As filed with the Securities and Exchange Commission on
March 19, 1998
_________________________________________________________________
Registration No. 333-41497
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
AMENDMENT NO. 1 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)
Pennsylvania 6331 23-2934601
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification
of incorporation Classification Number)
or organization) Code Number)
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:
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
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
=================================================================
Proposed
Title of each maximum
class of offering aggregate Amount of
securities to Amount to be price per offering registra-
be registered share price(1) tion fees
- -----------------------------------------------------------------
Common Stock, 3,322,222 $10.00 $33,222,220 $10,067
no par shares(2)
value per
share
=================================================================
(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>
[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 promptly
returned 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 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 Estimated Net
Estimated Net Proceeds of
Underwriting Proceeds Subscription,
Syndicated Commission 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(5) $ $ $ $
</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 March 3, 1998, the estimated
consolidated pro forma market value of Mercer Mutual as
a subsidiary of the Company is between $22.1 million
and $29.9 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>
PROSPECTUS
[LOGO]
MERCER INSURANCE GROUP, INC.
Up to 2,990,000 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 2,990,000 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 221,000 and 332,222
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 2,990,000 shares. The total
numbers of shares of Common Stock offered in the Subscription
Offering may be increased to up to 3,322,222 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.
It is anticipated that shares not subscribed for in the
Subscription Offering and Community Offering (collectively, the
"Conversion Offerings"), if any, will 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 2,210,000 shares of Common Stock in
the Offerings.
For more information, please call the Stock Information
Center (the "Conversion Center") toll-free at 1-888-___-____.
Prospective investors should review and consider the
discussion under "Risk Factors" beginning on page __.
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.
Purchase Fees and Estimated Net
Price(1) Expenses(2) Proceeds(3)
Per Share(4)... $ 10.00 $ .64 $ 9.36
Total Minimum.. $22,100,000.00 $1,587,100.00 $20,512,900.00
Total Midpoint. $26,000,000.00 $1,657,300.00 $24,342,700.00
Total Maximum.. $29,900,000.00 $1,727,500.00 $28,172,500.00
(1) Determined in accordance with an independent appraisal
(the "Appraisal") prepared by Alex Sheshunoff & Company
("Sheshunoff") and updated as of March 3, 1998, which
states that the consolidated pro forma market value of
Mercer Mutual as a subsidiary of the Company ranged
from $22.1 million (the "Total Minimum") to
$29.9 million (the "Total Maximum") with a midpoint of
$26 million (the "Total Midpoint," collectively, the
range from the Total Minimum to the Total Maximum is
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 2,990,000 shares at a Purchase Price of $10.00
per share (the "Purchase Price"). The Company,
however, may issue up to 3,322,222 shares in the event
the ESOP purchases shares in excess of the Total
Maximum in order to satisfy its 10% subscription. The
final appraised value will be determined at the time of
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 $437,100 and $577,500 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 $2.2 million at the Total Minimum, $2.6 million at
the Total Midpoint, and $3.0 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 $9.28 and $9.42, respectively.
SANDLER O'NEILL & PARTNERS, L.P.
The date of this Prospectus is __________________, 1998
<PAGE>
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 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 2,990,000 shares or more, the Company, as required
by the Plan, will sell all 2,990,000 shares offered
hereby to participants in the Subscription Offering and
will sell up to an additional 332,222 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 2,210,000 shares but less than 2,990,000
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 2,990,000
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 2,210,000 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 2,210,000 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 2,990,000
(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 2,210,000, then the Company
will cancel the Offering and all subscription
funds will be returned promptly to subscribers
without interest.
There is a difference of approximately $7.8 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 estimated
consolidated pro forma market value of Mercer Mutual as a
subsidiary of the Company. 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 (4.5%, 3.8%
and 3.4% of the number of shares issued at the Total Minimum,
Total Midpoint and Total Maximum). No person may purchase fewer
than 25 shares. There are 42,432 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 2,990,000 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 in proportion to the respective amounts of
shares for which they subscribed. If all 42,432 Eligible
Policyholders were to subscribe for 100,000 shares of Common
Stock, then each Eligible Policyholder would receive only
approximately 70 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 178,500 shares of the Common
Stock to be issued in the Conversion (6.9% at the Total
Midpoint), not including 10% of the Common Stock (260,000 shares
at the Total Midpoint) expected to be purchased by the ESOP 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 CoreStates Bank, N.A. established specifically for this
purpose. If the Conversion is not completed within 45 days after
the extended Termination Date, the Offerings will be terminated
and all funds held will be promptly returned without interest.
See "The Conversion -- The Conversion Offerings" and "--Purchases
in the 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 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 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, 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
100%
Queenstown Holding Company, Inc.
100%
Mercer Insurance Company, Inc.
____________________
ORGANIZATIONAL STRUCTURE AFTER THE CONVERSION
LOGO
Shareholders
100%
Mercer Insurance Group, Inc.
100%
Mercer Mutual Insurance Company
100%
Queenstown Holding Company, Inc.
100%
Mercer Insurance Company, Inc.
<PAGE>
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, The Company was formed under
Inc. 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, 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 $23.7 million,
respectively, and net income of
$2.2 million and $640,000, respectively.
At December 31, 1997, Mercer Mutual and
its subsidiaries had consolidated assets
of $74.1 million, total equity of
$23.2 million and over 43,000 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 and/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 Mercer Mutual's exposure to severe
For the Conversion 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 a
$1.4 million net loss and a $665,000
reduction in net income, respectively,
for 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. 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 May __, 1998, the Pennsylvania
Department held a hearing regarding the
Conversion. The Plan was approved by
the Pennsylvania Department on May __,
1998 and is subject to the approval of
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 Set forth on page __ of the Prospectus
After the Conversion 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 Pennsylvania law requires that the
Number of Shares aggregate purchase price of the Common
to be Issued Stock to be issued in the Conversion be
consistent with an independent appraisal
of the estimated consolidated pro forma
market value of Mercer Mutual as a
subsidiary of the Company following the
Conversion. Sheshunoff, a firm
experienced in corporate valuations, has
made an independent appraisal of the
estimated consolidated pro forma market
value of Mercer Mutual as a subsidiary
of the Company and has determined that,
as of March 3, 1998, such estimated pro
forma market value was $26 million. The
Estimated Valuation Range in
Sheshunoff's appraisal, which extends
15% below and 15% above the estimated
value, is from $22.1 million to
$29.9 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 valuation, Sheshunoff has relied
upon and assumed the accuracy and
completeness of financial and
statistical information provided by the
Company, and Sheshunoff did not
independently verify the financial
statements, projections and other
information provided by the Company and
Mercer Mutual, 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. The appraisal will be
updated immediately prior to completion
of the Offering 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 2,990,000 shares
or more, the Company, as required by the
Plan, will sell all 2,990,000 shares
offered hereby to participants in the
Subscription Offering and will sell up
to an additional 332,222 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 2,210,000 shares but less than
2,990,000 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 2,990,000
shares (excluding the 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. If participants in the
Subscription Offering subscribe for
fewer than 2,210,000 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
2,210,000 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 2,990,000 (excluding the 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. If the number of
shares subscribed for in the Offerings
is less than 2,210,000, then the Company
will 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 the Company
proceeds with the Offerings, then the
Company will promptly notify all
subscribers by mail of the updated
Appraisal. 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
$7.8 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
estimated 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 The shares of Common Stock to be
and Community issued in the Conversion are being
Offerings 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. Subscrip-
tion rights of directors, officers and
employees of Mercer Mutual will be
subordinated to subscription rights of
Eligible Policyholders. Concurrently,
and subject to the prior rights of
holders of subscription rights, any
shares of Common Stock not subscribed
for in the Subscription Offering are
being offered at the Purchase Price in
the Community Offering to members of the
general public. Preference will be
given in the Community Offering to
(i) natural persons and trusts of
natural persons who are permanent
residents of New Jersey and Pennsylvania
(the "Local Community"), (ii) principals
of Eligible Policyholders in the case of
an Eligible Policyholder that is not a
natural person, (iii) licensed insurance
agencies that have been appointed by
Mercer Mutual to market and distribute
policies of insurance, and their owners,
(iv) named insureds under policies of
insurance issued by Mercer Mutual after
October 17, 1997, and (v) providers of
goods and services to, and identified
by, Mercer Mutual. The Company reserves
the absolute right to accept or reject
any orders in the Community Offering, in
whole or in part.
Subscription rights will expire if
not exercised by, and the Conversion
Offerings will terminate at, 1:00 p.m.,
Eastern Standard Time on ___________,
1998, unless extended by the Company for
up to 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 If participants in the Conversion
Community Offering Offerings (excluding the ESOP) subscribe
for fewer than 2,990,000 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 To ensure that each purchaser
and Procedure for purchaser receives a prospectus at least
Purchasing Shares 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 Offering must do so
prior to the Termination Date by
delivering (by mail or in person) to the
Conversion Center at the Company's
principal executive offices located at
10 North Highway 31, P.O. Box 278,
Pennington, New Jersey 08534, a properly
executed and completed Stock Order Form
and Certification Form, together with
full payment for all shares for which
the subscription is made. A Stock Order
Form and Certification Form will be
included with each prospectus delivered
to a prospective purchaser of Common
Stock and no Stock Order Form or
Certification Form will be delivered to
a prospective purchaser unless
accompanied by a prospectus or prior
delivery of a prospectus can be
verified. Payment for shares of Common
Stock may be made by cash (if delivered
in person), 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 CoreStates
Bank, N.A. Such funds will not be
released until the Conversion is
completed or terminated. The Conversion
will be completed no later than
__________, 1998. If the number of
shares subscribed for in the Offerings
at the Purchase Price through
__________, 1998 is less than 2,210,000
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.
For more information, please call the
Conversion Center toll-free at
1-888-___-____. See "The Conversion --
The Conversion Offerings," "-- Purchases
in the Offerings," "-- Marketing and
Underwriting Arrangements" and "--
Description of Sales Activities in the
Offerings."
Purchase Limitations No person may purchase fewer than
25 shares in the Offering. 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 (4.5% of the shares to be
issued in the Conversion at the minimum
of the Estimated Valuation Range).
There are 42,432 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 2,990,000 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
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 70 shares. The Company is
unable to predict the number of Eligible
Policyholders that may participate in
the Subscription Offering.
Purchase of Common The directors and executive
Stock by Management 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 178,500 shares
of Common Stock in the Conversion, which
equals 6.9% 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 employees without
payment by such persons of cash
consideration. See "Use of
Proceeds." In addition, the Board
of Directors of the Company has
adopted, subject to shareholder
approval, a Management Recognition
Plan (the "MRP") pursuant to which
the Company intends to award to
employees and directors of the
Company up to 4% of the number of
shares of Common Stock sold in the
Conversion without payment by such
persons of cash consideration, and
a Stock Compensation Plan (the
"Compensation Plan") pursuant to
which the Company intends to grant
options to acquire Common Stock to
employees and directors of the
Company, in an amount up to 10% of
the number of shares of Common
Stock sold in the Conversion. The
Company intends to award shares
under the MRP and to grant stock
options under the Compensation Plan
as soon as practicable after the
approval of the MRP and the
Compensation Plan by the Company's
shareholders. The MRP and the
Stock Compensation Plan are subject
to approval by the Company's
shareholders at the first annual
meeting of shareholders to be held
no sooner than six months after the
consummation of the Conversion. No
decisions concerning the number of
shares to be awarded or options to
be granted to any director or
officer have been made at this
time. See "Management of the
Company -- Certain Benefit Plans
and Agreements."
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
$20.5 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
($3.3 million at the 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 $20.5 million
and $31.4 million and the implementation
of the ESOP, the Company would retain
between $13.3 million and $23.1 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 MIC, 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 The Plan provides that no person shall
Subscription Rights transfer or enter into any agreement or
understanding to transfer the legal or
beneficial ownership of subscription
rights issued under the Plan or, prior
to exercise of the subscription rights,
the shares of Common Stock to be issued
upon their exercise. Persons violating
such prohibition will lose their right
to purchase Common Stock in the
Conversion. Each person exercising
subscription rights will be required to
certify that his or her purchase of
Common Stock is solely for the
purchaser's own account and that there
is no agreement or understanding
regarding the sale or transfer of such
shares.
Market for the Common The Company has received approval to
Stock 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
Offering and Syndicated Community
Offering, 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 "Investment Considerations --
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 -- Pennsylvania Law" and --
"Certain Anti-Takeover Provisions in the
Articles of Incorporation and Bylaws"
and "Description of Capital Stock."
<PAGE>
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
the consolidated balance sheet data at December 31, 1993 and 1994
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.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written. . . . . . . . $28,453 $24,958 $24,699 $24,355 $23,349
Net premiums written(1). . . . . . . . 17,461 20,124 21,245 19,377 18,964
Statement of Income Data:
Net premiums earned. . . . . . . . . . 17,969 20,634 20,817 18,681 18,225
Net investment income. . . . . . . . . 2,350 2,289 2,132 1,904 2,196
Net realized investment gains. . . . . 589 596 53 277 509
Other income . . . . . . . . . . . . . 173 155 161 166 159
------- ------- ------- ------- -------
Total revenues . . . . . . . . . 21,081 23,674 23,163 21,028 21,089
------- ------- ------- ------- -------
Losses and Expenses:
Losses and loss adjustment
expenses(1)(2) . . . . . . . . . . 10,594 14,801 13,296 14,107 11,631
Other underwriting expenses. . . . . 7,269 8,062 8,360 8,976 8,494
------- ------- ------- ------- -------
Total expenses . . . . . . . . . 17,863 22,863 21,656 23,083 20,125
------- ------- ------- ------- -------
Income (loss) before federal income
taxes. . . . . . . . . . . . . . . . 3,218 811 1,507 (2,055) 964
Federal income tax expense (benefit) . 1,001 171 369 (681) 165
------- ------- ------- ------- -------
Net income (loss)(2) . . . . . . . . . $ 2,217 $ 640 $ 1,138 $(1,374) $ 799
======= ======= ======= ======= =======
Selected Balance Sheet Data (at period end): (Unaudited) (Unaudited)
Total investments and cash . . . . . $48,506 $45,434 $44,022 $35,470 $40,414
Total assets . . . . . . . . . . . . 74,085 74,074 77,523 71,750 71,110
Total liabilities. . . . . . . . . . 50,849 54,792 58,560 57,547 53,469
Total equity . . . . . . . . . . . . $23,236 $19,282 $18,963 $14,202 $17,641
GAAP Ratios:
Loss and loss adjustment expense
ratio(2)(3). . . . . . . . . . . . 58.9% 71.7% 63.9% 75.5% 63.8%
Underwriting expense ratio(4). . . . 40.5% 39.1% 40.2% 48.0% 46.6%
Combined ratio(5). . . . . . . . . . 99.4% 110.8% 104.1% 123.5% 110.4%
Statutory Data:
Statutory combined ratio . . . . . . 102.1% 110.5% 103.0% 122.6% 110.7%
Industry combined ratio(6) . . . . . 101.6 105.9% 106.4% 108.4% 106.9%
Statutory surplus. . . . . . . . . . $20,132 $16,087 $14,938 $11,133 $12,979
Ratio of statutory net written
premiums to statutory
surplus. . . . . . . . . . . . . . .87x 1.25x 1.42x 1.74x 1.46x
Pro Forma Data(7):
Net income . . . . . . . . . . . . . $ 2,071
Net income per share of
Common Stock . . . . . . . . . . . $ 1.04
Weighted average number of shares
of Common Stock outstanding. . . . 2,000,050
_____________________
</TABLE>
(1) 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."
(2) 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 property
losses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Calculated by dividing losses and loss adjustment expenses
by net premiums earned.
(4) Calculated by dividing other underwriting expenses by net
premiums earned.
(5) The sum of the Loss and Loss Adjustment Expense Ratio and
the Underwriting Expense Ratio.
(6) As reported by A.M. Best Company, Inc., an independent
insurance rating organization.
(7) Information excerpted from unaudited Pro Forma
Consolidated Statements of Income for the year ended
December 31, 1997. See "Pro Forma Data."
<PAGE>
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, 99.3%, 99.1% 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 Mercer Mutual's $1.4 million net loss for
the year ended December 31, 1994 and its $665,000 reduction in
net income in the year ended December 31, 1996, as compared to
the prior year. 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 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 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.
Further, 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.
If the Conversion is completed but the Act, or any portion
of the Act, is declared unconstitutional, the remedy a court
would grant in any litigation 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 December 31,
1997 was $20.1 million). Such distribution could
be required to be made in cash, Common Stock or
other debt or equity securities. Any required
distribution of Common Stock or other equity
securities would materially dilute the interests
of existing holders of the Common Stock.
No assurance can be given that the Company would have sufficient
funds, or the capacity to borrow sufficient funds, to honor any
of its obligations under any remedy imposed by a court in any
litigation. In such event, the Company could be forced to seek
the protection of the bankruptcy laws and Mercer Mutual could be
deemed insolvent and seized by the Pennsylvania Department. In
addition, the commencement of any litigation could have a
material adverse impact on the market price of the Common Stock
during the pendency of the litigation and an adverse
determination of such litigation would have such a material
adverse effect.
Possible Adverse Impact of Broad Valuation Range and Its Use to
Determine the Number of Shares of Common Stock Sold
If the value set forth in the final updated Appraisal is
within the Estimated Valuation Range, the Conversion can be
completed and the Company can sell between 2,210,000 and
2,990,000 shares of Common Stock. There is a difference of
approximately $7.8 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
2,990,000 shares are sold than if 2,210,000 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 $73,000 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 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. 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.
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."
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 companies, and the planned improvement of capital
strength through the Offerings. Each of these measures is in
various stages of implementation. See "Business - A.M. Best
Rating."
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 December 31, 1997,
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 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 last three years, 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. 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. Pennsylvania
law regulates the distribution of dividends and other payments by
Mercer Mutual to the Company. 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. 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 Company's 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. This 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 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," "-- 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 178,500 shares of the Common Stock to
be issued in the Conversion, or 6.9% thereof at the Total
Midpoint 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,
309,400, 364,000 and 418,600 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."
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 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 Director
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."
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
$2.2 million to $3.3 million based on a sale of 221,000 shares to
the ESOP (at the Total Minimum) and 332,222 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 will be limited by Pennsylvania
regulatory restrictions on capital distributions by Mercer
Mutual. 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."
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 minimum, midpoint and maximum of the Estimated Valuation
Range, and at the 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 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) 178,500
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 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 $1.2 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.
<PAGE>
<TABLE>
<CAPTION>
Maximum of
Minimum of Midpoint of Maximum of 2,990,000
2,210,000 2,600,000 2,990,000 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
Offering. . . . . . . . $22,100 $26,000 $29,900 $33,222
Less estimated
expenses, including
underwriting fees . . (1,587) (1,657) (1,727) (1,787)
------ ------- ------- -------
Estimated net proceeds. . 20,513 24,343 28,173 31,435
Less:
Common Stock to be
acquired by ESOP. . . (2,210) (2,600) (2,990) (3,322)
------ ------- ------- ------
Estimated net proceeds,
as adjusted(1) . . . . $18,303 $21,743 $25,183 $28,113
======= ======= ======= =======
_________
</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 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 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.
CAPITALIZATION
The following table sets forth information regarding the
consolidated historical capitalization of Mercer Mutual and its
subsidiaries at December 31, 1997 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 may be significantly increased or decreased above
or below the Total Midpoint of the Estimated Valuation Range. No
resolicitation of subscribers and other purchasers will be made
unless the final appraised value of Mercer Mutual is below the
Total Minimum or above the Total Maximum of the Estimated
Valuation Range. A change in the number of shares to be issued
in the Conversion may materially affect the Company's pro forma
capitalization. See "Use of Proceeds" and "The Conversion --
Stock Pricing and Number of Shares to be Issued."
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Consolidated
Capitalization of the Company
Based on the Sale of
---------------------------------
Historical 2,990,000
Consolidated shares at
Capitalization 2,210,000 2,600,000 2,990,000 $10.00 per
of Mercer shares at shares at shares at share plus
Mutual at $10.00 $10.00 $10.00 ESOP
December 31, 1997 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). . . . . . . . . . -- 20,513 24,343 28,173 31,435
Retained earnings . . . . . . 20,693 20,693 20,693 20,693 20,693
Unrealized gains. . . . . . . 2,543 2,543 2,543 2,543 2,543
Less:
Common stock to be acquired --
by ESOP(3). . . . . . . . . -- (2,210) (2,600) (2,990) (3,322)
------- ------- ------- ------- -------
Total(4). . . . . . . . . . . 23,236 41,539 44,979 48,419 51,349
======= ======= ======= ======= =======
____________
</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 (260,000 shares at the
midpoint of the Estimated Valuation Range). 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 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) 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 any such purchase from its cash flow, and (iv) the
Company may issue new shares directly to the MRP and
purchase shares for the MRP in the open market, each of
which methods would have different effects on the
Company's shareholders' equity. 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 December 31, 1997 gives effect to the Conversion and
implementation of the ESOP as if they had occurred as of
December 31, 1997 and assumes that 2,210,000 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 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 2,210,000
shares of Common Stock. If less than 2,210,000 shares of Common
Stock are subscribed for in the Conversion Offerings, the
remaining shares, up to a maximum of 2,990,000 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.<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of December 31, 1997
(in thousands)
Historical Pro Forma
Consolidated Adjustments Consolidated(4)
<S> <C> <C> <C>
ASSETS
Investments:
Fixed income securities . . $34,947 $18,303(1) $53,250
Equity securities . . . . . 10,852 _______ 10,852
Total investments . . . . . 45,799 18,303 64,102
Cash and cash equivalents . . 2,707 2,707
Receivables . . . . . . . . . 16,540 16,540
Prepaid reinsurance premiums. 3,046 3,046
Deferred policy acquisition
costs, and other assets . . 5,993 _______ 5,993
Total assets. . . . . . . . . $74,085 $18,303 $92,388
======= ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Losses and loss adjustment
expenses . . . . . . . . $31,872 $31,872
Unearned premiums . . . . . 14,723 14,723
Other liabilities . . . . . 4,254 _______ 4,254
Total liabilities . . . . . 50,849 0 50,849
Shareholders' equity:
Common stock. . . . . . . . -- 20,513 20,513
Unearned Employee Stock
Ownership Plan
compensation. . . . . . . -- (2,210)(2) (2,210)
Retained earnings . . . . . 20,693 20,693
Accumulated other
comprehensive income. . .
Unrealized gains in
investments net of
deferred income taxes . 2,543 2,543
Total shareholders' 23,236 18,303(3) 41,539
equity. . . . . . . . . .
Total liabilities and
stockholders' equity. . . . $74,085 $18,303 $92,388
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet
<PAGE>
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):
Issuance of 2,210,000 shares at $10/share $22,100
Estimated conversion expenses (1,587)
Net proceeds from Conversion $20,513
=======
Less: Common Stock to be purchased
by ESOP (2,210)
Net investable proceeds $18,303
=======
(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 $2,210. 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 $18
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 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.
Maximum
Plus
Minimum Maximum ESOP
Net proceeds from Conversion $20,513 $28,173 $31,435
Common Stock to be
acquired by ESOP $ 2,210 $ 2,990 $ 3,322
<PAGE>
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 . . . 2,563 221(2) 2,784
Total expenses . . . . 17,863 221(3) 18,084
Income before taxes. . . . 3,218 (221) 2,997
Income taxes . . . . . . . 1,001 (75)(4) 926
Net income . . . . . . . . $ 2,217 $ (146) $ 2,071
======= ======== =======
Earnings per share data:
Net income per share of
Common Stock $ 1.04
Weighted average number
of shares of Common
Stock outstanding 2,000,050(6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Income.
<PAGE>
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. If such proceeds were
invested at 5.14% for the year ended December 31, 1997,
pro forma net income (after tax), as reported herein,
would have increased by $640 for 1997, and pro forma
net income per share, as reported herein, would have
increased by $.31 per share.
(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 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 minimum and maximum of the Estimated
Valuation Range.
<TABLE>
<CAPTION>
December 31, 1997
Minimum Maximum
<S> <C> <C>
Compensation expense $ 221 $ 299
Net income $2,071 $2,020
Net income per share of
Common Stock $1.04 $0.75
Weighted average number of shares
of Common Stock outstanding 2,000,050 2,705,950
</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 2,210,000 (221,000) 1,989,000
Shares allocated -- 22,100 22,100
December 31, 1997 2,210,000 (198,900) 2,011,100 2,000,050
========= ========= ========= =========
</TABLE>[/R]
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.
<PAGE>
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 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."
Mercer Insurance Group, Inc.
MD & A Selected Financial Data
<TABLE>
<CAPTION>
Year ended December 31,
% %
1997 change 1996 change 1995
<S> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written 28,453 14.0% 24,958 1.0% 24,699
Assumed premiums written 547 (89.1%) 5,013 (51.3%) 10,287
Ceded premiums written 11,539 17.2% 9,847 (28.3%) 13,741
Net premiums written 17,461 (13.2%) 20,124 (5.3%) 21,245
Change in unearned
premiums 508 510 (428)
Net premiums earned 17,969 (12.9%) 20,634 (0.9%) 20,817
Net investment income 2,350 2.7% 2,289 7.4% 2,132
Net realized investment
gains 589 (1.2%) 596 1,024.5% 53
Other income 173 11.6% 155 (3.7%) 161
Total revenue 21,081 (11.0%) 23,674 2.2% 23,163
Losses and expenses:
Loss and loss adjustment
expenses 10,594 (28.4%) 14,801 11.3% 13,296
Other underwriting
expenses 7,269 (9.8%) 8,062 (3.6%) 8,360
Total expenses 17,863 (21.9%) 22,863 5.6% 21,656
Income (loss) before
federal income taxes 3,218 296.8% 811 (46.2%) 1,507
Federal income tax
expenses (benefit) 1,001 485.4% 171 (53.7%) 369
Net income (loss) 2,217 246.4% 640 (43.8%) 1,138
Loss and loss adjustment
expense ratio 58.9% 71.7% 63.9%
Expense ratio 40.5% 39.1% 40.2%
Combined ratio 99.4% 110.8% 104.1%
</TABLE>
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 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 a new quota share reinsurance
program for the homeowners business (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 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 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 $18.3 million and $28.1 million,
an increase of approximately 77.9% to 119.6% over the
consolidated capital of Mercer Mutual at December 31, 1997. See
"Use of Proceeds," "Capitalization" and "Pro Form 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 $221,000 (at the Total Minimum) and
$332,222 (at the Total Maximum) annually, plus interest at the
prime rate in effect as of the consummation of the Conversion.
See "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 119,600 shares at the 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 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 December 31, 1997.
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 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 and
correspondingly decreasing the amount of premiums ceded to
reinsurers. 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. Management
believes that by increasing the amount of retained premiums, this
restructuring should have a positive impact on its results of
operations and financial conditions and that the increase in
capital caused by the Conversion will assist the Insurance
Companies in absorbing any increase in losses and loss adjustment
expenses which may be 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 caused thereby, 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.
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,
are either Year 2000 compliant or will 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'
exposure thereunder. 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.
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 each of the years in the three-year period ended
December 31, 1997. As of December 31, 1997, 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 December 31, 1997, the
consolidated assets of Mercer Mutual and its subsidiaries were
$74.1 million.
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.
Completion of the Conversion will supply the additional
surplus necessary to support substantially increased commercial
and casualty premium volume.
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 as well.
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
Company's 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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
% of % of % of
1997 Total 1996 Total 1995 Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Direct Premiums Written:
Homeowners. . . . . . . . . . . . . $13,057 45.9% $12,101 48.5% $11,602 47.0%
Commercial multi-peril. . . . . . . 6,374 22.4 5,065 20.3 4,437 17.8
Other liability . . . . . . . . . . 3,965 13.9 3,486 14.0 3,563 14.3
Fire, allied, inland marine . . . . 3,413 12.0 3,437 13.8 4,112 16.5
Workers' compensation . . . . . . . 1,239 4.4 869 3.5 985 3.9
Commercial automobile . . . . . . . 405 1.4 - - - -
------- ------ ------- ------ ------- ------
Total. . . . . . . . . . . . . $28,453 100.0% $24,958 100.0% $24,699 100.0%
======= ====== ======= ====== ======= ======
<CAPTION>
Year Ended December 31,
------------------------------------------------
% of % of % of
1997 Total 1996 Total 1995 Total
------- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Earned
Homeowners. . . . . . . . . . . . . $ 8,215 45.7% $10,347 50.1% $10,182 48.9%
Commercial multi-peril. . . . . . . 2,969 16.5 2,903 14.1 2,471 11.9
Other liability . . . . . . . . . . 2,825 15.7 2,925 14.2 2,829 13.6
Fire, allied, inland marine . . . . 2,746 15.3 3,250 15.8 3,991 19.2
Workers' compensation . . . . . . . 1,235 6.9 1,209 5.8 1,344 6.5
Commercial automobile(1). . . . . . (21) (0.1) - - - -
------- ------ ------- ------ ------- ------
Total. . . . . . . . . . . . . $17,969 100.0% $20,634 100.0% $20,817 100.0%
======= ====== ======= ====== ======= ======
Net Loss Ratio
Homeowners(2) . . . . . . . . . . . 67.2% 85.4% 78.8%
Commercial multi-peril. . . . . . . 33.5% 59.3 34.3
Other liability . . . . . . . . . . 70.7% 102.7 72.1
Fire, allied, inland marine . . . . 49.4% 36.3 38.4
Workers' compensation . . . . . . . 54.4% 5.2 63.8
Commercial automobile(1). . . . . . (239.4%) - -
Total. . . . . . . . . . . . . 58.9% 71.7% 63.9%
Expense Ratios
Homeowners. . . . . . . . . . . . . 43.1% 38.4% 41.4%
Commercial multi-peril. . . . . . . 31.2% 42.1 38.9
Other liability . . . . . . . . . . 42.5% 39.1 41.8
Fire, allied, inland marine . . . . 38.6% 37.0 37.0
Workers' compensation . . . . . . . 40.7% 43.2 39.0
Commercial automobile(1). . . . . . (173.4%) - -
Total. . . . . . . . . . . . . 40.5% 39.1% 40.2%
Combined Ratios(3)
Homeowners. . . . . . . . . . . . . 110.3% 123.8% 120.2%
Commercial multi-peril. . . . . . . 64.7% 101.4 73.3
Other liability . . . . . . . . . . 113.2% 141.8 113.9
Fire, allied, inland marine . . . . 88.0% 73.3 75.3
Workers' compensation . . . . . . . 95.1% 48.4 102.8
Commercial automobile(1). . . . . . (412.8%) - -
Total. . . . . . . . . . . . . 99.4% 110.8% 104.1%
Industry Combined Ratio(4). . . . . - 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 year ended December 31,
1997, as compared to the year ended December 31, 1996,
is principally due to improved weather conditions
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) The Industry Combined Ratio for the year ended
December 31, 1997 is not available.
Homeowners Policy
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 December 31, 1997, Mercer Mutual
had approximately 29,000 homeowners policies in force, with 25%
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 December 31, 1997, approximately 1,800 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 December 31, 1997,
approximately 2,200 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 December 31, 1997.
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.
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 December 31, 1997, over 98% of the
Insurance Companies' workers' compensation insureds have other
Mercer Mutual policies. There were approximately 1,150 workers'
compensation policies in effect as of December 31, 1997.
Marketing
The Insurance Companies market their property and casualty
insurance products in New Jersey and Pennsylvania 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 year ended December 31, 1997, the Insurance
Companies' largest agency accounted for approximately 7.3% of the
Insurance Companies' direct premiums written, and no other agency
accounted for more than 5% of the Insurance Companies' direct
premiums written. During such period, no agency accounted for
more than 5% of the Insurance Companies' net premiums earned.
For the year ended December 31, 1997, the Insurance Companies'
top 10 agencies accounted for 26.8% of direct premiums written,
and the average volume per agency was $173,000, with the largest
agency generating approximately $2.1 million in premium revenue
for the Insurance Companies.
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' policies are marketed exclusively
through their network of independent agencies. 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 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 December 31, 1997,
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 December 31,
1997, 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 19% of all open claims under the Insurance Companies'
policies have resulted in litigation. Litigated claims are
assigned to outside counsel.
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. For the year ended
December 31, 1996, the Insurance Companies ceded to reinsurers
$14.4 million of earned premiums. The Insurance Companies'
reinsurance arrangements are placed with non-affiliated
reinsurers, and are generally renegotiated annually. 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 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 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 December 31, 1997
the Company's five largest reinsurers based on percentage of
ceded premiums are set forth in the following table:
Percentage of A.M. Best
Name Ceded Premiums Best Rating
American Re-Insurance Co. 28.23% A+
Motors Insurance Corporation 13.01% A+
Scor Reinsurance Company 9.38% A+
TIG Reinsurance Company 9.30% A
PMA Reinsurance Corporation 5.03% A+
The following table sets forth the five largest amounts
of loss and loss expenses recoverable from reinsurers on unpaid
claims as of December 31, 1997.
Loss and
loss expenses
recoverable A.M. Best
Name on unpaid claims Rating
(In thousands)
Hartford Fire Insurance Co. 1,644 A+
Franklin Mutual Insurance Co. 1,644 A
Cumberland Mutual Fire Ins. Co. 1,610 A+
Odyssey Reinsurance Co. 716 A-
American Re-Insurance Co. 549 A+
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 restructuring of
the Insurance Companies' reinsurance program effective January 1,
1997.
As described above, the Insurance Companies terminated
their participation in the Homeowners Pool effective December 31,
1996. As a result, a significant decrease in assumed premiums
earned is reflected in the year ended December 31, 1997, as the
Insurance Companies no longer assumed business from the other
Homeowners Pool participants.
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.
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 years ended December 31, 1997, 1996 and
1995 as prepared in accordance with GAAP.
Reconciliation of Reserve for Losses
and Loss Adjustment Expenses
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at the beginning of period . . . . . . . . . $35,221 $36,176 $35,531
Less: Reinsurance recoverables and receivables . . . . (15,147) (16,819) (17,233)
Net reserves for losses and loss adjustment
expenses at beginning of period . . . . . . . . . . 20,074 19,357 18,298
Add: Provision for losses and loss adjustment
expenses for claims occurring in:
The current year . . . . . . . . . . . . . . . . 11,649 16,445 14,251
Prior years . . . . . . . . . . . . . . . . . . (1,055) (1,644) (955)
Total incurred losses and loss adjustment
expenses . . . . . . . . . . . . . . . . . . . 10,594 14,801 13,296
Less: Loss and loss adjustment expenses
payments for claims occurring in:
The current year . . . . . . . . . . . . . . . . 4,775 7,715 5,302
Prior years . . . . . . . . . . . . . . . . . . 6,042 6,369 6,935
Total losses and loss adjustment expenses. . . . 10,817 14,084 12,237
Net reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . 19,851 20,074 19,357
Add: Reinsurance recoverables and receivables . . . . 12,021 15,147 16,819
Reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . $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.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1987 1988 1989 1990 1991
---- ---- ---- ---- ----
(In thousands)
<S> <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
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 2,760 3,268 4,702 5,195 5,621
Two years later. . . . . . . . . . . 4,101 5,129 7,282 8,091 8,587
Three years later. . . . . . . . . . 5,181 6,684 9,342 10,307 11,315
Four years later . . . . . . . . . . 5,825 7,899 10,888 12,112 13,162
Five years later . . . . . . . . . . 6,363 8,643 11,694 12,904 14,033
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
Two years later. . . . . . . . . . . 7,657 10,914 13,989 15,632 16,293
Three years later. . . . . . . . . . 7,581 10,330 13,540 14,787 15,973
Four years later . . . . . . . . . . 7,256 10,076 12,724 14,209 15,411
Five years later . . . . . . . . . . 7,272 9,603 12,643 13,945 15,298
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE
net of reinsurance recoverable . . . $20,067 $18,995 $18,298 $19,357 $20,074 $19,851
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 6,329 6,023 6,935 6,368 6,042 --
Two years later. . . . . . . . . . . 9,940 9,786 10,272 9,554
Three years later. . . . . . . . . . 12,723 12,144 12,336
Four years later . . . . . . . . . . 14,160 13,590
Five years later . . . . . . . . . . 14,852
Six years later. . . . . . . . . . .
Seven years later. . . . . . . . . .
Eight years later. . . . . . . . . .
Nine years later . . . . . . . . . .
Ten years later. . . . . . . . . . .
Liability estimated as of:
One year later . . . . . . . . . . . 18,246 17,746 17,344 17,712 19,018 --
Two years later. . . . . . . . . . . 17,603 17,088 16,860 17,247
Three years later. . . . . . . . . . 16,985 16,779 16,495
Four years later . . . . . . . . . . 16,490 16,244
Five years later . . . . . . . . . . 16,225
Six years later. . . . . . . . . . .
Seven years later. . . . . . . . . .
Eight years later. . . . . . . . . .
Nine years later . . . . . . . . . .
Ten years later. . . . . . . . . . .
Cumulative total redundancy
(deficiency). . . . . . . . . . . 3,842 2,751 1,803 2,110 1,056 --
Gross liability - end of year. . . . . 38,472 33,308 35,531 36,176 35,221 31,872
Reinsurance recoverables . . . . . . . 18,405 14,313 17,233 16,819 15,147 12,021
Net liability - end of year. . . . . . $20,067 $18,995 $18,298 $19,357 $20,074 $19,851
======= ======= ======= ======= ======= =======
Gross reestimated liability-latest . . 33,323 28,775 31,011 30,974 31,539
Reestimated reinsurance recoverables-
latest. . . . . . . . . . . . . . 17,097 12,531 14,515 13,726 12,521
Net reestimated liability-latest . . . 16,225 16,244 16,495 17,247 19,018
====== ====== ====== ====== ======
Gross cumulative redundancy. . . . . . 5,149 4,533 4,520 5,202 3,682
====== ====== ====== ====== ======
</TABLE>
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 December 31, 1997 At December 31, 1996 At December 31, 1995
------------------------ ------------------------ ------------------------
Market Market Market
Cost(2) Value Cost(2) Value Cost(2) Value
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Fixed income securities(1)
United States government and
government agencies . . . . . . . $25,195 $25,407 $23,702 $23,691 $18,516 $19,074
Obligations of states and
political subdivisions. . . . . . 3,396 3,517 4,313 4,343 5,146 5,237
Industrial and miscellaneous. . . . 300 300 -- -- -- --
Mortgage-backed securities. . . . . 6,106 5,723 7,631 6,930 9,764 9,306
Total fixed income securities . . 34,997 34,947 35,646 34,964 33,426 33,617
Equity securities . . . . . . . . . . 6,948 10,852 5,892 7,795 5,320 6,837
Total . . . . . . . . . . . . . . $41,945 $45,799 $41,538 $42,759 $38,746 $40,454
======= ======= ======= ======== ======= =======
</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.
The table below contains consolidated information
concerning the investment ratings of Mercer Mutual's fixed
maturity investments at December 31, 1997.
Type/Ratings of Amortized Market
Investment(1) Cost Value Percentages(2)
- --------------- --------- ------ --------------
(Dollars in thousands)
U.S. Government and
agencies . . . . . . . $25,195 $25,407 72.7%
AAA. . . . . . . . . . . 8,633 8,342 23.9
AA . . . . . . . . . . . 769 795 2.2
A. . . . . . . . . . . . 300 300 0.9
BBB. . . . . . . . . . . 100 103 0.3
Total. . . . . . . . . $34,997 $34,947 100.0%
____________
(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.
<PAGE>
The table below sets forth the maturity profile and
weighted average yields of Mercer Mutual's consolidated fixed
maturity investments as of December 31, 1997 (substituting
average life for mortgage-backed securities):
Amortized Market
Maturity Cost(1) Value Percentages(2)
(Dollars in thousands)
More than 1 year
through 5 years $ 1,361 $ 1,496 4.3%
More than 5 years
through 10 years 25,251 25,470 72.9
More than 10 years 2,279 2,258 6.4
Mortgage-backed
securities(3) 6,106 5,723 16.4
Total $34,997 $34,947 100.0%
======= ======= =====
____________
(1) Fixed maturities are carried at market value in the
consolidated financial statements of Mercer Mutual.
(2) Represents percent of market value of the classification as
a percent of the total.
(3) Mortgage backed securities consist of mortgage pass-
through holdings and securities collateralized by home
equity loans. These securities follow a structured
principal repayment schedule and are of high credit
quality rated "AAA" or better by Standard & Poor's.
These securities are presented separately in the
maturity schedule due to the inherent risk associated
with prepayment or early authorization. The average
duration of this portfolio is 3.6 years.
The average duration of Mercer Mutual's fixed maturity
investments, excluding mortgage backed securities which are
subject to paydown, as of December 31, 1997 was approximately 5.5
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.
Mercer Mutual's consolidated net investment income,
average cash and invested assets and return on average cash and
invested assets for the years ended December 31, 1997, 1996 and
1995 and were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
(Dollars in thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average invested assets. . . . . . . . $46,970 $44,728 $39,746
Net investment income . . . . . . . . 2,350 2,289 2,132
Return on average
invested assets. . . . . . . . . . . 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.
Regulation
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 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.
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
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.
The Insurance Companies' IRIS ratios for the year ended
December 31, 1997 have not yet been determined by the NAIC.
During 1994, 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,
change in net writings, and the change in surplus. 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. The change in surplus ratio
is a measurement of a company's financial condition. The table
below sets forth IRIS ratios outside the acceptable range for the
Insurance Companies during 1994, 1995 and 1996:
<TABLE>
<CAPTION>
Insurance
Values
Equal to or Mercer Mutual MIC
-------------- ---------------------- ----------------------
Ratio Name/Description Over Under 1996 1995 1994 1996 1995 1994
- ---------------------- ---- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in net writings 33 (33) 263 (84)
Two-year overall
operating ratio 100 100 104 109 103
Change in surplus 50 (10) (10)
</TABLE>
For Mercer Mutual, the 1995 and 1994 two-year overall
operating ratio was outside the acceptable range. For 1995 and
1994, operating results were adversely impacted by winter storms
and wind storms which resulted in significant losses in 1994.
These storms also account for the change in surplus in 1994 to be
outside the normal range.
For MIC, the 1995 and 1994 two-year overall operating ratios
were outside the acceptable range. The 1994 two-year overall
operating ratios was negatively impacted by MIC's share of winter
storms and wind storms it assumed from Mercer Mutual under terms
of their reinsurance treaties at the time. Those treaties 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 as well as the unusual result
for the 1995 two year operating ratio.
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.
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.
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. Approval of the applicable insurance commissioner is
required prior to consummation of transactions affecting the
control of an insurer. In some states, including 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. These laws also require notice to the
applicable insurance commissioner of certain material
transactions between an insurer and any person in its holding
company system and, in some states, certain of such transactions
cannot be consummated without the prior approval of the
applicable insurance commissioner.
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 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.
Intercompany Agreements
From September 15, 1982 to January 1, 1995, Mercer Mutual
and MIC were parties to reinsurance agreements whereby MIC ceded
100% of its business to Mercer Mutual and Mercer Mutual then
retroceded 10% of its business to MIC. These agreements have
been terminated. Mercer Mutual and MIC, however, remain 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.
Legal Proceedings
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.
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 December 31, 1997, the total number of full-time
equivalent employees of Mercer Mutual was 46. 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 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.
The following table sets forth certain information regarding
the directors of the Company.
<PAGE>
<TABLE>
<CAPTION>
Age at Business Experience
December 31, Director for the Last Five Years;
1997 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, Jr. 48 1985 Director of the Company, Mercer Mutual and
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 $900 and a monthly meeting fee of $700
and directors of MIC will be paid a monthly retainer of $300. 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.
The following table sets forth certain information regarding
the executive officers of the Company.
<TABLE>
<CAPTION>
Age at Executive Business Experience
December 31, Officer For the Last
Name 1997 Since(1) Title Five Years
<S> <C> <C> <C> <C>
William C. Hart 64 1986 President and President, Chief
Chief Executive Executive Officer,
and Director of
Mercer Mutual and MIC
Andrew R. Speaker 35 1990 Executive Vice Senior Vice President
President, Chief of Mercer Mutual and
Operating Officer, MIC from April 1994
Chief Financial to October 1, 1997;
Officer and Chief Financial
Treasurer Officer and Treasurer
of Mercer Mutual and
MIC since 1990.
Marion J. Crum 54 1984 Vice President Vice President and
and Secretary and Secretary of
Mercer Mutual and MIC
John G. Danka 49 1995 Vice President Vice President of
and Marketing Mercer Mutual and MIC
Director 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 and the Executive Vice
President, Chief Operating Officer, Chief Financial Officer and
Treasurer 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.
All Other
Name and Principal Salary Compensa-
Position Year (1)(2) Bonus tion(3)
William C. Hart 1997 $144,905 $ 9,102 $ 5,925
President and Chief 1996 135,776 12,191 5,919
Executive Officer 1995 129,136 0 5,165
Andrew R. Speaker 1997 108,421 7,079 4,110
Executive Vice 1996 97,964 9,144 3,768
President, Chief 1995 94,254 0 3,063
Operating Officer, Chief
Financial Officer and
Treasurer
(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. 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 a 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 certain stock incentive plans and
employment agreements with the executive officers of the Company.
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. Implementation
of certain of these stock incentive plans requires shareholder
approval.
Stock Compensation Plan.
On ___________, 1998, the Company's Board of Directors
adopted the Stock Compensation Plan (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 is to provide
additional incentive to directors and employees of the Company
and Mercer Mutual by facilitating their purchase of stock in the
Company. 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 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."
If Awards should expire, become unexercisable or be forfeited for
any reason without having been exercised or without becoming
vested in full, the shares of Common Stock subject to such Awards
will, unless the Compensation Plan is terminated, be available
for the grant of additional Awards under the Compensation Plan.
The Compensation Plan will be administered by a committee
of at least three directors of the Company who are designated by
the Board of Directors and who are "non-employee directors"
within the meaning of the federal securities laws (the
"Compensation Committee"). It is expected that the Compensation
Committee will initially consist of Directors Hornyak, Niedt, and
Van Noy. The Compensation Committee will select the employees to
whom Awards are to be granted, the number of shares to be subject
to such Awards, and the terms and conditions of such Awards
(provided that any discretion exercised by the Compensation
Committee must be consistent with the terms of the Compensation
Plan).
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"). The exercise price for Options
will be determined by the Compensation Committee as of the date
the Option is granted based on the then market price of the
Common Stock and other factors. The Compensation Plan permits
the Compensation Committee to impose transfer restrictions, such
as a right of first refusal, on the Common Stock that optionees
may purchase. No Option will be exercisable after the expiration
of ten years from the date it is granted; provided, however, that
in the case of any employee who owns more than 10% of the
outstanding Common Stock at the time an ISO is granted, the
option price for the ISO will not be less than 110% of the price
at which the Common Stock is sold in the Offering, and the ISO
will not be exercisable after the expiration of five years from
the date it is granted. An otherwise unexpired Option, unless
otherwise determined by the Compensation Committee, will cease to
be exercisable upon (i) an employee's termination of employment
for "just cause" (as defined in the Compensation Plan), (ii) the
date three months after an employee terminates service for a
reason other than just cause, death, or disability, (iii) the
date one year after an employee terminates service due to
disability, or (iv) the date two years after termination of such
service due to the employee's death. Options granted to non-
employee directors will automatically expire one year after
termination of service on the Board of Directors (two years in
the event of death).
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, as the Compensation
Committee prescribes in the grant, 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.
Payment to the optionee may be made in cash or shares of Common
Stock, as determined by the Compensation Committee.
Restricted Stock is Common Stock which is nontransferable
and forfeitable until a grantee's interest vests. Nevertheless,
the grantee is entitled to vote the Restricted Stock and to
receive dividends and other distributions made with respect to
the Restricted Stock. To the extent that a grantee becomes
vested in his Restricted Stock at any time during the
"Restriction Period" (as defined in the Compensation Plan) and
has satisfied applicable income tax withholding obligations, the
Company may deliver unrestricted shares of Common Stock to the
grantee. Vesting of Restricted Stock may be accelerated at the
discretion of the Compensation Committee. At the end of the
Restriction Period, the grantee will forfeit to the Company any
shares of Restricted Stock as to which he did not earn a vested
interest during the Restriction Period.
The Company will receive no monetary consideration for the
granting of Awards under the Compensation Plan, and will receive
no monetary consideration other than the Option exercise price
for each share issued to optionees upon the exercise of Options.
The Option exercise price may be paid in cash or Common Stock.
The exercise of Options and SARs and the conditions under which
Restricted Stock vests will be subject to such terms and
conditions established by the Compensation Committee as are set
forth in a written agreement between the Compensation Committee
and the optionee (to be entered into at the time an Award is
granted). In the event that the fair market value per share of
the Common Stock falls below the option price of previously
granted Options or SARs, the Compensation Committee will have the
authority, with the consent of the optionee, to cancel
outstanding Options or SARs and to reissue new Options or SARs at
the then current fair market price per share of the Common Stock.
Although directors and officers of the Company generally
will be prohibited under the federal securities laws from
profiting from certain purchases and sales of shares of Common
Stock within any six-month period, they generally will not be
prohibited by such laws from exercising options and immediately
selling the shares they receive, as long as the options are held
for six months from the date of grant. As a result, the
Company's directors and officers generally will be permitted to
benefit in the event the market price for the shares exceeds the
exercise price of their Options, without being subject to loss in
the event the market price falls below the exercise price.
Notwithstanding the provisions of any Award that provides
for its exercise or vesting in installments, all shares of
Restricted Stock shall become fully vested upon a "change in
control" (as defined in the Compensation Plan) and, for a period
of 60 days beginning on the date of such change in control, all
Options and SARs shall be immediately exercisable and fully
vested. In the event of a change in control, the Compensation
Committee may permit the holders of exercisable Options to
surrender their Options in exchange for cash in an amount equal
to the excess of the fair market value of the Common Stock
subject to the Options over their exercise price. No Award is
assignable or transferable except by will or the laws of descent
and distribution, or pursuant to the terms of a "qualified
domestic relations order" (within the meaning of Section 414(p)
of the Code and the regulations and rulings thereunder).
The initial grant of Options under the Compensation Plan
is expected to take place on the date of the receipt of
shareholder and regulatory approval of the Compensation Plan. No
decisions concerning the number of options to be granted to any
director or officer have been made at this time. No Awards will
be made prior to the receipt of shareholder approval of the
Compensation Plan.
Employee Stock Ownership Plan.
In connection with the Conversion, the Company's Board of
Directors has adopted the Company's Employee Stock Ownership Plan
(the "ESOP") for the exclusive benefit of participating
employees, to be implemented upon the completion of the
Conversion. Participating employees are all employees of the
Company and its subsidiaries who have attained age 21 and
completed one year of service with the Company or its
subsidiaries. The Company will submit to the IRS an application
for a letter of determination as to the tax-qualified status of
the ESOP. Although no assurances can be given, the Company
expects that the ESOP will receive a favorable letter of
determination from the IRS.
The ESOP intends to borrow funds from the Company pursuant
to the ESOP Loan in an amount sufficient to purchase 10% of the
Common Stock issued in the Conversion. The ESOP Loan will bear
an interest rate equal to the prime rate of interest set forth in
The Wall Street Journal on the closing date of the Conversion.
At the Total Midpoint, the ESOP Loan will require the ESOP to
make monthly principal payments of $21,667, 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.
On _________________, 1998, the Company's Board of Directors
adopted a management recognition plan (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 is 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 who are selected by members
of the Compensation Committee.
The MRP will be managed through a separate trust (the "MRP
Trust"). The Trustees of the MRP Trust (the "MRP Trustees"), who
are expected to be the members of the Compensation Committee,
have the responsibility to invest all funds contributed to the
MRP Trust.
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 Trust. In addition, if the
MRP purchases all of the MRP Shares in the open market and the
Company sells less than 2,300,582 shares of Common Stock in the
Offerings, the Company would not satisfy the Nasdaq National
Market listing requirement that outstanding Common Stock having a
market value of at least $18 million be held by persons who are
not affiliates of the Company. Therefore, to the extent
necessary to satisfy the Nasdaq National Market listing
requirements, the Company intends to issue the MRP Shares to the
MRP in lieu of having the MRP Trust purchase the MRP Shares in
the open market. Based on 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
10,500 shares, 104,000 shares, and 119,600 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 $105,000, $1,040,000 and $1,196,000,
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. Unless the
Compensation Committee decides to the contrary (which is not
expected to occur in the case of awards made on the MRP's
effective date), vesting will occur at the rate of 20% per year
of service following the award date. Unvested MRP Shares shall
be voted by the MRP Trustees in the same proportion as the
trustee of the ESOP's trust votes Common Stock held therein, and
shall be distributed as the award vests. Dividends on unvested
MRP Shares will be held in the MRP Trust for payment as vesting
occurs.
At the election of the participant, but subject to
approval by the Compensation Committee, unvested MRP Shares that
would otherwise be held by the MRP Trust may be distributed to
the participant in the form of restricted stock subject to
forfeiture. A participant who has received restricted stock may
vote such shares, will receive any dividends paid thereon
(subject to the same vesting rules applicable to the restricted
stock), and will be able to exchange restricted shares for
unrestricted shares as vesting occurs.
If an employee terminates employment for reasons other
than retirement at or after age 65, death, or disability, he or
she forfeits all rights to unvested MRP Shares. If the
employee's termination is caused by retirement at or after
age 65, death, or disability, all restrictions expire and all
awarded MRP Shares become vested and, consequently, unrestricted.
The same vesting rules apply to directors except that the
director retirement age is 75. The MRP provides that in the
event of a change in control of the Company, all MRP Shares
subject to outstanding awards will be immediately payable to the
holders of the awards.
Participants will recognize compensation income when
their MRP Shares vest, or at such earlier date pursuant to a
participant's election to accelerate income recognition pursuant
to Section 83(b) of the Code.
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 and can
terminate the MRP at any time, and, if it does so, any MRP Shares
not awarded will revert to the Company. 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.
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 shareholders of the Company 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 severe winter storms in such years that
were largely responsible for a $1.4 million net loss and a
$665,000 reduction in net income for such years, respectively.
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 determined
that the fastest and most effective method to achieve such goals
is through a substantial infusion of capital. The additional
capital would be used by Mercer Mutual to 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 an
amended and restated Plan on November 12, 1997. 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. The Pennsylvania
Department held a public hearing regarding the Conversion on
May __, 1998, and the Plan was approved by the Pennsylvania
Department on ____________, 1998. The Plan is subject to the
approval of Eligible Policyholders at the Special Meeting.
Completion of the Conversion is subject to the prior receipt of
the Pennsylvania Department's approval of the Company's
acquisition of control of Mercer Mutual.
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 and the New Jersey
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 $22,100,000 and $29,900,000, 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."
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, (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 has no intention
of doing so in the future), and (iii) in the unlikely event of a
solvent dissolution of the company, the right to receive a pro
rata distribution of any surplus remaining after the satisfaction
of all claims and other liabilities of the company. 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 the company described
above. Policyholder interests other than contract rights under
policies of insurance will be terminated as a result of the
Conversion.
If the Plan is not approved by the Eligible Policyholders or
if the Conversion fails to be completed for any other reason,
Mercer Mutual will continue its existence as a mutual insurance
company and Eligible Policyholders will retain the rights
described above.
Continuity of Insurance Coverage and Business Operations.
The Conversion will not affect the contractual rights of
policyholders to insurance protection under their individual
insurance policies with Mercer Mutual. During and after the
Conversion, the normal business of Mercer Mutual of issuing
insurance policies in exchange for premium payments and
processing and paying claims will continue without change or
interruption. After the Conversion, Mercer Mutual will continue
to provide services for policyholders under current policies and
by its present management and staff.
The Board of Directors of Mercer Mutual at the time of the
Conversion will continue to serve as the Board of Directors of
Mercer Mutual after the Conversion. The Board of Directors of
the Company will consist of the following persons, each of whom
is an existing director of Mercer Mutual: Roland D. Boehm,
James J. Freda, William C. Hart, George T. Hornyak, Richard U.
Niedt, Andrew R. Speaker, Eric W. Turner 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 has
no present intention of doing so in the future, whether or not
Mercer Mutual converts to stock form. Shareholders of the
Company, 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.
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 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."
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 2,990,000 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. 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:
Number of Percentage of Maximum Number
Eligible Policyholders Eligible Policyholders of Shares
Subscribing for Subscribing for Each Subscriber
100,000 Shares 100,000 Shares Could Purchase
42,432 100% 70
31,824 75% 93
21,216 50% 140
10,608 25% 281
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."
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. If any director, officer or employee does
not subscribe for his full allocation of shares, the shares
not subscribed for shall be allocated among the directors,
officers and employees whose subscriptions remain
unsatisfied in proportion to their respective subscriptions.
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.
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 2,210,000 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 2,990,000 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 March 3, 1998, the
estimated consolidated pro forma market value of Mercer Mutual as
a subsidiary of the Company was between $22.1 million and
$29.9 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
1,495,000 shares compared to a maximum of 2,990,000 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
2,210,000 and 2,990,000 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 $22,100,000 to $29,900,000. 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.
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
2,990,000 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
2,210,000 shares, but less than 2,990,000 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 2,990,000 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 2,210,000 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 2,210,000 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 2,210,000 shares; provided, however,
that no fractional shares of Common Stock will be issued. In
order to raise additional capital, or to 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 2,210,000 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 2,990,000 shares of
Common Stock (not including shares issued to the ESOP). See "The
Conversion -- The Conversion Offerings -- Community Offering,"
and "-- Syndicated Community Offering."
Offering Does Not Meet Minimum.
If the aggregate number of shares of Common Stock
subscribed for in the Offerings is less than 2,210,000 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 $7.8 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 2,990,000 shares
are sold than if 2,210,000 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 they will not have
available to them information concerning the final appraisal.
Tax Effects.
General.
Mercer Mutual has obtained from 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 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, minimum
tax credit 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, 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 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 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 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
2,210,000 shares of Common Stock have been subscribed for or
sold. If at least the 2,210,000 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 or in person) to the Company's principal
executive offices located at 10 North Highway 31, P.O. Box 278,
Pennington, New Jersey 08534 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 may be made by cash, check or money order
in U.S. Dollars. Payments made by cash, check or money order
will be placed in an Escrow Account at CoreStates Bank, N.A. The
Escrow Account will be administered by CoreStates Bank, N.A. (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 $437,100 and $577,500
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 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, if feasible, all shares of Common Stock not purchased in
the Conversion Offerings, if any, will 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 (4.5%, 3.9% and 3.4% of the number of
shares to be issued in the Conversion at the Total Minimum, Total
Midpoint and Total Maximum, respectively, of the Estimated
Valuation Range). The Plan states that subscribers in the
Subscription Offering can purchase up to 100,000 shares. There
are 42,432 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
2,990,000 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 70 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 and nine-tenths percent (34.9%)
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.
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.
Total
Name Shares(1)(2)(3)
Roland D. Boehm (4)(5) 15,000
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 (4) 500
Richard G. Van Noy, Jr. (4)(8) 12,000
Marion J. Crum 1,000
John Danka 1,500
Paul Ehrhardt 2,500
Total 178,500
____________
(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 (104,000 shares at the Total Midpoint).
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 (260,000 shares at the
Total Midpoint). 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 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
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 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. In the
event that the Pennsylvania 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 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.
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 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.
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 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) 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;
(6) 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; (7) limit the right of a person
or entity to vote more than 10% of the Company's voting stock;
(8) eliminate cumulative voting in elections of directors; and
(9) 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 2,210,000 and 2,990,000 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 3,322,222 shares), subject
to adjustment, of the Common Stock and no shares of preferred
stock in the Conversion. The Company has reserved for future
issuance under the Compensation Plan an amount of authorized but
unissued shares of Common Stock equal to 10% of the shares to be
issued 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 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
________________________________.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the
Company by Stevens & Lee, Wayne, Pennsylvania. Stevens & Lee has
consented to the reference herein to its opinion. 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.
In addition, copies of such documents may be obtained on the
Internet at http://www.sec.gov.
Mercer Mutual has filed an application for conversion 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.
<PAGE>
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.
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.
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.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF MERCER MUTUAL
Page
INDEPENDENT AUDITORS' REPORT F-
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS F-
(As of December 31, 1997 and 1996)
STATEMENTS OF EARNINGS F-
(For the years ended December 31, 1997,
1996 and 1995)
STATEMENTS OF CHANGES IN SURPLUS F-
(For the years ended December 31, 1997,
1996 and 1995)
STATEMENTS OF CASH FLOWS F-
(For the years ended December 31, 1997,
1996 and 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-
<PAGE>
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
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
(Dollars in thousands)
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
See accompanying notes to consolidated financial statements.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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 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 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.
<PAGE>
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
======= ====== ====== =======
<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.
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.
Estimated
Amortized fair
cost value
(Dollars in Thousands)
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
The gross realized gains and losses on investment securities
are as follows:
1997 1996 1995
(Dollars in Thousands)
Gross realized gains $1,027 $ 921 $ 778
Gross realized losses (438) (325) (725)
$ 589 $ 596 $ 53
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:
1997 1996 1995
(Dollars in Thousands)
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
(4) Property and Equipment
Property and equipment was as follows:
1997 1996
(Dollars in Thousands)
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
(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>
Premiums written 1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
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
======= ======= =======
<CAPTION>
Premiums earned 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
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>
Liabilities 1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Direct $27,068 $27,429 $27,906
Assumed 4,804 7,792 8,270
------- ------- -------
$31,872 $35,221 $36,176
======= ======= =======
<CAPTION>
Expenses Incurred 1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
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.
(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 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:
1997 1996
(Dollars in Thousands)
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
====== ======
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>
(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
======= ======= =======
<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 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.
<PAGE>
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.
<PAGE>
Table of Contents
Page
Prospectus Summary ....................................
Selected Financial Information and
Other Data .........................................
Investment Considerations .............................
Use of Proceeds .......................................
Dividend Policy .......................................
Market for the Common Stock ...........................
Capitalization ........................................
Pro Forma Data ........................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations........
Business ..............................................
Management of the Company .............................
The Conversion ........................................
Certain Restrictions on Acquisition of
the Company .........................................
Description of Capital Stock ..........................
Registration Requirements .............................
Legal Opinions ........................................
Experts ...............................................
Available Information .................................
Glossary of Selected Insurance Terms ..................
Index to Consolidated Financial
Statements ..........................................
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>
Up to
2,990,000 Shares
MERCER INSURANCE GROUP, INC.
(Proposed Holding Company for
Mercer Mutual Insurance Company)
COMMON STOCK
PROSPECTUS
SANDLER O'NEILL & PARTNERS, L.P.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expense of Issuance and Distribution.
The Company anticipates the following expenses:
SEC registration fee ......................... $ 10,067
Printing, postage, and mailing* .............. $ 350,000
Legal fees and expenses* ..................... $ 350,000
Accounting fees and expenses* ................ $ 150,000
Appraisal fee and expenses ................... $ 75,000
Blue sky fees and expenses (including
counsel fees)* .................. $ 25,000
Transfer and conversion agent fees
and expenses* .............................. $ 100,000
Miscellaneous* ............................... $ 89,933
Total $1,150,000
___________________
*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.
(a) Exhibits:
1.1 Agency Agreement dated _____________, 1998 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, of
Mercer Mutual Insurance Company**
3.1 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. - Management Recognition
Plan*
10.2 Mercer Insurance Group, Inc. - 1997 Stock Compensation
Plan*
10.3 Mercer Insurance Group, Inc. - Employee Stock Ownership
Plan*
10.4 Employment Agreement, dated as October 1, 1997,
between Mercer Insurance Group, Inc., Mercer
Mutual Insurance Company and William C. Hart**
10.5 Employment Agreement, dated as of October 1, 1997,
between Mercer Insurance Group, Inc., Mercer
Mutual Insurance Company and Andrew R.
Speaker**
10.6 Consultant's Agreement, dated April 1, 1994, among
Mercer Mutual Insurance Company, Mercer Insurance
Company and Roland D. Boehm**
10.7 Consultant's Agreement, dated August 5, 1986,
among Mercer Mutual Insurance Company, Mercer
Insurance Company and Eric W. Turner, Jr.**
10.8 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
March 3, 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*
_____________
* To be filed by Amendment
** Previously Filed
(b) Financial Statement Schedules:
Independent Auditor's Consent and Report on Schedules
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.
<PAGE>
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
March 18, 1998
<PAGE>
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
Column A Column B Column C Column D
Market Balance
Type of Investment Cost Value Sheet
(Dollars in Thousands)
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
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1997, 1996 and 1995
Schedule IV - Reinsurance
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Assumed Percentage
Ceded to from of Amount
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>
<PAGE>
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
Reserve Discount
Deferred for Losses if any
Affiliation Policy and Deducted Net Net
with Acquisition Loss Adj. 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>
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1997, 1996 and 1995
Schedule VI - Supplemental Information (continued)
<TABLE>
<CAPTION>
Column H Column I Column J Column K
Paid
Losses and LAE Losses and
Incurred 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>
<PAGE>
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the Registrant has duly caused this Pre-Effective Amendment
No. 1 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 March 19,
1998.
MERCER INSURANCE GROUP, INC.
By:/s/ Andrew R. Speaker
Andrew R. Speaker,
Executive Vice President
and Chief Operating
Officer
Pursuant to the requirements of the Securities Act
of 1933, this Pre-Effective Amendment No. 1 to Registration
Statement No. 333-41497 has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Capacity Date
/s/ William C. Hart* President, Chief March 19, 1998
William C. Hart Executive Officer,
and Director
(Principal
Executive Officer)
/s/ Roland D. Boehm* Vice Chairman of March 19, 1998
Roland D.Boehm the Board of
Directors
/s/ James J. Freda* Director March 19, 1998
James J. Freda
/s/ George T. Hornyak, Jr.* Director March 19, 1998
George T. Hornyak, Jr.
/s/ Richard U. Niedt* Director March 19, 1998
Richard U. Niedt
/s/ Eric W. Turner, Jr.* Director March 19, 1998
Eric W. Turner, Jr.
/s/ Richard G. Van Noy* Chairman of the March 19, 1998
Richard G. Van Noy Board of Directors
/s/ Andrew R. Speaker Executive Vice March 19, 1998
Andrew R. Speaker President, Chief
Operating Officer,
Chief Financial
Officer, Treasurer
and Director
(Principal Financial
and Accounting Officer)
*By /s/ Andrew R. Speaker
Andrew R. Speaker
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Number Title
1.1 Agency Agreement dated _____________, 1998 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, of Mercer Mutual Insurance
Company**
3.1 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. - Management
Recognition Plan*
10.2 Mercer Insurance Group, Inc. - 1997 Stock
Compensation Plan*
10.3 Mercer Insurance Group, Inc. - Employee Stock
Ownership Plan
10.4 Employment Agreement, dated as of October 1,
1997, between Mercer Insurance Group, Inc.,
Mercer Mutual Insurance Company and William
C. Hart**
10.5 Employment Agreement, dated as of October 1,
1997, between Mercer Insurance Group, Inc.,
Mercer Mutual Insurance Company and Andrew R.
Speaker**
10.6 Consultant's Agreement, dated April 1, 1994,
among Mercer Mutual Insurance Company, Mercer
Insurance Company and Roland D. Boehm**
10.7 Consultant's Agreement, dated August 5, 1986,
among Mercer Mutual Insurance Company, Mercer
Insurance Company and Eric W.
Turner, Jr.**
10.8 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
March 3, 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*
_____________
* To be filed by amendment.
** Previously Filed
1/98
MERCER INSURANCE GROUP, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(Effective January 1, 1998)
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 - INTRODUCTION ................................... 1
ARTICLE 2 - DEFINITIONS .................................... 2
ARTICLE 3 - ELIGIBILITY .................................... 12
3.1. Eligibility Generally .......................... 12
3.2. Eligibility Computation Period ................. 12
3.3. Commencement of Participation .................. 12
3.4. Cessation of Participation ..................... 12
3.5. Special Rules for Participation and Vesting
Purposes ....................................... 13
3.6. Years of Service ............................... 13
3.7. Participation upon Reemployment ................ 13
ARTICLE 4 - VESTING ........................................ 16
4.1. In General ..................................... 16
4.2. Normal Retirement Date ......................... 16
4.3. Death or Disability ............................ 16
4.4. Forfeiture of Account .......................... 16
ARTICLE 5 - CONTRIBUTIONS AND ALLOCATIONS .................. 18
5.1. Company Contributions .......................... 18
5.2. Time and Manner of Contributions ............... 18
5.3. Employee Contributions ......................... 18
5.4. Recovery of Contributions ...................... 18
5.5. Allocation of Employer Contributions ........... 19
5.6. Income on Investments .......................... 19
5.7. Certain Stock Transactions ..................... 20
5.8. Valuation of Trust Fund ........................ 20
ARTICLE 6 - MAXIMUM LIMITATION ON ALLOCATIONS .............. 22
6.1. Participation Solely in This Plan .............. 22
6.2. Participation in Another Defined Contribution
Plan ........................................... 23
6.3. Participation in a Defined Benefit Plan ........ 24
6.4. Definitions .................................... 25
ARTICLE 7 - INVESTMENT OF TRUST ASSETS ..................... 28
7.1. Trust .......................................... 28
ARTICLE 8 - COMPANY STOCK APPRAISAL ........................ 30
ARTICLE 9 - DISTRIBUTIONS .................................. 31
9.1. Termination of Employment ...................... 31
9.2. Death .......................................... 31
9.3. Time of Payment ................................ 33
9.4. Form of Payment ................................ 33
9.5. Direct Rollover ................................ 33
9.6. Diversification Election ....................... 35
9.7. Election to Retain Interests in Plan ........... 36
9.8. Mandatory Distributions ........................ 36
9.9. Dividend Distributions ......................... 39
9.10. Right of First Refusal ......................... 40
9.11. Prohibited Company Stock Transactions .......... 40
ARTICLE 10 - RIGHT TO SELL COMPANY STOCK ................... 43
10.1. Put Requirements ............................... 43
ARTICLE 11 - VOTING AND TENDER OF COMPANY STOCK ............ 46
11.1. Voting ......................................... 46
11.2. Tender ......................................... 46
11.3. Fiduciary Responsibilities ..................... 48
11.4. Procedures for Voting and Tender ............... 48
ARTICLE 12 - ADMINISTRATION ................................ 50
12.1. Fiduciary Responsibilities ..................... 50
12.2. The Administrative Committee ................... 51
12.3. Plan Expenses .................................. 53
12.4. Meetings and Voting ............................ 53
12.5. Compensation ................................... 53
12.6. Claims Procedures .............................. 53
12.7. Liabilities .................................... 56
ARTICLE 13 - AMENDMENTS .................................... 57
13.1. Right to Amend ................................. 57
13.2. Amendment by Administrative Committee .......... 57
13.3. Plan Merger and Asset Transfers ................ 58
ARTICLE 14 - TERMINATION ................................... 59
14.1. Right to Terminate ............................. 59
14.2. Effect of Termination .......................... 59
ARTICLE 15 - MISCELLANEOUS ................................. 60
15.1. Non-alienation of Benefits ..................... 60
15.2. Appointment of Guardian ........................ 60
15.3. Satisfaction of Benefit Claims ................. 60
15.4. Controlling Law ................................ 61
15.5. Non-guarantee of Employment .................... 61
15.6. Severability and Construction of the Plan ...... 61
15.7. No Requirement of Profits ...................... 62
15.8. All Risk on Participants and Beneficiaries ..... 62
ARTICLE 16 - TOP-HEAVY PROVISIONS .......................... 63
16.1. Determination of Top-Heavy Status .............. 63
16.2. Super Top-Heavy Plan ........................... 63
16.3. Top-Heavy Definitions .......................... 64
16.4. Top-Heavy Rules ................................ 65
ARTICLE 17 - EXEMPT LOANS .................................. 69
17.1. General ........................................ 69
17.2. Terms of Exempt Loan Agreements ................ 69
17.3. Prohibition on Purchase Arrangements ........... 70
17.4. Suspense Account ............................... 70
17.5. Sale of Financed Shares ........................ 72
<PAGE>
ARTICLE 1
INTRODUCTION
The Mercer Insurance Group, Inc. Employee Stock Ownership Plan
(the "Plan") was established by Mercer Insurance Group, Inc. (the
"Company") in order for its employees to participate in the
ownership of the Company. The Plan, effective as of January 1,
1998, is intended to be an employee stock ownership plan within the
meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986,
as amended, and is designed to invest primarily in Common Stock of
the Company which meets the requirements for qualifying employer
securities under Code Section 409(l). The purchase of Company
Stock for the Plan may be made with the proceeds of exempt loans
meeting the requirements of Section 54.4975-7(b) of the Treasury
Regulations (including any amendments thereto) and Section
2550.408(b)-3 of the Department of Labor Regulations (including any
amendments thereto), employer contributions, dividends on qualified
employer securities or a combination thereof.
<PAGE>
ARTICLE 2
DEFINITIONS
The following initially capitalized words and phrases
when used herein shall have the meanings set forth below, unless
the context clearly requires otherwise.
2.1. "Account" means the bookkeeping account established
for each Participant which reflects the value of the
Participant's interest in the Plan. This Account shall include a
Company Stock Account, reflecting the number of shares of Company
Stock allocated to the Participant and an Investment Account in
which shall be reflected other investments allocated to the
Participant.
2.2. "Administrative Committee" and "Committee," used
interchangeably, means the named fiduciary of the Plan, which is
appointed by the Board of Directors, as is more fully described
in Article 12.
2.3. "Affiliate" means the Company and any corporation
which is a member of a controlled group of corporations (as
defined in Code Section 414(b)) which includes the Company; any
trade or business (whether or not incorporated) which is under
common control (as defined in Code Section 414(c)) with the
Company; any organization (whether or not incorporated) which is
a member of an affiliated service group (as defined in Code
Section 414(m)) which includes the Company; and any other entity
required to be aggregated with the Company pursuant to
regulations under Code Section 414(o).
2.4. "Beneficiary" means the individual(s) or entities
entitled to receive the Participant's benefits under the Plan in
the event of the Participant's death prior to receiving all
benefits payable under the Plan.
2.5. "Board of Directors" means the Board of Directors of
the Company as constituted from time to time.
2.6. "Break in Service" means a Plan Year during which an
Employee (a) has terminated employment or is no longer employed
with the Company or an Affiliate, and (b) fails to complete more
than five hundred (500) Hours of Service.
2.7. "Code" means the Internal Revenue Code of 1986, as
amended and the regulations promulgated thereunder.
2.8. "Company" means Mercer Insurance Group, Inc. and any
Affiliate which adopts this Plan with the approval of the Board
of Directors of the Company and any successor to the business of
the Company that agrees to assume the Company's obligations under
the Plan.
2.9. "Company Stock" means shares of common stock issued by
the Company that are qualifying employer securities within the
meaning of Code Section 4975(e)(8). For purposes of Code Section
4975(e)(8), "Affiliate," as defined in Section 2.3 of the Plan,
shall be modified in accordance with Code Section 409(l)(4).
2.10. "Compensation" means the actual salary or wages paid
during a Plan Year (including shift differential, draw, overtime
and bonus) to a Participant by the Company for personal services,
and including any salary reduction contributions elected by a
Participant pursuant to any plan maintained by the Company in
accordance with Code Sections 401(k) and 125, but excluding
severance, commissions, the value of any stock options included
in gross income, awards under any nonqualified plans of deferred
compensation and reimbursement for business, travel or
entertainment expenses incurred by the Participant and not
reported to the Internal Revenue Service as wages.
The annual compensation for each Participant taken into
account under the Plan shall not exceed $150,000, as adjusted by
the Secretary or his designate at the same time and in the same
manner as under Code Section 415(d).
2.11. "Disability" shall have the meaning set forth in the
Company's long-term disability plan.
2.12. "Effective Date" means January 1, 1998 which is the
date on which the provisions of this Plan become effective.
2.13. "Employee" means an individual who is employed as a
common law employee by the Company or an Affiliate on a salaried
or hourly basis and with respect to whom the Company or the
Affiliate is required to withhold taxes from remuneration paid to
him or her by the Company or Affiliate for personal services
rendered to the Company, including any officer or director who
shall so qualify. The term shall not include leased employees
within the meaning of Code Section 414(n). Employees shall not
include any individual whose employment with the Company or an
Affiliate is governed by a collective bargaining agreement
between the Company and employee representatives if evidence
exists that retirement benefits were a subject of good faith
bargaining between the parties, and provided such bargaining
agreement does not provide for participation in this Plan.
2.14. "Employer" means the Company.
2.15. "Entry Date" means January 1, April 1, July 1 and
October 1 of each Plan Year.
2.16. "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time, including any
regulations promulgated thereunder.
2.17. "Exempt Loan" means an extension of credit to the
Plan which satisfies the requirements of Treasury Regulations
Section 54.4975-7(b) and Department of Labor Regulations Section
2550.408(b)-3, or any future law or regulation that modifies
either or both of these two regulations and affects the exemption
for such loans to an employee stock ownership plan.
2.18. "Fund" means the assets and all income, gains and
losses thereon held by the Trustee under the Trust Agreement for
the exclusive benefit of Participants and Beneficiaries of the
Plan.
2.19. "Highly Compensated Employee"
(a) Highly Compensated Employee means an Employee
who performs service during the determination year and is
described in one or more of the following groups:
(i) An Employee who is a 5% owner, as
defined in Code Section 416(i)(1)(A)(iii), at any time during the
determination year or the look-back year.
(ii) An Employee who receives compensation
in excess of $80,000 (indexed in accordance with Code
Section 415(d)) during the look-back year.
(iii) An Employee who receives compensation
in excess of $80,000 (indexed in accordance with Code
Section 415(d)) during the look-back year and is a member of the
top-paid group for the look-back year.
(b) For purposes of the definition of Highly
Compensated Employee, the following definitions and rules shall
apply:
(i) The determination year is the Plan Year
for which the determination of who is highly compensated is being
made.
(ii) The look-back year is the 12 month
period immediately preceding the determination year, or if the
Employer elects, the calendar year ending with or within the
determination year.
(iii) The top-paid group consists of the top
20% of employees ranked on the basis of compensation received
during the year. For purposes of determining the number of
employees in the top-paid group, employees described in Code
Section 414(q)(8) and Treasury Regulations Section 1.414(q)-1T
Q&A 9(b) are excluded.
(c) Compensation is compensation within the
meaning of Code Section 415(c)(3), plus, for purposes thereof,
elective or salary reduction contributions to a cafeteria plan,
cash or deferred arrangement under Code Section 401(k) or tax-
sheltered annuity. Employers aggregated under Code
Sections 414(b), (c), (m), or (o) are treated as a single
employer.
2.20. "Hours of Service" means:
(a) Performance of Duties. The actual hours for
which an Employee is paid or entitled to be paid by the Company
for the performance of duties;
(b) Nonworking Paid Time. Each hour for which an
Employee is paid or entitled to be paid by the Company on account
of a period of time during which no duties are performed
(irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity,
disability (to the extent not already included in Compensation),
layoff, jury duty, military duty or leave of absence; provided,
however, no more than 501 Hours of Service shall be credited to
an Employee on account of any single continuous period during
which he performed no duties; and provided further that no credit
shall be given for payments made or due under a plan maintained
solely for the purpose of complying with applicable worker's or
unemployment compensation or disability insurance laws or for
payments which solely reimburse an Employee for medical or
medically related expenses incurred by the Employee; and
(c) Maternity, Paternity and FMLA Leave. Solely
for purposes of determining whether a one year Break in Service
(as defined in Section 2.6 of the Plan) has occurred for purposes
of determining eligibility to participate and vesting, each hour
for which an Employee is absent from employment by reason of
(i) pregnancy of the Employee, (ii) birth of a child of the
Employee, (iii) placement of a child in connection with the
adoption of the child by an individual, or (iv) caring for the
child during the period immediately following the birth or
placement for adoption. Hours of Service shall also, for these
limited purposes, include each hour for which an Employee who has
worked for the Company or an Affiliate for at least 12 months and
for at least 1,250 Hours of Service during the year preceding the
start of the leave, is absent from employment on an unpaid family
leave for up to 12 weeks, as provided for in the Family and
Medical Leave Act of 1993 (the "FMLA Leave"), by reason of
(A) the birth or adoption of a child, (B) the care of a spouse,
child or parent with a serious health condition, or (C) his own
serious health condition, provided that such an Employee provides
the Company with a 30-day advance notice if the leave is
foreseeable, and/or medical certification satisfactory to support
his request for leave because of a serious health condition. For
purposes of determining whether an Employee's leave qualifies as
a "FMLA Leave" in order to be credited with Hours of Service
under this Plan, the Family and Medical Leave Act of 1993
("FMLA") and the regulations promulgated thereunder shall apply.
During the period of absence, the Employee shall be credited with
the number of hours that would be generally credited but for such
absence or if the general number of work hours is unknown, eight
Hours of Service for each normal workday during the leave
(whether or not approved). These hours shall be credited to the
computation period in which the leave of absence commences if
crediting of such hours is required to prevent the occurrence of
a one year Break in Service in such computation period, and in
other cases, in the immediately following computation period.
The computation period shall be the same as the relevant period
for determining eligibility computation periods and vesting
computation periods. Unless otherwise required under the FMLA
and the regulations promulgated thereunder, no more than
501 Hours of Service shall be credited under this paragraph for
any single continuous period (whether or not such period occurs
in a single computation period).
(d) Back Pay. Each hour for which back pay,
irrespective of mitigation of damages, is either awarded or
agreed to by the Company; provided, however, Hours of Service
credited under paragraphs (a), (b) and (c) above shall not be
recredited by operation of this paragraph.
(e) Equivalencies. The Administrative Committee
shall have the authority to adopt any of the following
equivalency methods for counting Hours of Service that are
permissible under regulations issued by the Department of Labor:
(i) Working Time; (ii) Periods of Employment; (iii) Earnings; or
(iv) Elapsed Time. The adoption of any equivalency method for
counting Hours of Service shall be evidenced by a certified
resolution of the Committee, which shall be attached to and made
part of the Plan. Such resolution shall indicate the date from
which such equivalency shall be effective.
(f) Miscellaneous. Unless the Administrative
Committee directs otherwise, the methods of determining Hours of
Service when payments are made for other than the performance of
duties and of crediting such Hours of Service to Plan Years set
forth in Department of Labor Regulations Sections 2530.200b-2(b)
and (c), shall be used hereunder and are incorporated by
reference into the Plan.
Participants on military leaves of absence who are not
directly or indirectly compensated or entitled to be compensated
by the Company while on such leave shall be credited with Hours
of Service as required by Section 9 of the Military Selective
Service Act.
Notwithstanding any other provision of this Plan to the
contrary, an Employee shall not be credited with Hours of Service
more than once with respect to the same period of time.
2.21. "Investment Manager" means an investment advisor,
bank or insurance company, meeting the requirements of ERISA
Section 3(38), appointed by the Company to manage the Plan's
assets in accordance with the Trust Agreement.
2.22. "Normal Retirement Date" means the first day of the
calendar month coincident with or following the date on which a
Participant attains age 65.
2.23. "Participant" means an Employee participating in the
Plan in accordance with Article 3.
2.24. "Plan" means the Mercer Insurance Group, Inc.
Employee Stock Ownership Plan, as set forth in this document and
in the Trust Agreement pursuant to which the Fund is maintained,
in each case as amended from time to time.
2.25. "Plan Year" means the calendar year.
2.26. "Suspense Account" means the account established and
maintained to hold Company Stock acquired with the proceeds of an
Exempt Loan and held in the Fund, which Company Stock has not
been allocated to the Accounts of Participants with respect to
the year of such acquisition.
2.27. "Trust Agreement" means the agreement of Trust
established by the Company and the Trustee for purposes of
holding title to the assets of the Plan.
2.28. "Trustee" means __________________________________ as
appointed by the Board of Directors of the Company in accordance
with Article 12 to hold legal title to the assets of the Fund and
that expressly agrees to be bound by the terms and conditions of
the Trust Agreement.
2.29. "Valuation Date" shall mean the last business day of
each calendar quarter (March 31, June 30, September 30 and
December 31), and such other more frequent dates as the
Administrative Committee may from time to time establish.
2.30. "Year of Service" means a Plan Year or the
eligibility computation period in which a Participant completes
at least 1,000 Hours of Service.
THE MASCULINE GENDER, WHERE APPEARING IN THE PLAN, SHALL BE
DEEMED TO INCLUDE THE FEMININE GENDER, UNLESS THE CONTEXT CLEARLY
INDICATES TO THE CONTRARY.
<PAGE>
ARTICLE 3
ELIGIBILITY
3.1. Eligibility Generally. Each Employee who is employed
by the Company on the Effective Date shall be eligible to become
a Participant in the Plan as of the Effective Date provided he
has attained age 21 and has satisfied the requirements of
Section 3.2 of the Plan relating to the completion of an
eligibility computation period.
3.2. Eligibility Computation Period. An Employee's
eligibility computation period shall be the twelve consecutive
month period during which the Employee is credited with 1,000 or
more Hours of Service beginning with the date the Employee first
performs an Hour of Service. Thereafter, the eligibility
computation period of an Employee shall be the Plan Year,
including the Plan Year that includes the first anniversary of
the date of his first Hour of Service.
\DMS Commencement of Participation. Each Employee who has
satisfied the requirements of Section 3.1 of the Plan shall
commence participation in the Plan on the later of the Effective
Date or the Entry Date concurrent with or next following the date
on which he satisfies such requirements.
3.4. Cessation of Participation. An Employee shall cease
to be a Participant upon the earliest of (a) the date on which he
retires under the Plan, (b) the date on which his employment with
the Company terminates for any reason, including death or
Disability, (c) the date on which his employment with the Company
is governed by a collective bargaining agreement that does not
provide for participation in this Plan; or (d) the date on which
he becomes a "leased employee" as defined in Code Section 414(n).
3.5. Special Rules for Participation and Vesting Purposes.
For purposes of determining an Employee's eligibility to
participate in the Plan pursuant to Section 3.1 of the Plan, and
for purposes of determining his Years of Service and vested
interest pursuant to this Section 3.5 and Section 4.1 of the
Plan, respectively, Hours of Service shall include an Employee's
Hours of Service (a) with an Affiliate after it became an
Affiliate hereunder, (b) while a "leased employee" as defined in
Code Section 414(n) with the Company or an Affiliate after it
became an Affiliate, (c) while an employee covered by the terms
of a collective bargaining agreement that does not provide for
participation in this Plan, or (d) with the Company prior to the
Effective Date provided such Employee was eligible to participate
in this Plan on the Effective Date in accordance with
Section 3.1.
3.6. Years of Service. A participant's vested interest in
his Account shall be based on his Years of Service. Subject to
the reemployment provisions of Section 3.7 of the Plan, a
Participant or Employee shall be credited with a Year of Service
for each Plan Year in which he is credited with 1,000 or more
Hours of Service with the Company.
3.7. Participation upon Reemployment. Upon the
reemployment of any person after the Effective Date who had
previously been employed by the Company on or after the Effective
Date, the following rules shall apply in determining his
participation in the Plan and his Years of Service under
Section 3.5 of the Plan:
(a) No Prior Participation. If the reemployed
Employee was not a Participant in the Plan during his prior
period of employment and the reemployed Employee incurred a one-
year Break in Service, he must meet the requirements of
Section 3.1 of the Plan for participation in the Plan as if he
were a new Employee. If the reemployed Employee was not a
Participant in the Plan during his prior period of employment and
the reemployed Employee did not incur a one-year Break in
Service, all Service with the Company before termination of
employment and after re-employment will be aggregated for
purposes of meeting the requirements of Section 3.1 of the Plan
for participation in the Plan. For purposes of this Article 3,
the term one-year Break in Service means a twelve consecutive
month period during which the Employee does not perform at least
500 hours of service.
(b) Prior Participation. If the reemployed
Employee was a Participant in the Plan during his prior period of
employment, he shall be entitled to resume participation in the
Plan on the date of his reemployment.
(c) Years of Service. Upon reemployment
following a Break in Service, any Employee who was entitled to a
nonforfeitable (vested) benefit as of the date of his original
Break in Service will have his Years of Service before and after
the Break in Service aggregated. Any Employee who was not
eligible for a nonforfeitable (vested) benefit under this Plan at
the date of his original Break in Service will have his Years of
Service before the Break in Service aggregated with his Years of
Service after the Break in Service unless the period commencing
with the date of his termination of employment and ending with
the date of his reemployment exceeds the greater of (i) his Years
of Service prior to the Break in Service or (ii) five years.
<PAGE>
ARTICLE 4
VESTING
4.1. In General. Each Participant shall have a vested
interest in his Account, if any, in accordance with the following
vesting schedule:
Years of Service
After the Effective Date Vested Percentage
0-5 Years of Service 0%
5 or more Years of Service 100%
For purposes of determining an Employee's vested
interest under this Section 4.1, an Employee's Years of Service
shall be disregarded as permitted by Code Section 411(a)(4)(D).
4.2. Normal Retirement Date. Notwithstanding the
provisions of Section 4.1 of the Plan, a Participant who
terminates employment on or after his Normal Retirement Date,
shall be 100 percent vested in his Account.
4.3. Death or Disability. Notwithstanding the provisions
of Section 4.1 of the Plan, if a Participant's employment is
terminated on account of death or Disability, he shall be
100 percent vested in his Account.
4.4. Forfeiture of Account. If a Participant terminates
employment prior to the time he is 100 percent vested in his
Account for a reason other than death, Disability, or Normal
Retirement, then the non-vested amount shall be immediately
forfeited and allocated as of the end of the Plan Year in which
the Participant incurs a one-year Break in Service. Forfeitures
shall be allocated to the Accounts of Participants who were
employed by the Company on the last day of the Plan Year with
respect to which forfeitures are allocated in the ratio that the
Compensation of each Participant for such Plan Year bears to the
total Compensation of all such Participants for such Plan Year.<PAGE>
ARTICLE 5
CONTRIBUTIONS AND ALLOCATIONS
5.1. Company Contributions. For each Plan Year, the
Company may contribute cash or shares of Company Stock, or both,
in such amounts as may be determined by the Board of Directors.
In no event, however, shall Company contributions made under this
Section 5.1 exceed fifteen percent (15%) of each Participant's
Compensation, except to the extent Company contributions are used
to pay the interest on an Exempt Loan.
In the event shares of Company Stock are sold to the
Trustee for a Plan Year, the fair market value of such Company
Stock shall be determined in accordance with the provisions of
Article 8. Employer contributions made under this Section 5.1
shall be transferred to the Trustee no later than the due date
(including extensions) for filing the Company's Federal income
tax return.
5.2. Time and Manner of Contributions. All Company
contributions shall be paid directly to the Trustee, and a
contribution for any Plan Year shall be made not later than the
date prescribed by law for filing the Company's Federal income
tax return (including extensions, if any) for the Company's
taxable year that ends within or with that Plan Year.
5.3. Employee Contributions. Participants are neither
permitted nor required to make contributions to the Plan.
5.4. Recovery of Contributions. The Company may recover
contributions to the Plan, only as set forth in this Section 5.4.
(a) Contributions made to the Plan shall be
conditioned upon the initial and continuing qualification of the
Plan. If the Plan is determined to be disqualified,
contributions made in respect of any period subsequent to the
effective date of such disqualification shall be returned to the
Company.
(b) Contributions made to the Plan shall be
conditioned upon their deductibility under the Code. To the
extent that a deduction is disallowed for any contribution, such
amount shall be returned to the Company within one year after the
disallowance of the deduction.
(c) If a contribution, or any part thereof, is
made on account of a mistake of fact, the amount of the
contribution attributable to such mistake shall be returned to
the Company within one year after it is made.
5.5. Allocation of Employer Contributions. Subject to the
limitations set forth in Article 6, Employer contributions made
to the Trust in the form of cash or Company Stock for a Plan Year
shall be allocated to the Accounts of Participants in the ratio
of the Compensation of each Participant for the Plan Year to the
total Compensation of all Participants for the Plan Year,
provided that the Participant has completed 1,000 Hours of
Service and is actively employed on the last date of the Plan
Year.
5.6. Income on Investments. The income, gains, and losses
attributable to investments under the Plan shall be allocated
annually or at such other times as the Administrative Committee
may determine to the Accounts of Participants and Beneficiaries
who have undistributed balances in their Accounts on the
Valuation Date, in proportion to the amounts in the Accounts
immediately after the preceding Valuation Date, but after first
reducing each Account by any distributions, withdrawals or
transfers from the Trust during the interim period and increasing
each Account by any transfers to the Trust and by contributions
made to the Trust during the interim period.
Distributions from the Plan shall include income,
gains, and losses accrued as of the coincident or immediately
preceding Valuation Date, and shall not be adjusted
proportionately to reflect any income, gains, or losses accrued
after that Valuation Date. All valuations shall be based on the
fair market value of the assets in the Trust on the Valuation
Date.
5.7. Certain Stock Transactions. Shares of Company Stock
received by the Trustee as a result of a stock split, dividend,
conversion, or as a result of a reorganization or other
recapitalization of the Company shall be allocated as of the day
on which such shares are received by the Trustee in the same
manner as the shares of Company Stock to which they are
attributable are then allocated.
5.8. Valuation of Trust Fund. As of each Valuation Date,
the Trustee shall determine the fair market value of the Trust,
after deducting withdrawals, distributions, and any expenses of
Plan administration paid out of the Trust, and including any
contributions allocated to Participants' Accounts, for the
valuation period ending on the Valuation Date. In determining
value, the Trustee may use such generally accepted methods as the
Trustee, in its discretion, deems advisable, which, in the case
of Company Stock shall be in accordance with the provisions of
Article 8.
<PAGE>
ARTICLE 6
MAXIMUM LIMITATION ON ALLOCATIONS
6.1. Participation Solely in This Plan.
(a) If the Participant does not participate in,
and has never participated in another plan qualified under Code
Section 401(a) that is maintained by the Employer, or a welfare
benefit fund (as defined in Code Section 419(e)) maintained by
the Employer, or an individual medical account (as defined in
Code Section 415(l)(2)) maintained by the Employer, which
provides an Annual Addition, the amount of Annual Additions which
may be credited to the Participant's Account for any Limitation
Year shall not exceed the lesser of the Maximum Permissible
Amount or any other limitation contained in the Plan. If the
Company's contribution that would otherwise be contributed or
allocated to the Participant's Account would cause the Annual
Additions for the Limitation Year to exceed the Maximum
Permissible Amount, the excess amounts in the Participant's
Account must be allocated and reallocated to other Participants.
If the allocation or reallocation of the excess amounts cause the
Maximum Permissible Amount to be exceeded with respect to each
Participant for the Limitation Year, then these amounts must be
held unallocated in a Code Section 415 suspense account. If a
Code Section 415 suspense account is in existence at any time
during a Limitation Year pursuant to this Section 6.1, it will
not participate in the allocation of the Trust's investment gains
and losses. If a suspense account is in existence at any time
during a particular Limitation Year, other than the Limitation
Year described in the preceding sentence, all amounts in the Code
Section 415 suspense account must be allocated and reallocated to
Participants' Accounts (subject to the Maximum Permissible
Amount) before any Employer contributions may be made to the Plan
for that Limitation Year.
(b) Prior to determining the Participant's actual
Compensation for the Limitation Year, the Company may determine
the Maximum Permissible Amount for a Participant on the basis of
a reasonable estimation of the Participant's Compensation for the
Limitation Year, uniformly determined for all Participants
similarly situated.
(c) As soon as is administratively feasible after
the end of the Limitation Year, the Maximum Permissible Amount
for the Limitation Year will be determined on the basis of the
Participant's actual Compensation for the Limitation Year.
(d) If, after determining the Participant's
actual Compensation or, if as a result of an allocation of
forfeitures, there is an amount in excess of the Maximum
Permissible Amount allocated to a Participant's Account, the
excess shall be allocated in the same manner as provided for in
Section 6.2(a) of the Plan.
6.2. Participation in Another Defined Contribution Plan.
(a) This Section 6.2 applies if a Participant is
also covered under another defined contribution plan or a welfare
benefit fund (as defined in Code Section 419(e)) or an individual
medical account (as defined in Code Section 415(l)(2) maintained
by the Employer which provides an Annual Addition during any
Limitation Year. If the Participant participates in one or more
such plans, all reductions in Annual Additions shall be made
under such plans and not under this Plan. In the event that,
notwithstanding the preceding sentence, the Annual Additions to
be credited under this Plan should exceed the Maximum Permissible
Amount, the Annual Additions which would otherwise be credited to
the Participant's Account under any other such plan shall be
reduced prior to making any reduction hereunder, which reduction
shall be made to the maximum extent possible under this Plan and
shall be reduced in the manner set forth in Section 6.1 of the
Plan.
6.3. Participation in a Defined Benefit Plan.
(a) In the event a Participant participates in a
defined benefit plan or plans maintained by the Employer as well
as this Plan, the sum of the Defined Benefit Plan Fraction and
the Defined Contribution Plan Fraction will not exceed 1.0 for
any Limitation Year. If there is an excess, appropriate
adjustments to the Participant's benefits under defined benefit
plans maintained by the Employer shall be made prior to making
any adjustments to a Participant's Account under this Plan.
(b) For purposes of this Section 6.3, the Defined
Benefit Plan Fraction for any Limitation Year is a fraction:
(i) the numerator of which is the projected
annual benefit of the Participant (as determined under Code
Section 415) under all defined benefit plans of the Employer
(determined as of the close of the year); and
(ii) the denominator of which is the lesser
of --
(A) the product of 1.25 multiplied by
the dollar limitation in effect under Code Section 415(b)(1)(A);
(B) the product of 1.4 multiplied by
the amount which may be taken into account under Code Section
415(b)(1)(B) with respect to such individual under the defined
benefit plan for such year.
(c) For purposes of this Section 6.3, the Defined
Contribution Plan Fraction for any Limitation Year is a fraction
(i) the numerator of which is the sum of the
Annual Additions to the Participant's accounts under all defined
contribution plans of the Employer as of the close of such year;
and
(ii) the denominator of which is the sum of
the lesser of the following amounts determined for such year and
for each prior Year of Service with the Employer:
(A) the product of 1.25 multiplied by
the dollar limitation in effect under Code Section 415(c)(1)(A);
(B) the product of 1.4 multiplied by
the amount which may be taken into account under Code Section
415(c)(1)(B) for the Participant for such year.
6.4. Definitions. The following definitions apply solely
for purposes of this Article 6.
(a) Annual Additions means the sum of the
following amounts credited to a Participant's Account for the
Limitation Year:
(i) employer contributions
(ii) employee contributions
(iii) forfeitures
(iv) amounts allocated to an individual
medical account (as defined in Code Section 415(l)(2)) which is
part of a pension or annuity plan maintained by the Employer
which are treated as Annual Additions to a defined contribution
plan, and
(v) amounts derived from contributions paid
or accrued, which are attributable to post-retirement medical
benefits, allocated to the separate account of a key employee, as
defined in Code Section 419A(d)(3), under a welfare benefit fund
maintained by the Employer which are treated as Annual Additions
to a defined contribution plan.
(vi) Excess amounts applied to reduce
Employer contributions under Sections 6.2 or 6.1 of the Plan in
the Limitation Year will be Annual Additions for such Limitation
Year.
(b) Compensation means wages, salary and other
remuneration for personal services required to be reported
pursuant to Code Sections 6041(d) and 6051(a)(3) except that
Compensation will be determined without regard to any rules under
Code Section 3401(a) that limit remuneration based upon the
nature or location of the services performed.
(c) Employer means the Company and all members of
a controlled group of corporations (as defined in Code
Section 414(b) and modified by Code Section 415(h)) all commonly
controlled trades or businesses (as defined in Code
Section 414(c) as modified by Code Section 415(h)), any
affiliated service group (as defined in Code Section 414(m)) of
which the Company is a part, and any other entity required to be
aggregated with the Employer pursuant to regulations under Code
Section 414(o).
(d) Limitation Year means the calendar year.
(e) Maximum Permissible Amount means the Maximum
Annual Additions that may be contributed or allocated to a
Participant's Account for any Limitation Year. Such amount shall
not exceed the lesser of:
(i) $30,000 (or if greater, 1/4 of the
dollar limitation in effect under Code Section 415(b)(1)(A)), or
(ii) 25 percent of the Participant's
Compensation for the Limitation Year.
The Maximum Permissible Amount shall be pro-rated in
the case of any Limitation Year of less than 12 months created by
the changing of the Limitation Year.
If no more than one-third of Company contributions to
the Plan for a Plan Year which are deductible under Code Section
404(a)(9) are allocated to the Accounts of Participants who are
Highly Compensated Employees, there shall be excluded in
determining the Maximum Permissible Amount of each Participant
for such Plan Year (A) the contributions applied to the payment
of interest on an Exempt Loan; and (B) any forfeitures of Company
contributions if the forfeited contributions were Company Stock
acquired with the proceeds of an Exempt Loan.
<PAGE>
ARTICLE 7
INVESTMENT OF TRUST ASSETS
7.1. Trust.
(a) All assets of the Plan shall be held in the
Trust. To the extent the Trustee deems practical, the Trustee
shall use all available cash, as directed by the Administrative
Committee, to purchase Company Stock in open market transactions,
from other stockholders or to buy newly issued Company Stock from
the Company. If the purchase is from the Company or a
Disqualified Person, such purchase shall be for adequate
consideration and no commission is to be charged with respect to
the purchase. If no such stock is available for purchase, or if
the Trustee determines that the purchase of such additional stock
is not practical, the Trustee shall invest in other securities or
property, real or personal, consistent with the requirements of
Title I of ERISA. These other securities, property and cash
shall be held by the Trustee in the Investment Fund. The
Investment Fund income shall be allocated as of each Valuation
Date to Participant's Investment Accounts in proportion to the
balance in these accounts at the beginning of the year.
(b) For purposes of this Article 7, Article 9,
Article 10 and Article 17, the term "Disqualified Person" means a
person defined in Code Section 4975(e), including but not limited
to (i) a fiduciary of the Plan; (ii) a person providing services
to the Plan; (iii) an owner of 50% or more of the combined voting
power or value of all classes of stock of the Company entitled to
vote or the total value of shares of all classes of stock of the
Company and certain members of such owner's family; or (iv) an
officer, director, 10% or greater shareholder or highly
compensated employee (who earns 10% or more of the yearly wages)
of the Company.
<PAGE>
ARTICLE 8
COMPANY STOCK APPRAISAL
The fair market value of Company Stock shall be
determined, on any relevant day, as follows: (a) if such stock
is then traded in the over-the-counter market, the closing sale
price (as reported in the National Market System by NASDAQ with
respect to such stock) for the most recent date (including such
relevant day) during which a trade in such stock has occurred, or
(b) if such stock is then traded on a national securities
exchange, the closing sale price for the most recent date
(including such relevant date) during which a trade in such stock
has occurred. In accordance with the provisions of Code Section
401(a)(28)(C), if Company stock is not actively traded in the
over-the-counter market, or on a national securities exchange, a
valuation of Company stock required to be made under this Plan
shall be made by an independent appraiser who satisfies
requirements similar to those contained in regulations issued
under Code Section 170(a)(1).
<PAGE>
ARTICLE 9
DISTRIBUTIONS
9.1. Termination of Employment. In the event of the
Participant's termination of employment for any reason (including
attaining his Normal Retirement Date, attainment of age 55 and
the completion of Five Years of Service or on account of death or
Disability), a Participant shall be entitled to a distribution of
all amounts determined under Article 4 that are credited to his
Account at the times set forth in this Article 9.
9.2. Death. Upon the death of a Participant, all amounts
credited to his Account shall be distributed to his Beneficiary,
determined in accordance with this Section 9.2.
(a) The Administrative Committee may require such
proof of death and such other evidence of the right of any person
to receive payment of the Account of a deceased Participant as
the Administrative Committee deems necessary. The Administrative
Committee's determination of death and of the right of any person
to receive payment shall be conclusive and binding on all
parties.
(b) The Beneficiary upon the death of a
Participant shall be his spouse; provided, however, that the
Participant may designate, on a form provided by the
Administrative Committee for such purpose, a Beneficiary other
than his spouse, if:
(i) the spouse has waived the right to be
the Participant's Beneficiary in the manner set forth in
subsection (c) of this Section 9.2; or
(ii) the Participant has established to the
satisfaction of the Administrative Committee that he has no
spouse or that his spouse cannot be located.
(c) Any consent by a Participant's spouse to
waive a death benefit must be filed with the Administrative
Committee in writing, in a manner, and on a form provided by the
Committee for such purpose. The spouse's consent must
acknowledge the effect of the consent and must be witnessed by a
notary public. The designation of a Beneficiary other than
spouse made by a married Participant must be consented to by his
spouse and may be revoked by the Participant in writing without
the consent of the spouse. Any new beneficiary designation must
comply with the requirements of this subsection (c). A former
spouse's waiver shall not be binding on a new spouse.
(d) In the event the designated Beneficiary fails
to survive the Participant, or if such designation shall be
ineffective for any reason, the Participant's Account shall be
paid in the following order of priority: first to the
Participant's surviving spouse, if any; second, if there is no
surviving spouse, to the Participant's surviving children, if
any, in equal shares; third, if there is neither a surviving
spouse nor surviving children, to the legal representatives of
the estate of the Participant.
9.3. Time of Payment.
(a) The distribution of a Participant's Account
shall begin as soon as administratively feasible, but not later
than 60 days after the end of the Plan Year, in which his date of
termination of employment occurred.
(b) The distribution of the Participant's Account
balance will be in one lump sum.
9.4. Form of Payment. Distributions of a Participant's
Account balance under this Article 9 shall be made in Company
Stock unless the distributee elects cash.
Such distributions shall be the fair market value of each
share multiplied by the number of shares credited to the
Participant's Account, with appropriate adjustments to reflect
intervening stock dividends, stock splits, stock redemptions, or
similar changes to the number of outstanding shares. The fair
market value of a share shall be determined as of the Valuation
Date immediately preceding the date the distribution is made or,
in the case of a transaction between the Plan and a Disqualified
Person, determined as of the date of the transaction.
9.5. Direct Rollover.
(a) Notwithstanding any provision of the Plan to
the contrary that would otherwise limit a distributee's election
under this Article 9, a distributee may elect, at the time and in
the manner prescribed by the Plan Administrator, to have any
portion of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a direct
rollover.
For purposes of this Section 9.5, the
following definitions apply:
"Eligible rollover distribution". An eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an eligible
rollover distribution does not include: any distribution that is
one of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
Beneficiary, or for a specified period of ten years or more, or
any distribution to the extent such distribution is required
under Code Section 401(a)(9); or the portion of any distribution
that is not includable in gross income (determined without regard
to the exclusion for net unrealized appreciation with respect to
employer securities).
"Eligible retirement plan". An eligible retirement
plan is an individual retirement account described in Code
Section 408(a), an individual retirement annuity described in
Code Section 408(b), an annuity plan described in Code Section
403(a), or a qualified trust described in Code Section 401(a),
that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
"Distributee". A distributee includes an employee or
former employee. In addition, the employee's or former
employee's surviving spouse and the employee's or former
employee's spouse or former spouse who is the alternate payee
under a qualified domestic relations order, as defined in Code
Section 414(p), are distributees with respect to the interest of
the spouse or former spouse.
"Direct rollover". A direct rollover is a payment by
the plan to the eligible retirement plan specified by the
distributee.
9.6. Diversification Election. Notwithstanding any
provision of this Article to the contrary, effective for Plan
Years commencing on or after January 1, 2007, a Participant who
has attained age 55 and completed at least ten years of
participation in this Plan may elect in writing, on a form
provided by the Administrative Committee for such purpose, within
ninety days after the close of each Plan Year during the
Qualified Election Period, to direct the investment of a portion
of his interest in the Company Stock Account not in excess of 25
percent of such interest, less amounts subject to all prior
elections under this Section 9.6 as a transfer to the applicable
Mercer Insurance Group, Inc. defined contribution plan which
permits Participants to make investment elections. Upon a
Participant's election to diversify a portion of his interest in
the Company Stock Account, Company Stock in an amount equal to
the portion so elected, valued as of the Valuation Date
concurrent with or immediately preceding the date of such
election will be transferred to the applicable Mercer Insurance
Group, Inc. defined contribution plan which permits Participants
to make investment elections. A participant may then make
investment elections among the several funds. Starting from the
sixth Plan Year during the Qualified Election Period of a
Participant, 50 percent shall be substituted for 25 percent in
the preceding sentence.
For purposes of this Section 9.6, "Qualified Election
Period" means, with respect to a Participant, the period
beginning with the later of (a) the Plan Year in which the
Participant attains age 55 or (b) the Plan Year in which the
Participant completes at least ten years of participation in the
Plan and ending with the year in which the Participant terminates
his employment for any reason.
9.7. Election to Retain Interests in Plan. No distribution
shall be made to a Participant before his Normal Retirement Date
unless (a) the Participant's prior written consent to the
distribution has been obtained by the Administrative Committee,
or (b) the value of the Participant's Account does not exceed
$3,500 as of the date of the event giving rise to the
distribution.
9.8. Mandatory Distributions.
(a) Subject to the provisions of Section 9.3 of
the Plan, unless a Participant otherwise elects in writing,
payment of benefits under this Plan shall commence not later than
sixty days after the close of the Plan Year in which the latest
of the following dates occur:
(i) the date on which the Participant
attains age 65;
(ii) the 10th anniversary of the date on
which the Participant commenced participation in the Plan; or
(iii) the date the Participant terminates
employment with the Company.
(b) (i) Any provision of this Plan to the
contrary notwithstanding, all amounts credited to a Participant's
Account shall commence to be distributed not later than April 1
of the calendar year following the calendar year in which the
Participant attains age 70-1/2, whether or not the Participant has
terminated employment. Any subsequent distributions for other
distribution calendar years, including the minimum distribution
for the distribution calendar year in which the Participant's
initial minimum distribution on April 1 occurs, will be made in a
lump-sum on or before December 31 of that distribution calendar
year. All such distributions shall be made in accordance with
the rules set forth in Code Section 401(a)(9), including the
minimum distribution incidental requirements of Treasury
Regulations Section 1.401(a)(9)-2.
(ii) In the event the Participant dies after
distributions have commenced under this Article 9 but before his
entire Account is distributed, the remaining portion of his
Account shall be distributed at least as rapidly as under the
method of distribution being used as of the date of his death.
(iii) In the event the Participant dies
before distributions under this Article 9 have commenced, then,
unless the Beneficiary of the Participant is his spouse or a
designated Beneficiary, the entire balance in the Account of the
Participant shall be distributed on or before the December 31 of
the calendar year in which occurs the fifth anniversary of the
death of such Participant.
The preceding paragraph shall not apply if either
condition of (A) or (B) as set forth below are satisfied:
(A) If the Participant's designated
Beneficiary is the surviving spouse of such Participant or former
Participant, such distribution shall not be required to begin
prior to the date on which the Participant or former Participant
would have attained age 70 1/2, and at such time may be
distributed over the life expectancy of such spouse (if the
surviving spouse dies prior to commencement of distributions to
such spouse, then this subsection (A) shall be applied as if the
surviving spouse were the Participant or former Participant);
(B) If the Participant or former
Participant's distribution, or any portion thereof, is payable to
a designated Beneficiary, such distribution or portion thereof
may be distributed in accordance with regulations over the life
of such designated Beneficiary (or over, a period not extending
beyond the life expectancy of such designated Beneficiary) if
such distribution or portion thereof begins not later than one
year following the Participant or former Participant's death or
such later date as may be prescribed by regulations. For
purposes of subsections (A) and (B), life expectancy shall be
calculated in accordance with the provisions of Code Section 72.
Life expectancy of a surviving spouse may be calculated annually,
however. In the case of any other designated Beneficiary, life
expectancy must be calculated at the time payment first
commences.
Any amount payable to a child pursuant to the death of
a Participant or former Participant shall be treated as if it
were payable to the Participant's or former Participant's
surviving spouse if such amount would become payable to the
surviving spouse upon such child reaching majority (or other
designated event permitted by regulations).
Any distribution required under the incidental death
benefit requirements of Code Section 401(a)(9) shall be treated
as a distribution required under this Section of 9.8.
9.9. Dividend Distributions.
(a) Any cash dividends on Company Stock acquired
with the proceeds of an Exempt Loan and held in Suspense Account
shall be applied first to repay the principal and, at the
Committee's discretion, the interest, of the Exempt Loan. In
addition, if any cash dividends on shares of such Company Stock
allocated to Participant's Accounts are used to pay the principal
and/or the interest of the Exempt Loan at the Committee's
discretion, Company Stock with a fair market value not less than
the amount of the dividends so used must be allocated to the
Participants' Accounts to which such cash dividends would have
been allocated.
(b) After the payment of the principal and the
interest of the Exempt Loan, any remaining cash dividends on
Company Stock may be used to purchase Company Stock or allocated
to Accounts of Participants to subsection (c) below.
(c) In the case of any cash dividends on Company
Stock that are allocable to the Accounts of Participants with
respect to vested shares, they may be paid currently (or within
ninety days after the end of the Plan Year in which the dividends
are paid to the Trust) as cash, or the Company may pay such
dividends directly to the Participants' Accounts as the
Administrative Committee may determine.
9.10. Right of First Refusal. In the event a Participant
(or former Participant) or his Beneficiary desires to sell to a
third person Company Stock he received as a distribution from the
Plan, the Participant must first offer the Company, then the
Plan, the right to purchase his Company Stock at a price and on
such terms not less favorable to the Participant than the greater
of (a) the price established by a bona fide offer or (b) the fair
market value of the Company Stock using the value determined as
of the most recent Valuation Date. The right of the Company and
the Plan to purchase such stock shall lapse on the 14th day after
the Participant or former Participant or Beneficiary gives
written notice to the Company or the Plan of the fact that he has
received an offer from a third party to purchase his Company
Stock and of the price and other terms of such offer.
9.11. Prohibited Company Stock Transactions.
(a) No portion of the assets of the Plan
attributable to (or allocable in lieu of) Company Stock acquired
by the Plan in a sale to which Code Section 1042 applies may be
allocated to the Account of (i) any Qualifying Selling
Shareholder during the Nonallocation Period, or (ii) any other
person who owns more than 25 percent of (A) any class of
outstanding stock of the Company or any of its Affiliates, or
(B) the total value of any class of outstanding stock of the
Company or any of its Affiliates. For purposes of this Section,
the definition of "Affiliate" under Section 2.3 of the Plan shall
be modified in accordance with Code Section 409(l)(4).
(b) For purposes of this Section 9.11, the
following initially capitalized words shall carry the following
meanings:
(i) "Qualifying Selling Shareholder" means
any shareholder of Company Stock who makes an election under Code
Section 1042(a) with respect to Company Stock, or any individual
who is related to (within the meaning of Code Section 267(b)) the
shareholder of Company Stock as defined above. The term shall
not include any lineal descendant of such shareholder or if the
aggregate amount allocated to the benefit of all such lineal
descendants during the Nonallocation Period does not exceed more
than 5 percent of Company Stock (or amounts allocated in lieu
thereof) held by the Plan which are attributable to a sale to the
Plan by any person related to such descendants (within the
meaning of Code Section 267(c)(4)) in a transaction to which Code
Section 1042 applied.
(ii) "Nonallocation Period" means the period
beginning on the date of the sale of Company Stock and ending on
the later of the date which is 10 years after the date of the
sale, or the date of the Plan allocation attributable to the
final payment of acquisition indebtedness incurred in connection
with such sale.
<PAGE>
ARTICLE 10
RIGHT TO SELL COMPANY STOCK
10.1. Put Requirements.
(a) In the event Company Stock is distributed and
is not publicly traded in the over-the-counter market or on a
national securities exchange at the time of distribution, the
Participant, former Participant, or Beneficiary may have an
option (the "Put") to require the Company to purchase all of the
shares actually distributed to him. The Put may be exercised at
any time during the Option Period (as defined in subsection (f)
below) by giving the Administrative Committee and the Company
written notice of the election to exercise the Put. The Put may
be exercised by a former Participant or a Beneficiary only during
the Option Period with respect to which the former Participant or
Beneficiary receives a distribution of Company Stock.
(b) (i) The price paid for Company Stock sold to
the Plan or the Company pursuant to the Put shall be the fair
market value of each share multiplied by the number of shares to
be sold under the Put, with appropriate adjustments to reflect
intervening stock dividends, stock splits, stock redemptions, or
similar changes to the number of outstanding shares. The fair
market value of a share shall be determined (A) as of the
Valuation Date immediately preceding the date the Put is
exercised, or (B) in the case of a transaction between the Plan
and a Disqualified Person, determined as of the date of the
transaction.
(ii) If the distribution of Company Stock to
a former Participant or Beneficiary constituted a distribution
within one taxable year of the balance of his Account, the
Company reserves the right to establish guidelines to be
exercised in a uniform and nondiscriminatory manner, to make
payment for the shares subject to the Put on an installment basis
in substantially equal annual, quarterly or monthly payments over
a period not to exceed five years, such period beginning no later
than thirty days after exercise of the Put. The Company shall
pay reasonable interest at least annually on the unpaid balance
of the price and shall provide to the former Participant or
Beneficiary adequate security with respect to the unpaid balance.
If the distribution was part of an installment distribution, the
Company shall pay the Participant in cash within thirty days
after exercise of the Put.
(c) The Put shall not be assignable, except that
the Participant's or former Participant's legal representative
(in the event of a Participant's incapacity) or, in the event of
a Participant's or former Participant's death, his Beneficiary
shall be entitled to exercise the Put during the Option Period
for which it is applicable.
(d) The Trustee (on behalf of the Plan) in its
discretion, may assume the Company's obligations under this
Section at the time a Participant, former Participant, or
Beneficiary exercises the Put, with the Company's consent. If
the Trustee assumes the Company's obligations, the provisions of
this Section that apply to the Company shall also apply to the
Trustee.
(e) The Administrative Committee shall notify
each Participant, former Participant, and Beneficiary who is
eligible to exercise the Put of the fair market value of each
share of Company Stock as soon as practicable following its
determination. The Administrative Committee shall send all
notices required under this Section to the last known address of
a Participant, former Participant, or Beneficiary, and it shall
be the duty of those persons to inform the Administrative
Committee of any changes in address.
(f) For purposes of this Section, the "Option
Period" is the period of sixty days following the day on which a
Participant, former Participant, or Beneficiary receives a
distribution. If such person does not exercise the Put during
that sixty-day period, the Option Period shall also be the sixty-
day period beginning on the first anniversary of the day on which
he received a distribution. Notwithstanding the preceding
sentences, when Company Stock is acquired with the proceeds of an
Exempt Loan, the "Option Period" shall be the fifteen (15) month
period beginning on the date such Company Stock is distributed to
a Participant (or his Beneficiary). Such 15-month period shall
be extended by a period equal to the number of days, if any,
during which the Company is precluded from honoring the put
option by reason of applicable federal or state law.
<PAGE>
ARTICLE 11
VOTING AND TENDER OF COMPANY STOCK
11.1. Voting.
(a) All shares of Company Stock held in the Trust
shall be voted by the Trustee.
(b) Each Participant and Beneficiary shall be
entitled to direct the Trustee as to the manner in which Company
Stock allocated to his Account is to be voted on any and all
matters which may be presented to the shareholders of Company
Stock.
(c) With respect to (i) allocated Company Stock
as to which no direction is received, (ii) unallocated shares of
Company Stock in the Suspense Account and (iii) allocated shares
of Company Stock that are not subject to voting right pass
through requirement under Code Section 409(e), the Trustee shall
vote such shares in proportion to the response received from
Participants and Beneficiaries for allocated shares under (b)
above. In exercising such discretion, the Trustee shall comply
with its fiduciary duties as required by ERISA.
11.2. Tender.
(a) The Trustee shall not sell, alienate,
encumber, pledge, transfer or otherwise dispose of any Company
Stock; except (i) as specifically provided for in the Plan or a
Trust Agreement, or (ii) in the case of a "tender or exchange
offer", as set forth in subsection (b) of this Section 11.2.
For purposes of this Article 11, the term "tender or
exchange offer" shall mean: (A) any offer for, or request for or
invitation for tenders or exchanges of, or offers to purchase or
acquire any shares of Company Stock that is directed generally to
shareholders of the Company, or (B) any transaction involving
Company Stock which may be defined as a "tender offer" under
proposed or final rules or regulations promulgated by the
Securities and Exchange Commission.
(b) (i) In the event of a tender or exchange
offer, each Participant or, if the Participant is not alive, his
Beneficiary, shall have the right to determine confidentially
whether to tender or exchange any whole and fractional shares of
Company Stock allocated to his Account and shall be entitled to
instruct the Trustee as to the tender of such shares. Upon
receipt of such instructions, the Trustee shall act with
respect to such Company Stock as instructed. With respect to
Company Stock as to which no instruction is received and shares
of Company Stock in the Suspense Account, the Trustee shall
tender such shares in proportion to the response received from
Participants and Beneficiaries as to allocated shares of Company
Stock. In exercising such discretion, the Trustee shall comply
with its fiduciary requirements of ERISA.
(ii) All shares of Company Stock held in the
Fund and not tendered pursuant to subsection (b)(i) of this
Section 11.2, including allocated shares for which no
instructions are received, shall continue to be held by the
Trustee.
(iii) Any shares of Company Stock not
tendered by a Participant or Beneficiary pursuant to
subsection (b)(i) of this Section 11.2 shall continue to be held
by the Trustee in such Participant's or Beneficiary's Account.
The Account of each Participant or Beneficiary tendering shares
of Company Stock pursuant to subsection (b)(i) of this
Section 11.2 shall be credited with the cash received by the
Trustee in exchange for the shares tendered from such
Participant's or Beneficiary's Account.
11.3. Fiduciary Responsibilities.
Each Participant shall be a "named fiduciary," within
the meaning of ERISA Section 402(a), with respect to the voting
and tender of Company Stock pursuant to Sections 11.1 and 11.2 of
the Plan.
11.4. Procedures for Voting and Tender.
(a) The Administrative Committee shall establish
and maintain procedures by which Participants and Beneficiaries
shall be (i) timely notified of their right to direct the voting
and tender of Company Stock allocated to their Accounts and the
manner in which any such directions are to be conveyed to the
Trustee, and (ii) given information relevant to making such
decisions. No directions shall be honored by the Trustee unless
timely and properly conveyed in accordance with such procedures.
(b) Voting instructions received from
Participants and Beneficiaries shall be held in confidence by the
Trustee or its delegate for this purpose and shall not be
divulged to the Company or to any officer or employee of the
Company or to any other person.
ARTICLE 12
ADMINISTRATION
12.1. Fiduciary Responsibilities. A fiduciary shall have
only those specific powers, duties, responsibilities and
obligations as are specifically given him under the Plan or the
Trust. The Company shall have sole responsibility to make the
contributions provided for under the Plan and, by action of the
Board of Directors, to amend or terminate, in whole or in part,
the Plan or the Trust. The Board of Directors shall have sole
responsibility to appoint and remove members of the
Administrative Committee and the Trustees of the Plan. The
Administrative Committee shall have sole responsibility for the
general administration of this Plan and for the investment
policies of the Plan, for the selection of the Plan's investment
funds pursuant to the Plan, and for the appointment and removal
of any Investment Manager. Subject to the provisions of the Plan
and the Trust Agreement, the Trustee shall have sole
responsibility for the administration of the Trust and the
management of the assets held in the Trust, as set forth in the
Plan and the Trust. It is intended that each fiduciary shall be
responsible for the proper exercise of his own powers, duties,
responsibilities, and obligations and, except as otherwise
provided by law, shall not be responsible for any act or failure
to act by another fiduciary. A fiduciary may serve in more than
one fiduciary capacity with respect to the Plan. A fiduciary of
the Plan who is also an Employee shall not be compensated in his
capacity as fiduciary.
12.2. The Administrative Committee. Any member of the
Administrative Committee may resign with sixty (60) days advance
written notice to the Board of Directors. The Administrative
Committee shall select a Chairman and a Secretary to keep records
or to assist it in the discharge of its responsibilities. The
Administrative Committee shall have such duties and powers as are
necessary to discharge its responsibilities under the Plan,
including, but not limited to, the following:
(a) To require any person to furnish such
information as it requests for the purpose of the proper
administration of the Plan;
(b) To make and enforce such rules and
regulations and prescribe the use of such forms as it deems
necessary for the efficient administration of the Plan;
(c) To construe and interpret the Plan, including
the right to determine eligibility for participation, eligibility
for payment, the amount of benefits payable, the timing of
distributions and all other issues arising under the Plan as well
as the right to remedy possible ambiguities, inconsistencies or
omissions; provided, however, that all such interpretations and
decisions shall be applied in a uniform manner to all similarly
situated Participants and Beneficiaries;
(d) To employ and rely upon such advisors
(including attorneys, independent public accountants, investment
advisors and enrolled actuaries) as it deems appropriate or
helpful in connection with the operation and administration of
the Plan;
(e) To maintain complete records of the
administration of the Plan;
(f) To prepare and file with the appropriate
governmental agencies such reports as required from time to time
with respect to the Plan under ERISA, the Code, or other laws and
regulations governing the administration of the Plan;
(g) To furnish or disclose to Participants,
Employees who may become Participants, and Beneficiaries
information about the Plan and statements of accrued benefits
under the Plan, in accordance with ERISA, the Code, or other laws
and regulations governing the administration of the Plan;
(h) To delegate to one or more members of the
Administrative Committee, or to persons other than Administrative
Committee members, any authority, duty or responsibility
pertaining to the administration or operation of the Plan;
provided, however, that each such delegation shall be made by a
written instrument authorized by the Administrative Committee and
maintained with the records of the Plan. If any person other
than an Employee is so designated, such person must acknowledge
in writing his acceptance of the duties and responsibilities
delegated to him. All such instruments and acknowledgements
shall be considered a part of the Plan;
(i) To determine, pursuant to procedures adopted
by it, whether a state domestic relations order served upon the
Plan is a "qualified domestic relations order" (as defined in
Code Section 414(p)); to place in escrow any benefits payable in
the period during which the Administrative Committee determines
the status of an order; and to take any necessary action to
administer distributions under the terms of a "qualified domestic
relations order";
(j) To discharge any responsibilities which are
allocated to the Administrative Committee elsewhere in this Plan.
All decisions and interpretations of the Administrative
Committee shall be binding and shall be entitled to the maximum
deference permitted under the law.
12.3. Plan Expenses. The Company shall pay all expenses
authorized and incurred by the Administrative Committee, except
to the extent such expenses are paid from assets of the Trust.
12.4. Meetings and Voting. The Administrative Committee
shall act by a majority vote of its respective members at a
meeting or, by written consent of a majority of its members,
without a meeting. The Administrative Committee shall hold
meetings, as deemed necessary by them, although any member may
call a special meeting of his committee by giving reasonable
notice to the other members. The Secretary of the Administrative
Committee shall have authority to give certified notice in
writing of any action taken by his committee.
12.5. Compensation. The members of the Administrative
Committee, if Employees, shall serve without compensation.
12.6. Claims Procedures.
(a) Any Participant or Beneficiary ("Claimant")
may file a written claim for a benefit under the Plan with the
Administrative Committee or with a person named by the
Administrative Committee to receive such claims;
(b) In the event of a denial or limitation of any
benefit or payment due or requested by any Claimant, such
Claimant shall be given a written notification containing
specific reasons for the denial or limitation of his benefit.
The written notification shall contain specific reference to the
pertinent Plan provisions on which the denial or limitation is
based. In addition, it shall contain a description of any
additional material or information necessary for the Claimant to
perfect a claim and an explanation of why such material or
information is necessary. Further, the notification shall
provide appropriate information as to the steps to be taken if
the Claimant wishes to submit his claim for review. This written
notification shall be given to a Claimant within ninety days
after receipt of his claim by the Administrative Committee (or
its delegatee to receive such claims), unless special
circumstances require an extension of time for processing the
claim. If such an extension of time is required, written notice
of the extension shall be furnished to the Claimant prior to the
termination of the ninety-day period and such notice shall
indicate the special circumstances which make the postponement
appropriate;
(c) In the event of a denial or limitation of
benefits, the Claimant or his duly authorized representative
shall be permitted to review pertinent documents and to submit
issues and comments in writing to the Administrative Committee.
In addition, the Claimant or his duly authorized representative
may make a written request for a full and fair review of his
claim and its denial by the Administrative Committee; provided,
however, that such written request must be received by the
Administrative Committee (or its delegatee to receive such
requests) within sixty days after receipt by the Claimant of
written notification of the denial or limitation. The sixty-day
requirement may be waived by the Administrative Committee in
appropriate cases; and
(d) (i) A decision shall be rendered by the
Administrative Committee within sixty days after the receipt of
the request for review; provided, however, that where special
circumstances require an extension of time for processing the
decision, it may be postponed, on written notice to the Claimant
(prior to the expiration of the initial sixty-day period) for an
additional sixty days, but in no event shall the decision be
rendered more than one hundred and twenty days after the receipt
of such request for review.
(ii) Notwithstanding subsection (d)(i) of
this Section 12.6, if the Administrative Committee holds
regularly scheduled meetings at least quarterly to review such
appeals, a Claimant's request for review shall be acted upon at
the meeting immediately following the receipt of the Claimant's
request unless such request is filed within thirty days preceding
such meeting. In such instance, the decision shall be made no
later than the date of the second meeting following the receipt
of such request by the Administrative Committee (or its delegatee
to receive such requests). If special circumstances require a
further extension of time for processing a request, a decision
shall be rendered not later than the third meeting of the
Administrative Committee following the receipt of such request
for review, and written notice of the extension shall be
furnished to the Claimant prior to the commencement of the
extension.
(iii) Any decision by the Administrative
Committee shall be furnished to the Claimant in writing and in a
manner calculated to be understood by the Claimant and shall set
forth the specific reason(s) for the decision and the specific
Plan provision(s) on which the decision is based.
12.7. Liabilities. The Administrative Committee, each
member or former member of such Committee, and each person to
whom duties and responsibilities have been delegated under the
Plan shall be indemnified and held harmless by the Company, to
the fullest extent permitted by ERISA, other applicable laws, and
the charter and By-laws of the Company.
<PAGE>
ARTICLE 13
AMENDMENTS
13.1. Right to Amend. Except as otherwise set forth in this
Article 13 or as may be required by law, the Board of Directors
reserves the right to amend the Plan at any time and in any
manner, without prior notification, consultation, or bargaining
with any Employee or representative of Employees by written
resolution of the Board of Directors adopted at a duly convened
meeting of the Board of Directors in accordance with the By-Laws
of the Company and the laws of the Commonwealth of Pennsylvania.
To the extent required by the Code or ERISA, no amendment to the
Plan shall decrease a Participant's benefit or eliminate an
optional form of distribution. No amendment shall make it
possible for any assets of the Plan to be used for or diverted to
any purposes other than for the exclusive benefit of Participants
and Beneficiaries.
13.2. Amendment by Administrative Committee. The
Administrative Committee may adopt any ministerial and
nonsubstantive amendment it deems necessary or appropriate to
(a) facilitate the administration, management and interpretation
of the Plan, (b) conform the Plan to current practice, or
(c) cause the Plan and its related Trust to qualify under Code
Sections 401(a)(1), 501(a) and 4975(e)(7) or to comply with ERISA
or any other applicable laws; provided that such amendment does
not have any material effect on the estimated cost to the Company
of maintaining the Plan.
13.3. Plan Merger and Asset Transfers. No assets of the
Trust shall be merged or consolidated with, nor shall any assets
or liabilities be transferred to any other plan, unless the
benefits payable to each Participant or Beneficiary, if this Plan
were terminated immediately after such action, would be equal to
or greater than the benefits such individuals would have been
entitled to receive if this Plan had been terminated immediately
before such action.
<PAGE>
ARTICLE 14
TERMINATION
14.1. Right to Terminate. While the Company intends the
Plan to be permanent, the Board of Directors reserves the right
to terminate the Plan at any time, without prior notification,
consultation, or bargaining with any Employee or representative
of Employees by written resolution of the Board of Directors
adopted at a duly convened meeting of the Board of Directors in
accordance with the By-laws of the Company and the laws of the
Commonwealth of Pennsylvania.
14.2. Effect of Termination. If the Plan is terminated,
contributions shall cease, and the assets remaining in the Trust,
after payment of any expenses, including expenses of
administration or liquidation, shall be retained in the Trust for
distribution in accordance with the terms of the Plan. Upon
termination (including a partial termination), or upon the
complete discontinuance of contributions by the Company, all
Participants shall be 100 percent vested in their Accounts.
<PAGE>
ARTICLE 15
MISCELLANEOUS
15.1. Non-alienation of Benefits. Except to the extent set
forth in a "qualified domestic relations order" (as defined in
Code Section 414(p)), or as otherwise permitted or required by
law, no distribution or payment under this Plan to any
Participant or Beneficiary, or assets held in the Trust or Plan,
shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge, whether
voluntary or involuntary, and any attempt to so anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge
shall be void. Nor shall any such distribution or payment be
subject to the debts, contracts, liabilities, engagements or
torts of any person entitled to such distribution or payment.
15.2. Appointment of Guardian. Where it is established to
the satisfaction of the Administrative Committee that a guardian
has been duly appointed on behalf of a person entitled to a
distribution under the Plan, the Administrative Committee may
cause payment to be made to the guardian for the benefit of the
entitled person. The Administrative Committee shall have no
responsibility with respect to the application of amounts so
paid.
15.3. Satisfaction of Benefit Claims. The assets of the
Trust shall be the sole source of benefits under this Plan, and
each Participant or any other person who shall claim the right to
any payment or benefit under this Plan shall be entitled to look
only to the Trust for such payment or benefit, and shall not have
any right, claim or demand against the Company or any officer or
director of the Company. Such Participant or person shall not
have a right to or interest in any assets of the Trust, except as
provided from time to time under this Plan.
15.4. Controlling Law. The provisions of the Plan shall be
construed, administered and enforced under the laws of the United
States and the Commonwealth of Pennsylvania.
15.5. Non-guarantee of Employment. Nothing contained in
this Plan shall be construed as a contract of employment between
the Company and any Employee, or as a right of any Employee to be
continued in the employment of the Company or as a limitation of
the right of the Company to discharge any of its Employees, with
or without cause.
15.6. Severability and Construction of the Plan.
(a) If any provision of the Plan or the
application of it to any circumstance(s) or person(s) is invalid,
the remainder of the Plan and the application of such provision
to other circumstances or persons shall not be affected thereby.
(b) Unless the context otherwise indicates, the
masculine wherever used shall include the feminine and neuter;
the singular shall include the plural; and words such as
"herein", "hereof," "hereby," "hereunder" and words of similar
import shall refer to the Plan as a whole and not any particular
part of it.
15.7. No Requirement of Profits. Contributions may be made
to the Plan without regard to current or accumulated profits of
the Company.
15.8. All Risk on Participants and Beneficiaries. Each
Participant and Beneficiary shall assume all risk in connection
with any decrease in the value of the assets of the Trust and the
Participants' and Beneficiaries' Accounts.
<PAGE>
ARTICLE 16
TOP-HEAVY PROVISIONS
16.1. Determination of Top-Heavy Status.
(a) Any provision of this Plan to the contrary
notwithstanding, for any Plan Year commencing after December 31,
1983, in which the Plan is a Top-Heavy Plan or a Super Top-Heavy
Plan, the provisions of this Article shall apply. The provisions
of this Article shall have effect only to the extent required
under Code Section 416. This Plan shall be deemed a Top-Heavy
Plan only with respect to any Plan Year in which, as of the
Determination Date, the aggregate of the Accounts of Key
Employees under the Plan exceeds 60 percent of the aggregate of
the Accounts of all Employees under the Plan.
(b) If the Plan is not included in a Required
Aggregation Group with other plans, then it shall be Top-Heavy
only if (i) when considered by itself it is a Top-Heavy Plan and
(ii) it is not included in a Permissive Aggregation Group that is
not a Top-Heavy Group.
(c) If the Plan is included in a Required
Aggregation Group with other plans, it shall be Top-Heavy only if
the Required Aggregation Group, including any permissively
aggregated plans, is Top-Heavy.
16.2. Super Top-Heavy Plan. This Plan shall be a Super Top-
Heavy Plan if it would be a Top-Heavy Plan if 90 percent were
substituted for 60 percent.
16.3. Top-Heavy Definitions. Solely for purposes of this
Article, the following words and phrases shall have the following
meaning;
(a) "Aggregation Group or Top Heavy Group" means
either a Required Aggregation Group or a Permissive Aggregation
Group.
(b) "Determination Date" means, with respect to
any Plan Year, the last day of the preceding Plan Year or in the
case of the first Plan Year of any plan, the last day of such
Plan Year or such other date as permitted under rules issued by
the U.S. Department of the Treasury.
(c) "The Company" means and all members of a
controlled group of corporations (as defined in Code Section
414(b) as modified by Code Section 415(h)), all commonly
controlled trades or businesses (as defined in Code Section
414(c) as modified by Code Section 415(h)), or affiliated service
groups (as defined in Code Section 414(m)) of which the Company
is a part.
(d) "Key Employee" means any employee or former
employee (and the Beneficiaries of such employee) who at any a
time during the period of five years ending on the Determination
Date was an officer of the Company if such individual's annual
compensation (as defined in Treasury Regulations Section 1.415-
2(d)) exceeds 50 percent of the dollar limitation under Code
Section 415(b)(1)(A); an employee who is an owner (or person
considered an owner under Code Section 318) of one of the ten
largest interests in the Company if such individual's
compensation exceeds 100 percent of the dollar limitation under
Code Section 415(c)(1)(A); an owner of 5 percent of the Company;
or an owner of 1 percent of the Company who has annual
compensation of more than $150,000. The determination of who is
a Key Employee will be made in accordance with Code
Section 416(i). A Non-Key Employee means any Employee who is not
a Key Employee.
(e) "Permissive Aggregation Group" means a
Required Aggregation Group plus any other plans maintained and
selected by the Company; provided that all such plans when
considered together satisfy the requirements of Code Sections
401(a)(4) and 410.
(f) "Required Aggregation Group" means each
qualified plan of the Company in which at least one Key Employee
participates or which enables any plan in which a Key Employee
participates to meet the requirements of Code Sections 401(a)(4)
or 410.
(g) "Valuation Date" means, for purposes of
determining if the Plan is Top-Heavy, the most recent Valuation
Date in the period of twelve months ending on the Determination
Date.
16.4. Top-Heavy Rules. For any year in which a Plan is
determined to be a Top-Heavy Plan or a Super Top-Heavy Plan the
following rules shall apply:
(a) For each Plan Year in which the Plan is Top-
Heavy or Super Top-Heavy, minimum contributions for a Participant
who is a Non-Key Employee shall be required to be made on behalf
of each Participant who is employed by the Company on the last
day of the Plan Year. The amount of the minimum contribution
shall be the lesser of the following percentage of compensation:
(i) 3 percent, or
(ii) the highest percentage at which
Contributions are made under the Plan for the Plan Year on behalf
of any Key Employee.
(A) For purposes of this paragraph
(ii), all defined contribution plans included in a Required
Aggregation Group shall be treated as one plan.
(B) This paragraph (ii) shall not apply
if the Plan is included in a Required Aggregation Group and the
Plan enables a defined benefit plan included in the Required
Aggregation Group to meet the requirements of Code Sections
401(a)(4) or 410.
(C) If the highest percentage at which
Contributions are made under the Plan for a top-heavy Plan Year
on behalf of Key Employees is less than 3%, the amounts
contributed as a result of a salary reduction agreement must be
included in determining Contributions made on behalf of Key
Employees.
This subsection (a) shall not apply to the extent a
Participant other than a Key Employee is covered by any other
qualified plan(s) of the Company and the Company has provided
that the minimum contribution requirements applicable to this
Plan will be satisfied by the other plan(s).
(b) For any Plan Year in which the Plan is Top -
Heavy or Super Top-Heavy, only the first $150,000 (or such larger
amount as may be prescribed in rules issued by the U.S.
Department of the Treasury) of a Participant's annual
compensation shall be taken into account for purposes of
determining employer contributions under this Plan.
(c) The contributions made to the Plan by the
Company on behalf of a Participant shall be fully vested at all
times.
(d) For any Plan Year in which the Plan is Super
Top-Heavy, or for any Plan Year in which the Plan is Top-Heavy
and the additional minimum contributions or benefits required
under Code Section 416(h) are not provided, the dollar
limitations in the denominator of the Defined Benefit Fraction
and Defined Contribution Fraction (as defined in Article 6 of
this Plan) shall be multiplied by 100 percent rather than
125 percent. If the application of the provisions of this
Section 16.4 would cause any Participant to exceed 1.0 for any
Limitation Year, then the application of this Section shall be
suspended as to such Participant until such time as it no longer
exceeds 1.0. During the period of such suspension, appropriate
adjustments to the Participant's benefits under defined benefit
plans maintained by the Employer shall be made prior to making
any adjustments to a Participant's Account under this Plan.
(e) The vesting schedule when the Plan is Top-
Heavy is as follows:
Years of Service
After the Effective Date Vested Percentage
0-3 Years of Service 0%
3 or more Years of Service 100%
<PAGE>
ARTICLE 17
EXEMPT LOANS
17.1. General. The Trustee shall have the authority and
discretion to borrow money from a Disqualified Person, or another
source which is guaranteed by a Disqualified Person for the
purpose of (a) purchasing Company Stock, or (b) repaying a prior
Exempt Loan. Any Exempt Loan shall satisfy all of the
requirements of this Article 17.
17.2. Terms of Exempt Loan Agreements. All Exempt Loans
shall satisfy the following requirements:
(a) The loan shall be primarily for the benefit
of Participants and their Beneficiaries;
(b) The loan shall be for a specified term and
shall bear no more than a reasonable rate of interest.
(c) The collateral pledged by the Trustee shall
consist only of the Company Stock purchased with the borrowed
funds, or Company Stock that was pledged as collateral in
connection with a prior Exempt Loan that was repaid with the
proceeds of the current Exempt Loan.
(d) Under the terms of the agreement, the lender
shall have no recourse against the Trust, or any of its assets,
except with respect to the collateral and contributions (other
than contributions of Company Stock) by the Company that are made
to satisfy its obligations under the loan agreement and earnings
attributable to such collateral and such contributions.
(e) The payments made on the loan during a Plan
Year shall not exceed an amount equal to the sum of such
contributions and the earnings received during or prior to the
year less such payments on the exempt loan in prior years.
(f) In the event of default, the value of the
assets transferred in satisfaction of the loan shall not exceed
the amount of default; moreover, if the lender is a Disqualified
Person, the loan agreement shall provide for a transfer of assets
upon default only upon and to the extent of the failure of the
Plan to meet the payment schedule of the loan.
17.3. Prohibition on Purchase Arrangements. Except as
hereinafter provided in this Article 17, no Company Stock
acquired with the proceeds of an Exempt Loan shall be subject to
a put, call, or other option, or buy-sell or similar arrangement
while held by and when distributed from the Trust, whether or not
at the time of distribution the Plan is an employee stock
ownership plan. These protections and rights which attach to
Company Stock acquired with the proceeds of an Exempt Loan shall
not be terminable.
17.4. Suspense Account.
(a) If the Trust has entered into an Exempt Loan,
each Participant Account shall be adjusted for the payment of the
Exempt Loan in the manner set forth in the Trust Agreement.
Company contributions made to the Trust in the form of Company
Stock purchased with the proceeds of an Exempt Loan shall be held
in the Suspense Account as the collateral for that Exempt Loan.
Such stock shall be released from the Suspense Account on a
pro-rata basis according to the amount of the payment on the
Exempt Loan for the Plan Year, determined under one of the
following two alternative formulas in the discretion of the
Administrative Committee:
(i) for each Plan Year during the duration
of the Exempt Loan, the number of shares of Company Stock
released shall equal the number of such shares held in the
Suspense Account immediately before release for the current Plan
Year multiplied by a fraction, the numerator of which is the
amount of principal and interest paid for the year and the
denominator of which is the sum of the numerator plus the
remaining principal and interest to be paid for all future years.
The number of future years under the Exempt Loan must be
definitely ascertainable and must be determined without taking
into account any possible extensions or renewal periods. If the
interest rate under the loan is variable, the interest to be paid
in future years must be computed by using the interest rate
applicable as of the end of the Plan Year. If the collateral
includes more than one class of Company Stock, the number of
shares of each class to be released for a Plan Year must be
determined by applying the same fraction to each class; or
(ii) for each Plan Year during the duration
of the Exempt Loan, the number of shares of Company Stock
released is determined solely with reference to the principal
payment of the Exempt Loan. If Company Stock in the Suspense
Account is released in accordance with this subsection (ii),
(A) the Exempt Loan must provide for annual payments of principal
and interest at a cumulative rate that is not less rapid at any
time than level annual payments of such amounts for 10 years; and
(B) interest included in any payment is disregarded only to the
extent that it would be determined to be interest under standard
loan amortization tables.
This subsection (ii) will not be applicable if by
reason of a renewal, extension, or refinancing, the sum of the
expired duration of the Exempt Loan, the renewal period, the
extension period, and the duration of a new Exempt Loan exceeds
10 years.
(b) Shares of Company Stock released in
accordance with Section 17.4(a) of the Plan shall then be
allocated to the Accounts of Participants first, in an amount
equal in value to any dividends paid on shares previously
allocated to Participant's Accounts that are used to repay the
Exempt Loan. The remaining shares of such stock shall be
allocated to the Accounts of Participants in the same manner as
described in Section 5.5.
17.5. Sale of Financed Shares. In the event the Plan
receives an offer to participate in a corporate transaction
(i.e., a stock sale, asset sale, merger or consolidation) before
all the shares of Company Stock have been released from the
Suspense Account, the Trustee may enter into an agreement for the
sale of all Company Stock which is not allocated to the accounts
of Participants, and use the proceeds thereof to repay an Exempt
Loan. Any proceeds of the sale of unallocated Company Stock
which is not required to repay the Exempt Loan, will be allocated
as earnings to Participant's Accounts.
<PAGE>
IN WITNESS WHEREOF, Mercer Insurance Group, Inc. has
caused this Plan to be duly executed under seal this ____ day of
________, 1998.
MERCER INSURANCE GROUP, INC.
By_________________________________
William C. Hart, President and
Chief Executive Officer
Attest:
_____________________________
Andrew R. Speaker,
Executive Vice-President,
Chief Operating Officer,
Chief Financial Officer and
Treasurer
[SEAL]
EXHIBIT 23.2
ALEX SHESHUNOFF & CO.
March 16, 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 26, 1997 and (ii) our
statement concerning the value of subscription rights, in such
filings and in the Prospectus of Mercer Insurance Group, Inc.
Sincerely,
/s/ Gerard Feil
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 34,947 34,964
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 10,852 7,795
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 45,799 42,760
<CASH> 2,707 2,675
<RECOVER-REINSURE> 1,074 930
<DEFERRED-ACQUISITION> 3,019 2,989
<TOTAL-ASSETS> 74,085 74,074
<POLICY-LOSSES> 31,872 35,221
<UNEARNED-PREMIUMS> 14,723 13,179
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 23,236 19,282
<TOTAL-LIABILITY-AND-EQUITY> 74,085 74,074
17,969 20,634
<INVESTMENT-INCOME> 2,350 2,289
<INVESTMENT-GAINS> 589 596
<OTHER-INCOME> 173 155
<BENEFITS> 10,594 14,801
<UNDERWRITING-AMORTIZATION> 4,706 5,491
<UNDERWRITING-OTHER> 2,563 2,571
<INCOME-PRETAX> 3,218 811
<INCOME-TAX> 1,001 171
<INCOME-CONTINUING> 2,217 640
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,217 640
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 35,221 36,176
<PROVISION-CURRENT> 11,649 16,445
<PROVISION-PRIOR> (1,055) (1,644)
<PAYMENTS-CURRENT> 4,775 7,715
<PAYMENTS-PRIOR> 6,042 6,369
<RESERVE-CLOSE> 31,872 35,221
<CUMULATIVE-DEFICIENCY> (5,414) (4,536)
</TABLE>
<PAGE>
CONVERSION VALUATION UPDATE REPORT
Prepared for
MERCER MUTUAL INSURANCE COMPANY
and
MERCER INSURANCE GROUP, INC.
Pennington, New Jersey
Dated
March 3, 1998
Alex Sheshunoff & Company
Investment Banking
Nineteenth Floor
98 San Jacinto Boulevard
Austin, Texas 78701
(800) 279-2241
<PAGE>
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
March 3, 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 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 is 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. 1 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,
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.
98 SAN JACINTO BOULEVARD - SUITE 1925 - AUSTIN, TEXAS 78701
PHONE 512-479-8200 - FAX 512-472-8953
<PAGE>
Mercer Mutual Insurance Company
March 3, 1998
Page 2
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. 1 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 December 31, 1997; (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 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.
<PAGE>
Mercer Mutual Insurance Company
March 3, 1998
Page 3
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 March 3, 1998, the estimated pro forma market value of the Mercer as a
subsidiary of the Corporation was $26.0 million at the mid-point. Based upon
a range 15% above and below the midpoint, the estimated pro forma range was
$22.1 million at the minimum and $29.9 million at the maximum.
Very truly yours,
[SIG]
Alex Sheshunoff & Co. Investment Banking
<PAGE>
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
Conversion Valuation Update Report
March 3, 1998
RECENT FINANCIAL PERFORMANCE OF THE COMPANY
Overall, the trends discussed in our Appraisal continued during the last
quarter of 1997. Mercer reported net income of $2.2 million for the twelve
months ended December 31, 1997, a significant improvement over the fiscal year
1996 results and exceeded the 1997 estimated earnings of $1.9 million as of the
date of our Appraisal. In particular, net income for the quarter ended
December 31, 1997 was $702,000. Surplus at December 31, 1997 increased to
$23.2 million.
The Company continued to experience catastrophe losses below historic norms
during the last quarter. The loss and loss adjustment expense of $10.6 million
during 1997 was 28.4% below 1996 and the loss and loss adjustment expense ratio
fell to 58.9 during 1997 from 71.7 during 1996. Mild weather conditions in New
Jersey were the primary reasons for the improvement in the Company's results
overall.
The combined ratio during 1997 was 99.4% and the underwriting gain was $106,000
compared to an underwriting loss of $2.2 million during 1996. The positive
underwriting trend was also the result of Mercer's strategy of increasing its
casualty business to diversify its risk from weather related business.
Underwriting expenses decreased by 9.8% to $7.3 million for 1997 compared to
1996. The reduction was the result of changes in Mercer's reinsurance program
and a corresponding decrease in net commissions. In addition, the termination
of the Homeowners Pool resulted in a substantial reduction in assumed
commissions and favorable weather conditions resulted in additional ceded
commissions.
Direct premiums written during 1997 increased by 14.0% or $3.5 million compared
to 1996. Commercial lines premiums increased the largest by $2.6 million, or
28.2% as a result of the introduction of the religious institution program and
a commercial automobile program in 1997. In addition, homeowners premiums
increased due to increased rates. In contrast, assumed premiums written
decreased by $4.5 million, which was the result of the termination of Mercer's
participation in the New Jersey Homeowners Pool. The Company increased certain
premiums subject to reinsurance coverage during 1997 as discussed in our
Appraisal. As a result of the factors discussed above, net premiums written
decreased by $2.7 million during 1997 compared to 1996 and net premiums earned
also decreased by $2.7 million between theses periods.
Net investment income increased modestly during 1997 to $2.4 million. The
Company's principal investment is taxable fixed income securities, which
produced a yield of 6.7% during 1997 (similar to the yield during 1996). Net
realized investment gains decreased modestly during 1997 as the equity market
continued to experience favorable conditions.
1
<PAGE>
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
March 3, 1998
In summary, the improved earnings performance was the result of mild weather
conditions in the Company's market area.. As an example, the severe weather
conditions during the winter of 1996 squeezed net income during that year to
just $640,000. Also, to a significant extent, the earnings of insurance
companies such as Mercer are dependent upon the ability to generate significant
investment income.
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 was one of the best
weather years ever in its market area.
While mild weather conditions were the predominate reason for improved
earnings, the Company's management has and continues to take a number of steps
which will have a long-term impact on earnings. Some of these, among others,
as discussed in our Appraisal include: (1) increasing religious institutions
and other casualty lines, limiting coastal exposure, (2) changes in the
reinsurance program, (3) termination of the Homeowners Pool, and (4) seeking to
diversify its geographic risk.
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 continued to outperform the market during the last quarter of
1997 and early 1998. For the year ended December 31, 1997, the Firemark
Insurance Index rose 41.3% compared to 31% for the S&P 500 index. The recent
rally in the stock and bond markets continues to support the potential for
appreciation in the insurance sector during 1998. Significantly, the breath of
the insurance sector performance was strong with 186 stocks up versus a decline
of only 30 during the year.
One casualty was Home State Holdings, which we have removed from the
comparative group. While included for discussion purposes in our Appraisal,
Home State Holdings continued to decline through the end of the year and was
finally de-listed. The experience of Home State Holdings demonstrates that
even in a rapidly increasing market, institutions which do not perform to
expectations will be penalized.
2
<PAGE>
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
March 3, 1998
The best performing insurance sector last year were multi-line companies.
Travelers was the top performing stock of the Dow Jones Industrial Group last
year, rising 78%.
The Property & Casualty sector experienced a 42.5% increase in 1997.
Extraordinarily low catastrophe losses during 1997 propelled earnings. Whether
lower earnings as a result of El Nino generated storms during 1998 will create
disfavor among investors has yet to become evident. Also improving earnings in
1997 were capital gains generated by the bull market. The Personal Lines
sector favored better that other P & C groups. Allstate and other specialty
automobile insurers tended to lead the P & C sector forward. Reinsurers were
last in the P & C sector as short-term market conditions produced narrowing
margins.
The Life & Health sector, principally due to the market performance of health
insurers, was the under performing portion of the insurance industry. Life
Insurers rose 38.9% while Health Insurers rose 22.6%.
The prospect for 1998 varies by industry sector. Relevant to Mercer's
offering, the P & C sector will continue in its over-capacity and cost cutting
mode. The industry has been able to produce earnings through one time
restructuring activities and loss reserve practices which may not be available
in future periods. The likely deterioration in loss experiences in 1998 should
put pressure on earnings. Whether the losses are small enough for management
to continue to improve earnings through expense controls is a matter of luck.
In spite of the budding trouble with El Nino, we are not seeing Wall Street
earnings downgrades in large numbers. However, we would expect more downgrades
as storm related losses mount.
Firemark industry analysis expects the most deterioration in Commercial Lines
with relatively favorable fundamentals in the Personal Lines. However, they
believe that insurance stocks can continue to outperform the market as insurance
P/E multiples are at wide discounts to general market valuations. However, all
bets are off if the overall market corrects itself.
One factor noted in our Appraisal was the softening of the initial public
offering market and more modest price appreciation of these deals. The IPOs,
which have taken place in the past three months, indicate that this trend has
remained.
In summary, while overall market conditions may take P & C companies stock
prices higher in 1998 (absent a market correction), the industry's fundamentals
may deteriorate as catastrophe losses return to more normal levels (or above in
the face of El Nino) and competition continues to result in price cutting.
Lower bond market yields and a market correction could also hinder earnings and
share prices.
3
<PAGE>
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
March 3, 1998
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 February 25, 1998. Overall, the comparative group
experienced a strong 6.1% median price increase during approximately 14 weeks
since our Appraisal. However, there was a wide range of market performance,
with three companies experiencing losses while three companies experienced
price appreciation greater than 10%. Importantly, Old Guard, the most recent
conversion, experienced a very modest 2.1% price increase since our Appraisal.
The largest price increase was reported by State Auto and Motor Club of
America, which is consistent with trends in the Personal Lines Subsector.
As displayed on Table 2, 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. We continue to believe that Mercer's Offering
should be priced accordingly. Excluding Motor Club of America (for the reasons
discussed above), the price/book averages of Meridian, Old Guard, and Merchants
were 90%, 95%, and 89%, respectively. This represented little change from the
ratios noted in our Appraisal.
4
<PAGE>
Mercer Mutual Insurance Company
Mercer Insurance Group, Inc.
March 3, 1998
In our appraisal, we also concluded that Mercer should be discounted further
due to: (1) the new issue discount, (2) relative growth and financial
performance considerations, (3) the opportunity to price 15% above the
midpoint, (4) that Mercer is only the second insurance conversion, (5) market
volatility, and (6) the softening of the after-market price appreciation of
initial public offerings overall. We continue to believe that these discounts
remain in the relative proportions determined in our Appraisal for the reasons
stated at that time.
In short, we do not believe that changes in the market prices and valuations of
the comparative companies would cause a material change in the estimated market
value of Mercer.
CONCLUSION
Based upon the following, we believe the estimated pro forma market value of
Mercer pursuant to the Reorganization was $26 million. The resulting range was
$22.1 million at the minimum and $29.9 million at the maximum. Exhibit II
displays the pro forma analysis of the Bank's valuation range.
5
<PAGE>
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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>
EXHIBITS
<PAGE>
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING
DECEMBER 31, 1993-1997 & LAST TWELVE MONTHS ENDING SEPTEMBER 30, 1997
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM HARLEYSVILLE MERCHANTS
GROUP, ALFA GROUP, GROUP, FAMILY GROUP, GROUP,
INC. CORPORATION INC. INC. HOLDINGS INC. INC.
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
COMMON STOCK SYMBOL ALFA GRP DGIC FFH HGIC MGP
2:1 ADJ.
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK PRICE $ $ $ $ $ $ $
25-FEB-98 17 3/4 31 15/16 21 3/4 34 3/16 24 3/8 20 13/16
Twelve Month - High 18.00 33.96 22.38 34.38 27.13 21.25
Twelve Month - Low 11.25 22.33 16.88 22.13 15.00 17.38
Last to High 99% 94% 97% 99% 90% 98%
COMMON SHARES OUTSTANDING 40,787 30,532 6,001 5,254 28,822 2,909
$ $ $ $ $ $ $
MARKET CAPITALIZATION 723,969 975,131 130,522 179,624 702,536 60,545
BOOK VALUE PER SHARE @ 12/31/97 NA $ 13.44 NA NA $ 15.49 $ 23.21
BOOK VALUE PER SHARE @ 9/30/97 $ 9.02 $ 12.89 $ 14.88 $ 23.69 $ 14.94 $ 22.73
PRICE TO MOST RECENT BOOK VALUE 197% 238% 146% 144% 157% 90%
PRICE TO LTM EARNINGS 14.9 11.2 12.9 11.2 17.2 NM
PRICE TO 1998 ESTIMATED EARNINGS 13.1 14.1 8.4 12.7 12.8 9.9
FULLY DILUTED EARNINGS PER SHARE: $ $ $ $ $ $ $
- ---------------------------------
1998 Estimated 1.35 2.27 2.60 2.70 1.90 2.10
LTM 31-Dec-97* 1.21 2.01 NA NA 1.86 1.41
31-Dec-96 0.79 2.31 1.51 1.74 1.03 (0.36)
31-Dec-95 0.55 2.35 1.73 3.20 1.53 (1.19)
31-Dec-94 0.81 2.12 0.90 1.18 0.70 0.36
31-Dec-93 1.10 1.74 1.44 2.53 1.24 2.24
CGR 1993 - LTM 1997 2.4% 3.7% 1.2% -8.9% 10.7% -10.9%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 2.3% 1.5% 1.8% 0.0% 1.9% 1.0%
$ $ $ $ $ $ $
Current Indicated 0.40 0.48 0.40 0.00 0.46 0.20
31-Dec-96 0.39 0.59 0.33 0.00 0.40 0.20
31-Dec-95 0.38 0.45 0.30 0.00 0.36 0.20
31-Dec-94 0.34 0.40 0.27 0.00 0.33 0.20
31-Dec-93 0.28 0.34 0.24 0.00 0.30 0.10
CGR 1993- Indicated 1997 9.3% 9.0% 13.6% 0.0% 11.3% 18.9%
<CAPTION>
- -------------------------------------------------------------------------------------------------------
MERIDIAN MOTOR OLD STATE
INSURANCE CLUB GUARD SELECTIVE AUTO
GROUP, OF GROUP, INSURANCE FINANCIAL
INC. AMERICA INC. GROUP CORPORATION
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
COMMON STOCK SYMBOL MIGI MOTR OGGI SIGI STFC
2:1 pending 12/1/97 pre-split
<S> <C> <C> <C> <C> <C>
COMMON STOCK PRICE $ $ $ $ $
25-Feb-98 17 5/8 16 18 27 5/16 31 1/2
Twelve Month - High 19.75 17.50 19.63 28.63 34.88
Twelve Month - Low 13.50 9.88 13.56 20.00 16.75
Last to High 89% 91% 92% 95% 90%
COMMON SHARES OUTSTANDING 6,627 2,091 4,205 29,266 18,218
$ $ $ $ $
MARKET CAPITALIZATION 16,801 33,463 75,688 799,342 573,867
BOOK VALUE PER SHARE @ 12/31/97 NA NA NA $ 19.32 NA
BOOK VALUE PER SHARE @ 9/30/97 19.77 $ 10.40 $ 18.93 18.72 $ 11.65
PRICE TO MOST RECENT BOOK VALUE 89% 154% 95% 141% 270%
PRICE TO LTM EARNINGS 14.7 5.2 254.4 6.3 20.6
PRICE TO 1998 ESTIMATED EARNINGS 9.0 9.4 20.0 11.6 17.5
FULLY DILUTED EARNINGS PER SHARE: $ $ $ $ $
- ---------------------------------
1998 Estimated 1.95 1.70 0.90 2.35 1.80
LTM 31-Dec-97* 1.03 NA NA 2.27 1.82
31-Dec-96 1.08 2.61 (0.46) 3.72 1.25
31-Dec-95 1.72 1.18 (0.16) 3.61 1.42
31-Dec-94 1.35 2.46 0.03 2.66 0.82
31-Dec-93 1.53 1.60 0.81 3.82 0.77
CGR 1993 - LTM 1997 -9.4% 13.0% NM -12.2% 24.0%
DIVIDENDS PER COMMON SHARE:
- ---------------------------
Indicated Dividend Yield 1.8% 0.0% 0.6% 2.1% 0.6%
$ $ $ $ $
Current Indicated 0.32 0.00 0.10 0.56 0.18
31-Dec-96 0.30 0.00 0.00 1.12 0.15
31-Dec-95 0.28 0.00 0.00 1.12 0.14
31-Dec-94 0.24 0.00 0.00 1.12 0.13
31-Dec-93 0.24 0.00 0.00 1.12 0.11
CGR 1993- Indicated 1997 7.5% 0.0% NC -15.9% 13.1%
</TABLE>
* Most numbers as of September 30, 1997.
<PAGE>
Exhibit 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING
DECEMBER 31, 1993-1997 & LAST TWELVE MONTHS ENDING SEPTEMBER 30, 1997
MERCER MUTUAL INSURANCE COMPANY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM HARLEYSVILLE
GROUP, ALFA GROUP, GROUP, FAMILY GROUP,
INC. CORPORATION INC. INC. HOLDINGS INC.
- --------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
NET INCOME: $ $ $ $ $ $
- -----------
LTM 31-Dec-97 2,217 NA 65,436 NA NA 54,072
LTM 30-Sep-97 NA 49,566 NA 10,154 16,002 NA
31-Dec-96 640 32,189 51,084 8,896 6,924 28,680
31-Dec-95 1,138 22,318 52,377 9,858 9,606 41,331
31-Dec-94 (1,374) 32,867 47,625 5,040 3,526 18,454
31-Dec-93 799 44,960 39,922 6,382 7,584 31,940
CGR 1993- LTM 1997 29.1% 2.5% 13.1% 12.3% 20.5% 14.1%
NET INVESTMENT INCOME
- ---------------------
(excluding net realized gains/losses) $ $ $ $ $
31-Dec-97 2,350 NA 51,124 NA NA 81,783
LTM 30-Sep-97 NA 56,193 NA 11,521 17,846 NA
31-Dec-96 2,289 54,194 49,222 10,316 15,952 78,008
31-Dec-95 2,132 50,923 47,242 9,270 14,326 68,445
31-Dec-94 1,804 45,554 41,070 7,778 13,190 64,366
31-Dec-93 2,196 44,902 39,030 6,478 13,861 59,198
CGR 1993- LTM 1997 1.7% 6.6% 8.0% 17.9% 7.5% 9.7%
NET REALIZED GAINS (LOSSES): $ $ $ $ $ $
- ----------------------------
31-Dec-97 589 NA 391 NA NA 6,541
LTM 30-Sep-97 NA 3,718 NA 54 5,034 NA
31-Dec-96 596 2,808 49 173 (640) 3,182
31-Dec-95 53 1,106 505 399 912 2,245
31-Dec-94 277 572 2,888 34 1,340 3,367
31-Dec-93 509 4,890 1,396 845 (174) 1,001
CGR 1993- LTM 1997 3.7% -6.6% -27.3% -49.7% 131.9% 59.9%
EARNINGS BEFORE TAXES $ $ $ $ $ $
- ---------------------
31-Dec-97 3,218 NA 91,912 NA NA 67,281
LTM 30-Sep-97 NA 72,194 NA 13,376 23,800 NA
31-Dec-96 811 45,854 71,311 11,246 12,143 31,375
31-Dec-95 1,508 30,993 73,848 12,646 14,590 52,642
31-Dec-94 (2,055) 47,832 66,699 7,103 4,973 16,832
31-Dec-93 963 63,315 56,757 8,520 10,666 38,572
CGR 1993- LTM 1997 35.2% 3.3% 12.8% 11.9% 22.2% 14.9%
ASSETS $ $ $ $ $ $
- ------
31-Dec-97 74,085 NA 1,201,233 NA NA 1,801,195
30-Sep-97 NA 1,118,719 1,165,566 292,343 359,280 1,716,515
31-Dec-96 74,074 1,019,330 1,077,659 273,129 319,412 1,622,612
31-Dec-95 77,523 965,433 1,010,598 235,704 278,288 1,378,341
31-Dec-94 71,750 847,870 892,751 141,000 243,107 1,241,072
31-Dec-93 71,110 766,077 855,525 169,460 244,141 1,180,389
CGR 1993-1997 1.0% 9.9% 8.9% 14.6% 10.1% 11.1%
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
MERIDIAN MOTOR OLD STATE
MERCHANTS INSURANCE CLUB GUARD SELECTIVE AUTO
GROUP, GROUP, OF GROUP, INSURANCE FINANCIAL
INC. INC. AMERICA INC. GROUP CORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCOME: $ $ $ $ $ $
- -----------
LTM 31-Dec-97 4,198 NA NA 3,485 69,608 NA
LTM 30-Sep-97 NA 7,828 6,193 NA NA 32,143
31-Dec-96 (1,148) 5,800 5,330 (1,920) 55,551 22,602
31-Dec-95 (3,819) 11,617 2,417 (684) 53,042 25,542
31-Dec-94 1,131 9,121 5,035 144 38,276 14,662
31-Dec-93 5,909 9,411 3,260 3,388 22,678 13,729
CGR 1993- LTM 1997 -8.2% -4.5% 17.4% 0.7% 32.4% 23.7%
NET INVESTMENT INCOME
- ---------------------
(excluding net realized gains/losses) $ $ $ $ $ $
31-Dec-97 12,770 16,372 NA 5,877 100,530 25,078
LTM 30-Sep-97 NA NA 3,475 NA NA NA
31-Dec-96 11,724 14,908 3,087 4,321 96,952 23,879
31-Dec-95 10,368 14,564 2,764 4,458 91,640 22,617
31-Dec-94 9,849 13,996 2,730 3,932 80,657 17,756
31-Dec-93 9,155 13,569 2,784 3,928 77,326 17,222
CGR 1993- LTM 1997 10.0% 5.5% 6.5% 12.2% 7.8% 11.3%
NET REALIZED GAINS (LOSSES): $ $ $ $ $ $
- ----------------------------
31-Dec-97 112 4,477 NA 2,326 6,021 543
LTM 30-Sep-97 NA NA 1 NA NA NA
31-Dec-96 996 3,794 5 1,385 2,786 1,401
31-Dec-95 (832) 1,538 57 1,011 900 1,201
31-Dec-94 20 286 (43) 476 4,230 1,506
31-Dec-93 1,467 890 288 1,758 4,528 718
CGR 1993- LTM 1997 -47.4% 49.8% -75.7% 7.3% 7.4% -6.7%
EARNINGS BEFORE TAXES $ $ $ $ $ $
- ---------------------
31-Dec-97 5,422 7,128 NA 5,488 91,020 47,084
LTM 30-Sep-97 NA NA 4,979 NA NA NA
31-Dec-96 (3,033) 5,950 3,297 (3,347) 69,089 30,148
31-Dec-95 (6,818) 15,722 2,455 (1,368) 64,898 35,339
31-Dec-94 236 11,536 5,039 (388) 43,408 19,105
31-Dec-93 7,330 11,650 3,827 3,771 21,352 16,849
CGR 1993- LTM 1997 -7.3% -11.6% 6.8% 9.8% 43.7% 29.3%
ASSETS $ $ $ $ $ $
- ------
31-Dec-97 273,974 413,586 NA 176,072 2,306,191 493,151
30-Sep-97 278,747 409,674 96,289 180,669 2,328,336 480,909
31-Dec-96 262,123 397,798 95,533 137,462 2,183,639 453,120
31-Dec-95 252,808 322,588 81,959 134,853 2,113,077 434,496
31-Dec-94 227,750 291,406 79,172 127,831 1,866,680 334,796
31-Dec-93 221,556 285,936 86,669 140,213 1,721,850 320,203
CGR 1993-1997 5.5% 9.7% 2.7% 5.9% 7.6% 11.4%
</TABLE>
<PAGE>
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING
DECEMBER 31, 1993-1997 & LAST TWELVE MONTHS ENDING SEPTEMBER 30, 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>
LOSS & LAE RESERVES $ $ $ $ $
- -------------------
31-Dec-97 31,872 NA 378,026 NA NA
30-Sep-97 NA 125,835 373,338 116,750 150,297
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 1993-1997 -1.1% -20.1% 7.8% 9.9% 5.0%
STOCKHOLDERS' EQUITY $ $ $ $ $
- --------------------
31-Dec-97 23,236 NA 430,084 NA NA
30-Sep-97 NA 368,086 411,518 89,264 124,455
31-Dec-96 19,282 323,312 370,591 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 1993-1997 7.1% 9.0% 13.4% 11.4% 19.8%
COMBINED RATIO % % % % %
- --------------
31-Dec-97 99.4 NA 94.8 NA NA
30-Sep-97 NA 91.6 94.5 95.6 97.0
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 % % % % %
- ----------------
31-Dec-97 58.9 NA 69.6 NA NA
30-Sep-97 NA 65.3 68.7 62.8 69.4
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
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
MERIDIAN MOTOR
HARLEYSVILLE MERCHANTS INSURANCE CLUB
GROUP, GROUP, GROUP, OF
INC. INC. INC. AMERICA
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
LOSS & LAE RESERVES $ $ $ $
- -------------------
31-Dec-97 868,393 141,205 NA NA
30-Sep-97 836,189 136,079 162,439 48,655
31-Dec-96 796,820 133,479 161,309 47,667
31-Dec-95 645,941 119,722 123,577 39,824
31-Dec-94 603,088 104,015 123,755 41,665
31-Dec-93 560,811 93,896 119,764 45,818
CGR 1993-1997 11.6% 10.7% 7.9% 1.5%
STOCKHOLDERS' EQUITY $ $ $ $
- --------------------
31-Dec-97 446,515 67,462 131,894 NA
30-Sep-97 429,112 66,127 131,004 21,761
31-Dec-96 370,245 65,029 122,174 18,786
31-Dec-95 345,009 69,970 118,243 14,081
31-Dec-94 276,924 67,279 94,252 10,546
31-Dec-93 267,749 75,083 94,447 7,168
CGR 1993-1997 13.6% -2.6% 8.7% 32.0%
COMBINED RATIO % % % %
- --------------
31-Dec-97 NA 108.0 NA NA
30-Sep-97 NA 106.8 102.5 99.2
31-Dec-96 108.4 115.9 99.9 102.4
31-Dec-95 104.0 116.9 91.4 102.6
31-Dec-94 111.5 110.9 101.4 94.8
31-Dec-93 106.4 104.9 90.3 102.2
LOSS & LAE RATIO % % % %
- ----------------
31-Dec-97 NA 74.6 NA NA
30-Sep-97 NA 73.6 72.0 68.9
31-Dec-96 76.2 83.1 68.9 64.5
31-Dec-95 70.3 82.5 60.2 58.7
31-Dec-94 77.9 77.9 69.6 55.5
31-Dec-93 77.9 70.8 68.8 56.5
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
OLD STATE
GUARD SELECTIVE AUTO
GROUP, INSURANCE FINANCIAL
INC. GROUP CORPORATION
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
LOSS & LAE RESERVES $ $ $
- -------------------
31-Dec-97 NA 1,161,169 162,446
30-Sep-97 52,529 1,182,605 164,307
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 1993-1997 -2.9% 6.1% 5.6%
STOCKHOLDERS' EQUITY $ $ $
- --------------------
31-Dec-97 80,748 565,316 225,479
30-Sep-97 79,580 549,925 212,253
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 1993-1997 19.3% 15.0% 16.0%
COMBINED RATIO % % %
- --------------
31-Dec-97 100.8 NA NA
30-Sep-97 101.6 NA 94.9
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 % % %
- ----------------
31-Dec-97 61.7 NA NA
30-Sep-97 62.4 69.7 65.2
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
</TABLE>
<PAGE>
EXHIBIT 1
SHESHUNOFF PEER GROUP HISTORICAL ANALYSIS FOR THE YEARS ENDING
DECEMBER 31, 1993-1997 & LAST TWELVE MONTHS ENDING SEPTEMBER 30, 1997
MERCER MUTUAL INSURANCE COMPANY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MERCER
INSURANCE ALLIED DONEGAL FARM HARLEYSVILLE MERCHANTS
GROUP, ALFA GROUP, GROUP, FAMILY GROUP, GROUP,
INC. CORPORATION INC. INC. HOLDINGS INC. INC.
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
EXPENSE RATIO % % % % % % %
- -------------
31-Dec-97 40.5 NA 25.2 NA NA NA 33.4
30-Sep-97 NA 26.3 25.8 32.8 27.6 NA 33.2
31-Dec-96 39.1 33.7 24.9 31.2 29.2 32.3 32.8
31-Dec-95 40.2 40.3 25.6 31.8 29.8 33.7 34.4
31-Dec-94 48.1 30.1 27.0 30.7 28.4 33.6 33.0
31-Dec-93 46.6 26.7 28.6 30.2 27.7 28.5 34.1
RETURN ON EQUITY % % % % % % %
- ----------------
31-Dec-97 9.5% NA 15.2% NA NA 12.1% 6.2%
LTM 30-Sep-97 NA 13.5% NA 11.4% 12.9% NA NA
31-Dec-96 3.3% 10.0% 13.8% 10.9% 6.3% 7.7% -1.8%
31-Dec-95 6.0% 7.2% 14.9% 13.6% 13.0% 12.0% -5.5%
31-Dec-94 -9.7% 12.9% 16.9% 8.3% 6.7% 6.7% 1.7%
31-Dec-93 4.5% 17.2% 15.4% 11.0% 12.5% 11.9% 7.9%
NET REALIZED GAIN ( LOSS) / EBT % % % % % % %
- -------------------------------
31-Dec-97 18.3% NA 0.4% NA NA 9.7% 2.1%
30-Sep-97 NA 5.2% NA 0.4% 21.2% NA NA
31-Dec-96 73.5% 6.1% 0.1% 1.5% -5.3% 10.1% -32.8%
31-Dec-95 3.5% 3.6% 0.7% 3.2% 6.3% 4.3% 12.2%
31-Dec-94 -13.5% 1.2% 4.3% 0.5% 26.9% 20.0% 8.5%
31-Dec-93 52.9% 7.7% 2.5% 9.9% -1.6% 2.6% 20.0%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MERIDIAN MOTOR OLD STATE
INSURANCE CLUB GUARD SELECTIVE AUTO
GROUP, OF GROUP, INSURANCE FINANCIAL
INC. AMERICA INC. GROUP CORPORATION
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
EXPENSE RATIO % % % % %
- -------------
31-Dec-97 NA NA 39.1 NA NA
30-Sep-97 30.4 30.3 39.2 NA 29.7
31-Dec-96 31.0 37.9 34.7 31.6 26.4
31-Dec-95 31.2 43.9 34.9 31.1 30.1
31-Dec-94 31.8 39.3 34.8 33.4 25.9
31-Dec-93 21.5 45.7 34.4 37.3 29.1
RETURN ON EQUITY % % % % %
- ----------------
31-Dec-97 NA NA 4.3% 12.3% NA
LTM 30-Sep-97 6.0% 28.5% NA NA 15.1%
31-Dec-96 4.7% 28.4% -4.9% 11.7% 12.1%
31-Dec-95 9.8% 17.2% -1.7% 12.1% 15.2%
31-Dec-94 9.7% 47.7% 0.4% 11.6% 11.3%
31-Dec-93 10.0% 45.5% 8.5% 7.0% 11.0%
NET REALIZED GAIN ( LOSS) / EBT % % % % %
- -------------------------------
31-Dec-97 62.8% NA 42.4% 6.6% 1.2%
30-Sep-97 NA 0.0% NA NA NA
31-Dec-96 63.8% 0.2% -41.4% 4.0% 4.6%
31-Dec-95 9.8% 2.3% -73.9% 1.4% 3.4%
31-Dec-94 2.5% -0.9% -122.5% 9.7% 7.9%
31-Dec-93 7.6% 7.5% 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.
<PAGE>
Exhibit II
MERCER MUTUAL PRO FORMA CALCULATIONS
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
<S> <C> <C> <C> <C>
Gross Proceeds 22,100.0 26,000.0 29,900.0 33,222.0
Estiamted net expenses (1,587.0) (1,657.0) (1,727.0) (1,787.0)
Net Proceeds 20,513.0 24,343.0 28,173.0 31,435.0
Less: ESOP (2,210.0) (2,600.0) (2,990.0) (3,322.2)
Less: MRP (884.0) (1,040.0) (1,196.0) (1,328.9)
--------- --------- --------- ---------
Net Reinvestable Proceeds 17,419.0 20,703.0 23,987.0 26,783.9
Book Value 23,506.0 23,506.0 23,506.0 23,507.0
Net Proceeds 20,513.0 24,343.0 28,173.0 31,435.0
Less: MRP (c) (884.0) (1,040.0) (1,196.0) (1,328.9)
Less: ESOP (d) (2,210.0) (2,600.0) (2,990.0) (3,322.2)
--------- --------- --------- ---------
Pro Forma Book Value 40,925.0 44,209.0 47,493.0 50,290.9
Book Value without Unrealized Gains 20,963.0 20,963.0 20,964.0 20,965.0
Net Proceeds 20,513.0 24,343.0 28,173.0 31,435.0
Less: MRP (884.0) (1,040.0) (1,196.0) (1,328.9)
Less: ESOP (2,210.0) (2,600.0) (2,990.0) (3,322.2)
--------- --------- --------- ---------
Pro Forma Book Value w/o gains 38,382.0 41,666.0 44,951.0 47,748.9
Net Income - Fiscal year ended 12/31/97 2,217.0 2,217.0 2,217.0 2,218.0
Plus: JUA Expense (e) 270.6 270.6 270.6 270.6
Plus: Risk adjustment (f) 125.4 125.4 125.4 125.4
Less: NJ Retaliatory Tax (g) (132.0) (132.0) (132.0) (132.0)
Income on Proceeds (h) 670.2 796.6 923.0 1,030.6
Less: MRP (i) (116.7) (137.3) (157.9) (175.4)
Less: ESOP (j) (145.9) (171.6) (197.3) (219.3)
--------- -------- --------- ---------
Pro Forma Net Income 2,888.7 2,968.7 3,048.8 3,117.9
Net Income - 1997 Estimate 2,217.0 2,217.0 2,217.0 2,217.0
Loss Experience Adjustment (k) (500.0) (500.0) (500.0) (500.0)
Plus: JUA Expense (e) 270.6 270.6 270.6 270.6
Plus: Risk adjustment (f) 125.4 125.4 125.4 125.4
Less: NJ Retaliatory Tax (g) (132.0) (132.0) (132.0) (132.0)
Income on Proceeds (h) 670.2 796.6 923.0 1,030.6
Less: MRP (i) (116.7) (137.3) (157.9) (175.4)
Less: ESOP (j) (145.9) (171.6) (197.3) (219.3)
--------- -------- --------- ---------
Pro Forma Net Income 2,388.7 2,468.7 2,548.8 2,616.9
Price/Book 0.54 0.59 0.63 0.66
Price/Book w/o gains 0.58 0.62 0.67 0.70
Price/Earnings 7.7 8.8 9.8 10.7
Price/Earnings adjusted for loss experience 9.3 10.5 11.7 12.7
</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>
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>
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>
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>
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>
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>
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>
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 $3.5 million.
OVERVIEW OF MERCER
Mercer's culture and financial characteristics reflect the rationale of its
founders a century ago, that of providing rural homeowners and farm owners with
affordable mutual fire insurance. Over the years simple fire insurance evolved
into homeowners multi-peril package policies, and its once rural markets have
become highly developed suburban communities. Nonetheless, the Company has
remained loyal to many of its original founding principles with respect to the
lines of insurance it offers and geographical market areas in which it
underwrites.
This description and analysis of Mercer makes reference exclusively to the
Company's statutory financial information as filed with New Jersey's Department
of Banking and Insurance. This approach was utilized because the Company's
statutory financial
8
<PAGE>
information was more readily available in far greater detail than was its
generally accepted financial information (or "GAAP"). GAAP financial data
prepared for the Corporation's registration statement and conversion application
contain less detail and is available for a period of approximately three years.
Also, in the following "Industry Overview" section we make certain comparisons
between the Insurance Industry and Mercer. Comparisons such as composite
industry financial information are only available on a "statutory reporting
basis". However, in the "Comparative Methodology" section, we compare financial
and market information on a GAAP reporting basis for Mercer to that of other
comparable publicly held property casualty insurance companies.
The following table provides a summary of the Company's size, financial
strength, and underwriting commitments.
Summary Financial Data
(Statutory data, dollars in thousands)
<TABLE>
<CAPTION>
Year Admitted Policyholders' Net Premiums
Assets Surplus Written
($) ($) ($)
<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>
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 $7.7 million, or 38.3% of total Net Premiums
Written. These commercial lines products are principally sold to mercantile,
proprietors, business owners, light manufacturing, selected farm risks,
artisans, small contractors and religious institutions. The Company seeks to
underwrite standard rather than rated business and most of its premium rates are
promulgated by the Mutual Service Office ("MSO"), a mutual company rating
agency. The Company's own underwriting experience is not significant, or
credible enough, statistically to be able to create its own premium rates.
Another unique feature of the Company is that Mercer has elected to underwrite
all of its Workers' Compensation insurance in the Mercer Insurance Company a
wholly owned stock subsidiary, and the subsidiary's only line of insurance
underwritten. The Workers' Compensation business is processed by the Garden
State Re-insurance Association which is an insurance pool providing for the
sharing of workers' compensation losses under an excess of loss re-insurance
treaty. Based on its historically low loss experience in this line of business,
the Company has elected to withdraw from this pool effective December 31, 1997.
The table on the following page provides a summary of the Company's major
premium lines of business.
10
<PAGE>
1996 Distribution of Premiums by Line of Business
( dollars in thousands)
<TABLE>
<CAPTION>
Line of Net Premiums Net Premiums as Percentage
Insurance Written of Total Net Premiums
($) (%)
<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>
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>
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>
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>
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 $10.2 million,
these assessments had a dramatic impact on the Company's ability to maintain its
financial profitability, capital adequacy, A.M. Best's rating and foster growth.
15
<PAGE>
The following table provides a summary of the Company's JUA Assessments to its
net income and statutory surplus.
State of New Jersey JUA Assessments
(dollars in thousands)
<TABLE>
<CAPTION>
Year JUA Assessment Statutory Surplus Net Income
($) ($) ($)
<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>
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>
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>
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>
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 $4.2
million.
We can surmise, that the Company's solid selection of reinsurers, its prior
pooling and re-distribution of risks from its two pooling company partners, its
low level of Net Premiums Written relative to that of its Direct Premiums
Written, and its relatively low risk retention on any single risk relative to
its Policyholder Surplus, all indicate that the Company has taken a prudent,
cautious approach to its unique risk exposure, geographical and regulatory
environment.
LOSS RESERVES
One issue plaguing almost every insurance company at some point in time has been
that of accurately setting its Loss and Loss Adjustment Expense Reserves. This
has been particularly difficult in periods of rising economic inflation,
increased propensity of policyholders to sue and rising settlement expectations
nurtured by plaintiff attorneys. Fortunately, rising economic inflation has
abated and is no longer a serious consideration. In addition, it is much easier
to set reserves for claims of short duration, such as homeowner claims, when
compared to that of Workers' Compensation or certain longer duration liability
coverage.
20
<PAGE>
The following table provides a summary of the Company's Reserves for Loss & LAE,
Net Premiums Earned and compares it to Policyholders' Surplus.
Loss & LEA Reserves, Premiums Earned, Policyholders' Surplus
(dollars in thousands)
<TABLE>
<CAPTION>
Year Loss & LEA Premiums Ratio Policyholders' Ratio
Reserves Earned Surplus
($) ($) ($)
<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>
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
($) ($) ($)
<S> <C> <C> <C>
1990 16,178 13,540 (2,638)
1991 17,922 14,755 (3,149)
1992 19,535 15,902 (3,633)
1993 18,130 16,240 (1,890)
1994 17,387 16,205 (1,182)
1995 18,566 17,055 (1,511)
1996 19,272 19,272 --
</TABLE>
The preceding table demonstrates that Mercer has steadfastly and consistently
set conservative levels of reserves to dispose of its claims, such that with the
hindsight of time it is certain that such loss reserve amount proved to be
redundant. In addition, the Company has retained an actuary from the Company's
auditing firm KPMG Peat Marwick LLP, to provide a full loss and loss adjustment
expenses reserve analysis. This detailed report provides a range of acceptable
reserve values, and stated that Mercer Group made reasonable provision for the
Company's unpaid loss and loss expense obligations.
ASSETS AND INVESTMENTS
The Company's relatively steady state level of Net Premiums Written and Loss &
LAE Reserves suggests that its Total Admitted Assets and Total Invested Assets
also should not have changed dramatically over this time period.
22
<PAGE>
The following table provides a summary of the Company's Total Admitted Assets
and Invested Assets.
Total Admitted Assets, Invested Assets, and Net Amounts
(dollars in thousands)
<TABLE>
<CAPTION>
Year Admitted Assets Invested Assets Net Amounts
($) ($) ($)
<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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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
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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>
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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.
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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>
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>
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>
<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
$197 million) is 250 basis points greater than the required return on larger
capitalization companies.
Therefore, an important distinction should be made between the market valuation
characteristics of smaller market capitalized companies and larger market
capitalized companies. This same valuation dependence on size relationship is
evident among the comparative companies. The following page presents the
price/book ratio for each comparative company ranked by market capitalization.
55
<PAGE>
<TABLE>
<CAPTION>
Market 11/11/97
Capitalization Price/Book
Company ($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>
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>
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>
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>
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>
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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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>
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.
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<PAGE>
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>
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<PAGE>
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.
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<PAGE>
EXHIBITS
<PAGE>
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>
EXHIBIT I
QUALIFICATIONS OF ALEX SHESHUNOFF & CO. INVESTMENT BANKING
3
<PAGE>
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>
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>
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>
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>
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>
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>
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>
Exhibit II
AS & Co. Common Stock Comparison
11
<PAGE>
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>
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>
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>
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>
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>
EXHIBIT III
FIREMARK STATISTICAL REVIEW
17
<PAGE>
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>
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>
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>
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 $20.90 1.36
</TABLE>
21
<PAGE>
EXHIBIT IV
MUTUAL TO STOCK CONVERSIONS
22
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CLOSED CONVERSIONS BY DATE
PRICE ONE PERCENTAGE
OFFERING SHARES DAY AFTER PRICE
PRICE ISSUED IPO PROCEEDS CONVERSION CHANGE
COMPANY NAME STATE IPO DATE ($) (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>
OLD GUARD SHAR 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>
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>
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>
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>
