<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
---------------------------------------
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to ______________
Commission file number 1-9640
-----------------------------------------------
MERCHANTS GROUP, INC.
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1280763
- ------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 Main Street, Buffalo, New York 14202
- -------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
(716) 849-3333
- ----------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
x Yes No
___ ___
As of August 1, 1995, 3,158,188 shares of Common Stock, $.01 par
value per share, were outstanding.
The Exhibit Index for this document appears on page 18.
This document contains 21 pages.
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1994 1995
-------- ------------ ----------
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity at amortized cost
(fair value $31,863 in 1994 and
$33,818 in 1995) $ 33,933 $ 34,034
Available for sale at fair value
(amortized cost $135,034 in 1994
and $138,151 in 1995) 127,972 134,450
Other long-term investments at
fair value (amortized cost
$5,557 in 1994 and $4,615 in 1995) 4,387 4,615
Short-term investments 4,455 3,155
------------ ------------
Total investments 170,747 176,254
Cash 18 53
Interest due and accrued 1,965 1,715
Premiums receivable, net of allow-
ance for doubtful accounts of
$368 in 1994 and $876 in 1995 18,051 20,395
Deferred policy acquisition costs 11,587 12,629
Ceded reinsurance balances receivable 7,632 4,743
Prepaid reinsurance premiums 2,370 2,764
Receivable from affiliate - 1,752
Deferred federal income tax benefit 7,738 6,104
Other assets 2,299 5,648
------------ ----------
Total assets $222,407 $232,057
============ ==========
</TABLE>
See Notes to the Consolidated Financial Statements.
2
<PAGE> 3
MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands except share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1994 1995
--------------- -------------
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Reserve for losses and loss
adjustment expenses $104,015 $106,490
Unearned premiums 45,449 49,738
Other liabilities 5,267 7,235
Payable to affiliate 397 -
--------------- -------------
Total liabilities 155,128 163,463
--------------- -------------
Stockholders' equity:
Common stock, 3,158,188 shares
issued and outstanding at
December 31, 1994 and June 30, 1995 32 32
Additional paid in capital 34,678 34,678
Unrealized investment losses,
net of tax (6,878) (2,442)
Accumulated earnings 39,447 36,326
--------------- -------------
Total stockholders' equity 67,279 68,594
--------------- -------------
Commitments and contingent liabilities - -
Total liabilities and stock-
holders' equity $222,407 $232,057
=============== ==============
</TABLE>
See Notes to the Consolidated Financial Statements.
3
<PAGE> 4
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
1994 1995 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $22,643 $23,392 $45,205 $46,102
Net investment income 2,420 2,588 4,970 5,111
Realized investment
gains (losses) 30 (832) 27 (832)
Other revenues (expenses) 182 (224) 264 49
---------- ---------- ---------- ----------
Total revenues 25,275 24,924 50,466 50,430
---------- ---------- ---------- ----------
Expenses:
Net losses and loss
adjustment expenses 19,292 23,517 36,759 39,359
Amortization of deferred
policy acquisition costs 6,086 6,284 12,152 12,563
Other underwriting expenses 1,279 3,022 3,220 4,882
---------- ---------- ---------- ---------
Total expenses 26,657 32,823 52,131 56,804
---------- ---------- ---------- ---------
Loss before income taxes (1,382) (7,899) (1,665) (6,374)
Benefit for income taxes (611) (3,983) (919) (3,569)
---------- ---------- ---------- ---------
Net loss $ (771) $(3,916) $ (746) $(2,805)
========== ========== ========== =========
Primary and fully diluted
loss per share $ (.24) $ (1.23) $ (.23) $ (.88)
========== ========== ========== =========
Weighted average shares
outstanding:
Primary 3,177 3,181 3,177 3,178
Fully diluted 3,179 3,186 3,179 3,186
</TABLE>
See Notes to the Consolidated Financial Statements.
4
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<TABLE>
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<CAPTION>
Six Months
Ended June 30,
------------------
1994 1995
---- ----
<S> <C> <C>
Common stock, beginning and end $ 32 $ 32
------- -------
Additional paid in capital:
Beginning of period 34,659 34,678
Exercise of common stock options 9 -
------- -------
End of period 34,668 34,678
------- -------
Unrealized investment gains (losses),
net of tax:
Beginning of period 1,445 (6,878)
Change during the period (6,126) 4,436
------- -------
End of period (4,681) (2,442)
------- -------
Accumulated earnings:
Beginning of period 38,947 39,447
Net loss (746) (2,805)
Cash dividend on common stock (316) (316)
------- -------
End of period 37,885 36,326
------- -------
Total stockholders' equity $67,904 $68,594
======= =======
<FN>
See Notes to the Consolidated Financial Statements.
</TABLE>
5
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<TABLE>
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(in thousands)
<CAPTION>
Six Months
Ended June 30,
------------------
1994 1995
---- ----
<S> <C> <C>
Cash flows from operations:
Collection of premiums $42,589 $44,421
Payment of losses and loss
adjustment expenses (31,930) (33,428)
Payment of other underwriting
expenses (15,673) (16,047)
Investment income received 4,892 5,402
Investment expenses paid (77) (63)
Income taxes paid (585) (345)
Other cash receipts 264 49
------- -------
Net cash used in operations (520) (11)
------- -------
Cash flows from investing activities:
Proceeds from fixed maturities
sold or matured 14,504 6,947
Purchase of fixed maturities (17,908) (7,854)
Net decrease in other
long-term investments 33 12
Net (increase) decrease in
short-term investments (2,257) 1,300
Purchase of equipment, net (104) (43)
------- -------
Net cash provided by (used in)
investing activities (5,732) 362
------- -------
Cash flows from financing activities:
Funds borrowed under repurchase
agreement 6,563 -
Exercise of common stock options 9 -
Cash dividend on common stock (316) (316)
------- -------
Net cash provided by (used in)
financing activities 6,256 (316)
------- -------
Increase in cash and cash equivalents 4 35
Cash:
Beginning of period 4 18
------- -------
End of period $ 8 $ 53
======= =======
<FN>
See Notes to the Consolidated Financial Statements.
</TABLE>
6
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<TABLE>
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATIONS
(in thousands)
<CAPTION>
Six Months
Ended June 30,
-----------------
1994 1995
---- ----
<S> <C> <C>
Net loss $ (746) $(2,805)
Adjustments:
Depreciation and amortization (40) 71
Realized investment (gains) losses (27) 832
(Increase) decrease in assets:
Interest due and accrued (34) 250
Premiums receivable (1,791) (2,344)
Deferred policy acquisition costs (33) (1,042)
Ceded reinsurance balances receivable (474) 2,889
Prepaid reinsurance premiums (83) (394)
Deferred federal income tax benefit (455) (651)
Federal income taxes receivable (986) -
Receivable from affiliate (379) (1,752)
Other assets (142) (3,400)
Increase (decrease) in liabilities:
Reserve for losses and loss
adjustment expenses 5,544 2,475
Unearned premiums 193 4,289
Other liabilities (244) 1,968
Payable to affiliate (760) (397)
Federal income taxes payable (63) -
-------- -------
Net cash used in operations $ (520) $ (11)
======== =======
<FN>
See Notes to the Consolidated Financial Statements.
</TABLE>
7
<PAGE> 8
MERCHANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated balance sheet as of June 30, 1995 and the related
consolidated statement of income, of changes in stockholders' equity and of
cash flows for the six months ended June 30, 1994 and 1995 are unaudited. In
the opinion of management, the interim financial statements reflect all
adjustments necessary for a fair presentation of financial position and results
of operations. Such adjustments consist only of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of Merchants
Group, Inc. (the "Company"), its wholly-owned subsidiary, Merchants Insurance
Company of New Hampshire, Inc. ("MNH"), and M.F.C. of New York, Inc., an
inactive premium finance company which is a wholly-owned subsidiary of MNH.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") which differ in some
respects from those followed in reports to insurance regulatory authorities.
All significant intercompany balances and transactions have been eliminated.
2. Related Party Transactions
--------------------------
The Company and MNH do not have any paid employees. Under a management
agreement, Merchants Mutual Insurance Company ("Mutual") which owns 8.1% of the
Company's common stock at June 30, 1995, provides the Company and MNH with the
facilities, management and personnel required to manage their day-to-day
business. All underwriting, administrative, claims and investment expenses
incurred on behalf of Mutual and MNH are shared on an allocated cost basis,
determined as follows: for underwriting and administrative expenses, the
respective share of total direct premiums written for Mutual and MNH serves as
the basis of allocation; for claims expenses, the average number of outstanding
claims is used; investment expenses are shared based on each company's share of
total invested assets.
8
<PAGE> 9
3. Earnings Per Share
------------------
Primary and fully diluted loss per share were computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during each period, increased by the assumed exercise of 74,352 and 66,073
shares of common stock options in 1995 and 1994, respectively, which would have
resulted in 27,372 and 20,532 additional shares outstanding, respectively,
assuming the proceeds to the Company from exercise were used to purchase shares
of the Company's common stock, at its average market value per share during the
quarter.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations for the Six Months Ended June 30, 1995 As Compared to the
- -------------------------------------------------------------------------------
Six Months Ended June 30, 1994
- ------------------------------
Total revenues of $50,430,000 for the six months ended June 30, 1995
were substantially unchanged from $50,466,000 for the six months ended June 30,
1994. Net premiums earned increased $897,000, or 2% and net investment income
increased $141,000, or 3%. Net realized investment gains and losses decreased
from a gain of $27,000 for the six months ended June 30, 1994 to a loss of
$832,000 for the six months ended June 30, 1995. Other revenues decreased
$215,000 or 81%.
Net premiums earned increased by 2% from $45,205,000 in the six months
ended June 30, 1994 to $46,102,000 in the six months ended June 30, 1995. This
increase resulted from a 10% increase in net premiums written, which was partly
offset by a lower contribution to 1995 earnings from unearned premiums at
December 31, 1994 compared to the contribution to 1994 earnings from unearned
premiums at December 31, 1993.
Net premiums written increased from $45,315,000 for the six months
ended June 30, 1994 to $49,997,000 for the six months ended June 30, 1995
primarily as a result of a 7% increase in direct premiums written.
Voluntary commercial lines direct premiums written increased by 8% from
$26,768,000 in the six months ended June 30, 1994 to $28,828,000 in the six
months ended June 30, 1995. Workers' compensation direct premiums written
increased 7% and commercial auto direct written premiums increased 8% in the
six months ended June 30, 1995 compared to the six months ended June 30, 1994.
Commercial policy retention rates for the period ended June 30, 1995 improved
by 2.1 percentage points compared to the year earlier period. Commercial new
business units (policies which were written by the company for the first time)
for the six months ended June 30, 1995 increased by 7% compared to the six
months ended June 30, 1994. Voluntary commercial lines policies in force at
June 30, 1995 increased by 1% compared to June 30, 1994.
Voluntary personal lines direct premiums written increased by 5% from
$15,682,000 in the six months ended June 30, 1994 to $16,502,000 in the six
months ended June 30, 1995, due to a 3% increase in private passenger
automobile ("PPA") direct premiums written and a 16% increase in homeowners
policies direct premiums written. The growth in PPA direct premiums written
was primarily the result of a 3% increase in new business units in 1995
compared to the prior year. The growth in homeowners policies direct premiums
written resulted primarily from a 10% increase in new business units in 1995
compared to 1994.
10
<PAGE> 11
Involuntary direct premiums written, primarily involuntary PPA
insurance, which comprised 7% of total direct premiums written during both the
six months ended June 30, 1994 and 1995, increased by 4% from $3,170,000 in the
six months ended June 30, 1994 to $3,307,000 in the six months ended June 30,
1995.
Net investment income increased by 3% from $4,970,000 for the six
months ended June 30, 1994 to $5,111,000 for the six months ended June 30,
1995. On a taxable equivalent basis, net investment income increased by 1%.
During the six months ended June 30, 1994, the Company enhanced investment
income by executing certain trades that involved borrowing funds on a
short-term basis and investing the proceeds long-term at higher interest rates.
These trades increased investment income during the six months ended June 30,
1994 by approximately $56,000. Similar trades were not available during the
six months ended June 30, 1995. Further, the Company periodically re-evaluates
expected future cash flows pertaining to its collateralized mortgage obligation
("CMO") investments and records any resulting adjustments to investment income.
In response to the increase in market interest rates experienced during 1994,
which resulted in slower prepayments than previously anticipated, the Company
re-evaluated the expected future cash flows associated with its CMO investments
during the first quarter of 1995. This re-evaluation of expected future cash
flows resulted in a decrease in investment income during the six months ended
June 30, 1995 of approximately $55,000.
The Company's investment in Signet Group PLC ("Signet") cumulative
auction rate preference shares included in other long-term investments is
carried at fair value. During the three months ended June 30, 1995, the
Company recorded an $840,000 unrealized loss on its investment in Signet which
is included as a component of realized investment gains and losses in the
accompanying consolidated statement of income. Previously, such unrealized
gains or losses related to Signet were recorded directly to stockholders'
equity. There were no material gains or losses realized from the sale of
investments in the six months ended June 30, 1994 or 1995.
Other revenues decreased by 81% from $264,000 for the six months ended
June 30, 1994 to $49,000 for the six months ended June 30, 1995. This decrease
resulted primarily from a $450,000 increase in the reserve for uncollectible
premiums receivable. This increase in the reserve for uncollectible premiums
receivable related primarily to workers' compensation and contractors coverall
policies which were not renewed or which have been cancelled. These premiums
were generated upon the audit of insured records.
11
<PAGE> 12
Losses and loss adjustment expenses ("LAE") increased by 7% from
$36,759,000 in the six months ended June 30, 1994, to $39,359,000 in the six
months ended June 30, 1995. The loss and LAE ratio increased from 81.3% in the
six months ended June 30, 1994 to 85.4% in the six months ended June 30, 1995.
Losses in the six months ended June 30, 1995 included an increase in the
reserve for losses incurred primarily in the 1993 and 1994 accident years of
approximately $6,750,000, which added 14.6 percentage points to the loss and
LAE ratio. These losses resulted principally from higher than expected loss
severity on the Company's workers' compensation and contractors' coverall
policies. Losses in the six months ended June 30, 1994 include $3,135,000 paid
to Mutual for losses relating to the 1985 through 1994 accident years on
involuntary automobile insurance policies issued under automobile insurance
plans.
Losses and LAE for the six months ended June 30, 1994 also included
$2,400,000 of higher than normal weather related losses attributable to severe
winter weather experienced in the northeast United States during that period.
These weather related losses increased the loss and LAE ratio in the six months
ended June 30, 1994 by 5.3 percentage points.
The ratio of the amortization of deferred policy acquisition costs and
other underwriting expenses to net premiums earned increased from 34.0% for the
six months ended June 30, 1994 to 37.8% for the six months ended June 30, 1995.
Other underwriting expenses for the six months ended June 30, 1995 included
approximately $1,100,000 associated with the June 30, 1995 resignation of the
Company's former Chief Executive Officer, which amount represents the Company's
portion of the payment required in accordance with the management agreement
with Mutual.
Commissions, premium taxes and other state assessments that vary
directly with the Company's premium volume represented 21.1% of net premiums
earned in the six months ended June 30, 1995 compared to 21.3% of net premiums
earned in the six months ended June 30, 1994.
During the six months ended June 30, 1995, the Company recorded an
income tax benefit which resulted from its pre- tax loss. The effective
federal income tax rate used to derive this benefit was based upon the
Company's estimate of its effective federal rate for all of 1995. The benefit
recorded was larger than the statutory federal income tax rate due to tax
exempt income.
12
<PAGE> 13
Results of Operations for the Three Months Ended June 30,
- --------------------------------------------------------
1995 As Compared to the Three Months Ended June 30, 1994
- --------------------------------------------------------
Net premiums earned increased by 3% from $22,643,000 for the three
months ended June 30, 1994 to $23,392,000 for the three months ended June 30,
1995. This increase resulted primarily from the 10% increase in net premiums
written experienced during the six months ended June 30, 1995 compared to the
six months ended June 30, 1994.
Net premiums written increased by 14% from $24,016,000 for the three
months ended June 30, 1994 to $27,350,000 for the three months ended June 30,
1995 due to an 8% increase in direct premiums written and a $1,222,000 increase
in written premiums assumed from the National Workers' Compensation Reinsurance
Pool ("NWCRP"). This increase in written premiums assumed from the NWCRP
resulted primarily from a reapportionment of premiums assumed from the NWCRP.
At least annually, the NWCRP adjusts each participant's assumptions to properly
reflect their share of the related voluntary workers' compensation market.
This adjustment or reapportionment was recorded during the three months ended
June 30, 1995. During 1994, the reapportionment related to 1994 was received
and recorded in the third quarter.
Net investment income increased by 7% from $2,420,000 for the three
months ended June 30, 1994 to $2,588,000 for the three months ended June 30,
1995. On a taxable equivalent basis, net investment income increased by 6%.
The loss and LAE ratio increased 15.3 percentage points from 85.2% for
the three months ended June 30, 1994 to 100.5% for the three months ended June
30, 1995, due to the reserve strengthening related to prior accident years
recorded in the second quarter of 1995.
The ratio of the amortization of deferred policy acquisition costs and
other underwriting expenses to net premiums earned increased from 32.5% for the
three months ended June 30, 1994 to 39.8% for the three months ended June 30,
1995, primarily due to the expenses associated with the resignation of the
Company's former Chief Executive Officer.
Liquidity and Capital Resources
- -------------------------------
In developing its investment strategy, the Company determines a level
of cash and short-term investments which, when combined with expected cash
flow, is estimated to be adequate to meet expected cash obligations.
Historically, the excess of premiums collected over payments on claims,
combined with cash flow from investments, has provided the Company with
short-term funds in excess of normal operating demands for cash.
13
<PAGE> 14
Net cash used in operations decreased by $509,000 from $520,000 in the
six months ended June 30, 1994 to $11,000 in the six months ended June 30,
1995. Increases in cash provided by the collection of premiums of $1,832,000
and by investment income of $510,000 were offset by increases in the payment of
losses and loss adjustment expenses of $1,498,000 and of underwriting expenses
of $374,000.
Net cash provided by investing activities increased $6,094,000 from a
$5,732,000 use of cash in the six months ended June 30, 1994 to a $362,000
source of cash in the six months ended June 30, 1995. This increase in net
cash provided by investing activities resulted primarily from a $3,557,000
decrease in net cash used to purchase short-term investments.
Net cash provided by financing activities decreased $6,572,000 from a
$6,256,000 source of cash in the six months ended June 30, 1994 to a $316,000
use of cash in the six months ended June 30, 1995. This decrease was due to a
$6,563,000 decline in funds borrowed under repurchase agreements.
The Company has several objectives with respect to its investment
portfolio, which include maximizing total return while protecting
policyholders' surplus, maintaining flexibility and liquidity, and maintaining
a reasonable duration match between assets and liabilities. Like other
property and casualty insurers, the Company relies on premiums as a major
source of cash, and therefore liquidity. Cash flows from the Company's
investment portfolio, either in the form of interest or principal payments, are
an additional source of liquidity. Because the duration of the Company's
investment portfolio and liabilities are relatively matched, substantial
increases or decreases in market interest rates are not expected to have a
material effect on the Company's liquidity, or its results of operations.
The Company generally designates newly acquired fixed maturity
investments as available for sale and carries these investments at fair value.
Unrealized gains and losses related to these investments are recorded as a
component of stockholders' equity. At December 31, 1994, the Company had
recorded $6,878,000 of unrealized losses, net of tax, associated with its fixed
maturity investments. During the six months ended June 30, 1995, the Company
recorded $4,436,000 of unrealized gains, net of tax. These gains resulted from
the decline in market interest rates experienced during the period and from the
recognition of the $840,000 unrealized loss related to the Company's investment
in Signet as a realized loss.
14
<PAGE> 15
At June 30, 1995, the Company's bond portfolio represented 95.6% of
invested assets. Management believes that this level of bond holdings will not
adversely affect the Company's liquidity because it expects that cash receipts
from net premiums written and investment income will be sufficient to enable
the Company to satisfy its cash obligations in 1995. Furthermore, a
substantial portion of the Company's bond portfolio is invested in
mortgage-backed and other asset-backed securities, which, in addition to
interest income, provide monthly paydowns of bond principal.
At June 30, 1995, $76,539,000 or 43.4% of the Company's investment
portfolio was invested in mortgage-backed and other asset backed securities,
primarily planned amortization class ("PAC") and sequential pay CMO's. A
PAC-CMO has an amortization schedule that is protected against prepayment risk
under a wide range of interest rate scenarios and is therefore less susceptible
to prepayment risk than other mortgage backed securities. The Company has not
invested in the more volatile types of CMO products such as interest only,
principal only or inverse floating rate securities. All of the Company's CMO
investments have an active secondary market and their effect on the Company's
liquidity does not differ from that of other fixed maturity investments. The
Company does not own any other derivative financial instruments such as futures
or options.
At June 30, 1995, $2,552,000 or 1.4%, of the Company's investment
portfolio was invested in non-investment grade securities.
As a holding company, the Company is dependent on cash dividends from
MNH to meet its obligations and to pay any cash dividends. MNH is subject to
New Hampshire insurance laws which place certain restrictions on its ability to
pay dividends without the prior approval of state regulatory authorities.
These restrictions limit dividends to those that, when added to all other
dividends paid within the preceding twelve months, would not exceed 10% of the
insurer's statutory policyholders' surplus as of the preceding December 31.
The maximum amount of dividends that MNH could pay during any twelve month
period ending in 1995 without the prior approval of the New Hampshire Insurance
Commissioner is $5,168,000. MNH paid $500,000 of dividends to the Company
during the six months ended June 30, 1995.
15
<PAGE> 16
Under a management agreement, Mutual provides employees, services and
facilities for MNH to carry on its insurance business on a cost reimbursed
basis. The balance in the receivable from affiliate account represents the
amount owed by Mutual to the Company for the difference between premiums
collected and payments for losses, employees, services and facilities made by
Mutual on behalf of MNH.
On November 1, 1994, Mutual filed an application with the New York
Insurance Department to convert from a mutual company to a stock corporation
under the New York law that permits a mutual insurance company to demutualize.
In such a demutualization, a mutual insurance company's policyholders and
surplus note holders are entitled to receive their equitable share of that
company's appraised fair market value in cash or securities or a combination
thereof. Mutual's application is currently pending with the Department, and
must ultimately be approved by the Department and Mutual's policyholders after
the Department has determined Mutual's fair market value based upon an
independent appraisal. The Company has advised Mutual and the Department of
its interest in sponsoring Mutual's demutualization, and Mutual has granted the
Company a right of first refusal in that regard. The Company would consider
acquiring Mutual if it determines that the appraised value is acceptable and it
has sufficient capital to fund the acquisition. In the event the Company is
not able to acquire Mutual at a price, on terms or in a time frame acceptable
to the Company, the Company may elect to develop its own management structure
and might, therefore, terminate the management agreement with Mutual, subject
to its required five year notice provision, or request that Mutual and the
Department agree to amend the management agreement. Such an amendment might
include, but not be limited to, a shortening of the termination period.
MNH, like many other property-casualty insurance companies, is subject
to environmental damage claims asserted by or against its insureds. Management
of the Company is of the opinion that based on various court decisions
throughout the country, such claims should not be recoverable under the terms
of MNH's insurance policies because of either specific or general coverage
exclusions contained in the policies. However, there is no assurance that the
courts will agree with MNH's position in every case, nor can there be assurance
that material claims will not be asserted under policies which a court will
find do not explicitly or implicitly exclude claims for environmental damages.
Management, however, is not aware of any pending claim or group of claims which
would result in a liability that would have a material adverse effect on the
financial condition of the Company or MNH.
16
<PAGE> 17
Industry and regulatory guidelines suggest that the ratio of a
property-casualty insurer's annual net premiums written to its statutory
surplus should not exceed 3 to 1. The Company has consistently followed a
business strategy that would allow MNH to meet this 3 to 1 regulatory
guideline. For the first six months of 1995, MNH's ratio of net premiums
written to statutory surplus, annualized for a full year, was 2.1 to 1.
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 10, 1995 the Company held its annual meeting of stockholders.
During the meeting, Brent D. Baird, Richard E. Garman and James F. Marino were
elected Directors of the Company. Mr. Marino subsequently resigned as a
Director, effective June 30, 1995. Lawrence P. Castellani, Frank J.
Colantuono, Henry P. Semmelhack and Robert M. Zak are Directors of the Company
whose terms of office as Director continue beyond the date of the meeting.
A stockholder submitted a proposal to strongly recommend that the
Board of Directors conduct a search for a buyer of the Company using the
services of an investment banking firm and submit the highest resulting offer
to stockholders for approval within twelve months of the date of the annual
meeting.
A summary of stockholder voting with respect to the
election of Directors and the stockholder proposal follows:
<TABLE>
<CAPTION>
Election Election Election Stock-
of of of holder
B. Baird R. Garman J. Marino Proposal
-------- --------- --------- --------
<S> <C> <C> <C> <C>
For 2,438,708 2,438,708 2,438,085 702,994
Against - - - 1,386,444
Withheld 240,170 240,170 240,793 -
Abstain - - - 271,626
Non-votes - - - 317,814
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(11) Statement re computation of per share earnings
(filed herewith).
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
In a report filed on Form 8-K dated June 30, 1995, the
Company reported the resignation of its Chairman, President
and Chief Executive Officer.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCHANTS GROUP, INC.
(Registrant)
Date: August 7, 1995 By:/s/ Robert M. Zak
-----------------------------------
Robert M. Zak Senior Vice President,
Secretary and Treasurer (duly
authorized officer of the
registrant and chief
accounting officer)
19
<PAGE> 1
Exhibit 11
<TABLE>
MERCHANTS GROUP, INC.
Computation of Income Per Share
(in thousands, except per share data)
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
----------------- ----------------
1994 1995 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss for computing earnings
per common share -
without dilution and
fully diluted $ (771) $(3,916) $ (746) $(2,805)
====== ======= ====== =======
Weighted average number of common
shares outstanding - without
dilution 3,157 3,158 3,157 3,158
Addition from assumed exercise as of
the beginning of the period, of
common stock options outstanding
as of the end of the period,
reduced by the number of shares
assumed to have been repurchased
by the company with the proceeds
from exercise, at the average
market value per share during
the period 20 23 20 20
------ ------- ------ -------
Weighted average number of common
share and common share
equivalents outstanding 3,177 3,181 3,177 3,178
Addition from assumed exercise as
of the beginning of the period, of
common stock options outstanding as
of the end of the period, reduced
by the number of shares assumed to
have been repurchased by the
company with the proceeds from
exercise at the market value per
share as of the end of the period 2 5 2 8
------ ------- ------ -------
Weighted average number of common
shares and common share
equivalents outstanding, primary
and fully diluted 3,179 3,186 3,179 3,186
====== ======= ====== =======
Primary and fully diluted loss
per share $(.24) $(1.23) $(.23) $(.88)
====== ======= ====== =======
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT JUNE 30, 1995 AND ITS CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 134,450,000
<DEBT-CARRYING-VALUE> 34,034,000
<DEBT-MARKET-VALUE> 33,818,000
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 176,254,000
<CASH> 53,000
<RECOVER-REINSURE> 4,743,000
<DEFERRED-ACQUISITION> 12,629,000
<TOTAL-ASSETS> 232,057,000
<POLICY-LOSSES> 106,490,000
<UNEARNED-PREMIUMS> 49,738,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 32,000
0
0
<OTHER-SE> 68,562,000
<TOTAL-LIABILITY-AND-EQUITY> 232,057,000
46,102,000
<INVESTMENT-INCOME> 5,111,000
<INVESTMENT-GAINS> (832,000)
<OTHER-INCOME> 49,000
<BENEFITS> 39,359,000
<UNDERWRITING-AMORTIZATION> 12,563,000
<UNDERWRITING-OTHER> 4,882,000
<INCOME-PRETAX> (6,374,000)
<INCOME-TAX> (3,569,000)
<INCOME-CONTINUING> (2,805,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,805,000)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> (.88)
<RESERVE-OPEN> 97,614,000
<PROVISION-CURRENT> 28,923,000
<PROVISION-PRIOR> 10,136,000
<PAYMENTS-CURRENT> 9,101,000
<PAYMENTS-PRIOR> 24,030,000
<RESERVE-CLOSE> 103,542,000
<CUMULATIVE-DEFICIENCY> 10,136,000
</TABLE>
