<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 September, 30, 1996
------------------------------------------------
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
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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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x Yes No
---- ----
As of October 25, 1996, 3,136,069 shares of Common Stock, $.01 par value
per share, were outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1995 1996
------ ---------- -------------
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity at amortized cost
(fair value $20,348 in 1995 and
$19,390 in 1996) $ 19,477 $ 19,521
Available for sale at fair value
(amortized cost $163,249 in 1995
and $161,525 in 1996) 163,778 159,298
Other long-term investments at
fair value (amortized cost
$6,053 in 1995 and $7,158 in 1996) 4,493 7,158
Short-term investments 4,470 16,463
-------- --------
Total investments 192,218 202,440
Cash 39 255
Interest due and accrued 1,886 1,596
Premiums receivable, net of allow-
ance for doubtful accounts of
$416 in 1995 and $576 in 1996 20,360 20,733
Deferred policy acquisition costs 12,165 12,292
Ceded reinsurance balances receivable 7,014 8,299
Prepaid reinsurance premiums 2,866 2,865
Receivable from affiliate 1,091 2,817
Federal income taxes receivable 3,143 3,105
Deferred federal income tax benefit 5,491 5,440
Other assets 6,535 6,844
-------- --------
Total assets $252,808 $266,686
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements.
2
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MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands except share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Reserve for losses and loss
adjustment expenses $ 119,722 $ 126,265
Unearned premiums 48,773 49,249
Payable for securities -- 8,946
Other liabilities 14,343 13,170
--------- ---------
Total liabilities 182,838 197,630
--------- ---------
Stockholders' equity:
Common stock, issued and outstanding
3,213,894 shares at December 31,
1995 and 3,137,269 shares at
September 30, 1996 32 32
Additional paid in capital 35,302 35,340
Treasury stock, 80,000 shares at
September 30, 1996 -- (1,475)
Unrealized investment losses,
net of tax (357) (1,469)
Accumulated earnings 34,993 36,628
--------- ---------
Total stockholders' equity 69,970 69,056
--------- ---------
Commitments and contingent liabilities -- --
Total liabilities and stock-
holders' equity $ 252,808 $ 266,686
========= =========
</TABLE>
See Notes to the Consolidated Financial Statements.
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1995 1996 1995 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 24,432 $23,924 $ 70,534 $71,797
Net investment income 2,559 2,921 7,670 8,528
Net realized investment
gains (losses) -- 58 (832) 1,000
Other revenues 50 144 99 202
-------- ------- -------- -------
Total revenues 27,041 27,047 77,471 81,527
-------- ------- -------- -------
Expenses:
Net losses and loss
adjustment expenses 21,339 18,420 60,698 54,812
Amortization of deferred
policy acquisition costs 6,563 6,340 19,126 19,026
Other underwriting expenses 1,337 2,048 6,219 5,127
-------- ------- -------- -------
Total expenses 29,239 26,808 86,043 78,965
-------- ------- -------- -------
Income (loss) before
income taxes (2,198) 239 (8,572) 2,562
Provision (benefit) for
income taxes (202) 42 (3,771) 448
-------- ------- -------- -------
Net income (loss) $ (1,996) $ 197 $ (4,801) $ 2,114
======== ======= ======== =======
Primary and fully diluted
earnings (loss) per share $ (.62) $ .06 $ (1.49) $ .66
======== ======= ======== =======
Weighted average shares
outstanding:
Primary 3,219 3,182 3,218 3,207
Fully diluted 3,220 3,182 3,220 3,208
</TABLE>
See Notes to the Consolidated Financial Statements.
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1995 1996
-------- --------
<S> <C> <C>
Common stock, beginning and end $ 32 $ 32
-------- --------
Additional paid in capital:
Beginning of period 34,678 35,302
Exercise of common stock options 606 38
-------- --------
End of period 35,284 35,340
-------- --------
Treasury stock:
Beginning of period -- --
Change during period -- (1,475)
-------- --------
End of period -- (1,475)
-------- --------
Unrealized investment losses, net of tax:
Beginning of period (6,878) (357)
Change during the period 4,831 (1,112)
-------- --------
End of period (2,047) (1,469)
-------- --------
Accumulated earnings:
Beginning of period 39,447 34,993
Net income (loss) (4,801) 2,114
Cash dividend on common stock (474) (479)
-------- --------
End of period 34,172 36,628
-------- --------
Total stockholders' equity $ 67,441 $ 69,056
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements.
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE IN CASH
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operations:
Collection of premiums $ 70,948 $ 70,183
Payment of losses and loss
adjustment expenses (47,146) (49,737)
Payment of other underwriting
expenses (25,494) (25,174)
Investment income received 7,927 8,845
Investment expenses paid (94) (180)
Income taxes (paid) recovered (344) 213
Other cash receipts 99 202
-------- --------
Net cash provided by operations 5,896 4,352
-------- --------
Cash flows from investing activities:
Proceeds from fixed maturities
sold or matured 10,157 52,758
Purchase of fixed maturities (13,604) (49,815)
Net (increase) decrease in other
long-term investments 13 (1,703)
Net increase in short-term
investments (1,985) (11,993)
Purchase of equipment, net (61) (413)
-------- --------
Net cash used in investing
activities (5,480) (11,166)
-------- --------
Cash flows from financing activities:
Cash borrowed to purchase securities -- 8,946
Purchase of treasury stock -- (1,475)
Exercise of common stock options 606 38
Cash dividend on common stock (474) (479)
-------- --------
Net cash provided by
financing activities 132 7,030
-------- --------
Increase in cash 548 216
Cash:
Beginning of period 18 39
-------- --------
End of period $ 566 $ 255
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements.
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1995 1996
---- ----
<S> <C> <C>
Net income (loss) $ (4,801) $ 2,114
Adjustments:
Depreciation and amortization 88 2
Realized investment (gains) losses 832 (1,000)
(Increase) decrease in assets:
Interest due and accrued 215 290
Premiums receivable (2,579) (373)
Deferred policy acquisition costs (1,228) (127)
Ceded reinsurance balances receivable (931) (1,285)
Prepaid reinsurance premiums (437) 1
Deferred federal income tax benefit (855) 624
Federal income taxes receivable (3,260) 38
Receivable from affiliate (890) (1,726)
Other assets (57) (52)
Increase (decrease) in liabilities:
Reserve for losses and loss
adjustment expenses 14,214 6,543
Unearned premiums 5,024 476
Other liabilities 958 (1,173)
Payable to affiliate (397) --
-------- -------
Net cash provided by operations $ 5,896 $ 4,352
======== =======
</TABLE>
See Notes to the Consolidated Financial Statements.
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MERCHANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated balance sheet as of September 30, 1996 and the related
consolidated statement of income, of changes in stockholders' equity and of cash
flows for the nine months ended September 30, 1995 and 1996 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 September 30, 1996, 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.
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3. Earnings Per Share
------------------
Primary and fully diluted earnings (loss) per share were computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during each period, increased by the assumed exercise of 45,708 and
23,021 shares of common stock options in 1996 and 1995, respectively, which
would have resulted in 9,785 and 6,499 additional primary shares outstanding,
respectively, assuming the proceeds to the Company from exercise were used to
purchase shares of the Company's common stock, at its market value per share as
of September 30, 1996.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations for the Nine Months Ended September 30, 1996 As Compared
- ------------------------------------------------------------------------------
to the Nine Months Ended September 30, 1995
- -------------------------------------------
Total revenues increased 5% from $77,471,000 for the nine months ended
September 30, 1995 to $81,527,000 for the nine months ended September 30, 1996.
Net premiums earned increased $1,263,000, or 2% from $70,534,000 in the nine
months ended September 30, 1995 to $71,797,000 in the nine months ended
September 30, 1996. The increase in net premiums earned resulted primarily from
a higher contribution to 1996 earnings from unearned premiums at December 31,
1995 compared to the contribution to 1995 earnings from unearned premiums at
December 31, 1994.
Net premiums written decreased by 4% from $75,121,000 for the nine months
ended September 30, 1995 to $72,273,000 for the nine months ended September 30,
1996, as a result of a $3,182,000 decrease in written premiums assumed from
Mutual under the quota share reinsurance agreement between MNH and Mutual. In
December 1995, Mutual informed MNH that it was not terminating the agreement,
but was exercising its right under the agreement to eliminate all cessions of
its voluntary direct written premiums to MNH for calendar year 1996, while
retaining the right to resume such cessions, up to the 10% level, for subsequent
years. As a result, MNH assumed no written premiums from Mutual during the nine
months ended September 30, 1996.
The decrease in written premiums assumed from Mutual was somewhat offset by a
2% increase in direct premiums written from $73,795,000 for the nine months
ended September 30, 1995 to $75,207,000 for the nine months ended September
30, 1996.
Voluntary personal lines direct premiums written increased by 8% from
$25,987,000 in the nine months ended September 30, 1995 to $27,995,000 in the
nine months ended September 30, 1996, due to a 6% increase in private passenger
automobile ("PPA") direct premiums written and a 14% increase in homeowners
direct premiums written.
The growth in PPA direct premiums written was primarily the result of a 2%
increase in policies in force and a 3% increase in average premium per policy
compared to the prior year. The growth in homeowners policies direct premiums
written primarily resulted from a 4% increase in policies in force and an 8%
increase in average premium per policy compared to the prior year.
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Voluntary commercial lines direct premiums written decreased by 3% from
$42,526,000 in the nine months ended September 30, 1995 to $41,143,000 in the
nine months ended September 30, 1996. This decrease resulted primarily from a
16% decrease in commercial lines policies in force, which was partially offset
by a 14% increase in average premium per policy. Beginning in 1995 and
continuing in 1996, the Company has increased its mandatory deductibles and its
minimum premium level on certain of its commercial lines of business, primarily
its businessowners and multi-peril lines. These actions were designed to
eliminate certain small premium policies which were generally unprofitable and
significantly contributed to the decrease in commercial lines policies in force
and the increase in average premium per policy. Policies in force at September
30, 1996 declined from December 31, 1995 in each of the MNH's commercial lines
of business.
Involuntary direct premiums written, primarily involuntary PPA insurance,
which comprised 7% and 8% of total direct premiums written during the nine
months ended September 30, 1995 and 1996 respectively, increased by 15% from
$5,282,000 in the nine months ended September 30, 1995 to $6,069,000 in the nine
months ended September 30, 1996. This increase resulted primarily from
additional policy premiums related to an increase in the legally required
minimum automobile policy limits in New York State, which became effective
January 1, 1996.
Net investment income increased by 11% from $7,670,000 for the nine months
ended September 30, 1995 to $8,528,000 for the nine months ended September 30,
1996. Average invested assets during the nine months ended September 30, 1996
increased 8% compared to the nine months ended September 30, 1995. The average
portfolio yield increased 3% compared to the year earlier period. On a taxable
equivalent basis using statutory tax rates, net investment income increased 8%.
The percentage increase in net investment income on a taxable equivalent basis
was lower than the percentage increase in net investment income due to a
reduction in the percentage of invested assets allocated to tax-advantaged
investments compared to the prior period.
During the nine months ended September 30, 1996 the Company sold its
investment in Signet Group PLC ("Signet") cumulative auction rate preference
shares and recognized a realized gain of $900,000 before taxes. These shares had
been included in other long-term investments and were carried at fair value.
During the nine months ended September 30, 1995, the Company recorded an
$840,000 unrealized loss on its investment in Signet, which was included as a
component of realized investment gains and losses in the Company's consolidated
statement of income. In addition to the realized gain related to its investment
in Signet, the Company also
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realized $100,000 of net pre-tax gains on the sale of other investments during
the nine months ended September 30, 1996. There were no material realized gains
or losses from the sale of investments in the nine months ended September 30,
1995.
Other revenues increased 104% from $99,000 for the nine months ended
September 30, 1995 to $202,000 for the nine months ended September 30, 1996.
Net losses and loss adjustment expenses ("LAE") decreased by 10% from
$60,698,000 in the nine months ended September 30, 1995, to $54,812,000 in the
nine months ended September 30, 1996. The loss and LAE ratio decreased from
86.1% in the nine months ended September 30, 1995 to 76.3% in the nine months
ended September 30, 1996.
During the third quarter of 1996 the Company increased its reserve for losses
and LAE related to workers compensation policies written in 1991 through 1994 by
approximately $1,500,000. This increase in the reserve for prior year losses and
LAE added 2.1 percentage points to the loss and LAE ratio for the nine months
ended September 30, 1996.
Losses and LAE in the nine months ended September 30, 1996 also include
$2,200,000 of losses related to unusually severe winter weather that affected
the northeastern United States during the first quarter of 1996. These higher
than normal weather related losses increased the loss and LAE ratio in the nine
months ended September 30, 1996 by 3.1 percentage points.
During the nine months ended September 30, 1995, the Company increased its
reserve for losses and LAE related to prior accident years by $12,550,000 which
added 17.8 percentage points to the loss and LAE ratio.
The ratio of the amortization of deferred policy acquisition costs and other
underwriting expenses to net premiums earned decreased from 35.9% for the nine
months ended September 30, 1995 to 33.6% for the nine months ended September 30,
1996. Other underwriting expenses for the nine months ended September 30, 1995
included approximately $1,100,000 associated with the 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 20.8% of net premiums earned in
the nine months ended September 30, 1996 compared to 20.3% of net premiums
earned in the nine months ended September 30, 1995.
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The Company's effective federal income tax rate on operating income for the
nine months ended September 30, 1996 was 21.5%. Tax-advantaged bond income
reduced the Company's effective tax rate by 14.1 percentage points for the nine
months ended September 30, 1996. During the nine months ended September 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 at September 30, 1995 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.
Results of Operations for the Three Months Ended
- -------------------------------------------------
September 30, 1996 As Compared to the Three Months Ended September 30, 1995
- ---------------------------------------------------------------------------
Net premiums earned decreased by 2% from $24,432,000 for the three months
ended September 30, 1995 to $23,924,000 for the three months ended September 30,
1996. This decrease in net premiums earned resulted primarily from a $1,057,000
reduction in premiums earned assumed from Mutual under the quota share
reinsurance agreement between Mutual and MNH.
Net premiums written decreased by 2% from $25,124,000 for the three months
ended September 30, 1995 to $24,608,000 for the three months ended September 30,
1996 primarily due to Mutual's elimination of all cessions of its voluntary
direct written premiums to MNH for calendar year 1996 under the quota share
reinsurance agreement between MNH and Mutual.
Net investment income increased by 14% from $2,559,000 for the three months
ended September 30, 1995 to $2,921,000 for the three months ended September 30,
1996 due to a 7% increase in average invested assets and a 6% increase in
portfolio yield. On a taxable equivalent basis using
statutory tax rates, net investment income increased by 10%.
The loss and LAE ratio decreased 10.3 percentage points from 87.3% for the
three months ended September 30, 1995 to 77.0% for the three months ended
September 30, 1996. Losses and LAE in the three months ended September 30, 1996
included an increase in the reserve for losses and LAE incurred in 1991 through
1994 in the workers compensation line of business of approximately $1,500,000.
Losses and LAE in the three months ended September 30, 1995 included a
$5,800,000 increase in reserves for prior year losses and LAE.
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The ratio of the amortization of deferred policy acquisition costs and other
underwriting expenses to net premiums earned increased from 32.3% for the three
months ended September 30, 1995 to 35.1% for the three months ended September
30, 1996. Commissions related to the Company's estimated payments under a profit
sharing agreement with its agents, New York franchise taxes and salaries,
accounted for 1.1, 1.0 and .5 percentage points respectively, of this increase.
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.
Net cash provided by operations decreased by $1,544,000 from $5,896,000 in
the nine months ended September 30, 1995 to a $4,352,000 in the nine months
ended September 30, 1996, primarily due to a $2,591,000 increase in payments of
loss and loss adjustment expenses.
Net cash used in investing activities increased by $5,685,000 from $5,480,000
in the nine months ended September 30, 1995 to $11,165,000 in the nine months
ended September 30, 1996. This increase in net cash used in investing activities
resulted primarily from a $10,008,000 increase in net cash used to purchase
short-term investments.
Net cash provided by financing activities increased $6,897,000 from $132,000
in the nine months ended September 30, 1995 to $7,029,000 in the nine months
ended September 30, 1996. This increase was primarily due to an $8,946,000
increase in funds borrowed to purchase securities.
The Company has several objectives with respect to its investment portfolio,
which include maximizing after-tax total return while protecting policyholders'
surplus, maintaining flexibility and liquidity, and maintaining a reasonable
duration link 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 correlated, 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
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<PAGE> 15
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, 1995, the Company had recorded $357,000 of
unrealized losses, net of tax, associated with its fixed maturity investments.
During the nine months ended September 30, 1996 the Company recorded a
$1,112,000 increase in unrealized losses, net of tax.
At September 30, 1996, the Company's bond portfolio represented 88.3% 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 1996. 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 September 30, 1996, $105,618,000, or 52.2%, of the Company's investment
portfolio was invested in mortgage- backed and other asset backed securities,
including planned amortization class ("PAC") and sequential pay collateralized
mortgage obligations ("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 September 30, 1996 $3,325,000, or 1.6%, 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
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<PAGE> 16
MNH could pay during any twelve month period ending in 1996 without the prior
approval of the New Hampshire Insurance Commissioner is $4,661,000. MNH has not
paid any dividends to the Company during the nine months ended September 30,
1996.
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.
Mutual had filed an application in November 1994 with the New York Insurance
Department (the "Department") to convert from a mutual to a stock company, and
the Company had advised Mutual and the Department of its interest in sponsoring
Mutual's demutualization pursuant to a right of first refusal which Mutual had
previously granted to the Company. On September 6, 1996, Mutual advised the
Company that because of the significant improvement in Mutual's financial
condition, Mutual had withdrawn its demutualization application with the
Department. Since then the Company and Mutual have discussed possible
alternatives to Mutual's demutualization, including a pooling of their insurance
operations and modifications to the management agreement. State insurance
department approvals would be required depending on what alternatives, if any,
were agreed to. However, no agreement has been reached on any of these possible
alternatives, and, in the absence of the adoption of any such alternatives,
Mutual will continue to provide employees, services and facilities for the
Company and MNH under the management agreement, subject to any party's right to
terminate that agreement on five years' notice.
MNH, like many other property and casualty insurance companies, is subject to
environmental damage claims asserted by or against its insureds. Management of
the Company is of the opinion that based on various court decisions throughout
the country, such claims should not be recoverable under the terms of MNH's
insurance policies because of either specific or general coverage exclusions
contained in the policies. However, there is no assurance that the courts will
agree with MNH's position in every case, nor can there be assurance that
material claims will not be asserted under policies which a court will find do
not explicitly or implicitly exclude claims for environmental damages.
Management, however, is not aware of any pending claim or group of claims which
would result in a liability that would have a material adverse effect on the
financial condition of the Company or MNH.
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<PAGE> 17
Industry and regulatory guidelines suggest that the ratio of a property and
casualty insurer's annual net premiums written to its statutory surplus should
not exceed 3 to 1. The Company has consistently followed a business strategy
that would allow MNH to meet this 3 to 1 regulatory guideline. For the first
nine months of 1996, MNH's ratio of net premiums written to statutory surplus,
annualized for a full year, was 2.0 to 1.
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<PAGE> 18
PART II. OTHER INFORMATION
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
No reports on Form 8-K were filed during the period for
which this report is filed.
* * * * * * *
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
With the exception of historical information, the matters and statements
discussed, made or incorporated by reference in this Quarterly Report on Form
10-Q constitute forward-looking statements and are discussed, made or
incorporated by reference, as the case may be, pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve certain assumptions, risks and uncertainties
that could cause actual results to differ materially from those included in or
contemplated by the statements. These assumptions, risks and uncertainties
include, but are not limited to, those associated with factors affecting the
property-casualty insurance industry generally, including price competition,
size and frequency of claims, increasing crime rates, escalating damage awards,
natural disasters, fluctuations in interest rates and general business
conditions; the Company's dependence on investment income; the geographic
concentration of the Company's business in the Northeastern United States and in
particular in New York, New Hampshire, New Jersey, Rhode Island, Pennsylvania
and Massachusetts; the adequacy of the Company's loss reserves; government
regulation of the insurance industry; exposure to environmental claims;
dependence of the company on its relationship with Mutual; and the other risks
and uncertainties discussed or indicated in all documents filed by the Company
with the Commission. The Company expressly disclaims any obligation to update
any forward-looking statements as a result of developments occurring
after the filing of this report.
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: November 12, 1996 By:/s/ Robert M. Zak
------------------
Robert M. Zak
Chief Operating Officer
(duly authorized officer
of the registrant
and principal financial
officer)
19
<PAGE> 1
Exhibit 11
MERCHANTS GROUP, INC.
Computation of Income Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------ ------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) for computing
earnings per common share
without dilution and
fully diluted $(1,996) $ 197 $(4,801) $2,114
====== ===== ======= ======
Weighted average number of common
shares outstanding - without
dilution 3,213 3,172 3,213 3,197
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 6 10 5 10
------ ----- ------- -----
Weighted average number of common
shares and common share
equivalents outstanding 3,219 3,182 3,218 3,207
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 1 -- 2 1
------ ----- ------- -----
Weighted average number of common
shares and common share
equivalents outstanding, primary
and fully diluted 3,220 3,182 3,220 3,208
====== ===== ======= =====
Primary and fully diluted earnings
(loss) per share $ (.62) $ .06 $ (1.49) $ .66
====== ===== ======= =====
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 159,298,000
<DEBT-CARRYING-VALUE> 19,521,000
<DEBT-MARKET-VALUE> 19,390,000
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 202,440,000
<CASH> 255,000
<RECOVER-REINSURE> 8,299,000
<DEFERRED-ACQUISITION> 12,292,000
<TOTAL-ASSETS> 266,686,000
<POLICY-LOSSES> 126,265,000
<UNEARNED-PREMIUMS> 49,249,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 32,000
0
0
<OTHER-SE> 69,024,000
<TOTAL-LIABILITY-AND-EQUITY> 266,686,000
71,797,000
<INVESTMENT-INCOME> 8,528,000
<INVESTMENT-GAINS> 1,000,000
<OTHER-INCOME> 202,000
<BENEFITS> 54,812,000
<UNDERWRITING-AMORTIZATION> 19,026,000
<UNDERWRITING-OTHER> 5,127,000
<INCOME-PRETAX> 2,562,000
<INCOME-TAX> 448,000
<INCOME-CONTINUING> 2,114,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,114,000
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<RESERVE-OPEN> 113,708,000
<PROVISION-CURRENT> 53,312,000
<PROVISION-PRIOR> 1,500,000
<PAYMENTS-CURRENT> 19,269,833
<PAYMENTS-PRIOR> 30,964,167
<RESERVE-CLOSE> 118,286,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
