<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, 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
--------------------------------------------------
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 July 22, 1996, 3,189,519 shares of Common Stock, $.01 par value
per share, were outstanding.
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 1995 1996
------ ----------- ----------
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity at amortized cost
(fair value $20,348 in 1995 and
$19,309 in 1996) $ 19,477 $ 19,502
Available for sale at fair value
(amortized cost $163,249 in 1995
and $161,832 in 1996) 163,778 158,858
Other long-term investments at
fair value (amortized cost
$6,053 in 1995 and $6,153 in 1996) 4,493 6,153
Short-term investments 4,470 14,421
-------- --------
Total investments 192,218 198,934
Cash 39 34
Interest due and accrued 1,886 1,771
Premiums receivable, net of allow-
ance for doubtful accounts of
$416 in 1995 and $601 in 1996 20,360 21,966
Deferred policy acquisition costs 12,165 12,110
Ceded reinsurance balances receivable 7,014 7,726
Prepaid reinsurance premiums 2,866 2,890
Receivable from affiliate 1,091 2,120
Federal income taxes receivable 3,143 2,228
Deferred federal income tax benefit 5,491 6,204
Other assets 6,535 6,778
-------- --------
Total assets $252,808 $262,761
======== ========
</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,
1995 1996
----------- ----------
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C>
Liabilities:
Reserve for losses and loss
adjustment expenses $ 119,722 $ 123,244
Unearned premiums 48,773 48,589
Payable for securities -- 8,786
Other liabilities 14,343 12,726
--------- ---------
Total liabilities 182,838 193,345
--------- ---------
Stockholders' equity:
Common stock, issued and outstanding
3,213,894 shares at December 31,
1995 and 3,189,519 shares at
June 30, 1996 32 32
Additional paid in capital 35,302 35,311
Treasury stock -- (441)
Unrealized investment losses,
net of tax (357) (1,962)
Accumulated earnings 34,993 36,476
--------- ---------
Total stockholders' equity 69,970 69,416
--------- ---------
Commitments and contingent liabilities -- --
Total liabilities and stock-
holders' equity $ 252,808 $ 262,761
========= =========
</TABLE>
See Notes to the Consolidated Financial Statements.
3
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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,
------------------- --------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 23,392 $ 24,432 $ 46,102 $ 47,873
Net investment income 2,588 2,807 5,111 5,607
Net realized investment
gains (losses) (832) 935 (832) 942
Other revenues (expenses) (224) (68) 49 58
-------- -------- -------- --------
Total revenues 24,924 28,106 50,430 54,480
-------- -------- -------- --------
Expenses:
Net losses and loss
adjustment expenses 23,517 17,575 39,359 36,392
Amortization of deferred
policy acquisition costs 6,284 6,474 12,563 12,686
Other underwriting expenses 3,022 1,406 4,882 3,079
-------- -------- -------- --------
Total expenses 32,823 25,455 56,804 52,157
-------- -------- -------- --------
Income (loss) before
income taxes (7,899) 2,651 (6,374) 2,323
Provision (benefit) for
income taxes (3,983) 586 (3,569) 519
-------- -------- -------- --------
Net income (loss) $ (3,916) $ 2,065 $ (2,805) $ 1,804
Primary and fully diluted
earnings (loss) per share $ (1.23) $ .64 $ (.88) $ .56
======== ======== ======== ========
Weighted average shares
outstanding:
Primary 3,181 3,210 3,178 3,217
Fully diluted 3,186 3,212 3,186 3,219
</TABLE>
See Notes to the Consolidated Financial Statements.
4
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 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 -- 9
-------- --------
End of period 34,678 35,311
-------- --------
Treasury stock:
Beginning of period -- --
Change during period -- (441)
-------- --------
End of period -- (441)
-------- --------
Unrealized investment losses,
net of tax:
Beginning of period (6,878) (357)
Change during the period 4,436 (1,605)
-------- --------
End of period (2,442) (1,962)
-------- --------
Accumulated earnings:
Beginning of period 39,447 34,993
Net income (loss) (2,805) 1,804
Cash dividend on common stock (316) (321)
-------- --------
End of period 36,326 36,476
-------- --------
Total stockholders' equity $ 68,594 $ 69,416
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements.
5
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MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE IN CASH
(in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
-----------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operations:
Collection of premiums $ 44,421 $ 44,973
Payment of losses and loss
adjustment expenses (33,428) (33,731)
Payment of other underwriting
expenses (16,047) (17,163)
Investment income received 5,402 5,716
Investment expenses paid (63) (119)
Income taxes paid (recovered) (345) 510
Other cash receipts 49 58
-------- --------
Net cash provided by
(used in) operations (11) 244
-------- --------
Cash flows from investing activities:
Proceeds from fixed maturities
sold or matured 6,947 28,965
Purchase of fixed maturities (7,854) (26,407)
Net (increase) decrease in other
long-term investments 12 (688)
Net (increase) decrease in
short-term investments 1,300 (9,951)
Purchase of equipment, net (43) (201)
-------- --------
Net cash provided by (used in)
investing activities 362 (8,282)
-------- --------
Cash flows from financing activities:
Cash borrowed to purchase securities -- 8,786
Purchase of treasury stock -- (441)
Exercise of common stock options -- 9
Cash dividend on common stock (316) (321)
-------- --------
Net cash provided by (used in)
financing activities (316) 8,033
-------- --------
Increase (decrease) in cash 35 (5)
Cash:
Beginning of period 18 39
-------- --------
End of period $ 53 $ 34
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements.
6
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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>
Six Months
Ended June 30,
----------------------
1995 1996
---- ----
<S> <C> <C>
Net income (loss) $(2,805) $ 1,804
Adjustments:
Depreciation and amortization 71 (27)
Realized investment (gains) losses 832 (942)
(Increase) decrease in assets:
Interest due and accrued 250 115
Premiums receivable (2,344) (1,606)
Deferred policy acquisition costs (1,042) 55
Ceded reinsurance balances receivable 2,889 (712)
Prepaid reinsurance premiums (394) (24)
Deferred federal income tax benefit (651) 114
Federal income taxes receivable -- 915
Receivable from affiliate (1,752) (1,029)
Other assets (3,400) (140)
Increase (decrease) in liabilities:
Reserve for losses and loss
adjustment expenses 2,475 3,522
Unearned premiums 4,289 (184)
Other liabilities 1,968 (1,617)
Payable to affiliate (397) --
------- -------
Net cash provided by operations $ (11) $ 244
======= =======
</TABLE>
See Notes to the Consolidated Financial Statements.
7
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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 June 30, 1996 and the related
consolidated statement of income, of changes in stockholders' equity and of
cash flows for the six months ended June 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 8.0%
of the Company's common stock at June 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.
8
<PAGE> 9
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
48,458 and 74,352 shares of common stock options in 1996 and 1995,
respectively, which would have resulted in 11,954 and 27,372 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 June 30, 1996.
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, 1996
- ------------------------------------------------------------
As Compared to the Six Months Ended June 30, 1995
- -------------------------------------------------
Total revenues increased by 8% from $50,430,000 for the six months
ended June 30, 1995 to $54,480,000 for the six months ended June 30, 1996.
Net premiums earned increased $1,771,000, or 4% from $46,102,000
in the six months ended June 30, 1995 to $47,873,000 in the six months ended
June 30, 1996. The increase in net premiums earned resulted 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 5% from $49,997,000 for the six
months ended June 30, 1995 to $47,665,000 for the six months ended June 30,
1996, primarily as a result of a $2,124,000 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 six months ended June 30, 1996.
Direct premiums written increased 3% from $48,637,000 for the six
months ended June 30, 1995 to $50,152,000 for the six months ended June 30,
1996.
Voluntary personal lines direct premiums written increased by 8% from
$16,502,000 in the six months ended June 30, 1995 to $17,862,000 in the six
months ended June 30, 1996, due to a 7% increase in private passenger a
utomobile ("PPA") direct premiums written and a 16% 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 5% increase in average
premium per policy compared to the prior year. The growth in homeowners
policies direct premiums written primarily resulted from a 3% increase in
policies in force and a 10% increase in average premium per policy compared
to the prior year.
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<PAGE> 11
Voluntary commercial lines direct premiums written decreased by 3%
from $28,828,000 in the six months ended June 30, 1995 to $28,097,000 in
the six months ended June 30, 1996. This decrease resulted primarily from a 10%
decrease in commercial lines policies in force, which was partially offset by
an increase in average premium per policy. Policies in force at June 30, 1996
declined from June 30, 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 six months ended June 30, 1995 and 1996 respectively, increased by 27% from
$3,307,000 in the six months ended June 30, 1995 to $4,193,000 in the six
months ended June 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 10% from $5,111,000 for the six
months ended June 30, 1995 to $5,607,000 for the six months ended June 30,
1996. Average invested assets during the six months ended June 30, 1996
increased 10% compared to the six months ended June 30, 1995. On a taxable
equivalent basis using statutory tax rates, net investment income increased 7%.
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 exempt
investments compared to the prior period.
During the six months ended June 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 six months ended June 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 realized $42,000 of pre-tax gains on the sale of
other investments which were sold during the six months ended June 30, 1996.
There were no material realized gains or losses from the sale of investments in
the six months ended June 30, 1995.
Other revenues of $58,000 for the six months ended June 30, 1996 were
substantially unchanged from $49,000 for the six months ended June 30, 1995.
11
<PAGE> 12
Net losses and loss adjustment expenses ("LAE") decreased by 8% from
$39,359,000 in the six months ended June 30, 1995, to $36,392,000 in the six
months ended June 30, 1996. The loss and LAE ratio decreased from 85.4% in the
six months ended June 30, 1995 to 76.0% in the six months ended June 30, 1996.
Losses and LAE in the six months ended June 30, 1996 included
$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 six
months ended June 30, 1996 by 4.6 percentage points.
During the second quarter of 1995, the Company increased its reserve
for losses and LAE related to prior accident years by $6,750,000 which added
14.6 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 37.8% for the
six months ended June 30, 1995 to 32.9% for the six months ended June 30, 1996.
Other underwriting expenses for the six months ended June 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 22.0% of net premiums
earned in the six months ended June 30, 1996 compared to 21.1% of net premiums
earned in the six months ended June 30, 1995.
The Company's effective federal income tax rate on operating income for
the six months ended June 30, 1996 was 22.3%. Tax-exempt bond income reduced
the Company's effective tax rate by 12 percentage points for the six months
ended June 30, 1996. 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 at June
30, 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,
- ---------------------------------------------------------
1996 As Compared to the Three Months Ended June 30, 1995
- --------------------------------------------------------
Net premiums earned increased by 4% from $23,392,000 for the three
months ended June 30, 1995 to $24,432,000 for the three months ended June 30,
1996. This increase in net premiums earned resulted 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 $27,350,000 for the
three months ended June 30, 1995 to $26,209,000 for the three months ended June
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 8% from $2,588,000 for the three
months ended June 30, 1995 to $2,807,000 for the three months ended June 30,
1996 due to a 9% increase in average invested assets. On a taxable equivalent
basis using statutory tax rates, net investment income increased by 6%.
The loss and LAE ratio decreased 28.6 percentage points from
100.5% for the three months ended June 30, 1995 to 71.9% for the three months
ended June 30, 1996. Losses and LAE in the three months ended June 30, 1995
included the $6,750,000 increase in reserves for prior year losses and LAE.
Excluding the effect of this increase in reserves for prior years recorded in
the six months ended June 30, 1995, the loss and LAE ratio increased by .2
percentage points.
The ratio of the amortization of deferred policy acquisition costs and
other underwriting expenses to net premiums earned decreased from 39.8% for the
three months ended June 30, 1995 to 32.3% for the three months ended June 30,
1996. Other underwriting expenses for the three months ended June 30, 1995
included the $1,100,000 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 provided by operations increased by $255,000 from an $11,000
use of cash in the six months ended June 30, 1995 to a $244,000 source of cash
in the six months ended June 30, 1996.
Net cash used in investing activities increased by $8,644,000 from a
$362,000 source of cash in the six months ended June 30, 1995 to a $8,282,000
use of cash in the six months ended June 30, 1996. This increase in net cash
used in investing activities resulted primarily from a $11,251,000 increase in
net cash used to purchase short-term investments.
Net cash provided by financing activities increased $8,349,000 from a
$316,000 use of cash in the six months ended June 30, 1995 to an $8,033,000
source of cash in the six months ended June 30, 1996. This increase was
primarily due to an $8,786,000 increase in funds borrowed to purchase
securities.
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, 1995, the Company had
recorded $357,000 of unrealized losses, net of tax, associated with its fixed
maturity investments. During the six months ended June 30, 1996 the Company
recorded a $1,605,000 increase in unrealized losses, net of tax. The increase
in unrealized losses primarily resulted from a rise in long-term interest rates
during the period.
14
<PAGE> 15
At June 30, 1996, the Company's bond portfolio represented 89.7% 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 June 30, 1996 $99,799,000, or 50.2%, of the Company's investment
portfolio was invested in mortgage-backed and other asset backed securities,
primarily 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 June 30, 1996 $4,180,000, or 2.1%, 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
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 six months
ended June 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.
15
<PAGE> 16
Mutual has on file 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 holders of
surplus advances are entitled to receive their equitable share of that
company's appraised fair market value in cash or securities or a combination
thereof. After the Department has determined Mutual's fair market value based
upon an independent appraisal, Mutual will have the right to submit a plan of
conversion which will then have to be approved by the Department and Mutual's
policyholders. 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. If Mutual decides to proceed
with its demutualization, the Company would consider acquiring Mutual if the
Company determines that the appraised value is acceptable and it has sufficient
capital to fund the acquisition. In the event Mutual decides not to proceed
with its demutualization, or it does proceed but 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 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.
16
<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 six months of 1996, MNH's ratio of net premiums
written to statutory surplus, annualized for a full year, was 2.0 to 1.
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 8, 1996 the Company held its annual meeting of stockholders.
During the meeting, Lawrence P. Castellani and Frank J. Colantuono were
re-elected Directors of the Company. Brent D. Baird, Richard E. Garman, 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 summary of stockholder voting with respect to the election of
Directors follows:
Election Election
of of
L. Castellani F. Colantouno
------------- -------------
For 2,494,832 2,498,732
Withheld 29,485 25,585
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.
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 1, 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 Six
Months Ended Months Ended
June 30, June 30,
------------------ ------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) for computing
earnings per common share
without dilution and
fully diluted $(3,916) $ 2,065 $(2,805) $ 1,804
======= ======= ======= =======
Weighted average number of common
shares outstanding - without
dilution 3,158 3,200 3,158 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 average market value per
share during the period 23 10 20 10
------- ------- ------- -------
Weighted average number of common
shares and common share
equivalents outstanding 3,181 3,210 3,178 3,217
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 5 2 8 2
------- ------- ------- -------
Weighted average number of common
shares and common share
equivalents outstanding, primary
and fully diluted 3,186 3,212 3,186 3,219
======= ======= ======= =======
Primary and fully diluted earnings
(loss) per share $ (1.23) $ .64 $ (.88) $ .56
======= ======= ======= =======
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 158,858,000
<DEBT-CARRYING-VALUE> 19,502,000
<DEBT-MARKET-VALUE> 19,309,000
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 198,934,000
<CASH> 34,000
<RECOVER-REINSURE> 7,726,000
<DEFERRED-ACQUISITION> 12,110,000
<TOTAL-ASSETS> 262,761,000
<POLICY-LOSSES> 123,244,000
<UNEARNED-PREMIUMS> 48,589,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 32,000
0
0
<OTHER-SE> 69,384,000
<TOTAL-LIABILITY-AND-EQUITY> 262,761,000
47,873,000
<INVESTMENT-INCOME> 5,607,000
<INVESTMENT-GAINS> 942,000
<OTHER-INCOME> 58,000
<BENEFITS> 36,392,000
<UNDERWRITING-AMORTIZATION> 12,686,000
<UNDERWRITING-OTHER> 3,079,000
<INCOME-PRETAX> 2,323,000
<INCOME-TAX> 519,000
<INCOME-CONTINUING> 1,804,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,804,000
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<RESERVE-OPEN> 113,708,000
<PROVISION-CURRENT> 36,723,000
<PROVISION-PRIOR> (844,000)
<PAYMENTS-CURRENT> 11,172,000
<PAYMENTS-PRIOR> 22,559,000
<RESERVE-CLOSE> 115,856,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
