UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
-------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
COMMISSION FILE NUMBER 1-9640
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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 30, 2002: 2,110,152 SHARES OF COMMON STOCK.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31, March 31,
Assets 2001 2002
------ -------- --------
(unaudited)
Investments:
Fixed maturities:
Held to maturity at amortized cost (fair value
$14,035 in 2001 and $10,939 in 2002) $ 13,042 $ 10,205
Available for sale at fair value (amortized cost
$178,815 in 2001 and $180,898 in 2002) 182,170 183,309
Preferred stock at fair value 9,422 9,106
Other long-term investments at fair value 1,593 1,009
Short-term investments 6,905 6,045
-------- --------
Total investments 213,132 209,674
Cash 1,197 447
Interest due and accrued 2,309 1,995
Premiums receivable, net of allowance for doubtful
accounts of $431 in 2001 and $410 in 2002 21,685 20,602
Deferred policy acquisition costs 12,354 11,292
Ceded reinsurance balances receivable 18,810 19,684
Prepaid reinsurance premiums 3,559 3,212
Deferred income taxes 4,790 5,186
Other assets 8,727 8,606
-------- --------
Total assets $286,563 $280,698
======== ========
See Notes to the Consolidated Financial Statements
2
MERCHANTS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands except share amounts)
December 31, March 31,
2001 2002
--------- ---------
(unaudited)
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Reserve for losses and loss adjustment expenses $ 151,355 $ 152,917
Unearned premiums 50,179 45,824
Demand loan 200 600
Payable to affiliate 852 1,981
Other liabilities 15,426 13,968
--------- ---------
Total liabilities 218,012 215,290
--------- ---------
Stockholders' equity:
Common stock, 10,000,000 shares authorized, 2,224,452 shares issued and
outstanding at December 31, 2001 and 2,110,152 shares issued and
outstanding at March 31, 2002 32 32
Additional paid in capital 35,795 35,795
Treasury stock, 1,025,400 shares at December 31, 2001
and 1,139,700 shares at March 31, 2002 (20,332) (22,766)
Accumulated other comprehensive income 1,812 1,184
Accumulated earnings 51,244 51,163
--------- ---------
Total stockholders' equity 68,551 65,408
--------- ---------
Commitments and contingent liabilities - -
Total liabilities and stockholders' equity $ 286,563 $ 280,698
========= =========
See Notes to the Consolidated Financial Statements
3
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
Three Months
Ended March 31,
2001 2002
------- -------
(unaudited)
Revenues:
Net premiums earned $23,353 $23,130
Net investment income 3,563 2,570
Net realized investment gains 43 73
Other revenues 137 227
------- -------
Total revenues 27,096 26,000
------- -------
Expenses:
Net losses and loss adjustment expenses 18,761 17,896
Amortization of deferred policy acquisition costs 6,189 6,129
Other underwriting expenses 1,815 1,735
------- -------
Total expenses 26,765 25,760
------- -------
Income before income taxes 331 240
Income tax provision 119 98
------- -------
Net income $ 212 $ 142
======= =======
Basic and diluted earnings per share $ .09 $ .07
======= =======
Weighted average shares outstanding:
Basic 2,423 2,171
Diluted 2,425 2,174
See Notes to the Consolidated Financial Statements
4
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
Three Months
Ended March 31,
2001 2002
------- -------
(unaudited)
Net income $ 212 $ 142
------- -------
Other comprehensive income (loss) before taxes:
Unrealized gains (losses) on securities 2,835 (936)
Reclassification adjustment
for gains and losses included
in net income (43) (73)
------- -------
Other comprehensive income (loss) before taxes 2,792 (1,009)
Income tax provision (benefit) related to items
of other comprehensive income (loss) 1,069 (381)
------- -------
Other comprehensive income (loss) 1,723 (628)
------- -------
Comprehensive income (loss) $ 1,935 $ (486)
======= =======
See Notes to the Consolidated Financial Statements
5
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Three Months
Ended March 31,
2001 2002
-------- --------
(unaudited)
Common stock, beginning and end $ 32 $ 32
-------- --------
Additional paid in capital, beginning and end: 35,680 35,795
-------- --------
Treasury stock:
Beginning of period (16,063) (20,332)
Purchase of treasury shares (234) (2,434)
-------- --------
End of period (16,297) (22,766)
-------- --------
Accumulated other comprehensive income (loss):
Beginning of period (875) 1,812
Other comprehensive income (loss) 1,723 (628)
-------- --------
End of period 848 1,184
-------- --------
Accumulated earnings:
Beginning of period 51,348 51,244
Net income 212 142
Cash dividends (481) (223)
-------- --------
End of period 51,079 51,163
-------- --------
Total stockholders' equity $ 71,342 $ 65,408
======== ========
See Notes to the Consolidated Financial Statements
6
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months
Ended March 31,
2001 2002
-------- --------
(unaudited)
Cash flows from operations:
Collection of premiums $ 21,659 $ 20,392
Payment of losses and loss adjustment expenses (18,580) (17,591)
Payment of other underwriting expenses (9,998) (8,329)
Investment income received 3,967 3,032
Investment expenses paid (142) (78)
Income taxes (paid) recovered (78) 376
Other 134 228
-------- --------
Net cash used in operations (3,038) (1,970)
-------- --------
Cash flows from investing activities:
Proceeds from fixed maturities sold or matured 27,365 17,931
Purchase of fixed maturities (26,110) (17,071)
Net (increase) decrease in preferred stock (1,431) 149
Net (increase) decrease in other long-term investments (318) 583
Net increase in short-term investments 1,590 860
-------- --------
Net cash provided by investing activities 1,096 2,452
-------- --------
Cash flows from financing activities:
Settlement of affiliate balances 2,653 1,129
Increase in receivable for securities - (104)
Increase (decrease) in demand loan, net - 400
Purchase of treasury stock (234) (2,434)
Cash dividends (481) (223)
-------- --------
Net cash provided by (used in) financing activities 1,938 (1,232)
-------- --------
Decrease in cash (4) (750)
Cash:
Beginning of period 5 1,197
-------- --------
End of period $ 1 $ 447
======== ========
See Notes to the Consolidated Financial Statements
7
MERCHANTS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATIONS
(in thousands)
Three Months
Ended March 31,
2001 2002
------- -------
(unaudited)
Net income $ 212 $ 142
Adjustments:
Accretion (247) 71
Realized investment gains (43) (73)
(Increase) decrease in assets:
Interest due and accrued 570 314
Premiums receivable 1,667 1,083
Deferred policy acquisition costs 772 1,062
Ceded reinsurance balances receivable 716 (874)
Prepaid reinsurance premiums 1,129 347
Deferred income taxes 31 (15)
Other assets (690) 224
Increase (decrease) in liabilities:
Reserve for losses and loss adjustment expenses (534) 1,562
Unearned premiums (4,040) (4,355)
Other liabilities (2,581) (1,458)
------- -------
Net cash used in operations $(3,038) $(1,970)
======= =======
See Notes to the Consolidated Financial Statements
8
MERCHANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated balance sheet as of March 31, 2002 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, 2001 and 2002,
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, 2001.
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
--------------------------
With the exception of the Chief Operating Officer of MNH, 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 12.1% of the Company's common stock at March 31, 2002, 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 35,500 and 8,000 shares of common
stock options in 2002 and 2001, respectively, which would have resulted in 2,660
and 1,844 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
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations for the Three Months Ended March 31, 2002 As Compared to
------------------------------------------------------------------------------
the Three Months Ended March 31, 2001
-------------------------------------
Total revenues for the three months ended March 31, 2002 were $26,001,000, a
decrease of $1,095,000 or 4%, from $27,096,000 for the three months ended March
31, 2001.
Direct premiums written for the three months ended March 31, 2002 were
$20,481,000, a decrease of $1,761,000, or 8%, from $22,242,000 for the three
months ended March 31, 2001. Voluntary direct premiums written for the three
months ended March 31, 2002 were $19,271,000, a decrease of $2,452,000 or 11%,
from $21,723,000 for the three months ended March 31, 2001.
Voluntary personal lines direct premiums written for the three months ended
March 31, 2002 were $8,730,000, an increase of $217,000, or 3%, from $8,513,000
for the three months ended March 31, 2001. Private passenger automobile (PPA)
direct premiums written, which represented 77% of total voluntary personal lines
direct premiums written for the three months ended March 31, 2001 and 2000,
increased 3% from the year earlier period. Homeowners direct premiums written
for the three months ended March 31, 2002 increased 1% compared to the three
months ended March 31, 2001.
Voluntary commercial lines direct premiums written for the three months ended
March 31, 2002 decreased $2,670,000, or 20%, to $10,541,000 from $13,211,000 for
the three months ended March 31, 2001. Direct premiums written for all of the
Company's commercial lines of business decreased in the three months ended March
31, 2002, compared to the three months ended March 31, 2001. This decrease in
commercial lines direct premiums written was primarily attributable to a 7%
decrease in commercial lines policies in force at March 31, 2002 compared to
commercial lines policies in force at March 31, 2001. The reduction in
commercial lines policies in force was primarily the result of a 56% decrease in
commercial lines new business units in 2002 as compared to 2001.
The Company intends to continue to reduce direct written premiums in business
segments that it believes can no longer provide the opportunity to earn a
satisfactory return for its shareholders.
Involuntary direct premiums written, primarily PPA insurance, which comprised 6%
and 2% of all direct premiums written during the three months ended March 31,
2002 and 2001, respectively, increased by $691,000, or 133%, to $1,209,000 in
the three months ended March 31, 2002 from $518,000 for the three months ended
March 31, 2001, primarily due to an increase in the number of policies written
by the New York Automobile Insurance Plan (NYAIP). The Company is unable to
predict the volume of future assignments from the NYAIP.
Net premiums written decreased $1,319,000, or 6%, to $19,122,000 for the three
months ended March 31, 2002 from $20,441,000 for the three months ended March
31, 2001, primarily due to the 8% decrease in direct premiums written. Net
premiums earned for the three months ended March 31, 2002 were $23,130,000, a
decrease of 1% from $23,353,000 for the three months ended March 31, 2001.
10
Net investment income was $2,570,000 for the three months ended March 31, 2002,
a decrease of 28% from $3,563,000 for the three months ended March 31, 2001. The
average pre-tax yield associated with the investment portfolio decreased 123
basis points to 5.63% for the three months ended March 31, 2002 when compared to
the three months ended March 31, 2001. Average invested assets for the three
months ended March 31, 2001 decreased 3% compared to the year earlier period.
Losses and loss adjustment expenses (LAE) were $17,896,000 for the three months
ended March 31, 2002, a decrease of $865,000, or 5%, from $18,761,000 for the
three months ended March 31, 2001. The loss and LAE ratio decreased to 77.4% for
the three months ended March 31, 2001 from 80.3% for the three months ended
March 31, 2001, primarily due to a reduction in the loss and LAE ratio for the
current accident year compared to the 2001 accident year.
The ratio of amortized deferred policy acquisition costs and other underwriting
expenses to net premiums earned decreased to 34.0% for the three months ended
March 31, 2002 from 34.3% for the three months ended March 31, 2001.
Commissions, premium taxes and other state assessments that vary directly with
the Company's premium volume represented 21.5% of net premiums earned in the
three months ended March 31, 2002 compared to 22.0% in the three months ended
March 31, 2001.
The Company's effective income tax rate for the three months ended March 31,
2002 was 40.8%. This rate was calculated based upon the Company's estimate of
its effective income tax rate for all of 2002.
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 intention to continue to reduce
direct premiums written in business segments where returns are unsatisfactory
will likely result in continued negative cash flows from operations. The Company
believes that careful management of the relationship between assets and
liabilities will minimize the likelihood that investment portfolio sales will be
necessary to fund insurance operations and that the effect of any such sale on
the Company's stockholders' equity will not be material.
The Company's objectives with respect to its investment portfolio include
maximizing total return within investment guidelines while protecting
policyholders' surplus 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 is closely managed, increases or decreases in
market interest rates are not expected to have a material effect on the
Company's liquidity.
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 accumulated other
comprehensive income within stockholders' equity. At March 31, 2002, the
11
Company recorded as accumulated other comprehensive income in its Consolidated
Balance Sheet $1,184,000 of unrealized gains, net of taxes, associated with its
investments classified as available for sale. During the three months ended
March 31, 2002 the Company recorded $628,000 of unrealized losses, net of tax,
associated with its available for sale investments as other comprehensive
income.
At March 31, 2002, the Company's portfolio of fixed maturity investments
represented 92.3% 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, 2002, $65,264,000 or 33.7%, of the Company's fixed maturity
portfolio was invested in mortgage-basked 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 a secondary market and their effect on the
Company's liquidity does not differ from that of other fixed maturity
investments.
At March 31, 2002, $45,991,000 or 21.9% of the Company's investment portfolio
was invested in fixed maturity obligations of the U.S. Government or its
government sponsored agencies. Of this amount, $33,212,000 was invested in
United States Treasury Inflation Index Notes (TIPS). TIPS differ from
traditional treasury securities in that in addition to regular coupon payments,
the principal value changes daily based upon the Consumer Price Index (CPI) as
published by the United States Department of Labor. Accretion based upon the CPI
becomes part of the total return of the security and is subject to change as the
CPI rises or falls. Accretion can therefore be positive or negative and is
recorded as a component of net investment income. TIPS perform best in a
declining interest rate environment when the referenced CPI is rising. The
Company sold its entire TIPS investment in April, 2002 and recorded a gain on
the sale of $1,303,000.
At March 31, 2002 $8,688,000, or 4.1%, of the Company's investment portfolio was
invested in non-investment grade securities compared to $9,433,000, or 4.3%, at
March 31, 2001. 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, 2002, the Company repurchased 114,300
shares of its common stock at an average price per share of $21.29. The Company
was holding 1,139,700 shares of its common stock in treasury at March 31, 2002.
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, 2002, $600,000 was outstanding on this loan.
12
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 2002 without the prior approval of the New Hampshire Insurance
Commissioner is $5,263,000. MNH paid $5,060,000 of dividends to the Company in
2001. Dividends were paid in February 2001, May 2001 and September 2001, of
$2,200,000, $1,350,000 and $1,510,000, respectively. MNH paid a dividend of
$2,200,000 to the Company on February 19, 2002 and as such is restricted from
paying another dividend to the Company until May 2002. On May 1, 2002, the Board
of Directors of MNH declared a $900,000 cash dividend payable on May 30, 2002 to
common stockholders of record on May 30, 2002. The Company declared cash
dividends to its common stockholders of $.10 per share in the first quarter of
2002 amounting to $223,000. The Company declared a quarterly cash dividend of
$.10 per share payable on June 4, 2002 to shareholders of record as of the close
of business on May 17, 2002.
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.
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 2002, MNH's
ratio of net premiums written to statutory surplus, annualized for a full year,
was 1.5 to 1.
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 12.1% of the Company's common stock. Under the Management
Agreement, Mutual provides the Company and MNH with all facilities and with
personnel to operate their business. With the exception of the Chief Operating
Officer of MNH, 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, as currently written, creates a conflict of
13
interest between the Company and Mutual in their joint operation and prevents
the Company's shareholders from realizing the Company's fair value in a sale or
merger. Accordingly, on July 23, 1998 the Company gave notice to Mutual of its
intention to terminate the Management Agreement, and therefore, the Management
Agreement will terminate on July 23, 2003 unless the parties agree to renew or
extend it.
On March 4, 2002, the Company requested that Mutual extend the Management
Agreement under its existing terms to December 31, 2003 in order to provide for
a more orderly transition to a new management agreement with Mutual or a
different manager. The Company is in discussion with various potential
candidates, including Mutual, to provide management services to the Company
after the current Management Agreement expires. The Company intends to base the
new agreement on fee for services, rather than an allocation of expenses, as
currently calculated. The Company anticipates that the future manager will be
compensated for positive results through profit-sharing and that the Company
will be permitted to terminate the new agreement on substantially less than the
five (5) year notice that was required under the present Management Agreement.
Any agreement between MNH and Mutual or any other insurer to manage the business
of MNH will require the approval of the New Hampshire Insurance Department and
in the insurance department of state of the manager's domicile. State insurance
departments have broad discretion to approve or disallow actions or agreements
of their subject insurers in order to protect the interests of the public and
policyholders, as the regulators perceive those interests to be.
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 $209,674,000 at March 31, 2002 is subject to
changes in interest rates and to a lesser extent on credit quality. Further,
certain mortgage-backed and asset-backed securities are exposed to accelerated
prepayment risk generally caused by interest rate movements. If interest rates
were to decline, mortgage holders would be more likely to refinance existing
mortgages at lower rates. Acceleration of future repayments could adversely
affect future investment income, if reinvestment of the accelerated receipts was
made in lower yielding securities.
The following table provides information related to the Company's fixed maturity
investments at March 31, 2002. The table presents cash flows of principal
amounts and related weighted average interest rates by expected maturity dates.
The cash flows are based upon the maturity date or, in the case of
mortgage-backed and asset-backed securities, expected payment patterns. Actual
cash flows could differ from those shown in the table.
14
Fixed Maturities
----------------
Expected Cash Flows of Principal Amounts ($ in 000's):
TOTAL
-----
Esti-
Amor- mated
There- tized Market
2002 2003 2004 2005 2006 after Cost Value
-------- -------- -------- -------- -------- -------- -------- --------
Held to Maturity
----------------
Mortgage & asset backed
securities $ 2,007 $ 1,644 $ 2,602 $ 2,707 $ 1,031 $ 214 $ 10,205 $ 10,939
Average interest rate 7.1% 7.1% 7.1% 7.1% 7.1% 7.2% --- ---
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 2,007 $ 1,644 $ 2,602 $ 2,707 $ 1,031 $ 214 $ 10,205 $ 10,939
======== ======== ======== ======== ======== ======== ======== ========
Available for Sale
------------------
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $ 3,496 $ 4,198 $ 0 $ 5,086 $ 0 $ 33,212 $ 45,992 $ 47,007
Average interest rate 6.9% 4.1% 0.0% 4.2% 0.0% 4.9% --- ---
Obligations of states and
political subdivisions 1,485 6,309 1,004 0 0 40 8,838 9,007
Average interest rate 8.1% 7.2% 4.4% 0.0% 0.0% 7.3% --- ---
Corporate securities 20,581 31,099 6,269 9,640 0 4,207 71,796 72,236
Average interest rate 7.2% 5.3% 6.8% 4.1% 0.0% 11.3% --- ---
Mortgage & asset
backed securities 8,543 23,499 15,322 797 2,386 3,725 54,272 55,059
Average interest rate 5.7% 5.3% 5.5% 6.5% 5.1% 7.0% --- ---
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 34,105 $ 65,105 $ 22,595 $ 15,523 $ 2,386 $ 41,184 $180,898 $183,309
======== ======== ======== ======== ======== ======== ======== ========
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
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(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. Forward
looking statements may include, without limitation, statements relating to the
Company's plans, strategies, objectives, expectations and intentions. Words such
as "believes," "forecasts," "intends," "possible," "expects," "anticipates,"
"estimates," or "plans" and similar expressions are intended to identify forward
looking statements. 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 those 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, the Company's dependence on state insurance departments for
approval of rate increases; size and frequency of claims, 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; the Company's
dependence on the general reinsurance market; government regulation of the
insurance industry; exposure to environmental claims; dependence of the Company
on its relationship with Mutual and the uncertainty concerning what will happen
if the Management Agreement with Mutual is either not renewed or extended beyond
its termination date of July 23, 2003; the Company's intention to reduce written
premium in business segments that it believes no longer provide a satisfactory
return; 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.
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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, 2002 By:/s/ Kenneth J. Wilson
---------------------
Kenneth J. Wilson
Chief Financial Officer and
Treasurer (duly authorized
officer of the registrant and
chief accounting officer)
17