<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
-------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
COMMISSION FILE NUMBER 1-9640
-------------
MERCHANTS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
16-1280763
(I.R.S. Employer Identification No.)
250 MAIN STREET, BUFFALO, NEW YORK
(Address of principal executive offices)
14202
(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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ x ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 26, 2000:
2,515,352 SHARES OF COMMON STOCK.
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1999 2000
------ -------- --------
(unaudited)
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity at amortized cost (fair value
$14,705 in 1999 and $14,687 in 2000) $ 14,547 $ 14,485
Available for sale at fair value (amortized cost
$183,209 in 1999 and $176,895 in 2000) 182,082 174,391
Preferred stock at fair value 12,941 13,201
Other long-term investments at fair value 797 1,007
Short-term investments 2,544 6,670
-------- --------
Total investments 212,911 209,754
Cash 2 2
Interest due and accrued 2,117 2,241
Premiums receivable, net of allowance for doubtful
accounts of $431 in 1999 and $405 in 2000 19,964 19,020
Deferred policy acquisition costs 12,309 11,923
Ceded reinsurance balances receivable 5,396 6,321
Prepaid reinsurance premiums 3,168 3,179
Deferred income taxes 6,002 6,421
Other assets 7,654 7,409
-------- --------
Total assets $269,523 $266,270
======== ========
</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, March 31,
1999 2000
--------- --------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Reserve for losses and loss adjustment expenses $ 133,526 $ 135,059
Unearned premiums 49,616 48,170
Demand loan 1,025 700
Payable to affiliate 618 1,586
Other liabilities 15,351 12,912
--------- ---------
Total liabilities 200,136 198,427
--------- ---------
Stockholders' equity:
Common stock, 10,000,000 shares authorized, 2,595,852 shares issued and
outstanding at December 31, 1999 and 2,520,652 shares issued and
outstanding at March 31, 2000 32 32
Additional paid in capital 35,680 35,680
Treasury stock, 646,000 shares at December 31, 1999
and 721,200 shares at March 31, 2000 (13,139) (14,570)
Accumulated other comprehensive loss (1,188) (1,611)
Accumulated earnings 48,002 48,312
--------- ---------
Total stockholders' equity 69,387 67,843
--------- ---------
Commitments and contingent liabilities - -
Total liabilities and stockholders' equity $ 269,523 $ 266,270
========= =========
</TABLE>
See Notes to the Consolidated Financial Statements
3
<PAGE> 4
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
------- -------
(unaudited)
<S> <C> <C>
Revenues:
Net premiums earned $23,662 $23,033
Net investment income 3,271 3,456
Net realized investment gains 1 -
Other revenues 142 66
------- -------
Total revenues 27,076 26,555
------- -------
Expenses:
Net losses and loss adjustment expenses 16,327 17,493
Amortization of deferred policy acquisition costs 6,270 6,104
Other underwriting expenses 1,984 1,686
------- -------
Total expenses 24,581 25,283
------- -------
Income before income taxes 2,495 1,272
Income tax provision 846 455
------- -------
Net income $ 1,649 $ 817
======= =======
Basic and diluted earnings per share $ .58 $ .32
======= =======
Weighted average shares outstanding:
Basic 2,846 2,560
Diluted 2,854 2,562
</TABLE>
See Notes to the Consolidated Financial Statements
4
<PAGE> 5
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
------- ------
(unaudited)
<S> <C> <C>
Net income $1,649 $ 817
------ -------
Other comprehensive loss before taxes:
Unrealized losses on securities (78) (792)
Reclassification adjustment
for gains and losses included
in net income (16) -
------ -------
Other comprehensive loss before taxes (94) (792)
Income tax benefit related to items
of other comprehensive loss (32) (369)
------ -------
Other comprehensive loss (62) (423)
------ -------
Comprehensive income $1,587 $ 394
====== =======
</TABLE>
See Notes to the Consolidated Financial Statements
5
<PAGE> 6
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Common stock, beginning and end $ 32 $ 32
-------- --------
Additional paid in capital:
Beginning of period 35,511 35,680
Exercise of common stock options 66 -
-------- --------
End of period 35,577 35,680
-------- --------
Treasury stock:
Beginning of period (7,097) (13,139)
Purchase of treasury shares (751) (1,431)
-------- --------
End of period (7,848) (14,570)
-------- --------
Accumulated other comprehensive income (loss):
Beginning of period 1,173 (1,188)
Other comprehensive loss (62) (423)
-------- --------
End of period 1,111 (1,611)
-------- --------
Accumulated earnings:
Beginning of period 42,164 48,002
Net income 1,649 817
Cash dividends (466) (507)
-------- --------
End of period 43,347 48,312
-------- --------
Total stockholders' equity $ 72,219 $ 67,843
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements
6
<PAGE> 7
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
--------- --------
(unaudited)
<S> <C> <C>
Cash flows from operations:
Collection of premiums $ 22,050 $ 22,216
Payment of losses and loss adjustment expenses (17,361) (16,513)
Payment of other underwriting expenses (9,513) (9,882)
Investment income received 3,374 3,340
Investment expenses paid (91) (106)
Income taxes paid (2) (217)
Other 142 (6)
-------- --------
Net cash used in operations (1,401) (1,168)
-------- --------
Cash flows from investing activities:
Proceeds from fixed maturities sold or matured 32,276 10,299
Purchase of fixed maturities (27,082) (3,170)
Net increase in preferred stock - (330)
Net (increase) decrease in other long-term investments 120 (210)
Net increase in short-term investments (2,395) (4,126)
Disposition of equipment 697 -
-------- --------
Net cash provided by investing activities 3,616 2,463
-------- --------
Cash flows from financing activities:
Settlement of affiliate balances (1,063) 968
Decrease in demand loan, net - (325)
Proceeds from exercise of common stock options 66 -
Purchase of treasury stock (751) (1,431)
Cash dividends (466) (507)
-------- --------
Net cash used in financing activities (2,214) (1,295)
-------- --------
Increase in cash 1 -
Cash:
Beginning of period 16 2
-------- --------
End of period $ 17 $ 2
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements
7
<PAGE> 8
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
--------- --------
(unaudited)
<S> <C> <C>
Net income $ 1,649 $ 817
Adjustments:
Depreciation and amortization (11) (98)
Realized investment gains (1) -
(Increase) decrease in assets:
Interest due and accrued 73 (124)
Premiums receivable 967 944
Deferred policy acquisition costs 407 386
Ceded reinsurance balances receivable (323) (925)
Prepaid reinsurance premiums (84) (11)
Deferred income taxes 109 (50)
Other assets (67) 245
Increase (decrease) in liabilities:
Reserve for losses and loss adjustment expenses (1,788) 1,533
Unearned premiums (1,452) (1,446)
Other liabilities (880) (2,439)
--------- --------
Net cash used in operations $ (1,401) $ (1,168)
========= ========
</TABLE>
See Notes to the Consolidated Financial Statements
8
<PAGE> 9
MERCHANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 2000 and the related consolidated
statements of operations, of comprehensive income, of changes in stockholders'
equity and of cash flows for the three months ended March 31, 1999 and 2000,
respectively, 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 accompanying
consolidated financial statements should be read in conjunction with the
following notes and the Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
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. Certain
prior year balances have been reclassified to conform with current year
presentation.
2. RELATED PARTY TRANSACTIONS
The Company and MNH have no paid employees. Under a management agreement dated
September 26, 1986 (the Management Agreement), Merchants Mutual Insurance
Company (Mutual), which owned 10.1% of the Company's common stock at March 31,
2000, 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.
3. EARNINGS PER SHARE
Basic and diluted earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during each
period, increased by the assumed exercise of 8,000 and 65,750 shares of common
stock options in 2000 and 1999, respectively, which would have resulted in 1,825
and 8,128 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 THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1999
Total revenues for the three months ended March 31, 2000 were $26,555,000, a
decrease of $521,000 or 2%, from $27,076,000 for the three months ended March
31, 1999.
Direct premiums written for the three months ended March 31, 2000 were
$23,469,000, an increase of $188,000, or 1%, from $23,281,000 for the three
months ended March 31, 1999. Voluntary direct premiums written for the three
months ended March 31, 2000 were $23,213,000, an increase of $389,000 or 2%,
from $22,824,000 for the three months ended March 31, 1999.
Voluntary personal lines direct premiums written for the three months ended
March 31, 2000 were $8,464,000, a decrease of $621,000, or 7%, from $9,085,000
for the three months ended March 31, 1999. Private passenger automobile (PPA)
direct premiums written, which represented 78% and 80% of total voluntary
personal lines direct premiums written for the three months ended March 31, 2000
and 1999, respectively, decreased 9% from the year earlier period. PPA direct
premiums written decreased primarily due to fewer new policies being issued and
fewer renewal policies being retained, resulting from priced-based market
competition. Homeowners direct premiums written for the three months ended March
31, 2000 increased 2% compared to the three months ended March 31, 1999.
Voluntary commercial lines direct premiums written for the three months ended
March 31, 2000 were $14,749,000, an increase of $1,010,000, or 7%, from
$13,739,000 for the three months ended March 31, 1999, primarily due to
increases in commercial automobile (14%) and contractors coverall (12%) premiums
written. The increase in commercial automobile direct written premiums was
primarily due to a 21% increase in policies in force at March 31, 2000 compared
to March 31, 1999, somewhat offset by a decrease in average premium per
commercial automobile policy. The increase in contractors coverall direct
written premiums was attributable to a 13% increase in policies in force at
March 31, 2000 compared to the year earlier period.
Involuntary direct premiums written, primarily PPA insurance, which comprised 1%
and 2% of all direct premiums written during the three months ended March 31,
2000 and 1999, respectively, decreased by $201,000, or 44%, to $256,000 in the
three months ended March 31, 2000 from $457,000 for the three months ended March
31, 1999 because the New York Automobile Insurance Plan (NYAIP) continues to
adjust assignments as a result of having over-assigned policies to the Company
in 1997 and due to an overall decrease in the NYAIP pool of business.
Net premiums written decreased $550,000, or 2%, to $21,577,000 for the three
months ended March 31, 2000 from $22,127,000 for the three months ended March
31, 1999, primarily due to a $427,000 decrease in premiums assumed from
involuntary market facilities and the $201,000 decrease in involuntary direct
premiums written.
Net premiums earned for the three months ended March 31, 2000 were $23,033,000,
a decrease of $629,000 (3%) from $23,662,000 for the three months ended March
31, 1999, primarily due to a $370,000
10
<PAGE> 11
decrease in earned premiums assumed from involuntary market facilities and a
$580,000 decrease in involuntary direct earned premiums, primarily NYAIP earned
premiums.
Net investment income was $3,456,000 for the three months ended March 31, 2000,
an increase of 6% from $3,271,000 for the three months ended March 31, 1999. The
average pre-tax yield associated with the investment portfolio increased 33
basis points to 6.65%. Average invested assets for the three months ended March
31, 2000 increased less than 1% compared to the year earlier period.
Losses and loss adjustment expenses (LAE) were $17,493,000 for the three months
ended March 31, 2000, an increase of $1,166,000, or 7%, from $16,327,000 for the
three months ended March 31, 1999. The loss and LAE ratio increased to 75.9% for
the three months ended March 31, 2000 from 69.0% for the three months ended
March 31, 1999. The increase in losses and LAE resulted from an increase in
claims frequency experienced in the first quarter of 2000, primarily for private
passenger automobile and commercial automobile policies.
The ratio of amortized deferred policy acquisition costs and other underwriting
expenses to net premiums earned decreased to 33.8% for the three months ended
March 31, 2000 from 34.9% for the three months ended March 31, 1999, primarily
due to lower agency incentive commissions resulting from the higher loss and LAE
ratio. 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 three months ended March 31, 2000 compared to 22.0% of net premiums earned
in the three months ended March 31, 1999.
The Company's effective income tax rate for the three months ended March 31,
2000 was 35.8%. This rate was calculated based upon the Company's estimate of
its effective income tax rate for all of 2000. Non-taxable investment income,
primarily tax-exempt bond income, reduced the Company's effective tax rate by
approximately five percentage points.
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 income
from investments, has provided the Company with short-term funds in excess of
normal operating demands for cash.
The Company's objectives with respect to its investment portfolio include
maximizing total return while protecting stockholders' equity and maintaining
flexibility. 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 relative to the duration of its liabilities are
closely managed, 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
11
<PAGE> 12
as a component of accumulated other comprehensive income within stockholders'
equity. At March 31, 2000, the Company had recorded $1,611,000 of unrealized
losses, net of taxes, associated with its investments classified as "available
for sale" as accumulated other comprehensive income. During the three months
ended March 31, 2000 the Company recorded $423,000 of unrealized losses, net of
tax, associated with its available for sale investments.
At March 31, 2000, the Company's portfolio of fixed maturities represented 90.0%
of invested assets. Management believes that this level of bond holdings is
consistent with the Company's liquidity needs because it anticipates that cash
receipts from net premiums written and investment income will enable the Company
to satisfy its cash obligations. Furthermore, a 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 March 31, 2000, $99,133,000, or 52.5%, of the Company's fixed maturity
portfolio was invested in mortgage-backed and other-asset backed securities. The
Company invests in a variety of collateralized mortgage obligation (CMO)
products but has not invested in the derivative type 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.
At March 31, 2000, $9,656,000, or 4.6%, of the Company's investment portfolio
was invested in non-investment grade securities compared to $5,663,000, or 2.7%,
at March 31, 1999. All of the Company's non-investment grade securities are
currently performing to the Company's purchase expectations.
During the three months ended March 31, 2000, the Company repurchased 75,200
shares of its common stock at an average price per share of $19.03. The Company
was holding 721,200 shares of its common stock in treasury at March 31, 2000.
The Company has arranged for a $2,000,000 unsecured credit facility from a bank
in the form of a master grid note. Any borrowings under this facility are
payable on demand and carry an interest rate which can be fixed or variable and
is negotiated at the time of each advance. This facility is available for
general working capital purposes and for repurchases of the Company's common
stock. At March 31, 2000, $700,000 was outstanding on this loan.
As a holding company, the Company is dependent on cash dividends from MNH to
meet its obligations, pay any cash dividends and repurchase its shares. 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
31st. The maximum amount of dividends that MNH could pay during any twelve month
period ending in 2000 without the prior approval of the New Hampshire Insurance
Commissioner is $5,328,000. MNH paid the maximum allowable dividend to the
Company in 1999. Dividends were paid in January 1999, May 1999 and September
1999, of $2,000,000, $1,400,000 and $1,600,000, respectively. MNH paid a
dividend of $2,200,000 to the Company on February 14, 2000 and as such is
restricted from
12
<PAGE> 13
paying another dividend to the Company until May 2000. The Company declared cash
dividends to its common stockholders of $.20 per share in the first quarter of
2000 amounting to $507,000.
Under the Management Agreement, Mutual provides employees, services and
facilities for MNH to conduct its insurance business on a cost reimbursed basis.
The balance in the payable to or receivable from affiliate account represents
the amount owing to or owed by Mutual to the Company for the difference between
premiums collected and payments made for losses, employees, services and
facilities by Mutual on behalf of MNH.
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. MNH has consistently followed a business strategy that would allow it to
meet this 3 to 1 regulatory guideline. For the first three months of 2000 MNH's
ratio of net premiums written to statutory surplus, annualized for a full year,
was 1.7 to 1.
YEAR 2000
The Year 2000 issue relates to the way in which information systems distinguish
date data between the twentieth and twenty-first centuries. Also, many systems
and equipment that are not typically thought of as relating to computers contain
embedded hardware or software ("non-IT") that may have a time element. The
Company has not encountered any Year 2000 related problems as of the date of
this report.
MNH continues to evaluate the complex issues related to insurance coverage for
losses arising from the various possible situations involving Year 2000 problems
and its potential liability to its insureds. The Company believes that the
coverages MNH provides do not extend to the types of losses which are most
likely to occur as a result of Year 2000 problems. For certain classes of
commercial risks, MNH adopted endorsements to its policies that exclude coverage
for losses resulting from Year 2000 problems based on forms provided and filed
for approval with various regulatory authorities by the Insurance Services
Office, Inc. Use of these special endorsements is governed by the law and
regulatory policies of states in which MNH is authorized to do business.
It is possible, however, that future court interpretations of policy language
based on specific facts, or legislation mandating coverage, could result in
coverage for losses attributable to Year 2000 problems. Such decisions or
legislation could have a material adverse impact on MNH's results of operations
and financial condition. It is also possible that MNH may incur expenses
defending claims for which it is ultimately determined there is no insurance
coverage. MNH has made no provision for reserves for losses or LAE on claims
based on potential Year 2000 problems.
RELATIONSHIP WITH MUTUAL
The Company's and MNH's business and day-to-day operations are closely
aligned with those of Mutual. This is the result of a combination of factors.
Mutual has had a historical ownership interest in the Company and MNH. Prior to
November 1986 MNH was a wholly-owned subsidiary of Mutual. Following the
Company's initial public offering in November 1986 and until a secondary stock
offering in July 1993 the Company was a majority-owned subsidiary of Mutual.
Mutual currently owns 10.1% of the Company's common stock. Under the Management
Agreement, Mutual provides the Company and MNH with all
13
<PAGE> 14
facilities and personnel to operate their business. The only officers of the
Company or MNH who are paid full time employees are employees of Mutual whose
services are purchased under the Management Agreement. Also, the operation of
the Company's insurance business, which offers substantially the same lines of
insurance as Mutual through the same independent insurance agents, creates a
very close relationship among the companies.
During 1998, Mutual initiated discussions with the Company concerning
proposals for the acquisition of the Company by Mutual. The Company determined
that the terms proposed by Mutual were inadequate. The Company also determined
that the Management Agreement prevents the Company's shareholders from realizing
the Company's fair value in a sale or merger, and on July 23, 1998 the Company
gave notice to Mutual of its intention to terminate the Management Agreement.
The provisions of the Management Agreement require five year's prior written
notice for its termination. The Company does not expect the notice of
termination to have any material, short-term effect on the Company's operations.
However, the Company believes that the Management Agreement, as currently
written, creates conflicts of interest between the Company and Mutual in their
joint operations and prevents the Company's shareholders from realizing the fair
value of their shares.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk represents the potential for loss due to changes in the fair value
of financial instruments. The market risk related to the Company's financial
instruments primarily relates to its investment portfolio. The value of the
Company's investment portfolio of $209,754,000 at March 31, 2000 is subject to
changes in interest rates and to a lesser extent on credit quality. Further,
certain mortgage-backed and asset-backed securities are exposed to accelerated
prepayment risk generally caused by interest rate movements. If interest rates
were to decline, mortgage holders would be more likely to refinance existing
mortgages at lower rates. Acceleration of future repayments could adversely
affect future investment income, if reinvestment of the accelerated receipts was
made in lower yielding securities.
The following table provides information related to the Company's fixed maturity
investments at March 31, 2000. The table presents cash flows of principal
amounts and related weighted average interest rates by expected maturity dates.
The cash flows are based upon the maturity date or, in the case of
mortgage-backed and asset-backed securities, expected payment patterns. Actual
cash flows could differ from those shown in the table.
14
<PAGE> 15
FIXED MATURITIES
Expected Cash Flows of Principal Amounts ($ in 000's):
<TABLE>
<CAPTION>
TOTAL
-----------------------
Esti-
Amor- mated
There- tized Market
2000 2001 2002 2003 2004 after Cost Value
------- ------- ------- ------ ------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
- ----------------
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $ 1,647 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,647 $ 1,600
Average interest rate 5.4% 0.0% 0.0% 0.0% 0.0% 0.0% --- ---
Mortgage & asset backed
securities 0 196 1,815 1,710 1,556 7,561 12,838 13,087
Average interest rate 0.0% 7.2% 7.2% 7.1% 7.1% 7.3% --- ---
------- ------- ------- ------ ------- ------ -------- --------
Total $1,647 $ 196 $ 1,815 $1,710 $ 1,556 $7,561 $ 14,485 $ 14,687
======= ======= ======= ====== ======= ====== ======== ========
Available for Sale
- ------------------
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $ 7,400 $18,633 $ 350 $ 0 $ 0 $ 0 $ 26,383 $ 26,049
Average interest rate 5.3% 5.4% 6.3% 0.0% 0.0% 0.0% --- ---
Obligations of states and
political subdivisions 4,492 7,708 1,710 3,032 0 707 17,649 17,715
Average interest rate 4.6% 4.9% 5.6% 4.9% 0.0% 5.3% --- ---
Corporate securities 5,866 17,415 14,604 7,503 855 368 46,611 44,331
Average interest rate 5.7% 6.9% 7.1% 8.4% 8.6% 9.5% --- ---
Mortgage & asset
backed securities 23,433 33,391 16,761 4,463 1,543 6,661 86,252 86,296
Average interest rate 6.8% 6.9% 6.9% 7.0% 7.1% 7.2% --- ---
------- ------- ------- ------- ------- ------ -------- -------
Total $41,191 $77,147 $33,425 $14,998 $ 2,398 $7,736 $176,895 $174,391
======= ======= ======= ======= ======= ====== ======== ========
</TABLE>
The discussion and the estimated amounts referred to above include
forward-looking statements of market risk which involve certain assumptions as
to market interest rates and the credit quality of the fixed maturity
investments. Actual future market conditions may differ materially from such
assumptions. Accordingly, the forward-looking statements should not be
considered projections of future events by the Company.
15
<PAGE> 16
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
date of this report.
16
<PAGE> 17
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: May 8, 2000 By:/s/ Kenneth J. Wilson
----------------------
Kenneth J. Wilson
Chief Financial Officer and
Treasurer (duly authorized
officer of the registrant and
chief accounting officer)
17
<PAGE> 1
EXHIBIT 11
MERCHANTS GROUP, INC.
Computation of Income Per Share
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 2000
----------------------
<S> <C> <C>
Net income for computing earnings per common
share - without dilution and fully diluted $1,649 $ 817
====== =======
Weighted average number of common shares
outstanding - without dilution 2,846 2,560
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 8 2
------ -------
Weighted average number of common shares and
common share equivalents outstanding, diluted 2,854 2,562
====== =======
Basic and diluted earnings per share $ .58 $ .32
====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 174,391,000
<DEBT-CARRYING-VALUE> 14,485,000
<DEBT-MARKET-VALUE> 14,687,000
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 209,754,000
<CASH> 2,000
<RECOVER-REINSURE> 6,321,000
<DEFERRED-ACQUISITION> 11,923,00
<TOTAL-ASSETS> 266,270,000
<POLICY-LOSSES> 135,059,000
<UNEARNED-PREMIUMS> 48,170,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 32,000
<OTHER-SE> 67,811,000
<TOTAL-LIABILITY-AND-EQUITY> 266,270,000
23,033,000
<INVESTMENT-INCOME> 3,456,000
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 66,000
<BENEFITS> 17,493,000
<UNDERWRITING-AMORTIZATION> 6,104,000
<UNDERWRITING-OTHER> 1,686,000
<INCOME-PRETAX> 1,272,000
<INCOME-TAX> 455,000
<INCOME-CONTINUING> 817,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 817,000
<EPS-BASIC> .32
<EPS-DILUTED> .32
<RESERVE-OPEN> 127,500,000
<PROVISION-CURRENT> 17,482,000
<PROVISION-PRIOR> 11,000
<PAYMENTS-CURRENT> 3,284,000
<PAYMENTS-PRIOR> 13,273,000
<RESERVE-CLOSE> 128,436,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
