<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

       [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

       [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
            FOR THE TRANSITION PERIOD FROM __________ TO ___________.

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                          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 Identification No.)
incorporation or organization)

   250 MAIN STREET, BUFFALO, NEW YORK                      14202
(Address of principal executive offices)                 (Zip Code)


                                  716-849-3333
              (Registrant's telephone number, including area code)

Securities  registered pursuant to Section 12(b) of the Act:
     Title of each class - COMMON STOCK, $.01 PAR VALUE PER SHARE
     Name of each exchange on which registered - AMERICAN STOCK EXCHANGE, INC.

Securities registered pursuant to Section 12 (g) of the Act:  NONE

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.    Yes [X]   No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   [X]

As of February 29, 2000, 2,543,452 shares of common stock were outstanding. The
aggregate market value of the common shares held by non-affiliates of Merchants
Group, Inc. on February 29, 2000 was $47,054,000.

                       DOCUMENTS INCORPORATED BY REFERENCE
 Portions of the definitive Proxy Statement for the 2000 Annual Meeting of
           stockholders are incorporated by reference into Part III.
<PAGE>   2
                              MERCHANTS GROUP, INC.

                           ANNUAL REPORT ON FORM 10-K
                                DECEMBER 31, 2000

<TABLE>
<CAPTION>
                   PART I                                               PAGE #
                   ------                                               ------


<S>       <C>                                                           <C>
ITEM 1.   BUSINESS.                                                        3

ITEM 2.   PROPERTIES.                                                     19

ITEM 3.   LEGAL PROCEEDINGS.                                              19

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             19

                   PART II
                   -------

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED               20
          STOCKHOLDER MATTERS.

ITEM 6.   SELECTED FINANCIAL DATA.                                        21

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL               23
          CONDITION AND RESULTS OF OPERATIONS.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES                        29
          ABOUT MARKET RISK.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                    31

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                31
          ACCOUNTING AND FINANCIAL DISCLOSURE.

                   PART III
                   --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT              32

ITEM 11.  EXECUTIVE COMPENSATION.                                         32

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                 32
          AND MANAGEMENT.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                 32

                   PART IV
                   -------

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND                    33
          REPORTS ON FORM 8-K.
</TABLE>

                                       2
<PAGE>   3
                                     PART I

Item 1.  BUSINESS.

General
-------

      Merchants Group, Inc. (the "Company") was incorporated in August 1986 as a
Delaware holding company which, through its wholly owned subsidiary Merchants
Insurance Company of New Hampshire, Inc. ("MNH"), offers property and casualty
insurance to preferred risk individuals and small to medium sized businesses in
the northeastern United States.

Administration
--------------

      The Company and MNH operate and manage their business in conjunction with
Merchants Mutual Insurance Company ("Mutual"), a New York domiciled mutual
property and casualty insurance company, under a management agreement (the
"Management Agreement"). Mutual owns 10.0% of the Company's issued and
outstanding common stock. The Company and MNH do not have any operating assets
and have no employees. Under the Management Agreement, Mutual provides the
Company and MNH with the facilities, management and personnel required to
operate their day-to-day business. All costs incurred by Mutual with respect to
underwriting expenses are shared pro rata between Mutual and MNH based upon
their annual direct premiums written, and unallocated loss adjustment expenses
are allocated on the basis of the number of claims outstanding each month that
are attributable to each company. All of Mutual's and MNH's investment expenses
are shared pro rata based upon the average book value of the invested assets of
each company. MNH also pays Mutual an annual management fee of $50,000. The
Management Agreement requires that the Company and MNH pay Mutual 110% of
Mutual's costs of providing them with non-insurance related services, and that
the Company pay Mutual an annual fee of one half of one percent (.5%) of the
average book value of the Company's invested assets exclusive of the Company's
shares of MNH. Since the inception of the Management Agreement, Mutual has not
provided the Company or MNH with any non-insurance related services.

      The Management Agreement has certain features that are intended to prevent
conflicts of interest or to deal with them on an equitable basis should they
occur. Generally, business opportunities which are presented to the common
officers or employees of the companies must be presented to each company's Board
of Directors and approved and determined to be fair to each company in the
transaction by a majority of the directors of each company who are not
affiliated with any other company in the transaction.

      Any amendment to or modification of the Management Agreement must be
approved by the New York Insurance Department (the "Department"). The Management
Agreement provides that it may be terminated by any party to the agreement upon
five years written notice. On July 23, 1998, the Company gave notice of its
intention to terminate the Management Agreement to Mutual. Mutual and MNH have
jointly developed and paid for all accounting, computer and insurance marketing
systems used in their businesses. Upon termination of the Management Agreement,
each company will have the right, at no cost, to obtain copies of all these
systems, together with the right to use these systems in perpetuity.

                                       3
<PAGE>   4
Marketing
---------

      The Company markets its products through approximately 684 independent
agents, which also represent Mutual. The Company's primary marketing efforts are
directed to those independent agents that are dedicated to providing superior
service to their customers. The Company believes the opportunity for growth
exists through further penetration of agencies that are strategically aligned
with the Company's commitment to growth in its targeted markets.

      The Company believes that as a regional insurance company it has certain
advantages, including a closer relationship with its agents and a better
knowledge of its operating territories, that enable it to compete effectively
against larger regional and national carriers. The Company believes it
distinguishes itself from its competitors by providing its agents and
policyholders with superior service and ease of doing business, products that
target certain segments of the commercial and personal insurance markets, and an
agents' compensation program which, in addition to standard commission rates,
provides agents with a profit sharing plan.

      The Company services its agents from five Strategic Business Centers and
from its home office in Buffalo, New York. The Strategic Business Centers are
located in the Company's operating territories and focus primarily on policy
sales and underwriting. The manager of a Strategic Business Center appoints new
agents, agrees upon annual unit sales and premium objectives with the principal
of the agency, and ensures that the principal of the agency communicates these
objectives to the agency's sales staff. Strategic Business Center managers and
Territorial Managers, or "TM's," develop customized business plans for each
agent, which identify the opportunities to increase business and the actions
required to achieve the objectives agreed to by the agent and the Company.

      TM's meet with targeted agents' sales staff on a frequent basis to
underwrite the Company's renewal policies, as well as to solicit policies new to
the agent and/or to the Company. TM's are equipped with electronic technology to
provide prompt and efficient pricing and communication and can provide quotes
for all lines of business at the agents' offices. The Company believes personal
contact between TM's, who have underwriting authority, and an agent's sales
staff provides the Company with a competitive advantage compared to many other
property and casualty insurers, whose field representatives have limited or no
underwriting authority. By placing an underwriting decision maker in the agent's
office, and thereby simplifying the underwriting process, the Company believes
it can maintain and improve the retention rate on its renewal policies, as well
as attract new policies.

      Each Strategic Business Center has an Agents' Advisory Council that meets
at least twice a year. The Advisory Councils provide a forum for the Company and
its agents to discuss issues of mutual interest, and to assure that the agents'
business needs are being met. Additionally, the Chairpersons of the Advisory
Councils from each Strategic Business Center meet twice each year with senior
officers of MNH.

      In addition to standard commissions paid as a percentage of premiums
written, the Company's agents are eligible to participate in the Agents' Profit
Sharing Plan. This plan rewards agents based on premiums written and the loss
and allocated loss adjustment expense ("LAE") ratio on business placed by the
agent with the Company. Payments under the Agents' Profit Sharing Plan for 1999
totaled $2,375,000, or 2.4% of total direct premiums written. The Company
believes the terms of its

                                       4
<PAGE>   5
Agents' Profit Sharing Plan encourage its agents to increase the volume of
profitable business they place with the Company.

      Unlike many of its competitors, the Company pays the same commission rate
on policies billed directly to the insured by the Company and on policies billed
to the agent and, in turn, re-billed to the insured by the agent. By offering to
bill the insured directly for both personal and commercial policies, the Company
helps its agents minimize their administrative costs without a reduction in
commission income. Approximately 90% of the voluntary premiums written by the
Company in 1999 were billed directly to policyholders.

      In order to assist its independent agents to compete more effectively with
insurance companies that have direct sales forces, and to strengthen its
relationship with those agents, the Company provides advanced automation
services. In 1999, the Company introduced the Merchants MerLink(TM) system.
MerLink(TM) enables independent agents to submit policies to Merchants over the
Internet using their existing business computer and software, and to have these
submissions automatically update the Company's insurance policy processing
system. The benefits to agents are simplified client management, more time
available for sales activities, and fewer errors. Currently, the Company is
using MerLink(TM) for policy transactions with approximately 82 agents for
private passenger automobile and homeowners' policies. The Company plans to
offer MerLink(TM) capability for commercial lines insurance policies during the
first half of 2000. The Company believes that developing automation capabilities
to facilitate the sharing of information with its agents will improve its
competitive position compared to other property and casualty insurers that do
not have such capabilities.

Insurance Underwriting
----------------------

      The Company is licensed to issue insurance policies in 13 states,
primarily in the northeastern United States. In 1999, net premiums written
totaled $94,470,000, with 58% of the net premiums written derived from
commercial lines of insurance and 42% from personal lines of insurance.

      The following table sets forth the distribution of the Company's direct
premiums written by state for the years indicated:

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                                 ------------------------

                                            1997            1998            1999
                                            ----            ----            ----
<S>                                         <C>             <C>             <C>
New York                                     66%             65%             64%
New Jersey                                   15              18              19
New Hampshire                                10               9               8
Rhode Island                                  3               3               4
Pennsylvania                                  2               2               2
Massachusetts                                 2               2               2
Other                                         2               1               1
                                            ---             ---             ---
      Total                                 100%            100%            100%
                                            ===             ===             ===
</TABLE>

                                       5
<PAGE>   6
      The Company is licensed to underwrite most major lines of property and
casualty insurance. It issues policies primarily to preferred risk individuals
and small to medium sized commercial risks. In general, the Company does not
insure risks that involve a high potential of loss or have a long-tail reporting
period. The types of risks insured in the Company's lines of business include:

         o        Personal automobile - full coverage of family-owned standard
                  performance automobiles, generally requiring drivers with good
                  driving records during the past three years.

         o        Homeowners' - properties generally with no losses in the last
                  three years that are less than 30 years old and valued between
                  $125,000 and $500,000.

         o        Commercial automobile - primarily light and medium use
                  vehicles operating in a limited radius, with complete
                  background information required of all drivers.

         o        Commercial multi-peril - properties with medium to high
                  construction quality and low to moderate fire exposure, and
                  occupancies with low to moderate exposure to hazardous
                  materials and processes.

         o        General liability - low hazard service, mercantile and light
                  processing businesses, generally with three years of business
                  experience and with no losses in the last three years.

         o        Workers' compensation - risks with low loss frequency and
                  severity, low to moderate exposure to hazardous materials and
                  processes, and favorable experience modification factors.
                  Generally, workers' compensation insurance is written in
                  conjunction with other commercial insurance.

      The Company's underwriting strategy is to offer its insurance at rates
which are designed to cover its costs, including the costs of any involuntary
business associated with a particular line of insurance or a particular
territory. This pricing strategy makes the Company's rates non-competitive with
respect to certain lines of insurance or certain geographic regions. For
example, the Company's published rates for personal automobile insurance in the
densely populated areas within its region of operations are significantly higher
than those of some of its competitors. The Company believes that its pricing
strategy allows the Company to write the types of insurance for which the price
charged reflects the cost of providing coverage.

      Agents of the Company are also agents of Mutual, which generally sells the
same lines of insurance as the Company to standard risk individuals and
businesses. Applicants that meet the Company's preferred risk criteria are
issued policies by the Company. Applicants that do not meet the Company's
underwriting criteria, but which meet the less restrictive criteria of Mutual,
are issued policies by Mutual, generally at higher premium rates. From 1993
through 1995, under a quota share reinsurance agreement with Mutual, MNH assumed
10% of the standard risks insured by Mutual, which would not generally meet
MNH's more stringent underwriting guidelines. The terms of that agreement allow
Mutual to reduce its cessions to MNH to 0% of Mutual's direct voluntary premiums
written for any calendar year prior to the beginning of that calendar year.
Mutual has not ceded any of its voluntary direct written premiums to MNH under
this agreement since 1995 and has informed the Company that it will not cede any
of its voluntary direct written premiums to MNH in 2000.

                                       6
<PAGE>   7

      The Company establishes premium rates for most of its policies based on
its loss experience, in some cases after considering prospective loss costs
suggested by the Insurance Services Office, Inc., an industry advisory group,
for the preferred individual and commercial classes of business that it insures.
The Company establishes rates independently for its personal automobile and
homeowners insurance policies and its specialty products, such as its
Contractors Coverall Plus and businessowners' policies.

      The following table shows, for each of the years in the three year period
ended December 31, 1999 (i) the amount of the Company's net premiums written
attributable to various personal lines and commercial lines and (ii)
underwriting results attributable to each such line as measured by the calendar
year loss ratio for such line. The loss ratio is the ratio of incurred losses to
net premiums earned for a given period.

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                               ------------------------------------------------------------------------------------------------
                                             1997                              1998                             1999
                               ------------------------------------------------------------------------------------------------
                                Premiums                         Premiums                        Premiums
                                Written                          Written                         Written
                               ------------------------------------------------------------------------------------------------
                                                       Loss                               Loss                             Loss
                                Amount        %       Ratio       Amount        %        Ratio    Amount         %        Ratio
                               ------------------------------------------------------------------------------------------------
                                                                     (dollars in thousands)
<S>                            <C>          <C>        <C>       <C>          <C>        <C>      <C>          <C>        <C>
Personal
      Auto Liability           $26,187      27.0%      69.7%     $21,394      23.1%      79.3%    $18,915      20.0%      77.1%
      Auto Physical Damage      13,570      14.0       45.8       13,199      14.2       45.8      12,328      13.1       49.0
      Homeowners'
          Multi-Peril            7,789       8.0       35.7        8,066       8.7       36.5       8,630       9.1       56.2
                               -------     -----                 -------     -----                -------     -----

          Total                 47,546      49.0       57.5       42,659      46.0       61.8      39,873      42.2       64.1

Commercial
      Auto Liability            12,377      12.8      100.7       12,986      14.0       41.5      14,816      15.7       50.9
      Auto Physical Damage       2,948       3.1       45.8        3,025       3.3       49.8       3,819       4.1       54.7
      Commercial
          Multi-Peril           21,287      22.0       44.6       21,878      23.6       49.5      22,854      24.2       69.5
      Workers'
          Compensation           7,070       7.3      169.0        7,159       7.7       87.8       7,692       8.1       22.0
      Other Lines                5,583       5.8        6.0        5,051       5.4       39.1       5,416       5.7       37.6
                               -------     -----                 -------     -----                -------     -----

          Total                 49,265      51.0       73.6       50,099      54.0       50.6      54,597      57.8       53.7
                               -------     -----                 -------     -----                -------     -----

Total Personal &
      Commercial               $96,811     100.0%      65.7      $92,758     100.0%      56.5     $94,470     100.0%      58.2
                               =======     =====                 =======     =====                =======     =====
</TABLE>

      Calendar year loss ratios set forth in the table above include an estimate
of losses for that accident year, as well as increases or decreases in estimates
made in that year for prior accident year losses. Depending on the size of the
increase or decrease in prior accident year losses, calendar year loss ratios
may not be as indicative of the profitability of policies in force in a
particular year as accident year loss ratios, which do not take into account
increases or decreases in reserves for prior accident year losses.

                                       7
<PAGE>   8
      The following table sets forth the composition of voluntary direct
premiums written for 1995 through 1999:

<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                          -----------------------
                            1995        1996        1997        1998        1999
                            ----        ----        ----        ----        ----
<S>                         <C>         <C>         <C>         <C>         <C>
Commercial                   62%         60%         57%         58%         61%
Personal                     38          40          43          42          39
                            ---         ---         ---         ---         ---
Total                       100%        100%        100%        100%        100%
                            ===         ===         ===         ===         ===
</TABLE>

Commercial Lines
----------------

      The Company's commercial business is primarily retail and mercantile in
nature and generally consists of small to medium sized, low hazard commercial
risks which as a group have relatively stable loss ratios. The Company's
underwriting criteria exclude lines of business and classes of risks that are
considered by the Company to be high hazard or volatile, or which involve latent
injury potential or other long-tail liability exposures. Although the commercial
underwriting objectives of the Company and Mutual are similar, the Company has
refined its selection criteria to include specific classes of businesses,
occupancies, and operations with lower hazard ratings, which present a
relatively lower exposure to loss and are charged a correspondingly lower
premium. The Company offers specialized products within the commercial
multi-peril line such as the Contractors Coverall Plus for artisan and trade
contractors, and BusinessElite for specified retail, service and office risks.

      Despite the lack of significant premium rate increases in recent years in
most of its commercial lines and the significant level of competition in the
lines of business that the Company targets, the Company believes it can insure
commercial business profitably by selecting those classes of risks that offer
better than average profit potential. The Company competes for commercial
business based upon the service it provides to agents and policyholders, the
compensation it pays to its agents, and in certain instances, the price of its
products. The Company establishes prices after considering its costs, the
exposures inherent in a particular class of risk, estimated investment income,
projected future trends in loss frequency and severity, and the degree of
competition within a specific territory. Accordingly, the relative prices of the
Company's commercial products may vary considerably in relation to competitors'
prices.


Personal Lines
--------------


      The Company offers personal automobile and homeowners' insurance to
preferred risk individuals, generally requiring experienced drivers with no
accidents or moving violations in the last three years for personal automobile
insurance, and medium to high value homes with systems that are less than thirty
years old in fire protected areas for homeowners' insurance. Personal automobile
premium rates attempt to cover costs associated with required participation in
involuntary personal automobile programs, in addition to the costs directly
associated with the policies written voluntarily.

      The Company and Mutual have developed automated underwriting procedures
for personal automobile, homeowners and certain commercial lines of business,
which perform an initial review of policy applications based upon established
underwriting guidelines. Applications that do not meet the guidelines for
automated acceptance are either referred to underwriters who review the

                                       8
<PAGE>   9
applications and assess exposure, or rejected if the risk characteristics are
such that neither the Company nor Mutual would accept the applicant.

      As a condition to writing voluntary business in most states in which it
operates, the Company must participate in state-mandated programs which provide
insurance for individuals and businesses unable to obtain insurance voluntarily,
primarily for personal automobile insurance. The legislation creating these
programs usually allocates a pro rata portion of the risks attributable to such
insureds to each company writing voluntary business in the state on the basis of
its voluntary premiums written or the number of automobiles which it insures
voluntarily.

      The Company's gross (direct and assumed) premiums written attributable to
involuntary policies were $12,719,000, $6,036,000 and $3,726,000 in 1997, 1998
and 1999, respectively, mostly in New York. The Company is unable to predict the
level of its annual involuntary business for 2000 or future years.

Claims
------

      Insurance claims on policies written by the Company are investigated and
settled by claims adjusters employed by Mutual pursuant to the Management
Agreement. The Company and Mutual maintain several claims offices within their
operating territories. In areas where there is insufficient claim volume to
justify the cost of internal claims staff, the Company and Mutual use
independent appraisers and adjusters to investigate claims. The Company's claims
policy emphasizes timely investigation of claims, settlement of valid claims for
equitable amounts, maintenance of adequate reserves for claims and control of
external claims adjustment expenses. In order to support its claims policy, the
Company has implemented a program designed to ensure that as soon as practical,
claims are assigned an accurate value based on available information. The
program includes the centralization of certain branch claims operations and an
emphasis on the training of claims adjusters and supervisors by senior claims
staff. This claims policy is designed to support the Company's marketing policy
and provide agents and policyholders with prompt service and support.

      Claims settlement authority levels are established for each adjuster,
supervisor and manager based on their expertise and experience. When the Company
receives notice of a claim, it is assigned to an adjuster based upon its type,
severity and line of business. The claims staff then reviews the claim, obtains
appropriate information and establishes a loss reserve. Claims that exceed
certain dollar amounts or that cannot be readily settled are assigned to more
senior claims staff.

Loss and LAE Reserves
---------------------

      The Company, like other insurance companies, establishes reserves for
losses and LAE. These reserves are estimates intended to cover the probable
ultimate cost of settling all losses incurred and unpaid, including those losses
not yet reported to the Company. An insurer's ultimate liability is likely to
differ from its interim estimates because during the life of a claim, which may
be many years, additional facts affecting an insurer's liability may become
known. The reserves of an insurer are frequently adjusted based on monitoring by
the insurer and periodic review by state insurance departments. The Company
retains an independent actuarial firm to satisfy state insurance departments'
requirements with respect to the certification of reserves for losses and LAE.

                                       9
<PAGE>   10
      Loss reserves are established for known claims based on the type and
circumstance of the loss and the results of similar losses. For claims not yet
reported to the Company, loss reserves are based on statistical information from
previous experience periods adjusted for inflation, trends in court decisions
and economic conditions. LAE reserves are intended to cover the ultimate cost of
investigating all losses that have occurred and defending lawsuits, if any,
arising from these losses. LAE reserves are evaluated periodically using
statistical techniques which compare current costs with historical data.
Inflation is implicitly reflected in the reserving process through analysis of
cost trends and review of historical reserve results. With the exception of
workers' compensation claims, loss reserves are not discounted for financial
statement purposes.

      The Company's reserving process is based on the assumption that past
experiences, adjusted for the effect of current developments and trends, are
relevant in predicting future events. In the absence of specific developments,
the process also assumes that the legal climate regarding the claims process and
underlying liabilities remains constant. Other assumptions employed by the
Company or its actuarial firm change from time to time as circumstances change.
In estimating loss and LAE reserves, the Company employs a number of actuarial
methods, depending on their applicability to each line of business, in order to
balance the advantages and disadvantages of each method. No single method is
used to estimate loss and LAE reserves. Although different actuarial methods may
give rise to different reserve estimates, which may be higher or lower than the
reserves actually established by the Company, the Company believes that those
differences are not material.

      The Company has recorded changes in reserves for prior accident year
losses in most years. In 1997, the Company increased its reserves for prior
years by $4,508,000 primarily due to higher than anticipated severity of claims
on workers' compensation policies. In 1998 and 1999, the Company decreased its
reserves for prior years by $2,145,000 and $3,749,000, respectively, primarily
due to favorable loss experience related to automobile liability policies in
1998 and workers compensation policies in 1999.

                                       10
<PAGE>   11
      The following table sets forth the changes in the reserve for losses and
LAE for 1997, 1998 and 1999.

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                                 -----------------------

                                                            1997         1998           1999
                                                            ----         ----           ----
                                                                    (in thousands)
<S>                                                       <C>          <C>            <C>
Reserve for losses and LAE at beginning of year           $133,479     $141,205       $136,685
      Less reinsurance recoverables                          7,219       10,372          9,816
                                                          --------     --------       --------
      Net balance at beginning of year                     126,260      130,833        126,869
                                                          --------     --------       --------

Provision for losses and LAE for claims occurring in:
      Current year                                          67,119       67,379         69,835
      Prior years                                            4,508       (2,145)        (3,749)
                                                          --------     --------       --------
                                                            71,627       65,234         66,086
                                                          --------     --------       --------

Losses and LAE payments for claims occurring in:
      Current year                                          26,100       26,765         28,330
      Prior years                                           40,954       42,433         37,125
                                                          --------     --------       --------
                                                            67,054       69,198         65,455
                                                          --------     --------       --------

Reserve for losses and LAE at end of year, net             130,833      126,869        127,500
      Plus reinsurance recoverables                         10,372        9,816          6,026
                                                          --------     --------       --------
      Balance at end of year                              $141,205     $136,685       $133,526
                                                          ========     ========       ========
</TABLE>

      The first line of the following table presents, as of the end of the year
at the top of each column, the estimated amount of unpaid losses and LAE for
claims arising in that year and in all prior years, including claims that had
occurred but were not yet reported to the Company. For each column, the rows of
the table present, for the same group of claims, the amount of unpaid losses and
LAE as re-estimated as of the end of each succeeding year. The estimate is
modified as more information becomes known about the number and severity of
claims for each year. The "cumulative redundancy (deficiency)" represents the
change in the estimated amount of unpaid losses and LAE from the end of the year
at the top of each column through the end of 1999.

      For each column in the table, the change from the liability for losses and
LAE shown on the first line to the liability as re-estimated as of the end of
the following year was included in operating results for the following year.
That change includes the change in the previous year's column from the liability
as re-estimated one year later to the liability as re-estimated two years later
which, in turn, includes the change in the second preceding column from the
liability as re-estimated two years later to the liability as re-estimated three
years later, and so forth.

      The rows of the lower portion of the table present, as of the end of each
succeeding year, the amount of paid losses and LAE for claims unpaid at the end
of the year at the top of each column.

                                       11
<PAGE>   12
<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              -----------------------

                         1989     1990     1991      1992      1993      1994       1995      1996      1997      1998
                         ----     ----     ----      ----      ----      ----       ----      ----      ----      ----
                                                                  (in thousands)
<S>                     <C>      <C>      <C>      <C>       <C>       <C>        <C>       <C>       <C>       <C>
Liability for losses and LAE:

                        $66,892  $71,222  $77,274  $ 86,159  $ 89,939  $ 97,614   $113,718  $126,260  $130,781  $126,820

Liability re-estimated as of:
One year later           75,614   77,548   80,841    88,284    94,921   108,659    120,550   130,768   128,636   123,071
Two years later          76,310   75,987   81,743    91,224   100,607   113,091    128,192   133,029   130,498
Three years later        73,578   78,106   83,693    95,396   106,382   121,051    129,724   132,948
Four years later         75,672   79,563   87,105    99,779   112,983   121,791    131,647
Five years later         76,746   81,308   90,428   104,699   112,963   122,886
Six years later          77,026   84,530   92,370   104,808   112,963
Seven years later        79,690   85,219   93,046   105,183
Eight years later        79,890   84,765   93,346
Nine years later         79,415   84,896
Ten years later          80,020

Cumulative Redundancy (Deficiency):
                      $ (13,128) (13,674) (16,072) (19,024)   (23,024)  (25,272)   (17,929)   (6,688)      283     3,749
                      %   (19.6)   (19.2)   (20.8)   (22.1)     (25.6)    (25.9)     (15.8)     (5.3)       .2       3.0

Paid (Cumulative) as of:
One year later           32,538   32,666   30,082   35,724     34,551    36,916     38,549    40,954    42,433    37,125
Two years later          47,816   47,339   50,490   56,003     56,965    60,074     64,323    69,035    66,477
Three years later        58,489   61,585   63,925   69,863     72,963    77,982     84,638    86,364
Four years later         66,466   70,219   72,917   80,156     83,998    91,948     96,491
Five years later         71,322   75,018   79,374   86,808     93,295    99,171
Six years later          73,558   78,398   82,602   91,919     96,949
Seven years later        75,822   79,884   84,707   94,022
Eight years later        76,683   80,706   85,920
Nine years later         76,996   81,320
Ten years later          77,351
</TABLE>

      The loss and LAE reserves reported in the Company's consolidated financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") differ from those reported in the statements filed by MNH with the New
Hampshire Insurance Department in accordance with statutory accounting
principles ("STAT") as follows:

<TABLE>
<CAPTION>
                                                         As of December 31,
                                                        ---------------------
                                                   1997         1998         1999
                                                   ----         ----         ----
                                                           (in thousands)
<S>                                              <C>          <C>          <C>
Loss and LAE reserves on a STAT basis            $130,781     $126,820     $127,458
Adjustments:
      Ceded reinsurance balances recoverable       10,372        9,816        6,026
      Write-down of reinsurance recoverable            52           49           42
                                                 --------     --------     --------
Loss and LAE reserves on a GAAP basis            $141,205     $136,685     $133,526
                                                 ========     ========     ========
</TABLE>

                                       12
<PAGE>   13
Reinsurance
-----------

      The Company follows the customary industry practice of reinsuring a
portion of the exposure under its policies and as consideration pays to its
reinsurers a portion of the premium received on its policies. Insurance is ceded
principally to reduce an insurer's liability on individual risks and to protect
against catastrophic losses. Although reinsurance does not legally discharge an
insurer from its primary liability for the full amount of coverage provided by
its policies, it does make the assuming reinsurer liable to the insurer to the
extent of the reinsurance ceded.

      The Company is a party to reinsurance contracts under which certain types
of policies are automatically reinsured without the need for approval by the
reinsurer with respect to the individual risks that are covered ("treaty"
reinsurance). The Company also is a party to reinsurance contracts which are
handled on an individual policy or per risk basis and require the specific
agreement of the reinsurer as to each risk insured ("facultative" reinsurance).
Occasionally, the Company may secure facultative reinsurance to supplement its
coverage under treaty reinsurance.

      Effective January 1, 1998, the Company changed its primary reinsurer and
coverage. Prior to that time, the Company's excess of loss arrangements for
automobile liability, general liability and workers' compensation insurance
provided for recovery of losses over $500,000 up to a maximum of $5,000,000 per
occurrence. For claims occurring prior to 1993, the $500,000 threshold was
indexed for inflation for casualty lines other than workers' compensation and
New York State no-fault, and applied retroactively to all occurrences until they
are settled. There was no index provision for casualty claims occurring after
1992. This coverage was supplemented by additional treaty reinsurance covering
losses up to $5,000,000 in excess of the first $5,000,000.

      Prior to January 1, 1998, property reinsurance agreements provided for
recovery of property losses over $500,000 up to $2,000,000 per occurrence
without any index provision. Property catastrophe coverage placed with many
reinsurers worldwide provided for recovery of 95% of $40,000,000, subject to
aggregate retained losses of $5,000,000 for each natural disaster. The
reinsurance premium rate paid varied for each line of business.

      Effective January 1, 1998, the new property and casualty excess of loss
reinsurance agreements provide for recovery of casualty losses over $500,000 up
to $10,000,000 per occurrence and property losses over $500,000 up to
$10,000,000 per occurrence. This coverage is supplemented by a contingent
casualty layer of reinsurance for workers' compensation claims of $5,000,000 in
excess of the first $10,000,000 subject to a calendar year limit of $20,000,000.
Property catastrophe coverage provides for recovery of 95% of $50,000,000,
subject to aggregate retained losses of $5,000,000 per occurrence. The property
catastrophe reinsurance coverage is shared by the Company and Mutual on a pro
rata basis based upon the gross reported losses of the Company and Mutual for a
covered event.

      In 1987, the Company and its primary reinsurer agreed to limit the losses
which could be recovered by the Company under its excess of loss treaties for
the 1980 through 1986 accident years in exchange for a cap on retrospective
premiums due to the reinsurer. At December 31, 1999, recoverable losses exceeded
the cap and the excess losses have been retained by the Company.

      Effective January 1, 1993, Mutual and MNH entered into a quota share
reinsurance agreement under which MNH may assume up to 10% of Mutual's direct
voluntary written premiums and related

                                       13
<PAGE>   14
losses and allocated LAE in exchange for a reinsurance commission of 35%. The
agreement also provides for MNH to pay a contingent commission to Mutual equal
to any underwriting profit on the premiums assumed. Mutual pays the ceded
premiums, net of commissions and paid losses, to MNH on a monthly basis and MNH
invests these funds and earns investment income. To the extent commissions and
paid losses exceed premiums, MNH is required to pay the net monthly balance to
Mutual. The agreement may be terminated by either party effective as of any
January 1 with the prior approval of the New York Superintendent of Insurance
and upon six months' notice to the other party. In addition, the agreement may
be terminated by MNH at any time if any amount payable to MNH by Mutual becomes
more than 90 days overdue or if there is a change in control of Mutual approved
by the New York Superintendent of Insurance. Further, the agreement allows
Mutual to reduce its cessions to MNH from a maximum of 10% to a minimum of 0% of
Mutual's direct voluntary premiums written for any calendar year prior to the
beginning of that calendar year. Mutual has not ceded any portion of its direct
voluntary written premiums to MNH since 1995 and has informed the Company that
it will not cede any voluntary direct written premiums to MNH in 2000.

Investments
-----------

      The primary source of funds for investment by the Company is premiums
collected. Although premiums, net of commissions and other underwriting costs,
are taken into income ratably over the terms of the policies, they provide funds
for investment from the date they are received. Similarly, although
establishment of and changes in reserves for losses and LAE are included in
results of operations immediately, the amounts so set aside are available to be
invested until the Company pays those claims.

      The investments of the Company are regulated by New Hampshire insurance
law and are reviewed by the Board of Directors of the Company. Other than
certain short-term investments held to maintain liquidity, the Company primarily
invests in medium-term bonds, mortgage-backed and other asset-backed securities
including collateralized mortgage obligations, and tax-exempt securities. The
mortgage-backed securities held by the Company are typically purchased at
expected yields which are greater than comparable maturity Treasury securities
and are AAA or AA rated.

      The Company had $15,982,000 of tax-exempt bonds in its investment
portfolio at December 31, 1999. The Company believes these tax-exempt bonds are
of high quality (rated A or better) and, at the time of purchase, offered an
after-tax total return greater than comparable taxable securities.

      At December 31, 1999, the Company had $2,544,000 of short-term investments
with maturities less than 30 days, and $11,082,000 of non-investment grade
securities. These non-investment grade securities represented 5% of the
investment portfolio as compared to $6,706,000, or 3%, of the investment
portfolio at December 31, 1998.

                                       14
<PAGE>   15
      The table below gives information regarding the Company's investments as
of the dates indicated.

<TABLE>
<CAPTION>
                                                                 As of December 31,
                                       ------------------------------------------------------------------
                                               1997                    1998                    1999
                                       ------------------------------------------------------------------
                                        Amount       %          Amount        %         Amount        %
                                        ------       -          ------        -         ------        -
                                                              (dollars in thousands)
<S>                                    <C>           <C>       <C>           <C>       <C>           <C>
Fixed Maturities (1):
      U.S. Government and Agencies     $ 48,734      23.2%     $ 30,392      14.1%     $ 27,663      13.0%
      Corporate Bonds                   117,060      55.7       140,326      65.2       152,984      71.9
      Tax-Exempt Bonds                   28,764      13.7        27,066      12.6        15,982       7.5
                                       --------     -----      --------     -----      --------     -----
          Total Bonds                   194,558      92.6       197,784      91.9       196,629      92.4
Preferred stocks (2)                     10,582       5.0        10,373       4.9        12,941       6.1
Short-Term Investments (3)                4,470       2.1         6,280       2.9         2,544       1.2
Other (4)                                   634        .3           735        .3           797        .3
                                       --------     -----      --------     -----      --------     -----
Total Invested Assets                  $210,244     100.0%     $215,172     100.0%     $212,911     100.0%
                                       ========     =====      ========     =====      ========     =====
</TABLE>

(1)      Fixed Maturities are shown at their carrying amounts in the respective
         balance sheet. Held to Maturity fixed maturities are included at
         amortized cost. Available for Sale fixed maturities are included at
         fair value.
(2)      Shown at fair value.
(3)      Shown at cost, which approximates fair value.
(4)      Shown at estimated fair value or unpaid principal balance, which
         approximates estimated fair value.

      The table below sets forth the Company's net investment income and net
realized gains and losses, excluding the effect of income taxes, for the periods
shown:


<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                 1997           1998           1999
                                                 ----           ----           ----
                                                       (dollars in thousands)
<S>                                            <C>           <C>             <C>
Average investments (1)                        $202,041      $ 211,272       $211,596
Net investment income                            12,770         13,277         13,147
Net investment income as a percentage
    of average investments (2)                      6.3%           6.3%           6.2%

Net realized gains (losses) on investments     $    112      $      (2)      $     60
</TABLE>

(1)      At amortized cost.

(2)      The taxable equivalent yield for the years ended December 31, 1997,
         1998 and 1999 was 6.9%, 6.8%, and 7.0%, respectively, assuming an
         effective tax rate of 34%.

                                       15
<PAGE>   16
      The table below sets forth the carrying value of bonds and percentage
distribution of various maturities at the dates indicated. Fixed Maturities are
shown at their carrying amounts in the respective balance sheet. Held to
Maturity fixed maturities are included at amortized cost. Available for Sale
fixed maturities are included at fair value. The estimated repayment date is
used instead of the ultimate repayment date for mortgage backed and other asset
backed securities.

<TABLE>
<CAPTION>
                                                       As of December 31,
                             ------------------------------------------------------------------
                                      1997                   1998                    1999
                             ------------------------------------------------------------------
                              Amount         %        Amount        %         Amount         %
                              ------         -        ------        -         ------         -
                                                   (dollars in thousands)
<S>                          <C>           <C>       <C>          <C>        <C>           <C>
1 year or less               $ 47,499      24.4%     $ 51,892      26.2%     $ 49,742      25.3%
1 year through 5 years        116,508      59.9       126,631      64.0       132,421      67.4
5 years through 10 years       27,877      14.3        17,721       9.0        12,619       6.4
More than 10 years              2,674       1.4         1,540        .8         1,847        .9
                             --------     -----      --------     -----      --------     -----
      Total                  $194,558     100.0%     $197,784     100.0%     $196,629     100.0%
                             ========     =====      ========     =====      ========     =====
</TABLE>

Competition
-----------

      The property and casualty insurance business is highly competitive. The
Company is in direct competition with many national and regional multiple-line
insurers, many of which are substantially larger than the Company and have
considerably greater financial resources. Competition is further intensified by
the independent agency system because each of the independent agents who sells
the Company's policies also represents one or more other insurers. Also, the
Company's agents compete with direct writing insurers and this indirectly
affects the Company.

      Historically, the property and casualty industry has tended to be cyclical
in nature. During the "up" cycle, or "hard market," the industry is
characterized by price increases, strengthening of loss and LAE reserves,
surplus growth and improved underwriting results. Near the end of the "up"
cycle, an increase in capacity causes insurance companies to begin to compete
for market share on the basis of price. This price competition causes the
emergence of the "down" cycle, or "soft market," characterized by a reduction in
the premium growth rate and a general decline in profitability. Generally, the
down cycle is eventually accompanied by a decline in the adequacy of loss and
LAE reserves and a decrease in premium writing capacity. The property and
casualty insurance industry has experienced a cyclical downturn for the past
several years due primarily to intense premium rate competition and an excess
capacity to write premiums. Many of the circumstances which led to the current
cyclical downturn in the property and casualty insurance industry continue to
exist, and the Company cannot predict when or if market conditions for the
industry will improve.

Regulation
----------

General
-------

      MNH is subject to regulation under applicable insurance statutes,
including insurance holding company statutes, of the various states in which it
writes insurance. Insurance regulation is intended to provide safeguards for
policyholders rather than to protect stockholders of insurance companies or
their holding companies. Insurance laws of the various states establish
regulatory agencies with broad administrative powers including, but not limited
to, the power to grant or revoke licenses to transact

                                       16
<PAGE>   17
insurance business and to regulate trade practices, investments, premium rates,
the deposit of securities, the form and content of financial statements and
insurance policies, accounting practices and the maintenance of specified
reserves and capital. The regulatory agencies of each state have statutory
authority to enforce their laws and regulations through various administrative
orders, civil and criminal enforcement proceedings, and the suspension or
revocation of certificates of authority. In extreme cases, including insolvency,
impending insolvency and other matters, a regulatory authority may take over the
management and operation of an insurer's business and assets.

      Under insolvency or guaranty laws in the states in which MNH operates,
insurers doing business in those states can be assessed up to prescribed limits
for policyholder losses caused by other insurance companies that become
insolvent. The extent of any requirement for MNH to make any further payment
under these laws is not determinable. Most laws do provide, however, that an
assessment may be excused or deferred if it would threaten a solvent insurer's
financial strength. In addition, MNH is required to participate in various
mandatory pools or underwriting associations in certain states in which it
operates.

      The property and casualty insurance industry has been the subject of new
regulations and legislative activity in various states attempting to address the
affordability and availability of different lines of insurance. The regulations
and legislation generally restrict the discretion an insurance company has in
operating its business. It is not possible to predict the effect, if any, that
new regulations and legislation would have on the Company and MNH.

      The Company depends on cash dividends from MNH to pay cash dividends to
its stockholders and to meet its expenses. MNH is subject to New Hampshire state
insurance laws which restrict 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 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 $2,100,000, $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 paying another dividend to the Company until
May, 2000.

      In certain states in which it operates, MNH is required to maintain
deposits with the appropriate regulatory authority to secure its obligations
under certain insurance policies written in the jurisdiction. At December 31,
1999, investments of MNH having a par value of $1,900,000 were on deposit with
regulatory authorities.

      MNH and Mutual are required to file detailed annual reports with the
appropriate regulatory agency in each of the states in which they do business.
Their business and accounts are subject to examination by such agencies at any
time, and the laws of many states require periodic examination. The State of New
Hampshire Insurance Department most recently examined the accounts of MNH as of
December 31, 1997. MNH's annual report as of that date was accepted as
submitted, without adjustment.

      In 1993 the National Association of Insurance Commissioners ("NAIC")
adopted a risk-based capital measurement formula to be applied to all property
and casualty insurance companies. The

                                       17
<PAGE>   18
formula calculates a minimum required statutory net worth, based on the
underwriting, investment, credit, loss reserve and other business risks inherent
in an individual company's operations. Any insurance company that does not meet
threshold risk-based capital measurement standards could be forced to reduce the
scope of its operations and ultimately could become subject to statutory
receivership proceedings. MNH's capital substantially exceeds the statutory
minimum as determined by the risk-based capital measurement formula as of
December 31, 1999.

      The NAIC has established eleven financial ratios (the Insurance Regulatory
Information System, or "IRIS") to assist state insurance departments in their
oversight of the financial condition of insurance companies operating in their
respective states. The NAIC calculates these ratios based on information
submitted by insurers on an annual basis and shares the information with the
applicable state insurance departments. The ratios relate to leverage,
profitability, liquidity and loss reserve development. Each of the Company's
ratios for 1999 falls within the usual or acceptable range as published by the
NAIC.

Rates
-----

      Premium rate regulations vary greatly among states and lines of insurance,
and frequently require approval of the regulatory authority or limited review by
the authority prior to changes in rates. However, in New York and certain other
states, insurers writing private passenger automobile policies and in designated
commercial risk, professional liability and public entity insurance markets may
periodically revise rates within the limits of applicable flexibility bands
("flex-bands") on a file and use basis, but must obtain the Department's prior
approval in order to implement rate increases or decreases beyond these
flex-bands.

Insurance Holding Companies
---------------------------

      The Company is subject to statutes governing insurance holding company
systems. Typically, such statutes require the Company to file information
periodically concerning its capital structure, ownership, financial condition
and general business operations and material inter-company transactions not in
the ordinary course of business. Under the terms of applicable New Hampshire
statutes, any person or entity desiring to purchase shares which would result in
such person beneficially owning 10% or more of the Company's outstanding voting
securities would be required to obtain regulatory approval prior to the
purchase.

Involuntary Insurance
---------------------

      As a condition to writing voluntary insurance in most of the states in
which it operates, the Company must participate in programs that provide
insurance for persons or businesses unable to obtain insurance voluntarily.
Uncertainties as to the size of the involuntary market population make it
difficult to predict the amount of involuntary business in a given year.

Employees
---------

      The Company has no employees. At December 31, 1999, Mutual had 346
full-time equivalent employees. The Company believes that Mutual's relationship
with its employees is satisfactory.

                                       18
<PAGE>   19
Item 2.  PROPERTIES.

      Although the Company has no facilities, it benefits from the facilities of
Mutual pursuant to the Management Agreement, under which the Company is charged
a proportionate share of the costs of such facilities.

      The Company's corporate headquarters are located in Buffalo, New York in a
building owned by Mutual that contains approximately 113,000 square feet of
office space. Mutual also has regional underwriting and/or claims office
facilities in Buffalo, Albany and Hauppauge, New York; Manchester, New
Hampshire; and Moorestown, New Jersey. All of the offices except the Buffalo
office are leased.

Item 3.  LEGAL PROCEEDINGS.

      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.

      In addition to the foregoing matters, MNH is a defendant in a number of
other legal proceedings in the ordinary course of its business. Management of
the Company is of the opinion that the ultimate aggregate liability, if any,
resulting from such proceedings will not materially affect the financial
condition of the Company or MNH.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

                                       19
<PAGE>   20
                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

       The Company's common stock is traded on the American Stock Exchange (AMEX
symbol: MGP). The following table sets forth the high and low closing prices of
the common stock for the periods indicated as reported on the American Stock
Exchange.

<TABLE>
<CAPTION>
1999:                                                  High                Low
-----                                                  ----                ---
<S>                                                   <C>                 <C>
Fourth Quarter                                        $20.13              $19.50
Third Quarter                                          24.38               22.38
Second Quarter                                         22.38               21.25
First Quarter                                          22.50               21.00

<CAPTION>
1998:                                                  High                Low
-----                                                  ----                ---
<S>                                                   <C>                 <C>
Fourth Quarter                                        $21.75              $18.50
Third Quarter                                          24.38               19.25
Second Quarter                                         26.25               23.63
First Quarter                                          22.75               19.75
</TABLE>

       The number of stockholders of record of the Company's Common Stock as of
February 29, 2000 was 104. Securities held by nominees are counted as one
stockholder of record.

       The Company has paid a quarterly cash dividend to its common stockholders
since the third quarter of 1993. Continued payment of this dividend and its
amount will depend upon the Company's operating results, financial condition,
capital requirements and other relevant factors, including legal restrictions
applicable to the payment of dividends by its insurance subsidiary, MNH.

       As a holding company, the Company depends on dividends from its
subsidiary, MNH, to pay cash dividends to its stockholders. MNH is subject to
New Hampshire state insurance laws which restrict 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 policyholders'
surplus as of the preceding December 31. The maximum amount of dividends that
MNH could pay during any twelve month period ending in 2000 without prior
approval of the New Hampshire Insurance Commissioner is $5,328,000.

                                       20
<PAGE>   21
Item 6.  SELECTED FINANCIAL DATA.

       The selected financial data set forth in the following table for each of
the five years in the period ended December 31, 1999 have been derived from the
audited consolidated financial statements of the Company.

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                      ------------------------------------------------------------------
                                                        1995           1996           1997         1998           1999
                                                        ----           ----           ----         ----           ----
                                                                  (in thousands, except per share amounts)
<S>                                                   <C>            <C>            <C>          <C>            <C>
Net premiums written                                  $ 97,577       $ 96,622       $ 96,811     $ 92,758       $ 94,470
                                                      ========       ========       ========     ========       ========

Net premiums earned                                   $ 94,749       $ 95,752       $ 96,054     $ 93,540       $ 94,775
Net investment income                                   10,368         11,724         12,770       13,277         13,147
Net realized investment gains (losses)                    (832)           996            112           (2)            60
Other revenues                                             259            172            214          153            434
                                                      --------       --------       --------     --------       --------
     Total revenues                                    104,544        108,644        109,150      106,968        108,416
                                                      --------       --------       --------     --------       --------
Net losses and loss adjustment expenses                 78,195         79,603         71,627       65,234         66,086
Amortization of deferred policy acquisition costs       25,458         25,374         25,454       24,788         25,115
Other underwriting expenses                              7,709          6,700          6,647        8,689          7,552
                                                      --------       --------       --------     --------       --------
Total expenses                                         111,362        111,677        103,728       98,711         98,753
                                                      --------       --------       --------     --------       --------
Income (loss) before income taxes                       (6,818)        (3,033)         5,422        8,257          9,663
Provision (benefit) for income taxes                    (2,999)        (1,885)         1,224        2,334          2,870
                                                      --------       --------       --------     --------       --------
Net income (loss)                                     $ (3,819)      $ (1,148)      $  4,198     $  5,923       $  6,793
                                                      ========       ========       ========     ========       ========
Earnings (loss) per share:
Basic                                                 $  (1.19)      $   (.36)      $   1.41     $   2.05       $   2.48
                                                      ========       ========       ========     ========       ========
Diluted                                               $  (1.19)      $   (.36)      $   1.41     $   2.04       $   2.48
                                                      ========       ========       ========     ========       ========
Weighted average number of shares
     outstanding:
Basic                                                    3,214          3,174          2,973        2,895          2,738
Diluted                                                  3,219          3,182          2,980        2,904          2,743

Balance Sheet Data: (at year end)
------------------- -------------
Total investments                                     $192,218       $201,597       $210,244     $215,172       $212,911
Total assets                                           252,808        262,123        273,974      274,523        269,523
Reserve for losses and loss
     adjustment expenses                               119,722        133,479        141,205      136,685        133,526
Unearned premiums                                       48,773         49,710         50,406       49,382         49,616
Stockholders' equity                                    69,970         65,029         67,462       71,783         69,387

Dividend Data:
--------------
Cash dividend per common share                        $    .20       $    .20       $    .20     $    .20       $    .35
</TABLE>

                                       21
<PAGE>   22
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:

Certain statements made in this Annual Report on Form 10-K constitute
forward-looking statements and are made 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
those statements. These assumptions, risks and uncertainties include, but are
not limited to, those associated with factors affecting the property and
casualty insurance industry generally, including price competition, size and
frequency of claims, increasing crime rates, escalating damage awards, natural
disasters, fluctuations in interest rates and general business conditions; the
Company's dependence on investment income; the geographic concentration of the
Company's business in the northeastern United States and in particular in New
York, New Hampshire, New Jersey, Rhode Island, Pennsylvania and Massachusetts;
the adequacy of the Company's loss reserves; government regulation of the
insurance industry; exposure to environmental claims; dependence of the Company
on its relationship with Mutual; and the other risks and uncertainties discussed
or indicated in all documents filed by the Company with the Commission. The
Company expressly disclaims any obligation to update any forward-looking
statements as a result of developments occurring after the filing of this
report.

                                       22
<PAGE>   23
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

1999 Compared to 1998.
----------------------

       Total revenues for 1999 were $108,416,000, an increase of $1,448,000, or
1%, from $106,968,000 in 1998.

       Direct premiums written for 1999 were $100,227,000, an increase of
$1,271,000, or 1%, from $98,956,000 in 1998. Net written premiums for 1999 were
$94,470,000, an increase of $1,712,000, or 2%, from $92,758,000 in 1998.

       Voluntary personal lines direct premiums written for 1999 were
$38,493,000, a decrease of 3% from $39,518,000 in 1998. Private passenger
automobile direct premiums written, which comprised 76% and 78% of total
voluntary personal lines direct premiums written in 1999 and 1998, respectively,
decreased 5% in 1999 compared to 1998 primarily due to fewer new policies and
renewal policies retained resulting from price-based market competition.
Voluntary private passenger automobile policies in force at December 31, 1999,
decreased 7% compared to December 31, 1998. Homeowners direct premiums written
increased 6% in 1999 compared to 1998 due to a 9% increase in policies in force
resulting from an increase in new business units in 1999 as compared to 1998.

       Voluntary commercial lines direct premiums written for 1999 were
$59,621,000, an increase of 10% from $54,246,000 in 1998. This increase resulted
primarily from a $3,173,000, or 21%, increase in commercial auto direct premiums
written, a $573,000, or 8%, increase in workers' compensation direct premiums
written and a $1,406,000, or 22%, increase in contractors coverall direct
premiums written.

       The increase in commercial auto direct premiums written was primarily due
to a 25% increase in policies in force at December 31, 1999 compared to December
31, 1998, partially offset by a 3% decrease in average premium per commercial
auto policy at December 31, 1999 compared to December 31, 1998. The commercial
auto market continues to respond favorably to the Company's commercial auto
product enhancements and premium rate decreases enacted in early 1998. The
increase in workers' compensation direct premiums written was due to a 9%
increase in new business units in 1999 as compared to 1998. The increase in
contractors coverall direct premiums written was primarily due to a 14% increase
in average policies in force in 1999 compared to 1998 which in turn was due to
rate decreases in this line of business effective in the first quarter of 1999.

       Involuntary direct premiums written, primarily involuntary private
passenger automobile insurance, which comprised 2% and 5% of total direct
premiums written during 1999 and 1998, respectively, were $2,113,000 for 1999
compared to $5,192,000 in 1998. This 59% decrease resulted primarily from
decreased mandatory assignments from the New York Automobile Insurance Plan
("NYAIP"), which provides coverage for individuals who are unable to obtain auto
insurance in the voluntary market. During 1999 the NYAIP continued to adjust its
assignments as a result of having over assigned policies to the Company in 1997
and an overall decrease in the NYAIP's pool of business. Assignments from the
NYAIP vary depending upon a company's private passenger automobile market share
and the size of the NYAIP.

                                       23
<PAGE>   24
       Net premiums earned for 1999 were $94,775,000, an increase of $1,235,000,
or 1%, from $93,540,000 in 1998. Net premiums earned increased primarily due to
the 1% increase in direct premiums written.

       Net investment income was $13,147,000 in 1999, a decrease of 1% from
$13,277,000 in 1998, due to a decrease in average portfolio yield. Average
invested assets in 1999 were substantially unchanged from 1998.

       Other revenues were $434,000 for 1999, an increase of $281,000 or 184%
from $153,000 in 1998, primarily due to increased income from residual market
facilities.

       Net losses and LAE were $66,086,000 for 1999, an increase of 1% from
$65,234,000 in 1998. The increase in net losses and LAE was primarily
attributable to a non-recurring charge related to insurance related assessments,
which was offset by a non-recurring reduction in other underwriting expenses.
Absent this non-recurring charge, net losses and LAE were relatively unchanged
compared to 1998. The Company recorded decreases to its reserves for losses
related to prior accident years of $3,749,000 and $2,145,000 in 1999 and 1998,
respectively. These decreases in reserves for prior accident years reduced the
loss and LAE ratio in 1999 and 1998 by 3.9 and 2.3 percentage points,
respectively, and were primarily the result of favorable loss experience related
to auto liability policies in 1998 and workers' compensation policies in 1999.
The decrease in reserves for prior accident years was somewhat offset by an
increase in the loss and LAE ratio for losses and LAE occurring in the current
accident year.

       Involuntary automobile insurance business increased the Company's
calendar year loss and LAE ratio by approximately 1.1 and 3.5 percentage points
for the years ended December 31, 1999 and 1998, respectively. The combined ratio
on involuntary automobile business was greater than the combined ratio on
voluntary automobile business.

       The ratio of policy acquisition costs and other underwriting expenses to
net premiums earned decreased to 34.5% in 1999 from 35.8% in 1998, primarily due
to the aforementioned non-recurring reduction in insurance related assessments.
Expenses that vary directly with the Company's premium volume, primarily
commissions, premium taxes and state assessments, represented 20.6% and 21.7% of
net premiums earned in 1999 and 1998, respectively. Certain other underwriting
expenses, such as salaries, employee benefits and other operating expenses vary
indirectly with volume and comprise the remainder of the Company's underwriting
expenses.

       The amounts recorded by the Company for income taxes in 1999 and 1998
differed from those calculated using the statutory federal income tax rate
primarily due to tax exempt bond income.

1998 Compared to 1997.
----------------------

       Total revenues for 1998 were $106,968,000, a decrease of $2,182,000, or
2%, from $109,150,000 in 1997.

       Direct premiums written for 1998 were $98,956,000, a decrease of
$2,108,000, or 2%, from $101,064,000 in 1997. Net premiums written for 1998 were
$92,758,000, a decrease of $4,053,000, or 4%, from $96,811,000 in 1997.

                                       24
<PAGE>   25
       Voluntary personal lines direct premiums written for 1998 were
$39,518,000, substantially unchanged from $39,415,000 in 1997. Private passenger
automobile direct premiums written, which comprised 78% and 79% of total
voluntary personal lines direct premiums written in 1998 and 1997, respectively,
decreased 1% in 1998 compared to 1997 primarily due to intensified price-based
market competition. Homeowners direct premiums written increased 5% in 1998
compared to 1997 due to a 5% increase in average premium per policy.

       Voluntary commercial lines direct premiums written for 1998 were
$54,246,000, an increase of 5% from $51,572,000 in 1997. This increase resulted
primarily from a $1,260,000, or 9%, increase in commercial auto direct premiums
written, a $1,014,000, or 17%, increase in workers' compensation direct premiums
written and a $530,000, or 6%, increase in commercial package policies direct
premiums written.

       The increase in commercial auto direct premiums written was primarily due
to an 8% increase in average premium per policy at December 31, 1998 compared to
December 31, 1997. The increase in workers' compensation direct premiums written
was due to a 36% increase in new business units in 1998 as compared to 1997. The
increase in commercial package policy direct premiums written was due to an 11%
increase in policies in force at December 31, 1998 compared to 1997, partially
offset by a 3% decrease in average premium size.

       Involuntary direct premiums written, primarily involuntary private
passenger automobile insurance, which comprised 5% and 10% of total direct
premiums written during 1998 and 1997, respectively, were $5,192,000 for 1998
compared to $10,077,000 in 1997. This 48% decrease resulted primarily from
decreased mandatory assignments from the NYAIP, which provides coverage for
individuals who are unable to obtain auto insurance in the voluntary market.
During 1998 the NYAIP adjusted its assignments as a result of having over
assigned policies to the Company in 1997 and an overall decrease in the NYAIP's
pool of business.

       Net premiums earned for 1998 were $93,540,000, a decrease of $2,514,000,
or 3%, from $96,054,000 in 1997. Net premiums earned decreased primarily due to
a $2,503,000 (22%) decrease in involuntary earned premiums.

       Net investment income was $13,277,000 in 1998, an increase of 4% from
$12,770,000 in 1997, due to a 5% increase in average invested assets. Realized
investment losses were $2,000 in 1998 compared to $112,000 of realized gains in
1997.

       Net losses and LAE were $65,234,000 for 1998, a decrease of 9% from
$71,627,000 in 1997. The loss and LAE ratio decreased to 69.7% in 1998 from
74.6% in 1997. The decrease in net losses and LAE resulted from the fact that
there was a net decrease of $2,145,000 recorded during 1998 for losses occurring
in prior accident years. The Company recorded an increase to its reserves for
losses related to prior accident years of $4,508,000 in 1997.

       Involuntary automobile insurance business increased the Company's
calendar year loss and LAE ratio by approximately 3.5 and 3.4 percentage points
for the years ended December 31, 1998 and 1997, respectively.

                                       25
<PAGE>   26
       The ratio of policy acquisition costs and other underwriting expenses to
net premiums earned increased to 35.8% in 1998 from 33.4% in 1997 primarily due
to increased agency incentive commissions related to the Company's improved
underwriting results.

       Commissions, premium taxes and other state assessments that vary directly
with the Company's premium volume represented 21.7% and 20.8% of net premiums
earned in 1998 and 1997, respectively. The increase was due primarily to the
increase in agency incentive commissions. Certain other underwriting expenses,
such as salaries, employee benefits, and other operating expenses vary
indirectly with volume and comprise the remainder of the Company's underwriting
expenses.

       The amounts recorded by the Company for income taxes in 1998 and 1997
differed from those calculated using the statutory federal income tax rate
primarily due to tax exempt bond income.

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 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, 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
accumulated other comprehensive income within stockholders' equity. At December
31, 1999, the Company had recorded $1,188,000 of unrealized losses, net of tax,
associated with its fixed maturity investments as accumulated other
comprehensive loss. During 1999 the Company recorded $2,361,000 of unrealized
losses, net of tax, related to its investment portfolio as a component of other
comprehensive income.

       At December 31, 1999, the Company's portfolio of fixed maturity
investments represented 92.4% 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 December 31, 1999, $106,752,000, or 54.3%, of the Company's fixed
maturity portfolio was invested in mortgage-backed and other asset-backed
securities. The Company invests in a

                                       26
<PAGE>   27
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 December 31, 1999, $11,082,000, or 5%, of the Company's investment
portfolio was invested in non-investment grade securities compared to
$6,706,000, or 3%, at December 31, 1998. All of the Company's non-investment
grade securities are currently performing to the Company's purchase
expectations.

        During 1999 the Company repurchased 267,600 shares of its common stock
at an average price of $22.58 and was holding 646,000 shares in treasury as of
December 31, 1999.

       In August 1999, the Company 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 December 31, 1999, $1,025,000 was outstanding on this
loan.

       As a holding company, the Company is dependent upon 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
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
$5,329,000. MNH paid the maximum allowable dividend to the Company in 1999.
Dividends were paid in January 1999, May 1999 and September 1999, of $2,100,000,
$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 paying another
dividend to the Company until May, 2000. The Company paid a cash dividend to its
common stockholders of $.05 per share in the first quarter of 1999 and $.10 per
share in the second, third and fourth quarters of 1999. Total dividends paid
amounted to $955,000 in 1999.

       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. MNH's
ratio of net premiums written to statutory surplus for 1999 was 1.8 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 that may have a time element.
The Company has not encountered any Year 2000 related problems as of the date of
this report.

                                       27
<PAGE>   28
       The Company estimates that its share of the total expenses associated
with becoming Year 2000 compliant approximated $300,000. Approximately $150,000
of the expenses were for external costs, which included $112,000 in outside
consultant expenses and $38,000 for specific upgrades of software to address
Year 2000 compliance, and $150,000 of the expenses have been for internal
resources dedicated to achieving Year 2000 compliance. The Company estimates its
share of costs incurred in 1999 to be $10,000, which has been expensed. There
has not been a material impact on the Company's results of operations or
financial condition as a result of information technology projects being
deferred due to resource constraints caused by the Year 2000 project.

       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.

Environmental Claims
--------------------

       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.

Inflation
---------

       Inflation affects the Company, like other companies in the property and
casualty insurance industry, by contributing to higher losses, LAE and operating
costs, as well as greater investment income resulting from the higher interest
rates which can prevail in an inflationary period. Premium rates, however, may
not keep pace with inflation since competitive forces generally limit the
Company's ability to increase premium rates. The Company considers inflationary
trends in estimating its reserves for claims reported and for incurred but not
reported claims.

                                       28
<PAGE>   29
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 10.0% of the Company's common stock. Under the Management
Agreement, Mutual provides the Company and MNH with all 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 MNH'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 years' 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 a conflict of interest between the Company and Mutual in their
joint operations and prevents the Company's shareholders from realizing the fair
market value of their shares.

Item 7A.      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 $212,911,000 at December 31, 1999 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 table below provides information related to the Company's fixed
maturity investments at December 31, 1999. 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.

                                       29
<PAGE>   30
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     $  1,602
    Average interest rate              5.4%         0.0%         0.0%         0.0%        0.0%        0.0%           --           --

Mortgage & asset backed
       securities                        0          183        1,698        1,601       1,795       7,623        12,900       13,103
    Average interest rate              0.0%         7.2%         7.2%         7.1%        7.1%        7.3%           --           --
                                   -------      -------      -------      -------      ------      ------      --------     --------
Total                              $ 1,647      $   183      $ 1,698      $ 1,601      $1,795      $7,623      $ 14,547     $ 14,705
                                   =======      =======      =======      =======      ======      ======      ========     ========

Available for Sale
------------------

U.S. Treasury securities and
       obligations of U.S.
       Government corporations
       and agencies                $ 7,400      $18,622      $   350      $     0      $    0      $    0      $ 26,732     $ 26,016
    Average interest rate              5.3%         5.4%         6.3%         0.0%        0.0%        0.0%           --           --

Obligations of states and
       political subdivisions        4,595        8,720        1,710          700           0         215        15,940       15,982
    Average interest rate              4.9%         4.9%         5.6%         5.4%        0.0%        7.3%           --           --

Corporate securities                 7,887       15,423       14,568        7,415         849         317        46,459       46,233
    Average interest rate              5.5%         6.6%         7.1%         8.0%        8.6%        9.5%           --           --

Mortgage & asset
       backed securities            28,488       36,458       16,929        4,306       1,887       6,370        94,438       93,851
    Average interest rate              6.8%         6.9%         6.9%         7.0%        7.1%        7.2%           --           --
                                   -------      -------      -------      -------      ------      ------      --------     --------

Total                              $48,370      $79,223      $33,557      $12,421      $2,736      $6,902      $183,209     $182,082
                                   =======      =======      =======      =======      ======      ======      ========     ========
</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.

                                       30
<PAGE>   31
Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

       The consolidated financial statements required in response to this Item
are submitted as part of Item 14 (a) of this report, and are incorporated in
this item by reference.

       Quarterly data for the two most recent fiscal years is set forth below:



<TABLE>
<CAPTION>
                                                   Three months ended
                                                   ------------------
                                        3/31        6/30        9/30         12/31
                                        ----        ----        ----         -----
                                         (in thousands, except per share amounts)
<S>                                    <C>         <C>         <C>          <C>
1999
----
    Net premiums earned                $23,662     $23,524     $24,040      $23,549
    Net investment income                3,271       3,208       3,280        3,388
    Net realized investment gains            1           6          53           --
    Other revenues                         142         124          95           73
                                       -------     -------     -------      -------
    Total revenues                     $27,076     $26,862     $27,468      $27,010
                                       =======     =======     =======      =======
    Income before income taxes         $ 2,325     $ 2,613     $ 2,367      $ 2,358
    Net income                         $ 1,649     $ 1,850     $ 1,650      $ 1,644
    Net income per diluted share       $   .58     $   .67     $   .61      $   .63

1998
----
    Net premiums earned                $23,740     $23,875     $23,448      $22,477
    Net investment income                3,290       3,331       3,317        3,339
    Net realized investment losses          --          --          (2)          --
    Other revenues                          42          42          51           18
                                       -------     -------     -------      -------
    Total revenues                     $27,072     $27,248     $26,814      $25,834
                                       =======     =======     =======      =======
    Income before income taxes         $ 1,846     $ 2,098     $ 2,041      $ 2,272
    Net income                         $ 1,346     $ 1,520     $ 1,483      $ 1,574
    Net income per diluted share       $   .46     $   .52     $   .51      $   .55
</TABLE>

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

None.

                                       31
<PAGE>   32
                                    PART III


Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

       The information in response to this item is incorporated by reference
herein to the information under the caption "Election of Directors" presented in
the Company's definitive proxy statement filed or to be filed pursuant to
Regulation 14A and used in connection with the Company's 2000 Annual Meeting of
Shareholders to be held on or about May 3, 2000.

Item 11.  EXECUTIVE COMPENSATION.

       The information in response to this item is incorporated by reference
herein to the information under the caption "Executive Compensation" and
"Compensation of Directors" presented in the Company's definitive proxy
statement filed or to be filed pursuant to Regulation 14A and used in connection
with the Company's 2000 Annual Meeting of Shareholders to be held on or about
May 3, 2000, provided, however that information appearing under the captions
"Compensation Committee Report on Executive Compensation" and "Performance
Comparison" is not incorporated herein and should not be deemed to be included
in this document for any purpose.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT.

       The information in response to this item is incorporated by reference
herein to the information under the caption "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" presented in the
Company's definitive proxy statement filed or to be filed pursuant to Regulation
14A and used in connection with the Company's 2000 Annual Meeting of
Stockholders to be held on or about May 3, 2000.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       The information in response to this item is incorporated herein by
reference to the information under the caption "Management Agreement" and
"Certain Transactions" presented in the Company's definitive proxy statement
filed or to be filed pursuant to Regulation 14A and used in connection with the
Company's 2000 Annual Meeting of Shareholders to be held on or about May 3,
2000.


                                       32
<PAGE>   33
                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

     (a) (1)      The following financial statements of Merchants Group, Inc.
                  are included on pages F-1 to F-23:

             Report of Independent Accountants
             Consolidated Balance Sheet - December 31, 1998 and 1999.
             Consolidated Statement of Operations - Years ended December 31,
             1997, 1998 and 1999.
             Consolidated Statement of Changes in Stockholders' Equity - Years
             ended December 31, 1997, 1998 and 1999.
             Consolidated Statement of Cash Flows - Years ended December 31,
             1997, 1998 and 1999.
             Notes to Consolidated Financial Statements.

         (2)      The following financial statement schedules of Merchants
                  Group, Inc. are filed herewith pursuant to Item 8:

              Schedule I -
                  Summary of Investments - Other Than Investments in Related
                  Parties.

              Schedule II -
                  Amounts Receivable From/Payable to Related Parties, and
                  Underwriters, Promoters and Employees Other Than Related
                  Parties.

              Schedule III -
                  Condensed Financial Information of Registrant.

              Schedule V -
                  Supplemental Insurance Information (see Schedule X).

              Schedule VI - Reinsurance

              Schedule X  -
                  Supplemental Insurance Information Concerning Property -
                  Casualty Subsidiaries

         (b)      Reports on Form 8-K. There were no reports on Form 8-K filed
                  for the quarter ended December 31, 1999.

         (c)      Exhibits required by Item 601 of Regulation S-K:

     (3) (a)      Restated Certificate of Incorporation (incorporated by
                  reference to Exhibit No. 3C to Amendment No. 1 to the
                  Company's Registration Statement (No. 33-9188) on Form S-1
                  filed on November 7, 1986).

         (b)      Restated By-laws (incorporated by reference to Exhibit No. 3D
                  to Amendment No. 1 to the Company's Registration Statement
                  (No. 33-9188) on Form S-1 filed on November 7, 1986).

                                       33
<PAGE>   34
    (10) (a)      Management Agreement dated as of September 29, 1986 by and
                  among Merchants Mutual Insurance Company, Registrant and
                  Merchants Insurance Company of New Hampshire, Inc.
                  (incorporated by reference to Exhibit No. 10A to the Company's
                  Registration Statement (No. 33-9188) on Form S-1 filed on
                  September 30, 1986).

         (b)      Agreement of Reinsurance No. 6922 between Merchants Mutual
                  Insurance Company, Merchants Insurance Company of New
                  Hampshire, Inc. and General Reinsurance Corporation
                  (incorporated by reference to Exhibit No. 10E to the Company's
                  Registration Statement (No. 33-9188) on Form S-1 filed on
                  September 30, 1986).

         (c)      Agreement of Reinsurance No. 7299 between Merchants Mutual
                  Insurance Company, Merchants Insurance Company of New
                  Hampshire, Inc. and General Reinsurance Corporation,
                  (incorporated by reference to Exhibit No. 10o to the Company's
                  1987 Annual Report on Form 10-K (File No. 1-9640) filed on
                  March 19, 1988).

         (d)      Agreement of Reinsurance dated January 27, 1993, between
                  Merchants Mutual Insurance Company and Merchants Insurance
                  Company of New Hampshire, Inc. (incorporated by reference to
                  Exhibit (3) in the Company's Current Report on Form 8-K (File
                  No. 1-9640) filed on January 29, 1993).

         (e)      Agreement of Reinsurance No. 8009 between Merchants Mutual
                  Insurance Company, Merchants Insurance Company of New
                  Hampshire, Inc. and General Reinsurance Corporation,
                  (incorporated by reference to Exhibit 10e to the Company's
                  1995 Annual Report on Form 10-K filed on March 28, 1996).

         (f)      Property Catastrophe Reinsurance Agreement (HCI Agreement No.
                  439) between Merchants Mutual Insurance Company, Merchants
                  Insurance Company of New Hampshire, Inc. and General
                  Reinsurance Corporation, et. al., dated January 1, 1997,
                  (incorporated by reference to Exhibit No. 10f to the Company's
                  1996 Annual Report on Form 10-K filed on March 28, 1997).

         (g)      Property and Casualty Excess of Loss Reinsurance Agreement
                  between Merchants Mutual Insurance Company, Merchants
                  Insurance Company of New Hampshire, Inc. and American
                  Reinsurance Company, including endorsement, (incorporated by
                  reference to Exhibit 10g to the Company's 1998 Annual Report
                  on Form 10-K filed on March 29, 1999).

         (h)      Property Catastrophe Excess of Loss Reinsurance Agreement
                  between Merchants Mutual Insurance Company, Merchants
                  Insurance Company of New Hampshire, Inc. and the Subscribing
                  Reinsurers Executing the Interest and Liabilities Contracts
                  attached to this agreement, effective January 1, 1998
                  (incorporated by reference to Exhibit 10h to the Company's
                  1998 Annual Report on Form 10-K filed on March 29, 1999).

                                       34
<PAGE>   35
       * (i)      Merchants Mutual Capital Accumulation Plan (incorporated by
                  reference to Exhibit No. 10G to the Company's Registration
                  Statement (No. 33-9188) on Form S-1 filed on September 30,
                  1986).

       * (j)      Merchants Mutual Capital Accumulation Plan, fourth amendment,
                  effective January 1, 1996 (incorporated by referenced to
                  Exhibit 10(h) to the Company's 1996 Annual Report on Form 10-K
                  (File No. 1-9640) filed on March 28, 1997).

       * (k)      Merchants Mutual Capital Accumulation Plan Trust Agreement
                  (restated as of January 1, 1996 (incorporated by reference to
                  Exhibit 10(i) to the Company's 1996 Annual Report on Form 10-K
                  (File No. 1-9640) filed on March 28, 1997).

       * (l)      Merchants Mutual Supplemental Executive Retirement Plan dated
                  as of December 29, 1989 and Agreement of Trust dated as of
                  December 29, 1989 (incorporated by reference to Exhibit No.
                  10K to the Company's 1989 Annual Report on Form 10-K (File No.
                  1-9640) filed on March 21, 1990).

       * (m)      Amendment dated June 10, 1992 to Agreement of Trust under
                  Merchants Mutual Supplemental Executive Retirement Plan dated
                  as of December 29, 1989 (incorporated by reference to Exhibit
                  No. 10R to the Company's 1992 Annual Report on Form 10-K (File
                  No. 1-9640) filed on March 31, 1993).

       * (n)      Merchants Group, Inc. 1986 Stock Option Plan As Amended
                  Through February 16, 1993 (incorporated by reference to
                  Exhibit No. 10E to the Company's 1992 Annual Report on Form
                  10-K (File No. 1-9640) filed on March 31, 1993).

       * (o)      Form of Amended Indemnification Agreement entered into by
                  Registrant with each director and executive office of
                  Registrant (incorporated by reference to Exhibit No. 10N to
                  Amendment No. 1 to the Company's Registration Statement on
                  (No. 33-9188) Form S-1 filed on November 7, 1986).

       * (p)      Merchants Mutual Insurance Company Incentive Compensation
                  Plan, as amended January 24, 1996 (incorporated by reference
                  to Exhibit No. 10(n) to the Company's 1996 Annual Report on
                  Form 10-K (File No. 1-9640) filed on March 28, 1997).

       * (q)      Employee Retention Agreement between Robert M. Zak and
                  Merchants Mutual Insurance Company dated as of March 1, 1999
                  (incorporated by reference to Exhibit No. 10-A to the
                  Company's June 30, 1999 Quarterly Report on Form 10-Q filed on
                  August 12, 1999).

       * (r)      Employee Retention Agreement between Edward M. Murphy and
                  Merchants Mutual Insurance Company dated as of March 1, 1999
                  (incorporated by reference to Exhibit 10r to the Company's
                  1998 Annual Report on Form 10-K filed on March 29, 1999).

                                       35
<PAGE>   36
       * (s)      Employee Retention Agreement between Kenneth J. Wilson and
                  Merchants Mutual Insurance Company dated as of March 1, 1999
                  (incorporated by reference to Exhibit 10s to the Company's
                  1998 Annual Report on Form 10-K filed on March 29, 1999).

    (11) (a)      Statement re computation of per share earnings (incorporated
                  herein by reference to Note 9 to the Consolidated Financial
                  Statements included in Item 8).

    (21)          List of Subsidiaries of Registrant (incorporated by reference
                  to Exhibit No. 22 to the Company's Registration Statement (
                  No. 33-9188) on Form S-1 filed on September 30, 1986).

    (23)          Consent of Independent Accountants (filed herewith).

    (27)          Financial Data Schedule (filed herewith).

* Indicates a management contract or compensation plan or arrangement.

                                       36
<PAGE>   37
<TABLE>
                              MERCHANTS GROUP, INC.

                      SCHEDULE I - SUMMARY OF INVESTMENTS -
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                                December 31, 1999
                                 (in thousands)

<CAPTION>
                                                                       Amount at
                                                                      which shown
                                          Amortized Cost/   Market   in the balance
Type of Investment                              Cost         value        sheet
------------------                              ----         -----        -----
<S>                                           <C>          <C>          <C>
Fixed maturities:

United States Government and
    government agencies and authorities       $ 28,019     $ 27,618     $ 27,663
Corporate bonds                                 46,459       46,233       46,233
Mortgage and asset backed securities           107,338      106,954      106,751
Tax exempt bonds                                15,940       15,982       15,982
                                              --------     --------     --------

       Total fixed maturities                  197,756      196,787      196,629

Preferred stocks                                13,082       12,941       12,941

Short-term investments                           2,544        2,544        2,544

Other                                              797          797          797
                                              --------     --------     --------
                                              $214,179     $213,069     $212,911
                                              ========     ========     ========
</TABLE>

                                       37
<PAGE>   38
<TABLE>
                              MERCHANTS GROUP, INC.

        SCHEDULE II - AMOUNTS RECEIVABLE FROM/PAYABLE TO RELATED PARTIES,
                 AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER
                              THAN RELATED PARTIES
                  Years ended December 31, 1997, 1998 and 1999
                                 (in thousands)


<CAPTION>
                                              1997         1998           1999
                                              ----         ----           ----
<S>                                           <C>        <C>            <C>
Receivable from (payable to) Merchants Mutual
    Insurance Company(1):

Balance at beginning of period                $327       $   527        $(1,321)
Change during the period                       200        (1,848)           703
                                              ----       -------        -------

Balance at end of period                      $527       $(1,321)       $  (618)
                                              ====       =======        =======
</TABLE>

(1)      Under a Management Agreement, Merchants Mutual Insurance Company
         ("Mutual") provides employees, services and facilities for Merchants
         Insurance Company of New Hampshire, Inc. ("MNH") to carry on its
         insurance business on a cost reimbursed basis. The balance in the
         intercompany receivable (payable) account indicates the amount due from
         (to) Mutual for the excess (deficiency) of premiums collected over
         (from) payments for losses, employees, services and facilities provided
         to MNH.

                                       38
<PAGE>   39
<TABLE>
                                         MERCHANTS GROUP, INC.

                     SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                           (in thousands except per share and share amounts)


<CAPTION>
BALANCE SHEET
-------------
                                                                                   December 31,
                                                                               ---------------------
                                                                                1998           1999
                                                                                ----           ----
<S>                                                                            <C>           <C>
       Assets
       ------
Investment in subsidiary                                                       $70,788       $70,362
Other assets                                                                     1,043            98
                                                                               -------       -------
       Total assets                                                            $71,831       $70,460
                                                                               =======       =======

       Liabilities and Stockholders' Equity
       ------------------------------------

Other liabilities                                                              $    48       $    48
Demand loan                                                                         --         1,025
                                                                               -------       -------
       Total liabilities                                                            48         1,073
                                                                               -------       -------

Stockholders' equity:
    Preferred stock, $.01 par value, authorized and
         unissued 3,000,000 shares                                                  --            --
    Preferred stock, no par value, $424.30 stated value,
         no shares issued or outstanding at December 31,
         1998 or 1999                                                               --            --
    Common stock, $.01 par value, authorized 10,000,000 shares; issued and
         outstanding of 2,851,452 shares at December 31,
         1998 and 2,595,852 shares at December 31, 1999                             32            32
    Additional paid in capital                                                  35,511        35,680
    Treasury stock, 378,400 shares at December 31, 1998
         and 646,000 shares at December 31, 1999                                (7,097)      (13,139)
    Accumulated other comprehensive income (loss)                                1,173        (1,188)
    Accumulated earnings                                                        42,164        48,002
                                                                               -------       -------

       Total stockholders' equity                                               71,783        69,387
                                                                               -------       -------

       Total liabilities and stockholers' equity                               $71,831       $70,460
                                                                               =======       =======
</TABLE>

                                       39
<PAGE>   40
<TABLE>
                              MERCHANTS GROUP, INC.

          SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                    Continued
                                 (in thousands)


<CAPTION>
INCOME STATEMENT
----------------

                                                    Year ended December 31,
                                                ------------------------------
                                                 1997       1998         1999
                                                 ----       ----         ----
<S>                                             <C>         <C>         <C>
Revenues:
       Equity in net income of subsidiary       $4,485      6,161       $6,937
       Investment income                            21         61           39
       Net realized investment gains                 2         --           --
                                                ------     ------       ------
              Total revenues                     4,508      6,222        6,976

Expenses:
       General and administrative expenses         230        337          237
                                                ------     ------       ------
       Operating income before income taxes      4,278      5,885        6,739
       Income tax expense (benefit)                 80        (38)         (54)
                                                ------     ------       ------
              Net income                        $4,198     $5,923       $6,793
                                                ======     ======       ======
</TABLE>

                                       40
<PAGE>   41
<TABLE>
                                   MERCHANTS GROUP, INC.

               SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                      (in thousands)


<CAPTION>
STATEMENT OF CASH FLOWS
-----------------------

Increase (Decrease) in Cash and Cash Equivalents:

                                                              Year ended December 31,
                                                         ---------------------------------
                                                           1997         1998         1999
                                                           ----         ----         ----
                                                                   (in thousands)
<S>                                                      <C>          <C>          <C>
Cash flows from operating activities:                    $  (227)     $  (251)     $  (142)
                                                         -------      -------      -------
Cash flows from investing activities:
       Receipt of subsidiary common stock dividend         2,800        2,600        5,000
       Sale (purchase) of other investments, net             853         (630)         936
                                                         -------      -------      -------
       Cash flows from investing activities                3,653        1,970        5,936
                                                         -------      -------      -------

Cash flows from financing activities:
       Purchase of treasury stock                         (2,923)      (1,191)      (6,042)
       Proceeds of demand loan                                --           --        1,025
       Cash dividends                                       (589)        (579)        (955)
       Exercise of common stock options                       83           56          169
                                                         -------      -------      -------
       Cash flows from financing activities               (3,429)      (1,714)      (5,803)
                                                         -------      -------      -------

Net increase (decrease) in cash and cash equivalents          (3)           5           (9)
Cash and cash equivalents, beginning of year                   8            5           10
                                                         -------      -------      -------
Cash and cash equivalents, end of year                   $     5      $    10      $     1
                                                         =======      =======      =======


Reconciliation of net income to net
       cash provided by operations:

Net income                                               $ 4,198      $ 5,923      $ 6,793

Adjustments to reconcile net income
       to net cash provided by operations:

              Equity in income of subsidiary              (4,485)      (6,161)      (6,937)
              Net realized investment gains                   (2)          --           --
              Decrease in other liabilities                  (20)         (13)          --
              (Increase) decrease in other
                 (non-investment) assets                      93           (6)          --
              Other, net                                     (11)           6            2
                                                         -------      -------      -------
Net cash used in operating activities                    $  (227)     $  (251)     $  (142)
                                                         =======      =======      =======
</TABLE>

                                       41
<PAGE>   42
                              MERCHANTS GROUP, INC.

                 SCHEDULE III - CONDENSED FINANCIAL INFORMATION



NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------

       Cash dividends of $2,800,000, $2,600,000 and $5,000,000 were paid to the
Registrant by its consolidated subsidiary in the years ended December 31, 1997,
1998 and 1999 respectively.

                                       42
<PAGE>   43
<TABLE>
                              MERCHANTS GROUP, INC.

                            SCHEDULE VI - REINSURANCE
                    YEARS ENDED DECEMBER 31, 1997, 1998, 1999
                        (in thousands except percentages)


<CAPTION>
                                                                                Percentage
                                                Ceded      Assumed              of amount
                                     Gross     to other   from other   Net       assumed
                                     amount    companies  companies   amount     to net
                                     ------    ---------  ---------   ------     ------
<S>                                <C>          <C>        <C>        <C>         <C>
Year Ended December 31, 1997
Property and Casualty Premiums     $101,064     $6,895     $2,642     $96,811     2.7%

Year ended December 31, 1998
Property and Casualty Premiums     $ 98,956     $7,042     $  844     $92,758      .9%

Year ended December 31, 1999
Property and Casualty Premiums     $100,227     $7,369     $1,612     $94,470     1.7%
</TABLE>

                                       43
<PAGE>   44
<TABLE>
                                                      MERCHANTS GROUP, INC.

                                   SCHEDULE X - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
                                                PROPERTY - CASUALTY SUBSIDIARIES
                                          Years ended December 31, 1997, 1998 and 1999
                                                         (in thousands)


<CAPTION>
                                Reserves                                           Losses & loss
                      Deferred    for     Discount                              adjustment expenses  Amoritiza-
                       policy   losses &  if  any,                        Net   incurred related to   tion of  Paid losses
                      acquis-   loss ad-  deducted              Net     invest-     (1)       (2)    deferred   & loss ad-  Direct
                       ition    justment   from     Unearned   earned    ment     Current    Prior  acquisition  justment   premium
                       costs    expenses  reserves  premiums  premiums  income     years     years     costs     expenses   written
                       -----    --------  --------  --------  --------  ------     -----     -----     -----     --------   -------
<S>                   <C>       <C>        <C>      <C>       <C>       <C>       <C>       <C>        <C>       <C>       <C>

Year ended:


December 31, 1997     $12,597   $141,205   $6,394   $50,406   $96,054   $12,770   $67,119   $ 4,508    $25,454   $67,054   $101,064

December 31, 1998     $12,390   $136,685   $9,256   $49,382   $93,540   $13,277   $67,379   $(2,145)   $24,788   $69,198   $ 98,956

December 31, 1999     $12,309   $133,526   $8,492   $49,616   $94,775   $13,147   $69,835   $(3,749)   $25,115   $65,455   $100,227
</TABLE>

                                       44
<PAGE>   45
SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 30, 2000   BY: /s/Robert M. Zak, Senior Vice President
                              Robert M. Zak, Senior Vice President and Chief
                                Operating Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
     SIGNATURE                                   TITLE                                      DATE
     ---------                                   -----                                      ----


<S>                                      <C>                                           <C>
/s/Richard E. Garman                     Director, Chairman                            March 30, 2000
----------------------                   of the Board
Richard E. Garman


/s/Brent D. Baird                        Director, President                           March 30, 2000
----------------------
Brent D. Baird


/s/Robert M. Zak                         Director, Sr. VP &                            March 30, 2000
----------------------                   Chief Operating
Robert M. Zak                            Officer


/s/Kenneth J. Wilson                     Vice President & CFO                          March 30, 2000
----------------------                   (principal financial
Kenneth J. Wilson                        and accounting officer)


/s/Andrew A. Alberti                     Director                                      March 30, 2000
----------------------
Andrew A. Alberti


/s/Frank J. Colantuono                   Director                                      March 30, 2000
----------------------
Frank J. Colantuono


/s/Henry P. Semmelhack                   Director                                      March 30, 2000
----------------------
Henry P. Semmelhack
</TABLE>

                                       45
<PAGE>   46
                        Report of Independent Accountants
                        ---------------------------------


To the Board of Directors
and Stockholders of
Merchants Group, Inc.


In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) present fairly, in all material respects,
the financial position of Merchants Group, Inc. and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers
Buffalo, New York
February 14, 2000

                                      F-1
<PAGE>   47
<TABLE>
                                MERCHANTS GROUP, INC.
                                ---------------------

                              CONSOLIDATED BALANCE SHEET
                              --------------------------

                                    (in thousands)
                                    --------------

<CAPTION>
                                                                     December 31,
                                                                     ------------
                           Assets                                 1998         1999
                           ------                                 ----         ----
<S>                                                             <C>          <C>
Investments:
   Fixed maturities:
     Held to maturity at amortized cost                         $ 17,000     $ 14,547
     Available for sale at fair value                            180,784      182,082
   Preferred stock at fair value                                  10,373       12,941
   Other long-term investments at fair value                         735          797
   Short-term investments                                          6,280        2,544
                                                                --------     --------

               Total investments                                 215,172      212,911


Cash                                                                  16            2
Interest due and accrued                                           1,923        2,117
Premiums receivable, net of allowance for doubtful accounts
   of $454 in 1998 and $431 in 1999                               20,629       19,964
Deferred policy acquisition costs                                 12,390       12,309
Ceded reinsurance balances receivable                              9,741        5,396
Prepaid reinsurance premiums                                       2,629        3,168
Deferred income taxes                                              5,055        6,002
Other assets                                                       6,968        7,654
                                                                --------     --------

               Total assets                                     $274,523     $269,523
                                                                ========     ========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       F-2
<PAGE>   48
<TABLE>
                                  MERCHANTS GROUP, INC.
                                  ---------------------

                               CONSOLIDATED BALANCE SHEET
                               --------------------------

                    (in thousands except share and per share amounts)

<CAPTION>
                                                                       December 31,
                                                                       ------------
                                                                   1998           1999
                                                                   ----           ----
<S>                                                              <C>            <C>
         Liabilities and Stockholders' Equity
         ------------------------------------

Liabilities:
   Reserve for losses and loss adjustment expenses               $136,685       $133,526
   Unearned premiums                                               49,382         49,616
   Demand loan                                                       --            1,025
   Payable to affiliate                                             1,321            618
   Other liabilities                                               15,352         15,351
                                                                 --------       --------

                  Total liabilities                               202,740        200,136
                                                                 --------       --------

Stockholders' equity:
   Common stock, $.01 par value, authorized 10,000,000                 32             32
       shares, issued and outstanding 2,851,452 shares at
       December 31, 1998 and 2,595,852 shares at
       December 31, 1999
   Additional paid in capital                                      35,511         35,680
   Treasury stock, 378,400 shares at December 31, 1998             (7,097)       (13,139)
       and 646,000 shares at December 31, 1999
   Accumulated other comprehensive income (loss)                    1,173         (1,188)
   Accumulated earnings                                            42,164         48,002
                                                                 --------       --------

                  Total stockholders' equity                       71,783         69,387
                                                                 --------       --------

Commitments and contingent liabilities (Note 11)                     --             --

                  Total liabilities and stockholders' equity     $274,523       $269,523
                                                                 ========       ========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       F-3
<PAGE>   49
<TABLE>
                                    MERCHANTS GROUP, INC.
                                    ---------------------

                            CONSOLIDATED STATEMENT OF OPERATIONS
                            ------------------------------------

                           (in thousands except per share amounts)

<CAPTION>
                                                                Year ended December 31,
                                                                -----------------------
                                                           1997         1998          1999
                                                           ----         ----          ----
<S>                                                      <C>          <C>           <C>
Revenues:
   Net premiums earned                                   $ 96,054     $ 93,540      $ 94,775
   Net investment income                                   12,770       13,277        13,147
   Net realized investment gains (losses)                     112           (2)           60
   Other revenues                                             214          153           434
                                                         --------     --------      --------
       Total revenues                                     109,150      106,968       108,416
                                                         --------     --------      --------

Expenses:
   Net losses and loss adjustment expenses                 71,627       65,234        66,086
   Amortization of deferred policy acquisition costs       25,454       24,788        25,115
   Other underwriting expenses                              6,647        8,689         7,552
                                                         --------     --------      --------
       Total expenses                                     103,728       98,711        98,753
                                                         --------     --------      --------

Income before income taxes                                  5,422        8,257         9,663
Income tax provision                                        1,224        2,334         2,870
                                                         --------     --------      --------
       Net income                                        $  4,198     $  5,923      $  6,793
                                                         ========     ========      ========

Earnings per share:
    Basic                                                $   1.41     $   2.05      $   2.48
                                                         ========     ========      ========
    Diluted                                              $   1.41     $   2.04      $   2.48
                                                         ========     ========      ========

Weighted average number of shares outstanding:
   Basic                                                    2,973        2,895         2,738
   Diluted                                                  2,980        2,904         2,743
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       F-4
<PAGE>   50
<TABLE>
                               MERCHANTS GROUP, INC.
                               ---------------------

                  CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                  ----------------------------------------------

                                  (in thousands)

<CAPTION>
                                                      Year ended December 31,
                                                      -----------------------
                                                   1997        1998         1999
                                                   ----        ----         ----
<S>                                               <C>         <C>         <C>
Net income                                        $4,198      $5,923      $ 6,793
                                                  ------      ------      -------
Other comprehensive income (loss) before tax:
    Unrealized gains (losses)
          on securities                            2,595         185       (3,540)
    Reclassification adjustment
          for gains and losses included
          in net income                              (74)        (15)         (37)
                                                  ------      ------      -------
Other comprehensive income (loss)
    before tax                                     2,521         170       (3,577)
Income tax provision (benefit) related to
    items of other comprehensive income              857          58       (1,216)
                                                  ------      ------      -------
Other comprehensive income (loss)                  1,664         112       (2,361)
                                                  ------      ------      -------

Comprehensive income                              $5,862      $6,035      $ 4,432
                                                  ======      ======      =======
</TABLE>

                  The accompanying notes are an integral part of
                     these consolidated financial statements.

                                        F-5
<PAGE>   51
<TABLE>
                                MERCHANTS GROUP, INC.
                                ---------------------

              CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
              ---------------------------------------------------------

                                   (in thousands)

<CAPTION>
                                                        Year ended December 31,
                                                        -----------------------
                                                   1997         1998          1999
                                                   ----         ----          ----
<S>                                               <C>          <C>          <C>
Common stock:
    Beginning and end of year                     $    32      $    32      $     32
                                                  -------      -------      --------

Additional paid in capital:
    Beginning of year                              35,372       35,455        35,511
    Exercise of common stock options                   83           56           169
                                                  -------      -------      --------
    End of year                                    35,455       35,511        35,680
                                                  -------      -------      --------

Treasury stock:
    Beginning of year                              (2,983)      (5,906)       (7,097)
    Purchase of treasury shares                    (2,923)      (1,191)       (6,042)
                                                  -------      -------      --------
    End of year                                    (5,906)      (7,097)      (13,139)
                                                  -------      -------      --------

Accumulated other comprehensive income (loss)
    Beginning of year                                (603)       1,061         1,173
    Other comprehensive income (loss)               1,664          112        (2,361)
                                                  -------      -------      --------
    End of year                                     1,061        1,173        (1,188)
                                                  -------      -------      --------

Accumulated earnings:
    Beginning of year                              33,211       36,820        42,164
    Net income                                      4,198        5,923         6,793
    Cash dividends ($.20/share in 1997 and
       1998, $.35/share in 1999)                     (589)        (579)         (955)
                                                  -------      -------      --------
    End of year                                    36,820       42,164        48,002
                                                  -------      -------      --------

            Total stockholders' equity            $67,462      $71,783      $ 69,387
                                                  =======      =======      ========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       F-6
<PAGE>   52
<TABLE>
                                      MERCHANTS GROUP, INC.
                                      ---------------------

                               CONSOLIDATED STATEMENT OF CASH FLOWS
                               ------------------------------------

                                          (in thousands)

<CAPTION>
                                                                  Year ended December 31,
                                                                  -----------------------
                                                             1997          1998           1999
                                                             ----          ----           ----
<S>                                                        <C>           <C>           <C>
Cash flows from operations:
     Collection of premiums                                $ 96,102      $ 94,121      $  95,612
     Payment of losses and loss adjustment expenses         (67,054)      (69,198)       (65,455)
     Payment of underwriting expenses                       (32,019)      (32,159)       (33,381)
     Investment income received                              12,763        13,220         13,141
     Investment expenses paid                                  (309)         (341)          (381)
     Income taxes paid                                         (164)       (1,501)        (3,064)
     Other cash receipts                                        214           157            388
                                                           --------      --------      ---------
         Net cash provided by operations                      9,533         4,299          6,860
                                                           --------      --------      ---------

Cash flows from investing activities:
     Proceeds from fixed maturities sold or matured          81,035        95,217         98,624
     Purchase of fixed maturities                           (90,176)      (97,733)      (100,385)
     Net increase in preferred stock                         (2,067)         --           (2,977)
     Net (increase) decrease in other
         long-term investments                                1,671          (101)           (62)
     Net (increase) decrease in short-term investments        3,778        (1,810)         3,736
     (Purchase) disposition of equipment, net                  (146)         --              696
                                                           --------      --------      ---------
         Net cash used in investing activities               (5,905)       (4,427)          (368)
                                                           --------      --------      ---------

Cash flows from financing activities:
     Settlement of affiliate balances                          (200)        1,848           (703)
     Proceeds of demand loan                                   --            --            1,025
     Purchase of treasury stock                              (2,923)       (1,191)        (6,042)
     Proceeds from exercise of common stock options              83            56            169
     Cash dividends                                            (589)         (579)          (955)
                                                           --------      --------      ---------
         Net cash provided by (used in)
             financing activities                            (3,629)          134         (6,506)
                                                           --------      --------      ---------
     Increase (decrease) in cash                                 (1)            6            (14)
Cash, beginning of year                                          11            10             16
                                                           --------      --------      ---------
Cash, end of year                                          $     10      $     16      $       2
                                                           ========      ========      =========
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       F-7
<PAGE>   53
<TABLE>
                                   MERCHANTS GROUP, INC.
                                   ---------------------

                            CONSOLIDATED STATEMENT OF CASH FLOWS
                            ------------------------------------
              RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
              ---------------------------------------------------------------

                                       (in thousands)

<CAPTION>
                                                               Year ended December 31,
                                                               -----------------------
                                                           1997         1998         1999
                                                           ----         ----         ----
<S>                                                      <C>          <C>          <C>
Net income                                               $ 4,198      $ 5,923      $ 6,793

Adjustments:
     Depreciation and amortization                           (19)        (123)        (143)
     Net realized investment (gains) losses                 (112)           2          (60)

(Increase) decrease in assets:
     Interest due and accrued                                (65)         (65)        (194)
     Premiums receivable                                    (583)         455          665
     Deferred policy acquisition costs                      (201)         207           81
     Ceded reinsurance balances receivable                (3,297)       1,391        4,345
     Prepaid reinsurance premiums                             61          242         (539)
     Deferred income taxes                                  (532)       1,206          270
     Other assets                                          1,274          154       (1,432)

Increase (decrease) in liabilities:
     Reserve for losses and loss adjustment expenses       7,726       (4,520)      (3,159)
     Unearned premiums                                       696       (1,024)         234
     Other liabilities                                       387          451           (1)
                                                         -------      -------      -------
          Net cash provided by operations                $ 9,533      $ 4,299      $ 6,860
                                                         =======      =======      =======
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                       F-8
<PAGE>   54
                              MERCHANTS GROUP, INC.
                              ---------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

1.   Significant Accounting Policies
     -------------------------------

     Principles of consolidation and basis of presentation
     -----------------------------------------------------

     The consolidated financial statements of Merchants Group, Inc. (the
     "Company") include the accounts of 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. MNH is a stock property and casualty
     insurance company domiciled in the state of New Hampshire. MNH offers
     property and casualty insurance to preferred risk individuals and small to
     medium sized businesses in the northeast United States, primarily in New
     York, New Hampshire and New Jersey where a majority of its policies are
     written. As a holding company, the Company has had no operations.

     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. In its Annual Statement filed with regulatory authorities, MNH
     reported policyholders' surplus of $50,576,000 and $53,278,000 at December
     31, 1998 and 1999, respectively. MNH's net income as reported in its Annual
     Statement was $3,481,000 in 1997, $7,367,000 in 1998 and $7,141,000 in
     1999. All significant intercompany balances and transactions have been
     eliminated.

     The preparation of consolidated financial statements in conformity with
     GAAP requires management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities and disclosure of contingent
     assets and liabilities at the date of the financial statements and the
     reported amounts of revenues and expenses during the reporting period.
     Actual results may differ from those estimates.

     Investments
     -----------

     The Company has classified its investments in fixed maturities as either
     held to maturity or available for sale. Fixed maturities classified as held
     to maturity are presented at amortized cost and consist of debt securities
     that management intends and has the ability to hold until maturity. Fixed
     maturities classified as available for sale are presented at fair value and
     consist of debt securities that management may not hold until maturity. All
     preferred stocks are classified as available for sale and are presented at
     fair value. The net aggregate unrealized gain or loss, net of applicable
     income taxes, related to fixed maturities and preferred stock classified as
     available for sale is included as a component of accumulated other
     comprehensive income (loss) in stockholders' equity.

                                      F-9
<PAGE>   55
     Fixed maturities include mortgage backed and asset backed securities which
     are valued using the interest method. The Company estimates prepayments
     utilizing published data when applying the interest method. Periodic
     adjustments to prepayment assumptions are credited or charged to investment
     income.

     Other long-term investments include collateralized mortgage obligation
     residuals, carried at unpaid principal balances which do not vary
     significantly from fair value. Short-term investments, consisting primarily
     of money market mutual funds, have original maturities of three months or
     less and are carried at cost, which approximates fair value. Realized gains
     and losses on the sale of investments are based on the cost of the specific
     investment sold.

     Net premiums earned
     -------------------

     Premiums are recorded as revenue ratably over the terms of the policies
     written (principally one year). Unearned premiums are calculated using a
     monthly pro rata method.

     Deferred policy acquisition costs
     ---------------------------------

     Policy acquisition costs, such as commissions (net of reinsurance
     commissions), premium taxes and certain other underwriting expenses which
     vary directly with premium volume, are deferred and amortized over the
     terms of the related insurance policies. Deferred policy acquisition costs
     do not exceed estimated recoverable amounts after allowing for anticipated
     investment income.

     Reinsurance
     -----------

     Reinsurance assumed from business written through state reinsurance
     facilities has been reflected in unearned premiums, loss reserves, premiums
     earned and losses incurred based on reports received from such facilities.
     Ceded reinsurance premiums, losses and ceding commissions are netted
     against earned premiums, losses and commission expense, respectively.

     Reserve for losses and loss adjustment expenses
     -----------------------------------------------

     Liabilities for unpaid losses and loss adjustment expenses ("LAE") are
     estimates of future payments to be made to settle all insurance claims for
     reported losses and estimates of incurred but not reported losses based
     upon past experience modified for current trends. With the exception of
     workers' compensation losses, loss reserves are not discounted. Estimated
     amounts of salvage and subrogation on paid and unpaid losses are deducted
     from the liability for unpaid claims. The estimated liabilities may be more
     or less than the amount ultimately paid when the claims are settled.
     Management and the Company's independent consulting actuary regularly
     review the estimates of reserves needed and any changes are reflected in
     current operating results.

                                      F-10
<PAGE>   56
     The Company discounts its liability for workers' compensation case reserves
     on a tabular basis, using the National Council on Compensation Insurance
     Workers' Compensation Statistical Plan Table III A at a rate of 3.5%. The
     amount of discount at December 31, 1998 and 1999 is $9,256,000 and
     $8,492,000, respectively. Reserves for losses incurred but not reported and
     for LAE are not discounted.

     Structured settlements have been negotiated for claims on certain insurance
     policies. Structured settlements are agreements to provide periodic
     payments to claimants, and are funded by annuities purchased from various
     life insurance companies. The Company remains primarily liable for payment
     of these claims. Accordingly, a liability and a corresponding deposit in
     the amount $5,764,000 and $6,456,000 at December 31, 1998 and 1999,
     respectively, are recorded in the Company's consolidated balance sheet.

     Income taxes
     ------------

     The Company and its wholly owned subsidiary file a consolidated federal
     income tax return. The Company follows the asset and liability approach to
     account for income taxes, which requires the recognition of deferred tax
     liabilities and assets for the expected future tax consequences of
     temporary differences between the financial statement carrying amounts and
     the tax basis of assets and liabilities.

     Other financial instruments
     ---------------------------

     The fair values of the Company's other financial instruments, principally
     premiums receivable and certain non-insurance related liabilities, do not
     vary significantly from the amounts assigned in these financial statements.

     Insurance-related assessments
     -----------------------------

     In 1997, the American Institute of Certified Public Accountants' Accounting
     Standards Executive Committee issued Statement of Position ("SOP") 97-3,
     "Accounting by Insurance and Other Enterprises for Insurance-Related
     Assessments". The accounting guidance of this SOP focuses on the timing of
     recognition and measurement of liabilities for insurance-related
     assessments. The Company adopted SOP 97-3 in the first quarter of 1999. The
     impact of this adoption was not material to the Company's financial
     position or results of operations.

2.   Related Party Transactions
     --------------------------

     The Company and MNH have no paid employees. Under a management agreement
     Merchants Mutual Insurance Company ("Mutual"), which owns 9.8% of the
     Company's outstanding common stock at December 31, 1999, 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

                                      F-11
<PAGE>   57
     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. MNH also pays an annual
     management fee of $50,000 to Mutual. On July 23, 1998, the Company gave
     notice to Mutual of its intent to terminate the management agreement under
     its terms, which termination is effective five years after the date of
     notice.

     MNH's agents are also licensed to sell Mutual's products. The agents are
     informed of the underwriting criteria of each company as well as the
     classes of business that are acceptable to each company. Underwriters
     review each application submitted by an agent to determine which company's
     underwriting criteria the risk meets and then issue a policy in the
     appropriate company. The payable to or receivable from Mutual is
     non-interest bearing and represents the net of premiums collected and loss
     and operating expense payments made by Mutual on behalf of MNH. This
     balance is settled in cash on a monthly basis.

                                      F-12
<PAGE>   58

================================================================================
3.   Investments
     -----------

     Investments in fixed maturities and preferred stocks
     ----------------------------------------------------

     The amortized cost and estimated fair values of investments in fixed
     maturities held to maturity and available for sale and the cost and
     estimated fair value of preferred stocks are as follows:

<TABLE>
<CAPTION>
                                   Amortized        Gross        Gross
                                     Cost/        Unrealized   Unrealized    Estimated
                                     Cost           Gains        Losses      Fair Value
                                   ---------      ----------   ----------    ----------
                                                    (in thousands)
<S>                                <C>            <C>         <C>            <C>
December 31, 1998
-----------------

Fixed maturities:

Held to maturity
----------------

U.S. Treasury securities and
    obligations of U.S.
    government corporations
    and agencies                    $  1,647        $ --          $ 12        $  1,635
Mortgage and asset backed
    securities                        15,353           768         --           16,121
                                    --------        ------        ----        --------
        Total                       $ 17,000        $  768        $ 12        $ 17,756
                                    ========        ======        ====        ========

Available for sale
------------------

U.S. Treasury securities and
    obligations of U.S.
    government corporations
    and agencies                    $ 12,755        $   21         $--        $ 12,776
Obligations of states and
    political subdivisions            26,534           532         --           27,066
Corporate securities                  29,386           693          34          30,045
Mortgage and asset backed
    securities                       109,966           976          45         110,897
                                    --------        ------        ----        --------
        Total                       $178,641        $2,222        $ 79        $180,784
                                    ========        ======        ====        ========

Preferred stocks                    $ 10,099        $  408        $134        $ 10,373
                                    ========        ======        ====        ========
</TABLE>

                                      F-13
<PAGE>   59
<TABLE>
<CAPTION>
                                   Amortized       Gross        Gross
                                     Cost/       Unrealized   Unrealized     Estimated
                                     Cost          Gains        Losses       Fair Value
                                   ---------     ----------   ----------     ----------
                                                    (in thousands)
<S>                                <C>           <C>          <C>            <C>
December 31, 1999
-----------------

Fixed maturities:

Held to maturity
----------------

U.S. Treasury securities and
    obligations of U.S.
    government corporations
    and agencies                    $  1,647        $--         $   45        $  1,602
Mortgage and asset backed
    securities                        12,900         213            10          13,103
                                    --------        ----        ------        --------
        Total                       $ 14,547        $213        $   55        $ 14,705
                                    ========        ====        ======        ========

Available for sale
------------------

U.S. Treasury securities and
    obligations of U.S.
    government corporations
    and agencies                    $ 26,372        $--         $  356        $ 26,016
Obligations of states and
    political subdivisions            15,940          79            37          15,982
Corporate securities                  46,459          30           256          46,233
Mortgage and asset backed
    securities                        94,438         134           721          93,851
                                    --------        ----        ------        --------
        Total                       $183,209        $243        $1,370        $182,082
                                    ========        ====        ======        ========

Preferred stocks                    $ 13,082        $ 73        $  214        $ 12,941
                                    ========        ====        ======        ========
</TABLE>

     The amortized cost and fair value of fixed maturities by expected maturity
     at December 31, 1999 are shown below. Mortgage and asset backed securities
     are distributed in the table based upon management's estimate of repayment
     periods. Expected maturities will differ from contractual maturities
     because borrowers may have the right to call or prepay obligations with or
     without call or prepayment penalties.

                                      F-14
<PAGE>   60
<TABLE>
<CAPTION>
                                                                   Estimated Fair
                                                  Amortized Cost        Value
                                                  --------------   --------------
                                                           (in thousands)
<S>                                                  <C>              <C>
          Held to maturity
          ----------------
          Due in one year or less                    $  1,647         $  1,602
          Due after one year through five years         5,277            5,360
          Due after five years through ten years        7,623            7,743
          Due after ten years                            --               --
                                                     --------         --------
                  Total                              $ 14,547         $ 14,705
                                                     ========         ========

          Available for sale
          ------------------
          Due in one year or less                    $ 48,370         $ 48,096
          Due after one year through five years       127,937          127,143
          Due after five years through ten years        5,044            4,996
          Due after ten years                           1,858            1,847
                                                     --------         --------
                  Total                              $183,209         $182,082
                                                     ========         ========
</TABLE>

     Discount and premium pertaining to collateralized mortgage obligations are
     amortized over the securities' estimated redemption periods using the
     effective interest method. Yields used to calculate premium or discount are
     adjusted for prepayments quarterly.

     Fixed maturities with a par value of $1,900,000 were on deposit at December
     31, 1999 with various state insurance departments in compliance with
     applicable insurance laws.

     Proceeds from sales of available for sale fixed maturity securities and
     preferred stocks and gross realized gains and losses related to such sales
     are as follows:

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                ------------------------------
                                                1997        1998          1999
                                                ----        ----          ----
                                                       (in thousands)
<S>                                            <C>         <C>         <C>
      Proceeds from sales                      $26,652     $9,955      $16,968
      Gross realized gains                         138          1           76
      Gross realized losses                         26          3           16
</TABLE>

                                      F-15
<PAGE>   61
     Net investment income
     ---------------------

     Net investment income consists of:

<TABLE>
<CAPTION>
                                            Year ended December 31,
                                            -----------------------
                                          1997        1998        1999
                                          ----        ----        ----
                                                (in thousands)
<S>                                     <C>         <C>         <C>
          Fixed maturities              $11,472     $12,236     $12,118
          Short-term investments            686         513         464
          Other                             921         869         946
                                        -------     -------     -------
            Total investment income      13,079      13,618      13,528
          Investment expenses               309         341         381
                                        -------     -------     -------
            Net investment income       $12,770     $13,277     $13,147
                                        =======     =======     =======
</TABLE>

4.   Reinsurance
     -----------

     MNH follows the customary practice of reinsuring a portion of the exposure
     under its policies. Insurance is ceded principally to reduce net liability
     on individual risks and to protect against catastrophic losses. Although
     reinsurance does not legally discharge an insurer from its primary
     liability for the full amount of coverage provided by its policies, it does
     make the assuming reinsurer liable to the insurer to the extent of the
     reinsurance ceded.

     The effect of reinsurance on premiums written and earned for the years
     ended December 31, 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
                                  1998                      1999
                          --------------------      ---------------------
                          Premiums    Premiums      Premiums     Premiums
                          Written      Earned       Written       Earned
                          -------      ------       -------       ------
                                          (in thousands)
<S>                       <C>          <C>          <C>           <C>
     Direct               $98,956      $99,556      $100,227      $99,943
     Assumed                  844        1,267         1,612        1,663
     Ceded                 (7,042)      (7,283)       (7,369)      (6,831)
                          -------      -------      --------      -------
         Net premiums     $92,758      $93,540      $ 94,470      $94,775
                          =======      =======      ========      =======
</TABLE>

     As a result of the reinsurance agreements maintained by MNH, MNH is exposed
     to certain credit risk if one or more of its primary reinsurers were to
     become financially unstable. As of December 31, 1999, MNH has recognized
     amounts to be recovered from its primary reinsurers related to ceded losses
     and ceded unearned premiums totaling $7,725,000. MNH generally does not
     require collateral for reinsurance recoverable.

                                      F-16
<PAGE>   62
5.   Reserve for Losses and Loss Adjustment Expenses
     -----------------------------------------------

     Activity in the reserve for losses and LAE is summarized as follows:

<TABLE>
<CAPTION>
                                                                 1998          1999
                                                                 ----          ----
                                                                   (in thousands)
<S>                                                            <C>           <C>
     Reserve for losses and LAE at beginning of year           $141,205      $136,685
         Less reinsurance recoverables                           10,372         9,816
                                                               --------      --------
         Net balance at beginning of year                       130,833       126,869
                                                               --------      --------

     Provision for losses and LAE for claims occurring in:
         Current year                                            67,379        69,835
         Prior years                                             (2,145)       (3,749)
                                                               --------      --------
                                                                 65,234        66,086
                                                               --------      --------

     Loss and LAE payments for claims occurring in:
         Current year                                            26,765        28,330
         Prior years                                             42,433        37,125
                                                               --------      --------
                                                                 69,198        65,455
                                                               --------      --------

     Reserve for losses and LAE at end of year, net             126,869       127,500
         Plus reinsurance recoverables                            9,816         6,026
                                                               --------      --------
         Balance at end of year                                $136,685      $133,526
                                                               ========      ========
</TABLE>

     In 1998, the Company decreased its reserves for prior years by $2,145,000,
     primarily due to favorable loss experience related to automobile liability
     policies. In 1999, the Company decreased its reserves for prior years by
     $3,749,000 primarily due to favorable loss experience related to workers'
     compensation policies.

6.   Demand Loan
     -----------

     During 1999, the Company arranged for a $2,000,000 unsecured credit
     facility from a bank. 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. As of December 31, 1999, $1,025,000 was outstanding under
     this facility and carried a weighted average interest rate of 8.12%.

                                      F-17
<PAGE>   63
7.   Income Taxes
     ------------

     The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
                                       Year ended December 31,
                                     ---------------------------
                                     1997        1998       1999
                                     ----        ----       ----
                                            (in thousands)
<S>                                 <C>         <C>        <C>
     Current                        $1,756      $1,127     $2,600
     Deferred                         (532)      1,207        270
                                    ------      ------     ------
     Total income tax provision     $1,224      $2,334     $2,870
                                    ======      ======     ======
</TABLE>

     A reconciliation of the difference between the Company's total income tax
     provision and that calculated using statutory income tax rates is as
     follows:

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                             ----------------------------
                                             1997        1998        1999
                                             ----        ----        ----
                                                    (in thousands)
<S>                                         <C>         <C>         <C>
     Computed provision at
           statutory rate                   $1,843      $2,807      $3,285
     Adjustments:
           Tax-exempt investment income       (491)       (393)       (298)
           Dividend exclusion                 (147)       (128)       (150)
           Other items                          19          48          33
                                            ------      ------      ------
     Total income tax provision             $1,224      $2,334      $2,870
                                            ======      ======      ======
</TABLE>

                                      F-18
<PAGE>   64
     Deferred tax liabilities (assets) are comprised of the following:

<TABLE>
<CAPTION>
                                                         December 31,
                                                      ------------------
                                                      1998          1999
                                                      ----          ----
                                                        (in thousands)
<S>                                                 <C>           <C>
     Deferred policy acquisition costs              $  4,213      $  4,185
     Unrealized investment gains                         604          --
     Accretion of bond discount                          349           146
     Other                                               204           131
                                                    --------      --------
     Total deferred tax liabilities                    5,370         4,462
                                                    --------      --------

     Discounting of reserve for losses and
          loss adjustment expenses                    (6,826)       (6,425)
     Unearned premiums                                (3,179)       (3,159)
     Unrealized investment losses                       --            (612)
     Other                                              (279)         (268)
     Minimum tax credit carryforward                    (141)         --
                                                    --------      --------
     Total deferred tax assets                       (10,425)      (10,464)
                                                    --------      --------
          Net deferred income taxes                 $ (5,055)     $ (6,002)
                                                    ========      ========
</TABLE>

     Although realization is not assured, based upon the evidence available the
     Company believes that it is more likely than not that the net deferred
     income tax asset will be realized. The amount of the deferred tax asset
     considered realizable, however, could be reduced in the near term if
     estimates of future taxable income are not achieved.

8.   Stockholders' Equity
     --------------------

     Dividends
     ---------

     The Company depends on dividends from its subsidiary, MNH, to pay cash
     dividends to its stockholders and to meet its expenses. MNH is subject to
     New Hampshire state insurance laws which restrict 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
     an insurer's policyholders' surplus as of the preceding December 31. 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.

     Stock option plans
     ------------------

     The Company's stock option plan (the "Plan"), which reserved 200,000 shares
     of common stock for issuance to the Company's and MNH's officers and key
     employees of the Company's affiliate, Mutual, expired in 1996. Under the
     Plan, qualified and non-qualified stock options were granted at amounts not
     less than the fair market value of the Company's stock on the

                                      F-19
<PAGE>   65
     date of grant. Options granted under the Plan have a 10 year life and may
     be exercised in cumulative annual increments of 25% commencing one year
     from the date of grant.

     In accounting for its stock option plans, the Company remains under the
     expense recognition provisions of Accounting Principles Board Opinion No.
     25 "Accounting for Stock Issued to Employees" but follows the disclosure
     provisions of SFAS No. 123 "Accounting for Stock Based Compensation". No
     compensation expense was recognized in 1997, 1998 or 1999 for options
     granted under these plans.

     Had compensation expense for stock options granted under the Company's
     stock option plans been determined based on the fair value at the grant
     date consistent with the method required by SFAS No. 123, the Company's net
     income and earnings per share for the years ended December 31, 1998 and
     1999 would have been as follows:

<TABLE>
<CAPTION>
                                              1998            1999
                                              ----            ----
<S>                                        <C>             <C>
     Net income:
         As reported                       $5,923,000      $6,793,000
         Pro forma                         $5,884,000      $6,777,000
     Diluted earnings per share:
         As reported                            $2.04           $2.48
         Pro forma                              $2.03           $2.47
</TABLE>

     The fair value of each option granted in 1996 was estimated using a
     binomial option pricing model which is a modification of the Black-Scholes
     option pricing model, with the following assumptions for 1996: risk free
     interest rate of 6.25%, volatility of 18.0%, expected dividend yield of
     1.1% and expected life of 10 years.

     A summary of the status of the Company's outstanding options as of December
     31, 1997, 1998 and 1999, and changes during the years ending on those dates
     is presented below:

<TABLE>
<CAPTION>
                              1997                    1998                    1999
                     ----------------------  ----------------------  ----------------------
                                   Weighted                Weighted                Weighted
                                    Average                 Average                 Average
                       Options     Exercise    Options     Exercise    Options     Exercise
                     Outstanding     Price   Outstanding     Price   Outstanding     Price
                     -----------   --------  -----------   --------  -----------   --------
<S>                  <C>           <C>       <C>           <C>       <C>           <C>
     Beginning
       of year          90,750      $18.28      79,250      $18.39      71,500      $18.38
     Granted              --          --          --          --          --          --
     Exercised          (5,750)      14.64      (3,750)      15.04     (12,000)      14.05
     Forfeited          (5,750)      20.40      (4,000)      21.00     (12,500)      17.12
                        ------                  ------                 -------
     End of year        79,250       18.39      71,500       18.38      47,000       19.87
                        ======                  ======                 =======
     Options exer-
       cisable at
       year-end         45,500       16.45      51,000       17.37      37,250       19.58
                        ======                  ======                 =======
</TABLE>

                                      F-20
<PAGE>   66
     The following table summarizes information about the Company's outstanding
     stock options at December 31, 1999:

<TABLE>
<CAPTION>
                  Number        Remaining      Average        Number
               Outstanding     Contractual     Exercise    Exercisable
               at 12/31/99    Life in Years     Price      at 12/31/99
               -----------    -------------    --------    -----------
               <S>            <C>              <C>         <C>
                   8,000           2.1           14.38         8,000
                  39,000           6.1           21.00        29,250
                  ------                                      ------
                  47,000                                      37,250
                  ======                                      ======
</TABLE>

     Common stock repurchases
     ------------------------

     During 1997, 1998 and 1999, the Company repurchased 158,900, 58,800 and
     267,600 shares of its common stock, respectively. The Company was holding
     378,400 and 646,000 of these shares in treasury as of December 31, 1998 and
     1999 respectively.

     Preferred stock
     ---------------

     Preferred stock, no par value, $424.30 stated value, 10,000 shares
     authorized; no shares issued or outstanding at December 31, 1998 or
     December 31, 1999. The Company also has 3,000,000 shares of $.01 par value
     preferred stock which is authorized and unissued.

9.   Earnings Per Share
     ------------------

     The computations for basic and diluted earnings per share are as follows:

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                                 -----------------------
                                               1997       1998       1999
                                         ---------------------------------------
                                         (in thousands except per share amounts)
<S>                                           <C>        <C>        <C>
     Basic:
     Net income                               $4,198     $5,923     $6,793
     Weighted average shares outstanding       2,973      2,895      2,738
     Basic earnings per share                 $ 1.41     $ 2.05     $ 2.48

     Diluted:
     Net income                               $4,198     $5,923     $6,793
     Weighted average shares outstanding       2,973      2,895      2,738
     Plus incremental shares from assumed
        conversion of stock options                7          9          5
                                              ------     ------     ------
     Weighted average shares
        outstanding-adjusted                   2,980      2,904      2,743
                                              ======     ======     ======
     Diluted earnings per share               $ 1.41     $ 2.04     $ 2.48
</TABLE>

                                      F-21
<PAGE>   67
10.  Benefit Programs
     ----------------

     Mutual maintains a capital accumulation plan which is a profit sharing plan
     under Section 401(a) of the Internal Revenue Code that covers all employees
     who have completed six months of service. Mutual matches at least 15% and
     up to 100% of employee contributions, based on the combined net operating
     profits of Mutual and MNH. Additional contributions may be made at the
     discretion of the Board of Directors of Mutual. Under the terms of the
     management agreement, the Company's portion of the total contribution was
     $457,000, $554,000 and $580,000 for the years ended December 31, 1997, 1998
     and 1999, respectively.

11.  Commitments and Contingencies
     -----------------------------

     MNH, like many other property and casualty insurance companies, is subject
     to environmental damage claims asserted by or against its insureds.
     Management 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 MNH.

     In addition to the foregoing, MNH is a defendant in a number of other legal
     proceedings in the ordinary course of its business. Management of the
     Company is of the opinion that the ultimate aggregate liability, if any,
     resulting from such proceedings will not materially affect the financial
     condition of MNH or the Company.

                                      F-22