PROXY.
PLEASE VOTE TODAY BY RETURNING ALL PROXY FORMS RECEIVED.
SINCERELY,
MERCER MUTUAL INSURANCE COMPANY
#5
<PAGE> 1
MERCER MUTUAL INSURANCE COMPANY
10 NORTH HIGHWAY 31
PENNINGTON, NEW JERSEY 08534
NOTICE OF SPECIAL MEETING OF POLICYHOLDERS
Notice is hereby given that a Special Meeting of Policyholders (the
"Special Meeting") of Mercer Mutual Insurance Company ("Mercer Mutual" or the
"Company") will be held at The Conference Center at LaSalle University Bucks
County, 33 Silver Lake Road, Newtown, Pennsylvania, on ,
1998 at 9:00 a.m. Business to be considered at the Special
Meeting shall be:
(1) To consider and vote upon the Amended and Restated Plan of
Conversion from Mutual to Stock Organization (the "Plan") providing for the
conversion of Mercer Mutual from a Pennsylvania mutual insurance company to
a Pennsylvania stock insurance company, and certain related transactions
including the adoption of Amended and Restated Articles of Incorporation of
Mercer Mutual.
(2) To consider and vote upon any other matters that may lawfully come
before the Special Meeting.
As of the date of mailing of this Notice of Special Meeting, the Board of
Directors is not aware of any other matters that may come before the Special
Meeting.
Under the Bylaws of Mercer Mutual, each named insured under a policy of
insurance issued by Mercer Mutual that was in force at the close of business on
October 17, 1997 is a policyholder entitled to vote, except that each such
policy is entitled to only one vote at the Special Meeting.
BY THE ORDER OF THE BOARD OF DIRECTORS
William C. Hart
President, Chief Executive Officer and
Director
, 1998
Pennington, New Jersey
------------------------
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL
AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO
FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO
ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN
PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE> 2
MERCER MUTUAL INSURANCE COMPANY
PROXY STATEMENT
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD OF DIRECTORS OF
MERCER MUTUAL INSURANCE COMPANY FOR USE AT A SPECIAL MEETING OF ITS
POLICYHOLDERS TO BE HELD ON , 1998 AND ANY ADJOURNMENT OF THAT
MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE "FOR" THE AMENDED AND RESTATED
PLAN OF CONVERSION FROM MUTUAL TO STOCK ORGANIZATION OF MERCER MUTUAL.
INTRODUCTION
Purpose of Meeting. A Special Meeting of Policyholders (the "Special
Meeting") of Mercer Mutual Insurance Company ("Mercer Mutual" or the "Company")
will be held at The Conference Center at LaSalle University Bucks County, 33
Silver Lake Road, Newtown, Pennsylvania on , , 1998,
at 9:00 a.m., local time. The purpose of the Special Meeting is to consider and
vote upon an Amended and Restated Plan of Conversion from Mutual to Stock
Organization (the "Plan"), which was unanimously adopted by the Company's Board
of Directors and which, if approved by two-thirds of the votes cast at the
Special Meeting by named insureds under policies of insurance issued by the
Company that were in force at the close of business on October 17, 1997
("Eligible Policyholders"), will permit the Company to convert from a
Pennsylvania mutual insurance company to a Pennsylvania stock insurance company
(the "Conversion") and to become a wholly owned subsidiary of Mercer Insurance
Group, Inc. (the "Holding Company") pursuant to the provisions of the
Pennsylvania Insurance Company Mutual-to-Stock Conversion Act (the "Act"). The
Holding Company is a newly-organized Pennsylvania corporation formed by Mercer
Mutual for the purpose of becoming its holding company upon the completion of
the Conversion. All statements made in this Proxy Statement regarding the Plan
are hereby qualified in their entirety by reference to the Plan, a copy of which
is attached hereto as Exhibit A.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Company has determined that, in accordance
with the Bylaws of the Company, the terms of the Plan and the provisions of the
Act, each named insured under an insurance policy issued by the Company that was
in force at the close of business on October 17, 1997 (the "Voting Record Date")
is a member who is entitled to notice of and to vote at the Special Meeting.
Each such Eligible Policyholder will be entitled at the Special Meeting to cast
one vote for each insurance policy under which such Eligible Policyholder is the
named insured as of the Voting Record Date; provided, however, that only one
vote may be cast for each insurance policy in force as of the Voting Record
Date. Thus, an Eligible Policyholder under more than one insurance policy in
force as of the Voting Record Date shall have more than one vote, but if there
is more than one Eligible Policyholder under an insurance policy in force as of
the Voting Record Date, such Eligible Policyholders shall collectively have only
one vote with respect to such insurance policy.
Seven Eligible Policyholders must be present, in person or by proxy, to
constitute a quorum at the Special Meeting. Approval of the Plan will require
the affirmative vote, either in person or by proxy, of at least two-thirds of
the votes cast at the Special Meeting. As of the Voting Record Date, the Company
had 42,178 policies outstanding with respect to which Eligible Policyholders
would be entitled to cast a total of 42,178 votes at the Special Meeting.
Eligible Policyholders may vote at the Special Meeting or any adjournment
thereof in person or by proxy. If no contrary instructions are given, such
proxies will be voted in favor of the Plan. If any other matters are properly
presented before the Special Meeting, the proxies solicited hereby will be voted
on such matters by
<PAGE> 3
the proxyholders according to their discretion. Any member giving a proxy will
have the right to revoke his or her proxy at any time before it is voted by
delivering written notice or a duly executed proxy bearing a later date to the
Secretary of the Company, or by attending the Special Meeting and voting in
person.
In the event that conflicting proxies are received from more than one
Eligible Policyholder with respect to the same policy, the proxyholders will
vote in accordance with the instructions of a majority of such Eligible
Policyholders and, in the case of a tie, the proxyholders will vote in
accordance with the instructions set forth in the latest proxy to be filed.
The Company has retained Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") to act as conversion agent as well as financial advisor in connection
with the Conversion. As part of its duties as conversion agent, Sandler O'Neill
will solicit proxies in favor of the Plan. Mercer Mutual will pay Sandler
O'Neill a fee of $30,000 and its reasonable out-of-pocket expenses incurred
fulfilling its duties as conversion agent. Independent agents of the Company, as
the primary contact between the Company and policyholders, can be expected
frequently to be the initial contact with policyholders and, as a result, may
obtain proxies in favor of the Plan. The Company expects to reimburse such
agents for their reasonable expenses. Proxies also may be solicited by officers,
directors or other employees of the Company, in person, by telephone or through
other forms of communication. Such persons will be reimbursed by the Company
only for their expenses incurred in connection with such solicitation.
The proxies solicited hereby will be used only at the Special Meeting and
at any adjournment thereof; they will not be used at any other meeting.
MERCER INSURANCE GROUP, INC.
Mercer Insurance Group, Inc. was incorporated under the laws of the
Commonwealth of Pennsylvania on November 12, 1997 at the direction of the Board
of Directors of Mercer Mutual for the purpose of serving as a holding company of
Mercer Mutual upon the acquisition of all of the capital stock issued by Mercer
Mutual in the Conversion. Prior to the Conversion, the Holding Company has not
engaged, and will not engage, in any material operations. Upon completion of the
Conversion, the Holding Company will have no significant assets other than the
outstanding capital stock of Mercer Mutual and between approximately $15.7
million and $26.8 million of the net proceeds from the Offerings (as hereinafter
defined). The Holding Company's principal business will be to hold the stock of
Mercer Mutual. The Holding Company also may provide management services to
Mercer Mutual.
The holding company structure will permit the Holding Company to expand the
services currently offered through Mercer Mutual, although there are no
definitive plans or arrangements for such expansion at present. The Holding
Company will have greater flexibility than Mercer Mutual to diversify its
business activities through existing or newly-formed subsidiaries or through
acquisition or merger with other insurance companies or financial service
institutions. After the Conversion, the Holding Company will be subject to
regulation by the Pennsylvania Department of Insurance (the "Department").
The Holding Company's executive offices are located at 10 North Highway 31,
Pennington, New Jersey, and its telephone number is (609) 737-0426.
MERCER MUTUAL INSURANCE COMPANY
Mercer Mutual was organized and commenced operations in 1844. Mercer Mutual
currently operates as a Pennsylvania mutual insurance company through its main
office located in Pennington, New Jersey and its branch office located in
Yardley, Pennsylvania. Mercer Mutual is primarily engaged in the business of
writing property and casualty insurance policies and is licensed to write
insurance in Pennsylvania and New Jersey. For the year ended December 31, 1997,
Mercer Mutual and its subsidiaries had consolidated revenue of $21.0 million and
net income of $2.2 million. For the three months ended March 31, 1998, Mercer
Mutual and its subsidiaries had consolidated revenue of $6.1 million and net
income of $696,000. At March 31, 1998, Mercer
2
<PAGE> 4
Mutual and its subsidiaries had consolidated assets of $74.7 million, total
equity of $24.5 million and over 42,000 property and casualty policies in force.
Mercer Mutual is, and after the Conversion will continue to be, subject to
examination and comprehensive regulation by the Department.
Mercer Mutual's executive offices are located at 10 North Highway 31,
Pennington, New Jersey, and its telephone number is (609) 737-0426.
3
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
Mercer Mutual prior to the Conversion at and for the periods indicated. The
consolidated statement of income data for the years ended 1997, 1996, 1995 and
1994 and the consolidated balance sheet data at December 31, 1997, 1996 and 1995
are derived from the audited consolidated financial statements of Mercer Mutual
and its subsidiaries, which are not included in this Proxy Statement. The
consolidated statement of income data for the three months ended March 31, 1998
and 1997 and the year ended December 31, 1993, and the consolidated balance
sheet data at March 31, 1998 and 1997 and at December 31, 1994 and 1993, are
derived from the unaudited consolidated financial statements of Mercer Mutual
and include all adjustments (consisting only of normal recurring accruals) that
Mercer Mutual considers necessary for a fair presentation of such financial
information for such period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 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............... $ 7,122 $ 6,420 $28,453 $24,958 $24,699 $24,355 $23,349
Net premiums written(1)(2)............ 6,440 3,082 17,461 20,124 21,245 19,377 18,964
Statement of Income Data:
Net premiums earned................. 5,265 4,384 17,969 20,634 20,817 18,681 18,225
Net investment income............... 553 614 2,350 2,289 2,132 1,904 2,196
Net realized investment gains....... 211 89 589 596 53 277 509
Other income........................ 43 37 173 155 161 166 159
--------- ------- --------- ------- ------- ------- -------
Total revenues................ 6,072 5,124 21,081 23,674 23,163 21,028 21,089
--------- ------- --------- ------- ------- ------- -------
Losses and Expenses:
Losses and loss adjustment
expenses(2)(3).................... 2,861 2,908 10,594 14,801 13,296 14,107 11,631
Other underwriting expenses......... 2,195 1,634 7,269 8,062 8,360 8,976 8,494
--------- ------- --------- ------- ------- ------- -------
Total expenses................ 5,056 4,542 17,863 22,863 21,656 23,083 20,125
--------- ------- --------- ------- ------- ------- -------
Income (loss) before federal income
taxes............................... 1,016 582 3,218 811 1,507 (2,055) 964
Federal income tax expense
(benefit)........................... 320 227 1,001 171 369 (681) 165
--------- ------- --------- ------- ------- ------- -------
Net income (loss)(3).................. $ 696 $ 355 $ 2,217 $ 640 $ 1,138 $(1,374) $ 799
========= ======= ========= ======= ======= ======= =======
Selected Balance Sheet Data (at period
end):
(UNAUDITED) (UNAUDITED)
Total investments and cash.......... $50,625 $44,776 $48,506 $42,760 $40,454 $33,408 $36,191
Total assets........................ 74,697 71,625 74,085 74,074 77,523 71,750 71,110
Total liabilities................... 50,162 52,390 50,849 54,792 58,560 57,547 53,549
Total equity........................ $24,535 $19,235 $23,236 $19,282 $18,963 $14,202 $17,641
GAAP Ratios:
Loss and loss adjustment expense
ratio(3)(4)....................... 54.3% 66.3% 58.9% 71.7% 63.9% 75.5% 63.8%
Underwriting expense ratio(5)....... 41.7% 37.3% 40.5% 39.1% 40.2% 48.0% 46.6%
Combined ratio(6)................... 96.0% 103.6% 99.4% 110.8% 104.1% 123.5% 110.4%
Statutory Data (at period end):
Statutory combined ratio............ 93.8% 113.6% 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................... $21,498 $16,759 $20,132 $16,087 $14,938 $11,133 $12,979
Ratio of statutory net written
premiums to statutory
surplus(8)........................ 1.20x .74x .87x 1.25x 1.42x 1.74x 1.46x
Pro Forma Data(9):
Net income (loss)(10)(11)........... $654 $2,051
Net income (loss) per share of
common stock(10)(11).............. $0.29 $0.90
Weighted average number of shares of
common stock outstanding(12)...... 2,284,960 2,269,288
</TABLE>
4
<PAGE> 6
- ------------
(1) The increase from March 31, 1997 to March 31, 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 the Company's participation in a
pooling arrangement with two other insurance companies.
(3) Loss and loss adjustment expenses, net income, and loss and loss adjustment
expense ratio for the years ended December 31, 1994 and 1996 were adversely
affected by the frequency and severity of weather-related property losses.
(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 March 31, 1998 and 1997 is
unavailable.
(8) Annualized for the periods ended March 31, 1998 and 1997.
(9) The unaudited pro forma data gives effect to the Conversion and the
implementation of the ESOP (as hereinafter defined) as if they had occurred
as of January 1, 1997. Accordingly, pro forma data reflects data of the
Holding Company and its subsidiaries on a consolidated basis. The unaudited
pro forma information does not purport to represent what Mercer Mutual's
consolidated net income actually would have been had the Conversion and
implementation of the ESOP occurred on January 1, 1997 or to project Mercer
Mutual's consolidated net income for any future date or period. The 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.
(10) Does not reflect any income from the investment of net investable proceeds
assumed to be received as of January 1, 1997. 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 three months ended March 31, 1998, pro forma net income (after tax), as
reported herein, would have increased by $702,000 and $175,000 for the year
ended December 31, 1997 and the three months ended March 31, 1998,
respectively, and pro forma net income per share, as reported herein, would
have increased by $0.31 and $0.08 per share, respectively.
(11) The unaudited pro forma consolidated net income data, as prepared, gives
effect to the sale of 2,507,500 shares of the Common Stock of the Holding
Company (the "Holding Company Common Stock"), the minimum number of shares
that must be sold in the Conversion. The following table provides a
comparison between the sale of Holding Company Common Stock at the total
minimum and total maximum number of shares that may be sold in the
Conversion.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
---------------------- ----------------------
MINIMUM MAXIMUM MINIMUM MAXIMUM
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income.......................... $ 2,051 $ 1,993 $ 654 $ 637
Net income per share of common
stock............................. $ 0.90 $ 0.65 $ 0.29 $ 0.21
Weighted average number of shares of
common stock outstanding.......... 2,269,288 3,070,213 2,284,960 3,091,416
</TABLE>
5
<PAGE> 7
(12) Calculation of weighted average number of shares outstanding:
<TABLE>
<CAPTION>
TOTAL LESS:
SHARES UNALLOCATED SHARES WEIGHTED
ISSUED ESOP SHARES OUTSTANDING AVERAGE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
January 1, 1997................... 2,507,500 (250,750) 2,256,750
ESOP Shares allocated............. -- 25,075 25,075
--------- -------- --------- ---------
December 31, 1997................. 2,507,500 (225,675) 2,281,825 2,269,288
ESOP Shares allocated............. -- 6,269 6,269 --
--------- -------- --------- ---------
March 31, 1998.................... 2,507,500 (219,406) 2,288,094 2,284,900
========= ======== ========= =========
</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.
6
<PAGE> 8
CAPITALIZATION
The following table sets forth information regarding the consolidated
historical capitalization of Mercer Mutual at March 31, 1998 and the pro forma
consolidated capitalization of the Holding Company giving effect to the sale of
the Holding Company Common Stock at the minimum, midpoint and maximum of the
Estimated Valuation Range (as defined herein), and at the maximum of the
Estimated Valuation Range plus the shares to be issued to the Holding Company's
tax qualified employee stock ownership plan (the "ESOP") in an amount equalling
10% of the shares issued in the Conversion. Depending on market and financial
conditions, the total number of shares to be issued in the Conversion may be
significantly increased or decreased above or below the midpoint of the
Estimated Valuation Range. A change in the number of shares to be issued in the
Conversion may materially affect the Holding Company's pro forma capitalization.
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
CAPITALIZATION OF THE HOLDING COMPANY
BASED ON THE SALE OF
HISTORICAL -----------------------------------------------
CONSOLIDATED 2,507,500 2,950,000 3,392,500 3,392,500
CAPITALIZATION SHARES AT SHARES AT SHARES AT SHARES AT
OF MERCER $10.00 $10.00 $10.00 $10.00 PER
MUTUAL AT PER PER PER SHARE PLUS
MARCH 31, 1998 SHARE SHARE SHARE ESOP 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 27,550 31,900 35,601
Retained earnings...................... 21,389 21,389 21,389 21,389 21,389
Unrealized gains....................... 3,146 3,146 3,146 3,146 3,146
Less:
Common stock acquired by ESOP(3)....... -- (2,508) (2,950) (3,393) (3,769)
------ ------ ------ ------ ------
Total(4)............................... 24,535 45,236 49,139 53,042 56,367
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Pro forma shareholders' equity is not intended to represent the fair market
value of the Holding Company Common Stock, the net fair market value of the
Holding 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 Holding Company Common Stock that
could be purchased pursuant to a Stock Compensation Plan (the "Compensation
Plan"), if implemented, under which directors, executive officers and other
employees of the Holding Company would be granted options to purchase an
aggregate amount of Holding Company Common Stock equal to 10% of the shares
issued in the Conversion (250,750, 295,000, 339,250, and 376,944 shares at
the minimum, midpoint and maximum of the Estimated Valuation Range and the
maximum of the Estimated Valuation Range plus ESOP shares, respectively).
Implementation of the Compensation Plan requires, among other things,
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.
(3) Assumes that 10% of the shares of Holding Company 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 Holding Company. Under generally
accepted accounting principles, the aggregate purchase price of shares of
Holding Company Common Stock to be purchased by the ESOP in the Conversion
represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As the loan to the ESOP is repaid,
7
<PAGE> 9
shares are released and allocated to ESOP participants' accounts, and a
corresponding reduction in the charge against capital will occur.
(4) Does not reflect any adjustments to shareholders' equity that would result
from the implementation of a Management Recognition Plan (the "MRP") that
the Holding Company intends to adopt, subject to shareholder approval.
Shareholder approval is expected to be sought at the first annual meeting of
shareholders held no earlier than six months following the Conversion.
DESCRIPTION OF THE PLAN OF CONVERSION
GENERAL
Effective as of October 17, 1997, Mercer Mutual (i) adopted a Plan of
Conversion under the Act, and (ii) directed formation of the Holding Company to
be a holding company for Mercer Mutual upon completion of 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, which will be accomplished by the amendment of its
Articles of Incorporation to authorize the issuance of capital stock and to
comply with the requirements of a Pennsylvania stock corporation, and (ii) issue
all of its authorized capital stock to the Holding Company in exchange for a
portion of the net proceeds to be received by the Holding Company from the sale
of Holding Company Common Stock. The Holding Company will offer for sale between
2,507,500 and 3,769,444 shares of Holding Company Common Stock (including shares
to be issued to the ESOP), which amount was determined based upon an independent
appraisal of the consolidated pro forma market value of Mercer Mutual as a
subsidiary of the Holding Company. The appraisal was performed by Alex
Sheshunoff & Company ("Sheshunoff"). See "-- Appraisal of the Company" and
"-- The Offering of Holding Company Common Stock."
The Conversion is contingent upon approval of the Plan by the Eligible
Policyholders of the Company. The Department approved the Plan on ,
1998, subject to the Plan's approval by the Eligible Policyholders of the
Company and subject to the satisfaction of certain other conditions imposed by
the Department in its approval. Department approval, however, does not
constitute a recommendation or endorsement of the Plan.
THE OFFERING OF HOLDING COMPANY COMMON STOCK
In connection with the Plan, the Holding Company is concurrently offering
for sale Holding Company Common Stock through the issuance of nontransferable
subscription rights (the "Subscription Offering"), first, to the Eligible
Policyholders, second, to the ESOP, and third, to the directors, officers and
employees of the Company. Subscription rights received in any of the foregoing
categories will be subordinated to the subscription rights of those in a prior
category, except that the ESOP shall have the right to purchase in the aggregate
up to ten percent (10%) of the number of shares of Holding Company Common Stock
issued in the Conversion. This Proxy Statement does not constitute an offer to
sell shares of Holding Company Common Stock. Such offer shall be made only by
means of a prospectus. A COPY OF THE PROSPECTUS MAY BE OBTAINED BY COMPLETING
AND RETURNING THE ENCLOSED PRE-ADDRESSED, POSTAGE-PAID POSTCARD.
Concurrently with the Subscription Offering, shares of Holding Company
Common Stock not sold in the Subscription Offering are being offered to the
general public in a community offering (the "Community Offering"). In the
Community Offering preference will be given to (i) natural persons and trusts of
natural persons who are permanent residents of the State of New Jersey and the
Commonwealth of Pennsylvania (the "Local Community"), (ii) principals of
Eligible Policyholders in the case of an Eligible Policyholder which is a
corporation, partnership, limited liability company or other entity, (iii)
licensed insurance agencies who have been appointed by the Company to market and
distribute polices of insurance, and their owners, (iv) named insureds under
policies of insurance issued by the Company after October 17, 1997 and (v)
providers of goods or services to 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
8
<PAGE> 10
establishing a physical, on-going, non-transitory presence within one of the
counties in the Local Community) and continues to reside in the Local Community
at the time of the Community Offering. In all cases, the determination as to
whether a potential purchaser is a "resident" of the Local Community shall be
determined in the sole discretion of the Holding Company. 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 Holding Company, in its absolute
discretion, to reject orders in the Community Offering in whole or in part. The
Subscription Offering and the Community Offering (collectively, the "Conversion
Offerings") will be managed by Sandler O'Neill.
Any shares of Holding Company Common Stock not purchased in the Conversion
Offerings may, in the absolute discretion of the Holding Company, be offered for
sale to the general public through a syndicate of registered broker-dealers to
be formed and managed by Sandler O'Neill (the "Syndicated Community Offering").
The Conversion Offerings and the Syndicated Community Offering, if any, are
hereinafter collectively referred to as the "Offerings."
The Holding Company Common Stock issued in the Offerings will be freely
transferable under the Securities Act of 1933, as amended (the "1933 Act");
provided, however that shares issued to directors and officers of Mercer Mutual
or of the Holding Company will be restricted as to transfer for a period of one
year from the effective date of the Conversion pursuant to the provisions of the
Act, and will be subject to additional transfer restrictions under the
Securities Act of 1933, as amended.
APPRAISAL OF THE COMPANY
The Act requires that the aggregate purchase price of the Holding Company
Common Stock to be issued in the Conversion be equal to the fair market value of
such shares based upon an independent appraisal of the estimated consolidated
pro forma market value of Mercer Mutual following the Conversion as a subsidiary
of the Holding Company. Sheshunoff, a firm experienced in corporate valuations,
has made an independent appraisal of the estimated consolidated pro forma market
value of Mercer Mutual (the "Appraisal") as a subsidiary of the Holding Company
and has determined that, as of June 4, 1998, such estimated consolidated pro
forma market value ranged from $25,075,000 to $33,925,000 (the "Estimated
Valuation Range"). The Holding Company, in consultation with its advisors, has
determined to offer the shares in the Conversion at a price of $10.00 per share
(the "Purchase Price"). Accordingly, the Holding Company will offer between
2,507,500 and 3,392,500 shares of Holding Company Common Stock in the Offerings,
except that the Holding Company may issue up to 3,769,444 shares if necessary to
satisfy the ESOP's subscription rights to purchase 10% of the shares issued in
the Conversion. Such Appraisal is not intended and must not be construed as a
recommendation of any kind as to the advisability of purchasing such shares or
as any form of assurance that, after the Conversion, such shares can be resold
at or above the Purchase Price. The Appraisal considered a number of factors and
was based upon estimates derived from those factors, all of which are subject to
change from time to time. In preparing the valuation, Sheshunoff relied upon and
assumed the accuracy and completeness of financial and statistical information
provided by Mercer Mutual. Sheshunoff did not verify the unaudited consolidated
financial statements of Mercer Mutual as of and for the three months ended March
31, 1998 or the audited consolidated financial statements of Mercer Mutual as of
and for the years ended December 31, 1997, 1996 or 1995, or independently value
the assets of Mercer Mutual. The Appraisal will be further updated immediately
prior to the completion of the Conversion.
The total number of shares to be issued in the Conversion may be increased
or decreased without a resolicitation of subscribers so long as the aggregate
purchase price is not less than the minimum or more than the maximum of the
Estimated Valuation Range, which maximum may be increased if necessary to
satisfy the ESOP's subscription rights. Based on the Purchase Price and
excluding shares issued to the ESOP, the total number of shares of Holding
Company Common Stock that may be issued without a resolicitation of subscribers
is from 2,507,500 to 3,392,500 shares.
AMENDMENT OF ARTICLES OF INCORPORATION.
The Conversion will be accomplished by filing Articles of Conversion of
Mercer Mutual. Upon completion of the Conversion, Mercer Mutual will issue all
of its newly issued shares of common stock
9
<PAGE> 11
(100,000 shares) to the Holding Company in exchange for $5 million of the net
proceeds from the Offerings. None of Mercer Mutual's assets will be distributed
in order to effect the Conversion, other than to pay expenses incident thereto.
The proposed amendment and restatement of Mercer Mutual's existing Articles
of Incorporation is an integral part of the Plan. A copy of the proposed Amended
and Restated Articles of Incorporation of Mercer Mutual are attached to this
Proxy Statement as Exhibit B.
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 the Company 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
early December 1995. On August 12, 1997, management was directed by the Board of
Directors 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 next regularly scheduled meeting of the Board of Directors
on October 17, 1997, the Board of Directors unanimously adopted the Plan,
subject to approval by the Department and the policyholders of Mercer Mutual.
The Board of Directors unanimously adopted amendments to the Plan on November
12, 1997. An application with respect to the Conversion was filed by the Company
with the 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. The
Board of Directors adopted additional amendments to the Plan on April 15, 1998
and May 13, 1998. The Department, after publication of notice and the mailing of
such a notice to each Eligible Policyholder, held a public hearing regarding the
Conversion on June 5, 1998. The Plan was approved by the Pennsylvania Department
on July , 1998 and is subject to the approval of Eligible Policyholders at the
Special Meeting.
The net proceeds from the sale of Holding Company Common Stock in the
Conversion will substantially increase the equity of the Holding Company and the
equity and statutory surplus of Mercer Mutual, thereby enhancing policyholder
protection and increasing the amount of funds available to support both current
operations and future growth. The Holding Company presently estimates that it
will receive, after adjustment to reflect the purchase of shares by the ESOP,
between $20.7 million and $31.8 million in net proceeds from the Offerings. Of
this amount, the Holding Company expects to contribute $5.0 million to Mercer
Mutual in exchange for all of Mercer Mutual's common stock. In addition, the
holding company structure will provide greater flexibility than Mercer Mutual
alone would have for diversification of business activities and geographic
operations. Management believes that this increased capital and operating
flexibility will enable Mercer Mutual to compete more effectively with other
insurance companies. Management also believes that
10
<PAGE> 12
the Conversion will enhance the future access of the Holding Company to the
capital markets and permit the Holding Company to attract, motivate and retain
highly qualified employees though the use of stock-based compensation programs.
EFFECT OF THE CONVERSION ON POLICYHOLDERS
General. Each policyholder in a mutual insurance company, such as the
Company, has certain interests in the 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 Mercer Mutual and certain other fundamental corporate
transactions, such as an amendment to the articles of incorporation of Mercer
Mutual or a merger of Mercer Mutual, (ii) the right to receive dividends if, as
and when declared by the Board of Directors of Mercer Mutual (Mercer Mutual has
never declared a policyholder dividend and currently does not anticipate doing
so in the future), and (iii) in the unlikely event of a solvent dissolution of
Mercer Mutual, the right to receive a pro rata distribution of any surplus
remaining after the satisfaction of all claims and other liabilities of Mercer
Mutual. However, these interests 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 Mercer Mutual
described above. Upon the completion of the Conversion, the interests of Mercer
Mutual's policyholders, other than their contractual rights under insurance
policies, will be terminated as a result of the Conversion.
IF THE PLAN IS NOT APPROVED BY THE REQUISITE VOTE OF THE ELIGIBLE
POLICYHOLDERS OR IF THE CONVERSION FAILS TO BE COMPLETED FOR ANY OTHER REASON,
MERCER MUTUAL WILL CONTINUE ITS EXISTENCE AS AN INDEPENDENT MUTUAL INSURANCE
COMPANY.
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 serving Mercer Mutual at the time of the Conversion
will serve as the Board of Directors of Mercer Mutual after the Conversion. The
Board of Directors of the Holding 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, Jr., Richard U. Niedt, Andrew R.
Speaker, Eric W. Turner, Jr. and Richard G. Van Noy. 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. Instead, voting rights
in Mercer Mutual will be vested exclusively in the Holding Company, which will
own all the capital stock of Mercer Mutual. Voting rights in the Holding Company
will be vested exclusively in the shareholders of the Holding Company. Each
holder of Holding Company Common Stock shall be entitled to vote on any matter
to be considered by the shareholders of the Holding Company, subject to the
terms of the Holding Company's Articles of Incorporation, Bylaws and to the
provisions of Pennsylvania and federal law.
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 Holding Company, its
shareholders, including Eligible Policyholders who purchase shares of Holding
Company Common Stock in the Subscription Offering, will have the exclusive right
to receive dividends paid by the Holding Company.
11
<PAGE> 13
Rights Upon Dissolution. After the Conversion, policyholders will no
longer have the right to receive a pro rata distribution of any remaining
surplus in the unlikely occurrence of a solvent dissolution of Mercer Mutual.
Instead, this right will vest in the Holding Company as the sole shareholder of
Mercer Mutual.
Tax Effects.
In General.
The Company has obtained from the Internal Revenue Service (the "IRS") 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. The
PLR confirms, 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 the 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 Holding Company 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
Holding Company 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
Holding Company 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, the IRS has
ruled 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 will 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,
any gain resulting from the receipt of the subscription rights should constitute
a capital gain, and provided the Holding Company 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 Holding Company 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
12
<PAGE> 14
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.
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.
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 Holding
Company will be final, conclusive and binding upon all persons. The Plan may be
amended at any time by the affirmative vote of two-thirds of the directors of
the Holding Company and Mercer Mutual, subject to the Department's approval of
such amendment. The Plan may be amended at any time after it is approved by
Eligible Policyholders of Mercer Mutual and prior to the effective date of the
Conversion by the affirmative vote of two-thirds of the directors of the Holding
Company and of Mercer Mutual then in office; provided, however, that any such
amendment shall be subject to approval by the Department; and provided further,
that, if such amendment is determined by the 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 the Department adopts regulations containing mandatory or
optional provisions applicable to the Conversion prior to its 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
Holding Company and of Mercer Mutual, and no resolicitation of proxies or
further approval by the Eligible Policyholders shall be required.
TERMINATION
The Plan may be terminated at any time before it is approved by Eligible
Policyholders by the affirmative vote of two-thirds of the directors of the
Holding 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 of the
Conversion by the affirmative vote of two-thirds of the directors of the Holding
Company and of Mercer Mutual; provided, however, that any such termination shall
be subject to approval by the Department.
CERTAIN BENEFITS TO MANAGEMENT
The ESOP is expected to purchase 10% of the shares of Holding Company
Common Stock sold in the Conversion, which will be awarded to substantially all
employees without payment by such persons of cash consideration. Under the ESOP,
shares of Holding Company Common Stock will be allocated annually to employees
of Mercer Mutual over a 10 year period on the basis of their respective annual
wages. Employees must be employed at least 500 hours in a calendar year in order
to receive an allocation. In addition, the Holding Company intends to adopt the
MRP, pursuant to which the Holding Company intends to award to employees and
directors of the Holding Company up to 4% of the number of shares of Holding
Company Common Stock sold in the Conversion without payment by such persons of
cash consideration, and the Compensation Plan, pursuant to which the Holding
Company intends to grant options to acquire Holding Company Common Stock to
employees and directors of Mercer Mutual and the Holding Company, in an
13
<PAGE> 15
amount up to 10% of the number of shares of Holding Company Common Stock sold in
the Conversion. The MRP and the Compensation Plan are subject to approval by the
Holding 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.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE "FOR" APPROVAL OF THE PLAN.
OFFER TO ACQUIRE MERCER MUTUAL
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 (the "Franklin Offer"). Pursuant to the Franklin Offer, Mercer Mutual
was asked to amend the Plan to provide that its policyholders would receive the
$23.2 million payment, or less than $550 per Eligible Policyholder, assuming
equal distribution to all Eligible Policyholders. Franklin also committed to
contribute an additional $5 million of capital to Mercer Mutual. Mercer Mutual's
Board of Directors unanimously rejected the Franklin Offer.
The Board of Directors believes that the Franklin Offer is not in the best
interest of Mercer Mutual and its policyholders and other constituents. The
Franklin Offer is completely inconsistent with Mercer Mutual's long-term
strategy of independently growing and developing its business and surplus
through operations, capital formation and acquisitions of out-of-market
insurance companies in order to improve its strength and diversity. An
acquisition of Mercer Mutual by Franklin, which does business only in New
Jersey, would be diametrically opposed to Mercer Mutual's core strategy of
improving the geographic diversity of its business. See "Description of the Plan
of Conversion -- Background and Reasons for the Conversion" for a description of
the business strategies of Mercer Mutual.
On April 24, 1998, Franklin demanded that Mercer Mutual allow Franklin to
examine Mercer Mutual's list of Eligible Policyholders. On May 7, 1998, Mercer
Mutual refused such demand and 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 rejected Franklin's request because management of Mercer
Mutual believes that Franklin's intended purposes for requesting a list of
Eligible Policyholders are (i) to solicit opposition to the Plan so that
Conversion will not be approved by the Eligible Policyholders and Mercer Mutual,
a competitor of Franklin, will not complete the Conversion and become a stronger
competitor, and (ii) to use the list to make an offer for the stock of Mercer
Mutual, in violation of the insurance holding company laws. Management further
believes that allowing Franklin to inspect and copy its proprietary list of
Eligible Policyholders would enable Franklin to use the list to communicate and
market Franklin and its insurance products directly to Mercer Mutual's
policyholders. Further, management believes that Mercer Mutual policyholders
have an expectation that their relationship as a policyholder of Mercer Mutual
will be kept private and, therefore, exposing the policyholder list to Franklin,
as well as any of Franklin's communications resulting therefrom, could be
considered an invasion of the Eligible Policyholders' privacy.
On May 11, 1998, Franklin responded by filing in the same court an
application to compel production of the policyholder list. The litigation
between Mercer and Franklin is still pending.
The only matter that lawfully is before the Special Meeting is the Plan in
the form attached to this Proxy Statement. The Franklin Offer is not before the
Special Meeting. Any motions made at the Special Meeting other than the motion
to approve the Plan in the form attached to this Proxy Statement may be declared
by the chairman of the Special Meeting to be out of order, in which case they
will not be considered or voted on by policyholders at the Special Meeting.
14
<PAGE> 16
Even if the Franklin Offer was voted on and approved by a majority or more
of the Eligible Policyholders, such vote would not be binding on Mercer Mutual
or its Board of Directors, and the Board would take no action to accept,
implement or effect the Franklin Offer. The Board of Directors has made the
determination that acceptance of the Franklin Offer is not in the best interest
of Mercer Mutual and its constituents. If the Plan is not approved by the
requisite vote of the Eligible Policyholders, Mercer Mutual will continue its
existence as an independent mutual insurance company.
THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
The following is a summary of certain provisions of the Amended and
Restated Articles of Incorporation and Bylaws of Mercer Mutual, which will
become effective upon the completion of the Conversion.
Mercer Mutual's Amended and Restated Articles of Incorporation will
authorize Mercer Mutual to issue 100,000 shares of common stock, $40.00 par
value per share. All of Mercer Mutual's outstanding common stock will be issued
to and owned by the Holding Company. Accordingly, exclusive voting rights with
respect to the affairs of Mercer Mutual after the Conversion will be vested in
the Board of Directors of the Holding Company. A VOTE IN FAVOR OF THE PLAN WILL
ALSO CONSTITUTE A VOTE TO APPROVE THE AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF MERCER MUTUAL.
Mercer Mutual's Bylaws will provide that the number of directors of Mercer
Mutual shall not be fewer than five, with the exact number to be determined by
the Board of Directors. The proposed Bylaws will provide that the number of
directors will not be staggered, so that all of the members of the Board will be
elected each year.
Mercer Mutual's Amended and Restated Articles of Incorporation will provide
that such Articles may be amended only if such amendment is approved by the
Board of Directors of Mercer Mutual, and, if and to the extent required by law,
approved by the Department and the shareholders of Mercer Mutual (i.e., the
Holding Company). The Bylaws may be amended by a majority vote of the Board of
Directors of Mercer Mutual or by a majority vote of the outstanding shares of
voting stock of Mercer Mutual at a meeting called for such purpose.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF MERCER MUTUAL UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE PLAN. VOTING IN FAVOR OF THE PLAN WILL NOT OBLIGATE
ANY PERSON TO PURCHASE HOLDING COMPANY COMMON STOCK IN THE OFFERINGS.
15
<PAGE> 17
ADDITIONAL INFORMATION
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY MATERIAL
AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, TO
FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE TO ASSURE
THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON
IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY WRITTEN
INSTRUMENT DELIVERED TO THE SECRETARY OF MERCER MUTUAL AT ANY TIME PRIOR TO OR
AT THE SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY THE HOLDING COMPANY COMMON STOCK. SUCH OFFERS MAY BE MADE ONLY BY
THE PROSPECTUS.
BY ORDER OF THE BOARD OF DIRECTORS
William C. Hart
President, Chief Executive Officer and
Director
, 1998
Pennington, New Jersey
16
<PAGE> 18
EXHIBIT "A"
AMENDED AND RESTATED PLAN OF CONVERSION
FROM MUTUAL TO STOCK ORGANIZATION
MERCER MUTUAL INSURANCE COMPANY
ADOPTED OCTOBER 17, 1997,
AS AMENDED AND RESTATED ON NOVEMBER 12, 1997,
APRIL 15, 1998 AND MAY 13, 1998.
1. BACKGROUND AND BUSINESS PURPOSE
As of and effective on October 17, 1997, the Board of Directors of Mercer
Mutual Insurance Company ("Mercer Mutual"), after careful study and
consideration, adopted by unanimous vote this Plan of Conversion from Mutual to
Stock Organization (the "Plan"). Under the Plan, Mercer Mutual will convert from
a Pennsylvania mutual insurance company to a Pennsylvania stock insurance
company pursuant to the Insurance Company Mutual-to-Stock Conversion Act, 40
P.S. Sections 911-A, et seq. (the "Act") and will become a wholly-owned
subsidiary of Mercer Insurance Group, Inc., a to-be-formed holding company (the
"Holding Company") to be incorporated under Pennsylvania law at the direction of
Mercer Mutual. Mercer Mutual, as converted, is sometimes hereinafter referred to
as the "Converted Company" and the foregoing transaction is sometimes
hereinafter referred to as the "Conversion."
The Conversion is subject to provisions of the Act and the policies of the
Pennsylvania Department of Insurance (the "Department").
The Plan is subject to the prior written approval of the Department. The
Plan also must be approved by: (i) the affirmative vote of a majority of the
members of the Board of Directors of the Holding Company, and (ii) the
affirmative vote of at least two-thirds of the votes cast at a meeting of the
Eligible Policyholders (as hereinafter defined) of Mercer Mutual called for the
purpose of considering and voting upon the Plan. Pursuant to the Plan, shares of
stock of the Holding Company will be offered at a predetermined and uniform
price in a subscription offering pursuant to the exercise of non-transferable
subscription rights granted to the following persons (collectively, the
"Participants"): first to the Eligible Policyholders of Mercer Mutual; second,
to a tax-qualified employee stock benefit plan to be established by the Holding
Company, and third, to the directors, officers and employees of Mercer Mutual.
Shares not subscribed for in the subscription offering may be offered to the
general public in a community offering conducted concurrently with the
subscription offering. Shares remaining unsold, if any, may then be offered to
the general public in a best efforts or firm commitment underwritten public
offering or otherwise. The aggregate purchase price of the Holding Company stock
to be sold in the Conversion will be based upon an independent appraisal of
Mercer Mutual and will reflect the estimated consolidated pro forma market value
of the Converted Company as a subsidiary of the Holding Company.
It is the desire of the Board of Directors of Mercer Mutual to attract new
capital to the Converted Company in order to: (i) increase its statutory surplus
(and thereby strengthen policyholder protection), (ii) support current
operations, product growth, diversification of risk, and geographic expansion,
(iii) provide increased opportunities for existing employees, and (iv) create
new jobs. It is the further desire of the Board of Directors of Mercer Mutual to
reorganize the Converted Company as a wholly-owned subsidiary of the Holding
Company in order to enhance and improve operational flexibility, diversification
of business opportunities and financial capability for business and regulatory
purposes, thus enabling the Converted Company to compete more effectively with
other insurance companies. In addition, the Board of Directors of the Holding
Company intends to adopt a stock option plan and other stock benefit plans to
better attract, motivate and retain highly qualified employees, officers and
directors.
No change will be made in the Board of Directors or management of Mercer
Mutual as a result of the Conversion.
A-1
<PAGE> 19
2. DEFINITIONS
Act: The term the "Act" means the Insurance Company Mutual-to-Stock
Conversion Act (40 P.S. Sections 911-A, et seq.).
Acting in Concert: The term "Acting in Concert" means (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. A
person who acts in concert with another person ("other party") shall also be
deemed to be acting in concert with any person who is also acting in concert
with that other party, except that any Tax-Qualified Employee Stock Benefit Plan
will not be deemed to be acting in concert with its trustee or a person who
serves in a similar capacity solely for the purpose of determining whether stock
held by the trustee and stock held by the Tax-Qualified Employee Benefit Plan
will be aggregated.
Affiliate: The term "Affiliate" means, with respect to a person, a person
that, directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with such person.
Application: The term "Application" means the application for approval of
the Conversion to be filed by Mercer Mutual with the Department as contemplated
in Section 3 of the Plan.
Associate: The term "Associate," when used to indicate a relationship with
any person, means: (i) any corporation or organization (other than Mercer
Mutual, the Holding Company, a majority-owned subsidiary of Mercer Mutual or the
Holding Company or any other entity that is a member of the same consolidated
group as Mercer Mutual or the Holding Company under generally accepted
accounting principles) of which such person is an officer or partner or is,
directly or indirectly the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, except that such term shall not include a
Tax-Qualified Employee Stock Benefit Plan in which a person has a substantial
beneficial interest or serves as a trustee in a similar fiduciary capacity; and
(iii) any relative or spouse of such person, or any relative of such spouse, who
has the same home as such person.
Code: The term "Code" means the Internal Revenue Code of 1986, as amended.
Commissioner: The term "Commissioner" means the Insurance Commissioner of
the Commonwealth of Pennsylvania.
Community Offering: The term "Community Offering" means the offering of
shares of Conversion Stock to the general public by the Holding Company
concurrently with the Subscription Offering, giving preference 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 Residents of the Local Community, (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 that have been appointed by Mercer Mutual to market
and distribute policies of insurance, and their affiliates, (iv) named insureds
under policies of insurance issued by Mercer Mutual after October 17, 1997, and
(v) providers of goods or services to Mercer Mutual.
Conversion: The term "Conversion" means: (i) the amendment of the Articles
of Incorporation of Mercer Mutual to authorize the issuance of shares of
Converted Company Capital Stock and to conform to the requirements of a
Pennsylvania stock insurance company under the laws of the Commonwealth of
Pennsylvania, (ii) the offer and sale of Conversion Stock by the Holding Company
in the Subscription Offering and the Community Offering and in Underwritten
Public Offering or otherwise, and (iii) the purchase by the Holding Company of
all the Converted Company Capital Stock; all in accordance with the terms of the
Plan.
Conversion Stock: The term "Conversion Stock" means the shares of no par
value common stock to be offered and sold by the Holding Company pursuant to the
Plan.
A-2
<PAGE> 20
Converted Company: The term "Converted Company" means Mercer Mutual in its
form as a Pennsylvania stock insurance company resulting from its conversion to
the stock form of organization in accordance with the terms of the Plan.
Converted Company Capital Stock: The term "Converted Company Capital
Stock" means any and all authorized shares of capital stock of the Converted
Company.
Effective Date: The term "Effective Date" means the date Articles of
Conversion for Mercer Mutual are filed in the office of the Department of State
of the Commonwealth of Pennsylvania or such later date as may be specified in
such Articles.
Eligibility Record Date: The term "Eligibility Record Date" means the
close of business on October 17, 1997, the effective date of the adoption of the
Plan by the Board of Directors of Mercer Mutual.
Eligible Policyholder: The term "Eligible Policyholder" means a person
who, on the Eligibility Record Date, is a named insured under a Qualifying
Policy issued by Mercer Mutual.
Holding Company: The term "Holding Company" means Mercer Insurance Group,
Inc., a Pennsylvania business corporation incorporated at the direction of
Mercer Mutual for the purpose of becoming a holding company for the Converted
Company through (i) the issuance and sale of Conversion Stock under the Plan,
and (ii) the concurrent purchase of all of the Converted Company Capital Stock
to be issued and sold pursuant to the Plan.
Holding Company Stock: The term "Holding Company Stock" means any and all
authorized shares of capital stock of the Holding Company.
Independent Appraiser: The term "Independent Appraiser" means a person
independent of Mercer Mutual and the Holding Company, experienced and expert in
the area of corporate appraisals, to be chosen by Mercer Mutual and retained by
it to prepare an appraisal of the consolidated pro forma market value of the
Converted Company as a subsidiary of the Holding Company.
Local Community: The term "Local Community" means the State of New Jersey
and the Commonwealth of Pennsylvania, in their entirety, which States comprise
the primary geographic market area of Mercer Mutual.
Market Maker: The term "Market Maker" means a dealer (i.e., any person who
engages, either for all or part of such person's time, directly or indirectly,
as agent, broker or principal in the business of offering, buying, selling or
otherwise dealing or trading in securities issued by another person) who, with
respect to a particular security: (i) regularly publishes bona fide, competitive
bid and offer quotations in a recognized interdealer quotation system or
furnishes bona fide competitive bid and offer quotations on request, and (ii) is
ready, willing and able to effect transactions in reasonable quantities at such
dealer's quoted prices with other brokers or dealers.
Maximum of the Valuation Range: The term "Maximum of the Valuation Range"
means the valuation that is 15 percent (15%) above the midpoint of the Valuation
Range as provided in Section 7(A)(1) of the Plan.
Mercer Mutual: The term "Mercer Mutual" means Mercer Mutual Insurance
Company.
Minimum of the Valuation Range: The term "Minimum of the Valuation Range"
means the valuation that is 15 percent (15%) below the midpoint of the Valuation
Range as provided in Section 7(A)(1) of the Plan.
Offering: The term "Offering" means the Offering of Conversion Stock by
the Holding Company in the Subscription Offering, the Community Offering and in
an Underwritten Public Offering or otherwise pursuant to the Plan.
Officer: The term "officer" means an executive officer of the Holding
Company or of Mercer Mutual, as the case may be, including the President, the
Executive Vice President, any Senior Vice President, and Vice Presidents in
charge of principal business functions.
A-3
<PAGE> 21
Order Form: The term "Order Form" means the order form or forms to be used
by Eligible Policyholders and other persons eligible to purchase Conversion
Stock pursuant to the Plan.
Participant: The term "Participant" means a person entitled to purchase
shares of Conversion Stock in the Subscription Offering (i.e., an Eligible
Policyholder, a Tax-Qualified Employee Stock Benefit Plan, or a director,
officer or employee of Mercer Mutual).
Person: The term "person" means any individual, corporation, partnership,
association, limited liability company, trust or other entity.
Plan: The term "Plan" means this Plan of Conversion, as it may from time
to time be amended, under which Mercer Mutual will convert from a
Pennsylvania-chartered mutual insurance company to a Pennsylvania-chartered
stock insurance company and become a wholly-owned subsidiary of the Holding
Company.
Private Placement: The term "Private Placement" means the offer and sale
of Conversion Stock in a private placement as contemplated under Section 7 of
the Plan.
Purchase Price: The term "Purchase Price" means the uniform price per
share at which the Conversion Stock will be offered and sold in the Offering,
which price shall be determined by the Holding Company in accordance with
Section 7(A) of the Plan.
Qualifying Policy: The term "Qualifying Policy" means a policy of
insurance issued by Mercer Mutual and in force as of the close of business on
the Eligibility Record Date.
Registration Statement: The term "Registration Statement" means the
Registration Statement on Form S-1 and any amendments thereto filed by the
Holding Company with the SEC pursuant to the Securities Act of 1933, as amended,
to register the shares of Conversion Stock.
Resident: The term "Resident," as used in this Plan in relation to the
preference afforded natural persons and trusts of 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 the Local Community) and continues to reside therein at the time of the
Subscription and Community Offerings. Mercer Mutual may utilize policyholder
records and such other evidence as it may determine to be relevant to make a
determination as to whether a person resides in the Local Community. In the case
of a corporation or other business entity, such entity shall be deemed to be a
Resident 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 shall be made by Mercer Mutual in its sole and absolute discretion and
shall be final and binding.
Sale: The terms "sale" and "sell" mean every contract to sell or otherwise
dispose of a security or an interest in a security for value, but such terms do
not include an exchange of securities in connection with a merger or acquisition
approved by the Department.
SEC: The term "SEC" means the Securities and Exchange Commission or any
successor agency.
Special Meeting: The term "Special Meeting" means the Special Meeting of
Eligible Policyholders to be called by Mercer Mutual for the purpose of
submitting the Plan to its Eligible Policyholders for approval.
Subscription Offering: The term "Subscription Offering" means the offering
of shares of Conversion Stock to Eligible Policyholders, a Tax-Qualified
Employee Stock Benefit Plan and directors, officers and employees of Mercer
Mutual.
Subscription and Community Offering Prospectus: The term "Subscription and
Community Offering Prospectus" means the final prospectus to be used in
connection with the Subscription and Community Offerings.
Subscription Rights: The term "Subscription Rights" means the
non-transferable, non-negotiable, personal rights of Eligible Policyholders, the
Tax-Qualified Employee Stock Benefit Plan and directors, officers and employees
of Mercer Mutual to subscribe to purchase Conversion Stock at the Purchase
Price.
A-4
<PAGE> 22
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of Mercer Mutual or of the Holding Company, such as an
employee stock ownership plan, stock bonus plan, profit sharing plan or other
plan that, with its related trust, meets the requirements to be "qualified"
under Section 401 of the Internal Revenue Code of 1986, as amended. The term
"Non-Tax-Qualified Employee Stock Benefit Plan" means any defined benefit plan
or defined contribution plan which is not so qualified.
Underwritten Public Offering: The term "Underwritten Public Offering"
means the offer and sale of Conversion Stock in a best efforts or firm
commitment underwritten public offering as contemplated under Section 7 of the
Plan.
Valuation Range: The term "Valuation Range" means the estimated range of
the consolidated pro forma market value of Mercer Mutual as a subsidiary of the
Holding Company, to be prepared by the Independent Appraiser as provided in
Section 7(A)(1) of the Plan.
3. APPLICATION
Within 90 days after adoption of the Plan by the Board of Directors of
Mercer Mutual and prior to submission of the Plan to the Eligible Policyholders
for approval at the Special Meeting, Mercer Mutual must file an application for
approval of the Conversion with the Department pursuant to the Act (the
"Application"). The Application shall contain the following:
(A) The Plan;
(B) The independent evaluation of pro forma market value required by
Section 7(A) of the Plan;
(C) The form of notice required by this Section 3;
(D) The form of proxy to be solicited from Eligible Policyholders
pursuant to Section 4 of the Plan;
(E) The form of notice required by Section 809-A of the Act to persons
whose policies are issued after adoption of the Plan but before the
Effective Date;
(F) The proposed amended Articles of Incorporation and Bylaws of the
Converted Company; and
(G) The acquisition of control statement, as required by Section 1402
of the Insurance Company Act of 1921, as amended.
Upon the filing of the Application, Mercer Mutual shall send a notice by
first class mail to each Eligible Policyholder, which notice shall: (i) advise
such Eligible Policyholder of the adoption of the Plan, (ii) advise such
Eligible Policyholder of the filing of the Plan with the Department, (iii)
notify such Eligible Policyholder of his or her right to provide comments on the
Plan to the Department and to Mercer Mutual, (iv) advise such Eligible
Policyholder of the procedure to be followed in providing comments on the Plan;
(v) notify such Eligible Policyholder of his or her right to request and receive
a copy of the Plan; and (vi) disclose to such Eligible Policyholder that the
initial Plan is not the final approved Plan and that the Commissioner's
approval, if any, of the final plan does not constitute or imply endorsement of
the Plan or the Conversion by the Commissioner or the Department. Such notice
may be given by mailing one notice to the address of each Qualifying Policy, as
such address appears on the records of Mercer Mutual; separate notices to each
person who is an Eligible Policyholder in respect of such Qualifying Policy
shall not be required.
4. THE SPECIAL MEETING
Following the filing of the Application with the Department, a Special
Meeting to vote on the Plan shall be held by Mercer Mutual in accordance with
the bylaws of Mercer Mutual and applicable law. Notice of the Special Meeting
will be given by Mercer Mutual by means of the mailing of (i) a notice of
special meeting, (ii) a proxy statement, (iii) a form of proxy authorized for
use by the Department and (iv) a copy of the Plan as approved by the Department,
to the address of each Qualifying Policy as such address appears on the records
of Mercer Mutual at least 30 days prior to the Special Meeting; separate notices
to each person who is an Eligible Policyholder in respect of such Qualifying
Policy shall not be required. Mercer Mutual may in its
A-5
<PAGE> 23
discretion include with this mailing a Subscription and Community Offering
Prospectus as provided in Section 5 below.
Pursuant to the Act, the Plan must be approved by the affirmative vote of
at least two-thirds of the votes cast at the Special Meeting to be held by
Mercer Mutual. Voting may be in person or by proxy. The Department shall be
promptly notified of the vote of the Eligible Policyholders taken at the Special
Meeting. The Plan shall not be deemed to have been approved unless it is
approved by the Eligible Policyholders of Mercer Mutual.
5. OFFERING DOCUMENTS
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Community
Offering concurrently with or during the proxy solicitation of Eligible
Policyholders. The Holding Company may close the Subscription Offering and the
Community Offering before the Special Meeting, provided that the offer and sale
of the Conversion Stock shall be conditioned upon approval of the Plan by the
Eligible Policyholders.
The proxy solicitation materials of Mercer Mutual may require an Eligible
Policyholder to return to Mercer Mutual, by a reasonable date certain, an
accompanying postage-paid written communication requesting receipt of a
Subscription and Community Offering Prospectus in order to be entitled to
receive a Subscription and Community Offering Prospectus; the Subscription
Offering and the Community Offering shall be deemed under such circumstances to
have commenced on the date of the mailing of the proxy solicitation materials
and may not be closed until the expiration of at least thirty (30) days after
the date of mailing of such proxy solicitation materials; provided, however,
that either or both the Subscription Offering and the Community Offering may be
extended by the Holding Company for up to an additional forty-five (45) days
beyond the expiration of such thirty (30) day period. If the Subscription
Offering is commenced after the Special Meeting, Mercer Mutual shall mail to the
address of each Qualifying Policy as such address appears on the records of
Mercer Mutual, no more than thirty (30) days prior to the commencement of the
Subscription Offering, a written notice of the commencement of the Subscription
Offering, which notice shall state that Mercer Mutual is not required to furnish
a Subscription and Community Offering Prospectus unless an Eligible Policyholder
returns, by a reasonable date certain, an accompanying postage-paid written
communication requesting the receipt of the Subscription and Community Offering
Prospectus. Such notice may be given by mailing one notice to the address of
each Qualifying Policy as such address appears on the records of Mercer Mutual;
separate notices to each person who is an Eligible Policyholder in respect of
such Qualifying Policy shall not be required.
Prior to the commencement of the Subscription and Community Offerings, the
Holding Company shall file the Registration Statement with the SEC pursuant to
the Securities Act of 1933, as amended. The Holding Company shall not distribute
the Subscription and Community Offering Prospectus until the Registration
Statement has been declared effective by the SEC. The Subscription and Community
Offering Prospectus may be combined with the proxy statement prepared in
connection with the Special Meeting.
6. CONSUMMATION OF CONVERSION
The Effective Date will be the date upon which Articles of Conversion are
filed by Mercer Mutual in the office of the Department of State of the
Commonwealth of Pennsylvania. On the Effective Date, the Conversion Stock will
be issued and sold by the Holding Company, the Converted Company Capital Stock
will be issued and sold to the Holding Company and the Converted Company will
become a wholly-owned subsidiary of the Holding Company. The Converted Company
will issue to the Holding Company 100,000 shares of common stock, representing
all of the shares of Converted Company Capital Stock to be issued in the
Conversion, and the Holding Company will pay to the Converted Company that
portion of the aggregate net proceeds realized by the Holding Company from the
sale of the Conversion Stock under the Plan as may be determined by the Holding
Company, subject to any requirement of the Department.
A-6
<PAGE> 24
7. THE OFFERING
A. Determination of the Number of Shares of Conversion Stock Required to be
Offered and Sold.
The number of shares of Conversion Stock required to be offered and sold in
the Conversion will be determined as follows:
1. Independent Appraiser. An expert who is experienced in the field of
corporate appraisals and who is independent of the Holding Company and Mercer
Mutual (the "Independent Appraiser") will be retained by the Holding Company and
Mercer Mutual to prepare an appraisal of the consolidated pro-forma market value
of the Converted Company as a subsidiary of the Holding Company. The Independent
Appraiser will establish a valuation range (the "Valuation Range") consisting of
a midpoint valuation, a valuation 15 percent (15%) above the midpoint valuation
(the "Maximum of the Valuation Range") and a valuation 15 percent (15%) below
the midpoint valuation (the "Minimum of the Valuation Range"). The valuation of
the Independent Appraiser will be based upon the financial condition of Mercer
Mutual, a comparison of Mercer Mutual with comparable publicly-held insurance
companies, and such other factors as the Independent Appraiser may deem to be
relevant and as are not inconsistent with the provisions of the Act, including
(as required by the Act) that value which the Independent Appraiser estimates to
be necessary to attract a full subscription for the Conversion Stock. The
valuation of the Independent Appraiser will be submitted to the Department as
part of the Application to be filed by Mercer Mutual for approval of the
Conversion.
2. Purchase Price. The Purchase Price will be uniform as to all
purchasers in the Offering, will be determined by the Holding Company, and will
be an amount that when multiplied by the number of shares of Conversion Stock
offered (without regard to the shares offered pursuant to clauses 7.A.3(ii) and
(iii)) is within the Valuation Range.
3. Number of Shares of Conversion Stock to be Offered. The number of
shares of Conversion Stock to be offered in the Offering shall be equal to the
sum of: (i) the Maximum of the Valuation Range divided by the Purchase Price,
plus (ii) ten percent (10%) of clause (i), plus (iii) if necessary, the amount
required to enable the Tax-Qualified Employee Stock Benefit Plan to purchase in
the aggregate ten percent (10%) of the total shares of Conversion Stock issued
in the Offering.
4. Number of Shares of Conversion Stock to be Sold. Immediately following
the completion of the Subscription Offering and the Community Offering, the
Independent Appraiser will submit to the Holding Company and to the Department
its updated estimate of the pro-forma fair market value of the Converted Company
as a subsidiary of the Holding Company, as of the later of the last day of the
Subscription Offering or the last day of the Community Offering. If such updated
estimated valuation does not fall within the Valuation Range, then the Holding
Company, after consultation with the Department, may cancel the Offering and
terminate the Plan, establish a new Valuation Range, extend, reopen or hold a
new Offering or take such other action as may be authorized by the Department.
If such updated estimated valuation falls within the Valuation Range, the
following steps will be taken:
a. Subscription Offering Meets or Exceeds Maximum. If, upon conclusion of
the Subscription Offering and the Community Offering, the number of shares
subscribed for by Participants in the Subscription Offering multiplied by the
Purchase Price is equal to or greater than the Maximum of the Valuation Range,
then in such event the Conversion shall be promptly consummated and the Holding
Company on the Effective Date shall issue shares of Conversion Stock to the
subscribing Participants; provided, however, that the number of shares of
Conversion Stock issued shall not exceed the number of shares of Conversion
Stock offered in the Offering. In the event of an oversubscription in the
Subscription Offering, shares of Conversion Stock shall be allocated among the
subscribing Participants as provided in Section 7(C) below; provided, however,
that no fractional shares of Conversion Stock shall be issued.
b. Subscription Offering Meets or Exceeds Minimum. If, upon conclusion of
the Subscription Offering and the Community Offering, the number of shares of
Conversion Stock subscribed for by Participants in the Subscription Offering
multiplied by the Purchase Price is equal to or greater than the Minimum of the
Valuation Range, but less than the Maximum of the Valuation Range, then in such
event the Conversion shall
A-7
<PAGE> 25
be promptly consummated and the Holding Company on the Effective Date shall
issue to the subscribing Participants shares of Conversion Stock in an amount
sufficient to satisfy the subscriptions of such Participants in full. To the
extent that shares of Conversion Stock remain unsold after the subscriptions of
all Participants in the Subscription Offering have been satisfied in full, the
Holding 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 sell shares of Conversion Stock to purchasers in an
Underwritten Public Offering or Private Placement; provided, however, that the
number of shares of Conversion Stock issued shall not exceed the number of
shares of Conversion Stock offered in the Offering; and, provided further, that
no fractional shares of Conversion Stock shall be issued.
c. Subscription Offering Does Not Meet Minimum. If, upon conclusion of
the Subscription Offering and the Community Offering, the number of shares of
Conversion Stock subscribed for by Participants in the Subscription Offering
multiplied by the Purchase Price is less than the Minimum of the Valuation
Range, then in such event the Holding Company shall accept subscriptions
received from subscribers in the Community Offering and/or sell shares of
Conversion Stock to purchasers in an Underwritten Public Offering or Private
Placement. If the aggregate number of shares of Conversion Stock subscribed for
in the Subscription Offering, the Community Offering and in any Underwritten
Public Offering or Private Placement multiplied by the Purchase Price is equal
to or greater than the Minimum of the Valuation Range, then in such event the
Conversion shall be consummated promptly and the Holding Company shall on the
Effective Date shall: (i) issue to subscribing Participants shares of Conversion
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 Underwritten Public Offering or Private Placement such
additional number of shares of Conversion Stock such that the aggregate number
of shares of Conversion Stock to be issued to subscribing Participants, to
subscribers in the Community Offering and/or to purchasers in any Underwritten
Public Offering or Private Placement multiplied by the Purchase Price shall be
equal to the Minimum of the Valuation Range; provided, however, that no
fractional shares of Conversion Stock shall be issued. The Holding Company may
in its absolute discretion elect to issue shares of Conversion Stock to
subscribers in the Community Offering and/or to purchasers in any Underwritten
Public Offering in excess of the number determined by reference to clause (ii)
of the preceding sentence; provided, however, that the number of shares of
Conversion Stock issued shall not exceed the number of shares of Conversion
Stock offered in the Offering.
d. Offering Does Not Meet Minimum. If the aggregate number of shares of
Conversion Stock subscribed for in the Subscription Offering, the Community
Offering and in any Underwritten Public Offering or Private Placement multiplied
by the Purchase Price is less than the Minimum of the Valuation Range, then in
such event the Holding Company, in consultation with the Department, may cancel
the Offering and terminate the Plan, establish a new Valuation Range, extend,
reopen or hold a new Offering or take such other action as may be authorized by
the Department.
If, following a reduction in the Valuation Range approved by the
Department, the aggregate number of shares of Conversion Stock subscribed for in
the Offering multiplied by the Purchase Price is equal to or greater than the
Minimum of the Valuation Range (as such Valuation Range has been reduced), then
in such event the Conversion shall be promptly consummated. The Holding Company
on the Effective Date shall: (i) issue shares of Conversion Stock to
Participants in the Subscription Offering in an amount sufficient to satisfy the
subscriptions of such subscribers in full, and (ii) issue to subscribers in the
Community Offering and/or to purchasers in any Underwritten Public Offering or
Private Placement such additional number of shares of Conversion Stock such that
the aggregate number of shares of Conversion Stock to be issued multiplied by
the Purchase Price shall be equal to the Minimum of the Valuation Range (as such
Valuation Range has been reduced).
e. Discretion of the Holding Company. Notwithstanding anything to the
contrary set forth in the Plan, the Holding 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 Conversion Stock are to be sold
in an Underwritten Public Offering or Private Placement.
A-8
<PAGE> 26
B. Subscription Rights.
Subscription Rights are nontransferable, nonnegotiable personal rights to
subscribe for and purchase shares of Conversion Stock at the Purchase Price that
will be distributed by the Holding Company, without payment, to each
Participant. The receipt of Subscription Rights by a Participant will permit
(but will not require) the Participant to subscribe to purchase shares of
Conversion Stock at the Purchase Price in the Subscription Offering.
The exercise of Subscription Rights is irrevocable and an executed Order
Form may not be modified, amended or rescinded. Conversely, the failure of a
Participant to timely deliver a duly executed Order Form, together with full
payment for the shares of Conversion Stock subscribed for, will be deemed to
constitute an irrevocable waiver and release by the Participant of all rights to
subscribe for and purchase Conversion Stock in the Subscription Offering.
C. The Subscription Offering.
Subscription Rights to purchase shares of Conversion Stock at the Purchase
Price will be distributed by the Holding Company to the Participants in the
following priorities:
1. Eligible Policyholders. Each Eligible Policyholder will receive,
without payment, Subscription Rights to purchase up to the lesser of 5% or one
hundred thousand (100,000) shares of Conversion Stock; provided, however, that
the maximum number of shares that may be purchased by Eligible Policyholders in
the aggregate shall be equal to the Maximum of the Valuation Range divided by
the Purchase Price. In the event of an oversubscription, shares of Conversion
Stock will be allocated among subscribing Eligible Policyholders, as follows.
First, shares of Conversion 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) 1000 shares, or (ii) the number of
shares subscribed for. Second, any shares of Conversion Stock remaining after
such initial allocation will be allocated among the subscribing Eligible
Policyholders whose subscriptions remain unsatisfied in the proportion in which:
(i) the aggregate number of shares as to which each such Eligible Policyholder's
subscription remains unsatisfied bears to (ii) the aggregate number of shares as
to which all such Eligible Policyholders' subscriptions remain unsatisfied;
provided, however, that no fractional shares of Conversion Stock shall be
issued. If, because of the magnitude of the oversubscription, shares of
Conversion 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 Conversion 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.
2. Tax-Qualified Employee Stock Benefit Plans. The Tax-Qualified Employee
Stock Benefit Plan will receive, without payment, Subscription Rights to
purchase in the aggregate up to ten percent (10%) of the shares of Conversion
Stock to be issued in the Conversion.
3. Directors, Officers and Employees. Each director, officer and employee
of Mercer Mutual will receive, without payment, Subscription Rights to purchase
up to the lesser of 5% or one hundred thousand (100,000) shares of Conversion
Stock; provided, however, that such Subscription Rights shall be subordinated to
the Subscription Rights received by the Eligible Policyholders and may be
exercised only to the extent that there are shares of Conversion 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
Conversion Stock shall be allocated among them on the basis of a point system
under which one point will be assigned 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 Conversion Stock
equal to the remaining unallocated shares of Conversion 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-9
<PAGE> 27
A director, officer or employee of Mercer Mutual who subscribes to purchase
shares of Conversion Stock and who is also eligible to purchase shares of
Conversion Stock as an Eligible Policyholder will be deemed to purchase
Conversion Stock first in his or her capacity as an Eligible Policyholder.
D. Community Offering.
To the extent that fewer than the maximum number of shares of Conversion
Stock permitted to be sold to Eligible Policyholders and to the directors,
officers and employees of Mercer Mutual are purchased in the Subscription
Offering, shares of Conversion Stock may be sold to subscribers in the Community
Offering as provided in Section 7(A) above. Shares of Conversion Stock will be
offered in the Community Offering (which will commence concurrently with the
Subscription Offering) to the general public, giving preference to: (i) natural
persons and the trusts of natural persons (including individual retirement and
Keogh retirement accounts and personal trusts in which such natural persons have
substantial interests) who are Residents of the Local Community, (ii) principals
of Eligible Policyholders in the case of an Eligible Policyholder which is a
corporation, partnership, limited liability company or other entity, (iii)
licensed insurance agencies that have been appointed by Mercer Mutual to market
and distribute policies of insurance, and their affiliates, (iv) named insureds
under policies of insurance issued by Mercer Mutual after October 17, 1997, and
(v) providers of goods or services to Mercer Mutual. In the event that the
Holding Company elects to sell shares of Conversion Stock to subscribers in the
Community Offering, shares of Conversion Stock will be allocated among such
subscribers by the Holding Company in its sole discretion and the Holding
Company will have the right in its sole discretion to accept or reject
subscriptions from subscribers in the Community Offering, including the
preferred subscribers described in clauses (i)-(v) of this paragraph, in whole
or in part for any reason or for no reason.
Subject to the preferences described in the preceding paragraph, the
Conversion Stock to be offered in the Community Offering shall be offered and
sold in a manner designed to achieve a wide distribution of the Conversion
Stock.
E. Underwritten Public Offering, Private Placement or Other Action.
To the extent that fewer than the maximum number of shares of Conversion
Stock permitted to be sold to Eligible Policyholders and to the directors,
officers and employees of Mercer Mutual are purchased in the Subscription
Offering, shares of Conversion Stock may be sold in an Underwritten Public
Offering as provided in Section 7(A) above. In the event that the Holding
Company determines that a public offering is impractical, the Holding Company
will consult with the Department to determine the most practical alternative
available to effect the completion of the Conversion, including a Private
Placement of the remaining shares of Conversion Stock or a reduction in the
Valuation Range.
F. Limitations Upon Purchases of Shares of Conversion Stock.
The following additional limitations and exceptions shall apply to all
purchases of Conversion Stock:
1. To the extent that shares are available, no person may purchase fewer
than the lesser of 25 shares of Conversion Stock or shares of Conversion Stock
having an aggregate purchase price of $500.00 in the Conversion.
2. Purchases of shares of Conversion Stock in the Offering by any person,
when aggregated with purchases by such person's Affiliates and Associates, or by
a group of persons Acting in Concert, shall not exceed the lesser of 5% or one
hundred thousand (100,000) shares of Conversion Stock, except that Tax-
Qualified Employee Stock Benefit Plans may purchase up to ten percent (10%) of
the total shares of Conversion Stock issued in the Offering.
3. Officers and directors of Mercer Mutual and the Holding Company,
together with their Associates, may not purchase in the aggregate more than
thirty-four percent (34.0%) of the shares of Conversion Stock issued in the
Offering.
A-10
<PAGE> 28
4. For purposes of determining compliance with paragraphs 2 and 3 above,
shares of Conversion Stock to be held by the Tax-Qualified Employee Stock
Benefit Plans and attributable to a participant thereunder shall not be
aggregated with shares of Conversion Stock purchased by such participant or any
other purchaser of Conversion Stock in the Conversion.
5. Directors of the Holding 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
Holding 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 Holding Company may increase or decrease any of the purchase
limitations set forth herein at any time; provided that in no event shall the
maximum purchase limitation percentage applicable to Eligible Policyholders be
less than the maximum purchase limitation percentage applicable to any other
class of subscribers or purchasers in the Offerings. In the event that the
individual purchase limitation is increased after commencement of the
Subscription Offering and the Community Offering, the Holding Company shall
permit any person who subscribed for the maximum number of shares of Conversion
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 Conversion Stock to be
sold in the Conversion is decreased after commencement of the Subscription
Offering and the Community Offering, the order of any person who subscribed for
the maximum number of shares of Conversion 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 Conversion 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 Holding
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 Holding Company to purchase such excess shares shall be assignable by the
Holding Company.
G. Restrictions on and Other Characteristics of Conversion Stock.
1. Transferability.
Conversion Stock purchased by persons other than directors and officers of
Mercer Mutual and directors and officers of the Holding Company may be
transferred without restriction under the Plan. Conversion Stock purchased by
such directors and officers may not be sold for a period of one (1) year from
the Effective Date, provided that a sale by a personal representative of a
deceased director or officer shall not be considered a sale by such director or
officer.
The certificates representing shares of Conversion Stock issued by the
Holding Company to such directors and officers shall bear the following legend:
The shares of stock evidenced by this Certificate are restricted as to
transfer pursuant to the provisions of the Pennsylvania Insurance
Company Mutual-to-Stock Conversion Act (the "Conversion Act") and the
Securities Act of 1933, as amended (the "Securities Act"), and may not
be sold without an opinion of counsel for Mercer Insurance Group, Inc.
that such sale is permissible under the provisions of the Conversion Act
and the Securities Act.
In addition, the Holding Company shall give appropriate instructions to its
transfer agent with respect to the foregoing restrictions. Any shares of Holding
Company Stock subsequently issued pursuant to a stock
A-11
<PAGE> 29
dividend, stock split or otherwise, with respect to such restricted shares of
Conversion Stock shall be subject to the same restrictions as are then
applicable to such restricted shares of Conversion Stock.
2. Voting Rights.
After the consummation of the Conversion, exclusive voting rights with
respect to the Holding Company shall be vested in the holders of Holding Company
Stock and the Holding Company will have exclusive voting rights with respect to
the Converted Company Capital Stock.
3. Purchases by Officers, Directors and Associates Following Conversion.
Without the prior approval of the Commissioner, officers and directors of
the Converted Company and officers and directors of the Holding Company, and
their Associates, shall be prohibited for a period of three (3) years following
the Effective Date from purchasing outstanding shares of Holding Company Stock,
except through a broker-dealer. Notwithstanding this restriction: (i) block
purchases involving more than one percent (1%) of the then outstanding shares of
Holding Company Stock may be made without the use of a broker-dealer if approved
in writing by the Department, and (ii) purchases may be made by or for the
account of an officer or director (a) pursuant to a Tax-Qualified Employee Stock
Benefit Plan or (b) pursuant to a Non-Tax Qualified Employee Stock Benefit Plan
approved by the shareholders of the Holding Company pursuant to Section 921-A(b)
of the Act.
H. Mailing of Offering Materials and Collection of Subscriptions.
After approval of the Plan by the Department and the declaration of the
effectiveness of the Registration Statement by the SEC, the Holding Company
shall distribute the Subscription and Community Offering Prospectus and Order
Forms for the purchase of shares of Conversion Stock in accordance with the
terms of the Plan.
The recipient of an Order Form must properly complete, execute and return
the Order Form to the Holding Company on or before the last day of the
Subscription Offering or the Community Offering, as the case may be.
Self-addressed, postage paid return envelopes shall accompany the Order Forms
when delivered by the Holding Company to a potential subscriber. The Holding
Company will collate the returned Order Forms upon completion of the
Subscription Offering and the Community Offering. The failure by a person to
return a properly completed and executed Order Form within the prescribed time
limits shall be deemed a waiver and a release by such person of any rights to
purchase shares of Conversion Stock hereunder.
The sale of all shares of Conversion Stock shall be completed within 45
days after the last day of the Subscription Offering unless extended by the
Holding Company with the approval of the Department.
I. Method of Payment.
Payment for all shares of Conversion Stock subscribed for in the
Subscription Offering and the Community Offering must be received in full by the
Holding Company, together with properly completed and executed Order Forms,
indicating thereon the number of shares being subscribed for and such other
information as may be required thereon, on or prior to the expiration date
specified on the Order Form, unless such date is extended by the Holding
Company. Payment for all shares of Conversion Stock may be made by check or
money order.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares of
Conversion Stock by submitting an Order Form, together with (in the case of an
employee stock ownership plan) evidence of a loan commitment from the Holding
Company or an unrelated financial institution for the purchase of the shares of
Conversion Stock, during the Subscription Offering and by making payment for the
shares subscribed for on or before the Effective Date.
A-12
<PAGE> 30
J. Undelivered, Defective or Late Order Forms, Insufficient Payment.
In the event that an Order Form: (i) is not delivered to the addressee and
is returned to the Holding Company by the United States Postal Service (or the
Holding Company or Mercer Mutual are unable to locate the addressee); (ii) is
not received by the Holding Company or is received by the Holding Company after
the date specified thereon; (iii) is defectively completed or executed, or (iv)
is not accompanied by payment in full for the shares of Conversion Stock
subscribed for, the Subscription Rights of the person to whom such rights have
been granted will not be honored and such person will be treated as having
failed to return the completed Order Form within the time period specified
therein. Alternatively, the Holding Company may (but will not be required to)
waive any irregularity relating to any Order Form or require the submission of a
corrected Order Form or the remittance of full payment for the shares of
Conversion Stock subscribed for by such date as the Holding Company may specify.
Subscription orders, once tendered, may not be revoked. The Holding Company's
determinations with respect to the acceptability of the Order Forms will be
final, conclusive and binding upon all persons and neither the Holding 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 determination.
K. Persons Who Reside in Non-Qualified States or in Foreign Countries.
The Holding 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 Conversion Stock pursuant to the Plan reside. However, the Holding
Company shall not be required to offer or sell Conversion Stock to any person
who resides in a foreign country or who resides in a state of the United States
with respect to which any of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares of Conversion Stock under this Plan
reside in such state or foreign country, (ii) the granting of Subscription
Rights or the offer or sale of shares of Conversion Stock to such person would
require the Holding 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 qualification would be impracticable
for reasons of cost or otherwise. No payment will be made to any person in lieu
of the granting of Subscription Rights to any such person.
L. Sales Commissions.
Sales commissions may be paid as determined by the Holding Company or its
designee to securities dealers assisting subscribers in making purchases of
Conversion Stock in the Subscription Offering or in the Community Offering. In
addition, a sales commission may be paid to a securities dealer for advising and
consulting with respect to, or for managing the sale of Conversion Stock in, the
Subscription Offering, the Community Offering or any other offering.
M. Fractional Shares.
No fractional shares of Conversion Stock shall be issued in the Conversion.
All allocations required to be made hereunder in the event of an
oversubscription in the Subscription Offering shall be rounded down to the
nearest whole share.
N. Repurchase of Conversion Stock.
Without the prior approval of the Department, for a period of three (3)
years from the Effective Date, neither the Holding Company or the Converted
Company shall repurchase any Holding Company Stock from any person, except that
this restriction shall not apply to either:
(1) A repurchase on a pro rata basis pursuant to an offer made to all
shareholders of the Holding Company; or
(2) A purchase in the open market by a Tax-Qualified or
Non-Tax-Qualified Employee Stock Benefit Plan in an amount reasonable and
appropriate to fund the Plan.
A-13
<PAGE> 31
8. ARTICLES OF INCORPORATION
As part of the Conversion, Articles of Incorporation will be adopted by
Mercer Mutual to authorize the Converted Company to operate as a Pennsylvania
stock insurance company. By approving the Plan, the Eligible Policyholders of
Mercer Mutual will thereby approve amending Mercer Mutual's existing Articles of
Incorporation. Prior to completion of the Conversion, the form of amended
Articles of Incorporation may be revised in accordance with the provisions and
limitations for amending the Plan under Section 11 below. The amendment of the
existing Articles of Incorporation of Mercer Mutual shall occur on the Effective
Date.
9. REGISTRATION AND MARKET MAKERS
In connection and concurrently with the Conversion, the Holding Company
shall register the Holding Company Stock with the SEC pursuant to the Securities
Exchange Act of 1934, as amended.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the Holding Company
Stock. The Holding Company shall also use its best efforts to have the Holding
Company Stock quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System or listed on a national or regional securities
exchange.
10. STATUS OF POLICIES IN FORCE ON THE EFFECTIVE DATE
Each policy of insurance issued by Mercer Mutual and in force on the
Effective Date shall remain in force as a policy issued by the Converted Company
in accordance with the terms of such policy, except that, as of the Effective
Date: (i) all voting rights (if any) of the holder of such policy shall be
extinguished, (ii) all rights (if any) of the holder of such policy to share in
the surplus of Mercer Mutual or the Converted Company shall be extinguished, and
(iii) in the case of a participating policy, the Converted Company shall have
the right on the renewal date of such policy to issue a nonparticipating policy
as a substitute for the participating policy.
11. INTERPRETATION, AMENDMENT AND TERMINATION OF THE PLAN
A. Interpretation of the Plan.
The Board of Directors of Mercer Mutual and the Board of Directors of the
Holding Company shall have the exclusive authority to interpret and apply the
provisions of the Plan to particular facts and circumstances and to make all
determinations necessary or desirable to implement the Plan. Any such
interpretation, application or determination made in good faith and on the basis
of such information and assistance as was then reasonably available for such
purpose, shall be final, conclusive and binding upon all persons, and neither
the Holding Company nor Mercer Mutual (or the directors, officers, employees or
agents of either of them) shall be liable to any person in connection with any
such interpretation, application or determination.
B. Amendment.
The Plan may be amended, as follows:
1. Before Approval by the Department. The Plan may be amended at any time
before it is approved by the Department by the affirmative vote of two-thirds of
the directors of the Holding Company and two-thirds of the directors of Mercer
Mutual then in office.
2. After Approval by the Department. The Plan may be amended at any time
after its approval by the Department by the affirmative vote of two-thirds of
the directors of the Holding Company and two-thirds of the directors of Mercer
Mutual then in office; provided, however, that any such amendment shall be
subject to approval by the Department.
3. After Approval by the Eligible Policyholders. The Plan may be amended
at any time after its approval by the Eligible Policyholders and prior to the
Effective Date by the affirmative vote of two-thirds of the directors of the
Holding Company and two-thirds of the directors of Mercer Mutual then in office;
provided, however, that any such amendment shall be subject to approval by the
Department; and provided
A-14
<PAGE> 32
further that, if such amendment is determined by the 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 the Eligible Policyholders called
for that purpose.
4. Certain Conforming Amendments. In the event that the Department adopts
mandatory regulations applicable to the Conversion prior to the Effective Date,
the Plan may be amended to conform to such regulations at any time prior to the
Effective Date by the affirmative vote of two-thirds of the directors of the
Holding Company and two-thirds of the directors of Mercer Mutual then in office
and no resolicitation of proxies or further approval by the Eligible
Policyholders shall be required. In the event that the Department adopts
regulations applicable to the Conversion prior to the Effective Date and if such
regulations contain optional provisions, the Plan may be amended to conform to
any such optional provision at any time before the Effective Date by the
affirmative vote of two-thirds of the directors of the Holding Company and
two-thirds of the directors of Mercer Mutual then in office, and no
resolicitation of proxies or further approval by the Eligible Policyholders
shall be required.
C. Termination.
The Plan may be terminated as follows:
1. Before Approval by the Department. The Plan may be terminated at any
time before it is approved by the Department by the affirmative vote of
two-thirds of the directors of the Holding Company and two-thirds of the
directors of Mercer Mutual then in office.
2. After Approval by the Department. The Plan may be terminated at any
time after it is approved by the Department by the affirmative vote of
two-thirds of the directors of the Holding Company and two-thirds of the
directors of Mercer Mutual then in office.
3. After Approval by the Eligible Policyholders. The Plan may be
terminated at any time after it is approved by the Eligible Policyholders and
prior to the Effective Date by the affirmative vote of two-thirds of the
directors of the Holding Company and two-thirds of the directors of Mercer
Mutual then in office; provided, however, that any such termination shall be
subject to approval by the Department.
D. Binding Upon Eligible Policyholders.
By approving the Plan, the Eligible Policyholders of Mercer Mutual
authorize the amendment and termination of the Plan in accordance with the
provisions of this Section 11.
12. STOCK-BASED COMPENSATION PLANS
It is the intention of the Holding Company to adopt a stock compensation
plan (the "Stock Compensation Plan") and a management recognition plan (the
"Management Recognition Plan"), which plans shall, in accordance with the
requirements of the Act, be subject to approval by the shareholders of the
Holding Company at a meeting to be held after the expiration of six (6) months
from the Effective Date.
The Stock Compensation Plan, among other things, will authorize the Board
of Directors of the Holding Company to grant to directors, officers and
employees of the Holding Company and its subsidiaries (including the Converted
Company) options to purchase in the aggregate that number of shares of Holding
Company Stock equal to ten percent (10%) of the number of shares sold in the
Offering.
The Management Recognition Plan will authorize the Board of Directors of
the Holding Company to grant to directors, officers and employees of the Holding
Company and its subsidiaries (including the Converted Company) in the aggregate
that number of restricted shares of Holding Company Stock equal to four percent
(4%) of the number of shares sold in the Offering, which shares of restricted
stock will vest at a rate no greater than ratably over a period of five (5)
years (i.e., if vesting is ratable, then twenty percent (20%) of the shares
would vest each year on the anniversary of the date of grant).
A-15
<PAGE> 33
EXHIBIT B
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
MERCER MUTUAL INSURANCE COMPANY
FIRST. The name of the company is Mercer Mutual Insurance Company.
SECOND. The location and post office address of the registered office of
the company in this Commonwealth is One Glenhardie Corporate Center, Suite 202,
1275 Drummers Lane, Wayne, PA 19087.
THIRD. The company was originally created and organized under the laws of
the Commonwealth of Pennsylvania pursuant to Articles of Domestication filed
with the Department of State on October 16, 1997 and these Amended and Restated
Articles of Incorporation are adopted both pursuant to the provisions of the
Business Corporation Law of 1988 (the "BCL"), as amended, and the Pennsylvania
Insurance Company Mutual to Stock Conversion Act, as amended. The purpose of the
company is and it shall have unlimited power to engage in and to do any lawful
act concerning any and all lawful business for which company may be incorporated
under the BCL, including the business of insurance.
FOURTH. The term of the company's existence is perpetual.
FIFTH. The aggregate number of shares of capital stock which the company
shall have authority to issue is One Hundred Thousand (100,000) shares of common
stock, $40.00 par value per share.
SIXTH. The shareholders of the company shall not have the right to
cumulate their votes for the election of directors.
SEVENTH. No provision of these Amended and Restated Articles of
Incorporation may be amended, altered, changed or repealed unless such
amendment, alteration, change or repeal is:
(a) adopted by the Board of Directors;
(b) approved by the Pennsylvania Department of Insurance, if and to
the extent that such approval is required by law; and
(c) approved by the shareholders of the company, if and to the extent
that such approval is required by law.
B-1
