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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                          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 March 13, 2002, 2,110,152 shares of common stock were outstanding. The
aggregate market value of the common shares held by non-affiliates of Merchants
Group, Inc. on March 13, 2002 was $13,760,000. Solely for purposes of this
calculation, the Company deemed every person who beneficially owned 5% or more
of its common stock and all directors and executive officers to be affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE
    Portions of the definitive Proxy Statement for the 2002 Annual Meeting of
            stockholders are incorporated by reference into Part III.


                                       1

<PAGE>


                              MERCHANTS GROUP, INC.

                           ANNUAL REPORT ON FORM 10-K
                                DECEMBER 31, 2001

<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
          STOCKHOLDER MATTERS.                                                   20

ITEM 6.   SELECTED FINANCIAL DATA.                                               21

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
          ABOUT MARKET RISK.                                                     31

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                           33

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE.                                   33

          PART III
          --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                     34

ITEM 11.  EXECUTIVE COMPENSATION.                                                34

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                        34
          AND MANAGEMENT.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                        34

          PART IV
          -------

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND                           35
          REPORTS ON FORM 8-K.
</TABLE>


                                       2

<PAGE>



                                     PART I

Item 1.  BUSINESS.

GENERAL

     Merchants Group, Inc. (the Company), which was incorporated in August 1986
as a Delaware holding company, offers through its wholly owned subsidiary,
Merchants Insurance Company of New Hampshire, Inc. (MNH), 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). At December 31, 2001, Mutual owned 11.5% of the Company's
issued and outstanding common stock. The Company and MNH do not have any
operating assets and have only one employee. 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 to Mutual
of the Company's intention to terminate the Management Agreement, and
accordingly, the Management Agreement will terminate on July 23, 2003, unless
the parties agree to renew or extend it. 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>


MARKETING

     The Company markets its products through approximately 540 independent
agents, who also represent Mutual. The Company's primary marketing efforts are
directed to those independent agents who through their insurance expertise,
access to a broad range of products and focus on service, provide value for the
insurance consumer. The Company believes the opportunity for profit exists in
its targeted markets through further penetration of agencies who are
strategically aligned with the Company's commitment to growth.

     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 six 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(s) of the agency, and ensures that the principal(s) of the agency
communicates these objectives to the agency's sales staff. Strategic Business
Center managers and Territory Managers, or "TM's," develop customized business
plans for each agent that identify the opportunities to increase profitable
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 review
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 most
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 considered by the Company. Additionally, the
Co-chairpersons of the Advisory Councils from each Strategic Business Center
meet twice each year with senior officers of Mutual.

     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 and Mutual. Company payments under the Agents' Profit
Sharing Plan for 2001 totaled $2,049,000, or 2.0% of total direct premiums
written. The Company believes the terms of its Agents' Profit Sharing Plan
encourage its agents to increase the volume of profitable business they place
with the Company.



                                       4
<PAGE>


     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. The Company introduced the Merchants MerLink(TM) system in 1999.
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 100 agents
primarily for private passenger automobile and homeowners' policies. In 2000,
the Company began offering MerLink(TM) capability for certain commercial lines
insurance policies. In 2001, the Company began using its website to distribute
underwriting manuals, rate pages and applications to its agents. The Company
believes that developing automation capabilities to facilitate the sharing of
information with its agents improves 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 2001, net premiums written totaled
$93,973,000, with 54% of the net premiums written derived from commercial lines
of insurance and 46% 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:

                                              As of December 31,
                                   ---------------------------------------
                                   1999              2000             2001
                                   ---------------------------------------

      New York                      64%               66%               66%
      New Jersey                    19                16                12
      New Hampshire                  8                 8                10
      Rhode Island                   4                 4                 5
      Massachusetts                  2                 3                 3
      Pennsylvania                   2                 2                 2
      Other                          1                 1                 2
                                  ----              ----              ----
           Total                   100%              100%              100%
                                   ===               ===               ===



                                       5
<PAGE>


     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:

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

     -    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.

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

     -    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.

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

     -    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 pricing 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 may make the Company's rates non-competitive with respect to
certain lines of insurance or certain geographic regions. 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 have met
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 2002.

     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


                                       6
<PAGE>


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, 2001 (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,
                                ----------------------------------------------------------------------------------
                                            1999                      2000                         2001
                                ----------------------------------------------------------------------------------
                                 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            $18,915    20.0%   77.1%   $17,295    18.3%   79.0%     $20,059    21.3%    93.3%
      Auto Physical Damage       12,328    13.1    49.0     12,031    12.8    54.6       13,254    14.1     52.4
      Homeowners'
          Multi-Peril             8,630     9.1    56.2      9,144     9.7    58.4        9,847    10.5     37.3
                                 ------    ----             ------    ----              -------    ----     ----

          Total                  39,873    42.2    64.1     38,470    40.8    66.7       43,160    45.9     67.7

Commercial
      Auto Liability             14,816    15.7    50.9     15,548    16.5    87.4       12,685    13.5     72.1
      Auto Physical Damage        3,819     4.1    54.7      4,065     4.3    58.2        2,972     3.2     40.8
      Commercial
          Multi-Peril            22,854    24.2    69.5     25,900    27.4    52.1       27,411    29.2     76.1
      Workers'
          Compensation            7,692     8.1    22.0      7,421     7.9    84.6        6,735     7.2     61.3
      Other Lines                 5,416     5.7    37.6      2,938     3.1    10.3        1,010     1.0      5.1
                                 ------    ----             ------    ----              -------    ----     ----

          Total                  54,597    57.8    53.7     55,872    59.2    63.4       50,813    54.1     66.5
                                 ------    ----             ------    ----              -------    ----     ----

Total Personal &
      Commercial                $94,470   100.0%   58.2    $94,342   100.0%   64.7      $93,973  100.0%     67.0
                                =======   =====            =======   =====              ======   =====
</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>



     The following table sets forth the composition of voluntary direct premiums
written for 1997 through 2001:

<TABLE>
<CAPTION>

                                                            As of December 31,
                                         ---------------------------------------------------
                                         1997        1998        1999       2000        2001
                                         ----        ----        ----       ----        ----
<S>                                       <C>         <C>         <C>        <C>         <C>
      Commercial                          57%         58%         61%        64%         58%
      Personal                            43          42          39         36          42
                                         ---         ---         ---        ---         ---
      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 policy for artisan and
trade contractors.

     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 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 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 utilize 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
applications and assess exposure, or rejected if the risk characteristics are
such that neither the Company nor Mutual would insure 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


                                       8
<PAGE>


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 $3,726,000, $2,158,000 and $5,850,000 in 1999, 2000
and 2001, respectively, mostly in New York. The Company is unable to predict the
level of its annual involuntary business for 2002 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 maintains 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 the amount of damages and an insurer's
liability may become known. The reserves of an insurer are frequently adjusted
based on monitoring by the insurer and are periodically reviewed 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.

     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


                                       9
<PAGE>


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 1999 and 2001, the Company decreased its reserves for prior
years by $3,749,000 and $1,474,000, respectively, primarily due to favorable
loss experience related to workers compensation policies. In 2000, the Company
increased its reserves for prior years by $1,428,000, primarily due to higher
than anticipated frequency and severity of losses related to personal
automobile, commercial automobile and workers' compensation policies.

     The following table sets forth the changes in the reserve for losses and
LAE for 1999, 2000 and 2001.

<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                                          -----------------------
                                                                  1999            2000           2001
                                                                  ----            ----           ----
                                                                             (in thousands)
<S>                                                              <C>            <C>             <C>
Reserve for losses and LAE at beginning of year                  $ 136,685      $ 133,526       $ 145,075

      Less reinsurance recoverables                                  9,816          6,026          13,826
                                                                 ---------      ---------       ---------
      Net balance at beginning of year                             126,869        127,500         131,249
                                                                 ---------      ---------       ---------

Provision for losses and LAE for claims occurring in:
      Current year                                                  69,835         69,946          76,618
      Prior years                                                   (3,749)         1,428          (1,474)
                                                                 ---------      ---------       ---------
                                                                    66,086         71,374          75,144
                                                                 ---------      ---------       ---------

Losses and LAE payments for claims occurring in:
      Current year                                                  28,330         26,655          28,719
      Prior years                                                   37,125         40,970          45,561
                                                                 ---------      ---------       ---------
                                                                    65,455         67,625          74,280
                                                                 ---------      ---------       ---------

Reserve for losses and LAE at end of year, net                     127,500        131,249         132,113
      Plus reinsurance recoverables                                  6,026         13,826          19,242
                                                                 ---------      ---------       ---------
      Balance at end of year                                     $ 133,526      $ 145,075       $ 151,355
                                                                 =========      =========       =========
</TABLE>



                                       10
<PAGE>


     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 2001.

     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>


<TABLE>
<CAPTION>

                                                        As of December 31,
------------------------------------------------------------------------------------------------------------------------------------

                        1991       1992       1993      1994      1995      1996       1997        1998       1999      2000
                        ----       ----       ----      ----      ----      ----       ---         ----       ----      ----
                                                         (in thousands)
<S>                    <C>       <C>        <C>       <C>      <C>        <C>        <C>         <C>        <C>        <C>
Liability for losses and LAE:

                       $77,274   $86,159    $89,939   $97,614  $113,718   $126,260   $130,781    $126,820   $127,458   $131,178
Liability re-estimated as of:
One year later          80,841    88,284     94,921   108,659   120,550    130,768    128,636     123,071    128,886    129,704
Two years later         81,743    91,224    100,607   113,091   128,192    133,029    130,498     120,345    123,299
Three years later       83,693    95,396    106,382   121,051   129,724    132,948    127,893     113,661
Four years later        87,105    99,779    112,983   121,791   131,647    129,210    122,508
Five years later        90,428   104,699    112,963   122,886   127,183    124,238
Six years later         92,370   104,808    112,886   120,128   123,521
Seven years later       93,046   105,183    110,843   117,589
Eight years later       93,346   103,196    109,864
Nine years later        91,920   102,837
Ten years later         92,049
</TABLE>

<TABLE>
<CAPTION>

Cumulative Redundancy (Deficiency):
<S>                   <C>        <C>        <C>       <C>        <C>         <C>        <C>        <C>         <C>        <C>
                      $(14,475)  (16,678)   (19,925)  (19,975)   (9,803)     2,022      8,273      13,159      4,159      1,474
                      %  (18.7)    (19.4)     (22.2)    (20.5)     (8.6)       1.6        6.3        10.4        3.3        1.1

Paid (Cumulative) as of:
One year later          30,082    35,724     34,551    36,916     38,549     40,954     42,433      37,125     40,970     36,708
Two years later         50,490    56,003     56,965    60,074     64,323     69,035     66,477      63,325     61,132
Three years later       63,925    69,863     72,963    77,982     84,638     86,364     86,313      80,435
Four years later        72,917    80,156     83,998    91,948     96,491     98,300     94,590
Five years later        79,374    86,808     93,295    99,171    104,063    100,392
Six years later         82,602    91,919     96,949   103,829    105,096
Seven years later       84,707    94,022     99,525    99,724
Eight years later       85,920    95,347    100,033
Nine years later        86,555    96,883
Ten years later         88,006
</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 (SAP) as follows:

<TABLE>
<CAPTION>

                                                         As of December 31,
                                                         ------------------
                                                    1999       2000       2001
                                                    ----       ----       ----
                                                           (in thousands)

<S>                                               <C>        <C>        <C>
Loss and LAE reserves on a SAP basis              $127,458   $131,178   $132,113
Adjustments:
      Ceded reinsurance balances recoverable         6,026     13,826     19,242
      Write-down of reinsurance recoverable             42         71       --
                                                  --------   --------   --------
Loss and LAE reserves on a GAAP basis             $133,526   $145,075   $151,355
                                                  ========   ========   ========
</TABLE>



                                       12
<PAGE>


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.

     Prior to January 1, 1998, 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.

     Between January 1, 1998 and December 31, 2001, the Company's property and
casualty excess of loss reinsurance agreement provided 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. Effective January 1, 2002, the Company increased its retention
on casualty losses to $750,000.

     Property catastrophe coverage provides for recovery of 50% of $5,000,000
and of 95% of the next $56,750,000, 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.

     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.

     During 2000, the Company implemented a program to underwrite specialized
commercial auto insurance. All policies issued under this program were 100%
reinsured through certain subscribing underwriting members of Lloyd's of London
and therefore had no impact on net premiums earned or net losses and LAE
incurred by the Company. This program was discontinued for 2001.

     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 losses and allocated LAE in exchange for
a reinsurance commission of 35%. The agreement also provides for MNH to



                                       13
<PAGE>


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 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 2002.

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 $8,999,000 of tax-exempt bonds in its investment portfolio
at December 31, 2001. 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, 2001, the Company had $6,905,000 of short-term investments
with maturities less than 30 days, and $10,163,000 of non-investment grade
securities. These non-investment grade securities represented 5% of the
investment portfolio as compared to $10,083,000, or 5%, of the investment
portfolio at December 31, 2000.



                                       14
<PAGE>



     The table below gives information regarding the Company's investments as of
the dates indicated.

<TABLE>
<CAPTION>

                                                                 As of December 31,
                                  ----------------------------------------------------------------------------
                                              1999                       2000                    2001
                                  ----------------------------------------------------------------------------
                                      AMOUNT        %           AMOUNT         %          AMOUNT        %
                                      ------       ---          ------        ---         ------       ---
                                                           (dollars in thousands)
<S>                                  <C>           <C>          <C>           <C>         <C>           <C>
Fixed Maturities (1):
      U.S. Government and Agencies   $ 27,663      13.0%        $ 44,055      20.4%       $ 41,965      19.7%
      Corporate Bonds                 152,984      71.9          135,895      63.0         144,248      67.7
      Tax-Exempt Bonds                 15,982       7.5           16,207       7.5           8,999       4.2
                                     --------     -----         --------     -----        --------     -----
          Total Bonds                 196,629      92.4          196,157      90.9         195,212      91.6
Preferred Stocks (2)                   12,941       6.1           13,911       6.5           9,422       4.4
Short-Term Investments (3)              2,544       1.2            4,550       2.1           6,905       3.2
Other (4)                                 797        .3            1,036        .5           1,593        .8
                                     --------     -----         --------     -----        --------     -----

Total Invested Assets                $212,911     100.0%        $215,654     100.0%       $213,132     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,
                                                   -----------------------
                                                1999        2000         2001
                                                ----        ----         ----
                                                    (dollars in thousands)

<S>                                          <C>          <C>          <C>
Average investments (1)                      $ 211,956    $ 212,832    $ 213,449
Net investment income                           13,147       13,903       13,295
Net investment income as a percentage
    of average investments (2)                     6.2%         6.5%         6.2%

Net realized gains (losses) on investments   $      60    $     109         (580)
</TABLE>

(1)  At amortized cost.
(2)  The taxable equivalent yield for the years ended December 31, 1999, 2000
     and 2001 was 7.0%, 7.2% and 6.5%, respectively, assuming an effective tax
     rate of 34%.



                                       15
<PAGE>


     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,
                           ---------------------------------------------------------------------
                                    2000                     2001                    1999
                           ---------------------------------------------------------------------
                            AMOUNT         %         AMOUNT        %         AMOUNT          %
                            ------        ---        ------       ---        ------         ---
                                                      (dollars in thousands)
<S>                        <C>           <C>       <C>           <C>        <C>            <C>
1 year or less             $ 49,742      25.3%     $ 78,181      39.9%      $ 40,356      20.7%
1 year through 5 years      132,421      67.4        81,827      41.7        111,445      57.1
5 years through 10 years     12,619       6.4        34,562      17.6         39,029      20.0
More than 10 years            1,847        .9         1,587        .8          4,382       2.2
                           --------     -----      --------     -----       --------     -----
      Total                $196,629     100.0%     $196,157     100.0%      $195,212     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. Recently, there has been evidence of price firming
primarily within the commercial lines segment of the property casualty industry.
However, 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 for how long market conditions for the industry will continue to
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


                                       16
<PAGE>


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 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,
the maintenance of specified reserves and capital, and insurers' consumer
privacy policies. 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
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 2002 without the prior approval of the
New Hampshire Insurance Commissioner is $5,263,000. MNH paid the maximum
allowable dividends to the Company in 2001. Dividends were paid in February
2001, May 2001 and September 2001, of $2,200,000, $1,350,000 and $1,510,000,
respectively. MNH paid a dividend of $2,300,000 to the Company on February 19,
2002 and as such is restricted from paying another dividend to the Company until
May 2002 without the prior approval of the New Hampshire Insurance Commissioner.

     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,
2001, 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, 1999. MNH's annual statement 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 formula


                                       17
<PAGE>


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, 2001.

     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 2001 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 certain states, insurers
writing 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
state insurance department's prior approval in order to implement rate increases
or decreases outside these flex-bands.

INSURANCE HOLDING COMPANIES

     The Company is subject to statutes governing insurance holding company
systems. Typically, these 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, 2001, Mutual had 347
full-time equivalent employees. The Company believes that Mutual's relationship
with its employees is satisfactory.


                                       18
<PAGE>



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; Moorestown, New Jersey and Columbus, Ohio. 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>



                                     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.

2001:                       High              Low             Dividend
                            ----              ---             --------

Fourth Quarter            $23.10             $20.30            $.10
Third Quarter              22.60              20.20             .10
Second Quarter             21.25              18.10             .10
First Quarter              19.39              17.50             .10


2000:                       High              Low             Dividend
                            ----              ---             --------

Fourth Quarter            $18.25             $17.00             $.10
Third Quarter              18.50              17.00              .10
Second Quarter             16.88              15.06              .10
First Quarter              20.00              14.88              .10


     The number of stockholders of record of the Company's Common Stock as of
February 28, 2002 was 89. 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 2002 without prior
approval of the New Hampshire Insurance Commissioner is $5,263,000.



                                       20
<PAGE>



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, 2001 have been derived from the
audited consolidated financial statements of the Company.

<TABLE>
<CAPTION>

                                                                                As of December 31,
                                                        ---------------------------------------------------------------
                                                             1997        1998          1999        2000        2001
                                                             ----        ----          ----        ----        ----
                                                                    (in thousands, except per share amounts)
<S>                                                        <C>         <C>          <C>         <C>         <C>
Net premiums written                                       $  96,811   $  92,758    $  94,470   $  94,342   $  93,973
                                                           =========   =========    =========   =========   =========

Net premiums earned                                        $  96,054   $  93,540    $  94,775   $  94,259   $  93,885
Net investment income                                         12,770      13,277       13,147      13,903      13,295
Net realized investment gains (losses)                           112          (2)          60         109        (580)
Other revenues                                                   214         153          434         355         696
                                                           ---------   ---------    ---------   ---------   ---------
     Total revenues                                          109,150     106,968      108,416     108,626     107,296
                                                           ---------   ---------    ---------   ---------   ---------

Net losses and loss adjustment expenses                       71,627      65,234       66,086      71,374      75,144
Amortization of deferred policy acquisition costs             25,454      24,788       25,115      24,979      24,880
Other underwriting expenses                                    7,063       8,173        6,801       5,266       6,017
                                                           ---------   ---------    ---------   ---------   ---------
Total expenses                                               104,144      98,195       98,002     101,619     106,041
                                                           ---------   ---------    ---------   ---------   ---------
Income before income taxes                                     5,006       8,773      10,414        7,007       1,255
Provision for income taxes                                       808       2,850        3,621       2,668         434
                                                           ---------   ---------    ---------   ---------   ---------
Net income                                                 $   4,198   $   5,923    $   6,793   $   4,339   $     821
                                                           =========   =========    =========   =========   =========
Earnings per share:
Basic                                                      $    1.41   $    2.05    $    2.48   $    1.75   $     .35
                                                           =========   =========    =========   =========   =========
Diluted                                                    $    1.41   $    2.04    $    2.48   $    1.74   $     .35
                                                           =========   =========    =========   =========   =========

Weighted average number of shares
       outstanding:
Basic                                                          2,973       2,895        2,738       2,485       2,343
Diluted                                                        2,980       2,904        2,743       2,487       2,343

BALANCE SHEET DATA: (AT YEAR END)
Total investments                                          $ 210,244   $ 215,172    $ 212,911   $ 215,654   $ 213,132
Total assets                                                 273,974     274,523      269,523     281,621     286,563
Reserve for losses and loss
     adjustment expenses                                     141,205     136,685      133,526     145,075     151,355
Unearned premiums                                             50,406      49,382       49,616      50,857      50,179
Stockholders' equity                                          67,462      71,783       69,387      70,122      68,551

DIVIDEND DATA:
Cash dividend per common share                             $     .20   $     .20    $     .35   $     .40   $     .40
</TABLE>


                                       21
<PAGE>


"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:

With the exception of historical information, the matters and statements
discussed, made or incorporated by reference in this Annual Report on Form 10-K
constitute forward-looking statements and are discussed, made or incorporated by
reference, as the case may be, pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements may
include, without limitation, statements relating to the Company's plans,
strategies, objectives, expectations and intentions. Words such as "believes,"
"forecasts," "intends," "possible," "expects," "anticipates," "estimates," or
"plans" and similar expressions are intended to identify forward-looking
statements. Such forward-looking statements involve certain assumptions, risks
and uncertainties that could cause actual results to differ materially from
those included in or contemplated by those statements. These assumptions, risks
and uncertainties include, but are not limited to, those associated with factors
affecting the property and casualty insurance industry generally, including
price competition, the Company's dependence on state insurance departments for
approval of rate increases, size and frequency of claims, escalating damage
awards, natural disasters, fluctuations in interest rates and general business
conditions; the Company's dependence on investment income; the geographic
concentration of the Company's business in the northeastern United States and in
particular in New York, New Hampshire, New Jersey, Rhode Island, Pennsylvania
and Massachusetts; the adequacy of the Company's loss reserves; the Company's
dependence on the general reinsurance market; government regulation of the
insurance industry; exposure to environmental claims; dependence of the Company
on its relationship with Mutual and the uncertainty concerning what will happen
if the Management Agreement with Mutual is either not renewed or extended by its
termination date of July 23, 2003; the Company's intention to reduce written
premium in business segments that it believes no longer provide a satisfactory
return; and the other risks and uncertainties discussed or indicated in all
documents filed by the Company with the Commission. The Company expressly
disclaims any obligation to update any forward-looking statements as a result of
developments occurring after the filing of this report.


                                       22
<PAGE>

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

2001 COMPARED TO 2000.

     Total revenues for 2001 were $107,296,000, a decrease of $1,330,000, or 1%,
from $108,626,000 in 2000.

     Direct premiums written for 2001 were $100,953,000, a decrease of
$6,281,000 or 6%, from $107,234,000 for 2000. Voluntary direct premiums written
for 2001 were $96,515,000, a decrease of $9,201,000 or 9%, from $105,716,000 for
2000.

     Voluntary personal lines direct premiums written for 2001 were $40,192,000,
an increase of $1,701,000 or 4% from $38,491,000 in 2000. Private passenger
automobile direct premiums written, which comprised 74% of total voluntary
personal lines direct premiums written in 2001 and in 2000, increased 4% in 2001
compared to 2000 primarily due to a 3% increase in policies in force at December
31, 2001 as compared to December 31, 2000. Homeowners direct premiums written
increased 7% in 2001 compared to 2000 due to a 7% increase in policies in force,
resulting primarily from a 7% increase in new business units in 2001 as compared
to 2000.

     Voluntary commercial lines direct premiums written for 2001 were
$56,323,000, a decrease of 16% from $67,225,000 in 2000. This decrease was
attributable in part to the discontinuation in 2001 of a program to underwrite
specialized commercial auto insurance (the Auto Program) which produced
$5,470,000 of direct premiums written in 2000. All policies issued under the
Auto Program were 100% reinsured through certain Lloyd's syndicates and
therefore had no impact on net premiums written, net premiums earned or net
losses and LAE incurred by the Company. The Company recorded all direct
underwriting expenses incurred, including commissions with respect to the
acquisition of these policies, which were offset by reinsurance commission
income.

     The Company continues to experience higher loss frequency for certain of
its commercial lines of business not adequately covered by premiums collected
from those lines of business. In response to these higher losses, the Company
has filed for and received approval of rate increases in certain lines of
business, revised its underwriting guidelines, and removed discretionary pricing
credits where warranted. As a consequence of these actions, voluntary commercial
lines direct premiums written, excluding Auto Program premiums written, for 2001
decreased $5,416,000 or 9%, to $56,339,000 from $61,755,000 for 2000. Direct
premiums written for all of the Company's commercial lines of business, except
commercial package policies, decreased in 2001 compared to 2000. Commercial
lines policies in force at December 31, 2001 decreased 18% compared to
commercial lines policies in force at December 31, 2000. Commercial lines new
business units decreased 45% in 2001, compared to 2000.

     The Company intends to continue to reduce direct written premiums in
business segments that it believes no longer provide the opportunity to earn a
satisfactory return for its shareholders. The Company estimates that its
voluntary direct written premiums will decline in 2002 with further reductions
possible thereafter.

     Involuntary direct premiums written, primarily involuntary private
passenger automobile insurance, which comprised 4% and 1% of total direct
premiums written during 2001 and 2000, respectively, were $4,438,000 for 2001
compared to $1,518,000 in 2000, an increase of $2,920,000 or 192%. This increase


                                       23
<PAGE>


resulted primarily from increased 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. Assignments from the NYAIP
vary depending upon a company's private passenger automobile market share and
the size of the NYAIP. The Company believes it is likely that, due to a decrease
in the willingness of several major competitors to insure non-standard business
voluntarily, the number of policies written by the NYAIP will continue to
increase and therefore the amount of the Company's involuntary direct written
premiums will also continue to increase. However, the Company is unable to
predict the volume of future assignments from the NYAIP.

     Net premiums written decreased $369,000 or less than 1% to $93,973,000 for
2001 from $94,342,000 for 2000.

     Net premiums earned for 2001 were $93,885,000, a decrease of $374,000, or
less than 1%, from $94,259,000 in 2000. This decrease in net premiums earned
resulted primarily from a decrease in assumed premiums earned and is consistent
with the decrease in net written premiums.

     Net investment income was $13,295,000 in 2001, a decrease of 4% from
$13,903,000 in 2000, primarily due to a decrease in average portfolio yield.
Lower reinvestment rates in the Company's targeted maturity sector (2 years) led
to the decrease in average portfolio yield.

     Net realized investment losses were $580,000 for 2001 compared to net
realized investment gains of $109,000 for 2000. Net realized investment losses
for 2001 included $781,000 of unrealized losses related to the Company's fixed
maturity investment in a commercial finance company. The Company believes that
the decline in fair value of this investment is other than temporary and has
therefore recorded a realized loss.

     Other revenues were $696,000 for 2001, an increase of $341,000, or 96%,
from $355,000 for 2000. This increase resulted from an increase in premium
installment fee income and a decrease in charge-offs related to uncollectible
premiums receivable. The reduction in charge-offs resulted from a decline in the
average age of the Company's premium receivable.

     Net losses and LAE were $75,144,000 for 2001, an increase of $3,770,000 or
5% from $71,374,000 for 2000. The loss and LAE ratio increased to 80.0% for 2001
from 75.7% for 2000. Losses and LAE include $1,305,000 of losses and LAE related
to the September 11, 2001 terrorist attack on the World Trade Center (WTC) in
New York City. The WTC event added 1.4 percentage points to the Company's loss
and LAE ratio for 2001. Excluding the effect of the WTC event, the increase in
the loss and LAE ratio resulted primarily from the increase in involuntary
automobile insurance business which increased the Company's net loss and LAE
ratio by 6.3 percentage points in 2001, compared to 2.7 percentage points in
2000.

     The ratio of amortized deferred policy acquisition costs and other
underwriting expenses to net premiums earned increased to 32.9% in 2001 from
32.1% in 2000, primarily due to higher agency incentive commissions and lower
commissions earned on ceded reinsurance. Expenses that vary directly with the
Company's premium volume, primarily commissions, premium taxes and state
assessments, represented 20.7% and 20.0% of net premiums earned in 2001 and
2000, 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 Company's effective income tax rate was 34.6% for 2001 compared to
38.1% for 2000.


                                       24
<PAGE>


2000 COMPARED TO 1999.

     Total revenues for 2000 were $108,626,000, an increase of $210,000, or less
than 1%, from $108,416,000 in 1999.

     Direct premiums written for 2000 were $107,234,000, an increase of
$7,007,000, or 7%, from $100,227,000 in 1999. Net written premiums for 2000 were
$94,342,000, a decrease of $128,000 from $94,470,000 in 1999.

     Voluntary personal lines direct premiums written for 2000 were $38,491,000,
substantially unchanged from $38,493,000 in 1999. Private passenger automobile
direct premiums written, which comprised 74% and 76% of total voluntary personal
lines direct premiums written in 2000 and 1999, respectively, decreased 2% in
2000 compared to 1999 primarily due to fewer new policies and renewal policies
retained resulting from price-based market competition. Homeowners direct
premiums written increased 6% in 2000 compared to 1999 due to an 8% increase in
policies in force resulting primarily from a 7% increase in new business units
in 2000 as compared to 1999.

     Voluntary commercial lines direct premiums written for 2000 were
$67,225,000, an increase of 13% from $59,621,000 in 1999. This increase resulted
primarily from a $6,553,000, or 35%, increase in commercial auto direct premiums
written and a $1,013,000, or 13%, increase in contractors coverall direct
premiums written.

     The increase in commercial auto direct premiums written was primarily
attributable to $5,470,000 of direct premiums written for the Auto Program.
There were no Auto Program direct premiums written in 1999. Voluntary commercial
auto direct premiums written excluding the Auto Program were $19,654,000, an
increase of $1,083,000, or 6%, from $18,571,000 in 1999, primarily due to an
increase in average premium per policy. The increase in contractors coverall
direct premiums written was primarily due to a 24% increase in policies in force
in 2000 compared to 1999 somewhat offset by a decrease in average premium per
policy.

     Involuntary direct premiums written, primarily involuntary private
passenger automobile insurance, which comprised 1% and 2% of total direct
premiums written during 2000 and 1999, respectively, were $1,518,000 for 2000
compared to $2,113,000 in 1999, a decrease of $595,000 or 28%. This decrease
resulted primarily from decreased assignments from the NYAIP.

     Net premiums earned for 2000 were $94,259,000, a decrease of $516,000, or
less than 1%, from $94,775,000 in 1999. This decrease in net premiums earned
resulted primarily from a decrease in assumed premiums earned and is consistent
with the decrease in net written premiums.

     Net investment income was $13,903,000 in 2000, an increase of 6% from
$13,147,000 in 1999, primarily due to an increase in average portfolio yield.
Higher reinvestment rates in the Company's targeted maturity sector (2 years)
led to the increase in average portfolio yield.

     Net losses and LAE were $71,374,000 for 2000, an increase of 8% from
$66,086,000 for 1999. The loss and LAE ratio increased to 75.7% in 2000 from
69.7% in 1999. In 2000, the Company recorded an increase to its reserves related
to all prior accident years of $1,428,000. This increase, which was primarily
attributable to higher than estimated loss experience on personal and commercial
automobile and workers' compensation policies, added 1.5 percentage points to
the Company's 2000 calendar year loss and LAE ratio.


                                       25
<PAGE>


In 1999, the Company recorded a decrease to its reserves for prior years'
accidents of $3,749,000, which in turn reduced the Company's 1999 calendar year
loss and LAE ratio by 3.9 percentage points.

     The ratio of amortized deferred policy acquisition costs and other
underwriting expenses to net premiums earned decreased to 32.1% in 2000 from
33.7% in 1999, primarily due to lower agency incentive commissions resulting
from the increase in net losses and LAE and revisions to the profit sharing
program for agents, and to lower incentive compensation expenses. Expenses that
vary directly with the Company's premium volume, primarily commissions, premium
taxes and state assessments, represented 19.3% and 20.6% of net premiums earned
in 2000 and 1999, 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 Company's effective income tax rate for 2000 was 38.1%. Non-taxable
investment income reduced the Company's effective tax rate by approximately five
percentage points.

CRITICAL ACCOUNTING POLICIES

RESERVE FOR LOSSES AND LAE

     The Company establishes reserves for losses and LAE. These reserves 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.

     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.

     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.


                                       26
<PAGE>


     The Company has recorded changes in reserves for prior accident year losses
in most years. In 1999 and 2001, the Company decreased its reserves for prior
years by $3,749,000 and $1,474,000, respectively, primarily due to favorable
loss experience related to workers compensation policies. In 2000, the Company
increased its reserves for prior years by $1,428,000, primarily due to higher
than anticipated frequency and severity of losses related to personal
automobile, commercial automobile and workers' compensation policies. The total
reserves for losses and LAE were $151,355,000 and $145,075,000 at December 31,
2001 and 2000, respectively.

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. In 2001, however, the Company's operating
activities used $1,549,000 of cash. In 2000, operating activities provided
$6,564,000 of cash. This decrease in cash provided by operations was primarily
the result of a $2,690,000 (3%) decrease in premiums collected and a $6,655,000
(10%) increase in loss and LAE payments. The Company's intention to continue to
reduce direct premiums written in business segments where returns are
unsatisfactory will likely result in future negative cash flows from operations.
The Company believes that careful management of the relationship between assets
and liabilities will minimize the likelihood that investment portfolio sales
will be necessary to fund insurance operations and that the effect of any such
sale on the Company's stockholders' equity will not be material. Further, the
Company believes that the WTC event will not require any unplanned liquidation
of its investment portfolio.

     The Company's objectives with respect to its investment portfolio include
maximizing total return within investment guidelines while protecting
policyholders' surplus and maintaining flexibility. Like other property and
casualty insurers, the Company relies on premiums as a major source of cash, and
therefore liquidity. Cash flows from the Company's investment portfolio, either
in the form of interest or principal payments, are an additional source of
liquidity. Because the duration of the Company's investment portfolio relative
to the duration of its liabilities is closely managed, increases or decreases in
market interest rates are not expected to have a material effect on the
Company's liquidity, 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, 2001, the
Company recorded as accumulated other comprehensive income in its Consolidated
Balance Sheet $1,812,000 of unrealized gains, net of taxes, associated with its
investments classified as available for sale. During 2001 the Company recorded
$2,687,000 of unrealized gains, net of tax, associated with its available for
sale investments as other comprehensive income.

     At December 31, 2001, the Company's portfolio of fixed maturity investments
represented 91.6% 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.


                                       27
<PAGE>


     At December 31, 2001, $71,798,000, or 33.7%, of the Company's fixed
maturity portfolio was invested in mortgage-backed and other asset-backed
securities. The Company invests in a variety of collateralized mortgage
obligation ("CMO") products but has not invested in the derivative type of CMO
products such as interest only, principal only or inverse floating rate
securities. All of the Company's CMO investments have a secondary market and
their effect on the Company's liquidity does not differ from that of other fixed
maturity investments.

     At December 31, 2001, $41,965,000 or 19.7% of the Company's investment
portfolio was invested in fixed maturity obligations of the U.S. Government or
its government sponsored agencies. Of this amount, $33,802,000 was invested in
United States Treasury Inflation Index Notes (TIPS). TIPS differ from
traditional treasury securities in that in addition to regular coupon payments,
the principal value changes daily based upon the Consumer Price Index (CPI) as
published by the United States Department of Labor. Accretion based upon the CPI
becomes part of the total return of the security and is subject to change as the
CPI rises or falls. Accretion can therefore be positive or negative and is
recorded as a component of net investment income. TIPS perform best in a
declining interest rate environment when the referenced CPI is rising.

     At December 31, 2001, $10,163,000, or 5%, of the Company's investment
portfolio was invested in non-investment grade securities compared to
$10,083,000, or 5%, at December 31, 2000. All of the Company's non-investment
grade securities are currently performing to the Company's expectations at the
time of purchase.

     During 2001 the Company repurchased 214,300 shares of its common stock at
an average price of $19.92 and was holding 1,025,400 shares in treasury as of
December 31, 2001.

     The Company maintains 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, 2001, $200,000 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 2001
without the prior approval of the New Hampshire Insurance Commissioner is
$5,263,000. MNH paid the maximum allowable dividend to the Company in 2001.
Dividends were paid in February 2001, May 2001 and September 2001, of
$2,200,000, $1,350,000 and $1,510,000, respectively. MNH paid a dividend of
$2,300,000 to the Company on February 19, 2002 and as such is restricted from
paying another dividend to the Company until May, 2002. The Company paid a
quarterly cash dividend to its common stockholders of $.10 per share in 2001,
which amounted to $925,000.

     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 2001 was 1.8 to 1.


                                       28
<PAGE>


RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 and 142. SFAS No. 141 "Business Combinations" revised accounting standards
and disclosure requirements for business combinations. The provisions for SFAS
No. 141 were effective for any business combination completed after June 30,
2001. SFAS No. 142 "Goodwill and Other Intangible Assets," revises accounting
standards for all purchased intangible assets. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. Neither SFAS No. 141 nor No. 142
had any impact on the Company's 2001 consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets." This SFAS supercedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". SFAS No. 144 requires that Long-Lived Assets to be disposed of
be measured at the lower of carrying amount or fair value less cost to sell. The
provisions of SFAS Nos. 143 and 144 are not expected to have any impact on the
Company's consolidated financial statements.

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 may 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.

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. At
December 31, 2001 Mutual owned 11.5% of the Company's common stock. Under the
Management Agreement, Mutual provides the Company and


                                       29
<PAGE>


MNH with all facilities and with personnel to operate their business. With the
exception of the Chief Operating Officer of MNH, the only officers of the
Company or MNH who are paid full time employees are employees of Mutual whose
services are purchased under the Management Agreement. Also, the operation of
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, as currently written, creates a conflict of
interest between the Company and Mutual in their joint operation and prevents
the Company's shareholders from realizing the Company's fair value in a sale or
merger. Accordingly, on July 23, 1998 the Company gave notice to Mutual of its
intention to terminate the Management Agreement and, therefore, the Management
Agreement will terminate on July 23, 2003, unless the parties agree to renew
or extend it.

     On March 4, 2002, the Company requested that Mutual extend the Management
Agreement under its existing terms to December 31, 2003 in order to provide for
a more orderly transition to a new management agreement with Mutual or a
different manager. The Company is in discussion with various potential
candidates, including Mutual, to provide management services to the Company
after the current Management Agreement expires. The Company intends to base the
new agreement on fee for services, rather than an allocation of expenses, as
currently calculated. The Company anticipates that the future manager will be
compensated for positive results through profit-sharing and that the Company
will be permitted to terminate the new agreement on substantially less than the
five (5) year notice that was required under the present Management Agreement.


                                       30
<PAGE>


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 $213,132,000 at December 31, 2001 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, 2001. 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.


                                       31
<PAGE>




Expected Cash Flows of Principal Amounts ($ in 000's):

<TABLE>
<CAPTION>


                                                                                                               TOTAL
                                                                                                               -----
                                                                                                                     Esti-
                                                                                                          Amor-      mated
                                                                                             There-       tized      Market
                                    2002       2003         2004        2005       2006      after        Cost       Value
                                    ----       ----         ----        ----       ----      ------       ------     ------
<S>                              <C>         <C>         <C>         <C>         <C>         <C>         <C>        <C>
HELD TO MATURITY

Mortgage & asset backed
       securities                $  4,786    $  1,566    $  2,835    $  2,601    $    991    $    263    $ 13,042   $ 14,035
    Average interest rate             7.1%        7.1%        7.1%        7.1%        7.1%        7.2%       --         --
                                 --------    --------    --------    --------    --------    --------    --------   --------

Total                            $  4,786    $  1,566    $  2,835    $  2,601    $    991    $    263    $ 13,042   $ 14,035
                                 ========    ========    ========    ========    ========    ========    ========   ========

AVAILABLE FOR SALE

U.S. Treasury securities and
       obligations of U.S.
       Government corporations
       and agencies              $  3,841    $  4,200    $      0    $      0    $      0    $ 33,381    $ 41,422   $ 41,965
    Average interest rate             6.9%        4.1%        0.0%        0.0%        0.0%        7.3%       --         --

Obligations of states and
       political subdivisions       1,484       6,281       1,000           0           0          40       8,805      8,999
    Average interest rate             7.9%        7.2%        4.3%        0.0%        0.0%        7.3%       --         --

Corporate securities               23,537      36,817       6,260         999           0       3,422      71,035     72,450
    Average interest rate             7.2%        5.3%        6.8%        4.2%        0.0%       10.3%       --         --

Mortgage & asset
       backed securities           10,737      24,331      16,342         905         472       4,766      57,553     58,756
    Average interest rate             5.9%        5.4%        5.5%        6.5%        7.2%        7.0%       --         --
                                 --------    --------    --------    --------    --------    --------    --------   --------

Total                            $ 39,599    $ 71,629    $ 23,602    $  1,904    $    472    $ 41,609    $178,815   $182,170
                                 ========    ========    ========    ========    ========    ========    ========   ========
</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.


                                       32
<PAGE>


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>
2001
----
    Net premiums earned                            $ 23,353   $ 23,154   $ 23,230    $ 24,148
    Net investment income                             3,563      3,472      3,244       3,016
    Net realized investment gains (losses                43         39         30        (692)
    Other revenues                                      137        117        161         281
                                                   --------   --------   --------    --------
    Total revenues                                 $ 27,096   $ 26,782   $ 26,665    $ 26,753
                                                   ========   ========   ========    ========
    Income (loss) before income taxes              $    331   $  1,910   $ (1,230)   $    244
    Net income (loss)                              $    212   $  1,217   $   (809)   $    201
    Net income (loss) per diluted share            $    .09   $    .52   $   (.35)   $    .09

2000
----
    Net premiums earned                            $ 23,033   $ 23,606   $ 23,822    $ 23,798
    Net investment income                             3,456      3,388      3,481       3,578
    Net realized investment gains                      --            5        104        --
    Other revenues                                       66         16         81         192
                                                   --------   --------   --------    --------
    Total revenues                                 $ 26,555   $ 27,015   $ 27,488    $ 27,568
                                                   ========   ========   ========    ========
    Income before income taxes                     $  1,272   $  2,783   $  2,617    $    335
    Net income                                     $    817   $  1,801   $  1,670    $     51
    Net income per diluted share                   $    .32   $    .72   $    .68    $    .02
</TABLE>


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

None.


                                       33
<PAGE>



                                    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 2002 Annual Meeting of
Shareholders to be held on or about May 1, 2002, provided, however, that
information appearing under the heading "Report of the Audit Committee" is not
incorporated herein and should not be deemed included in this document for any
purpose.

Item 11. EXECUTIVE COMPENSATION.

     The information in response to this item is incorporated by reference
herein to the information under the captions "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 2002 Annual Meeting of Shareholders to be held on or about
May 1, 2002, 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 2002 Annual Meeting of
Stockholders to be held on or about May 1, 2002.

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 2002 Annual Meeting of Shareholders to be held on or about May 1,
2002.



                                       34
<PAGE>




                                     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, 2000 and 2001.
           Consolidated Statement of Operations - Years ended December 31, 1999,
           2000 and 2001.
           Consolidated Statement of Changes in Stockholders' Equity - Years
           ended December 31, 1999, 2000 and 2001.
           Consolidated Statement of Cash Flows - Years ended December 31, 1999,
           2000 and 2001.
           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, 2001.

     (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).


                                       35
<PAGE>

    (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 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).

        (g)  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, 2000 (incorporated by
             reference to Exhibit 10g to the Company's 2000 Annual Report on
             Form 10-K filed on March 28, 2001).

        (h)  Quota Share Reinsurance Treaty Agreement between Merchants
             Insurance Company of New Hampshire, Inc. and The Subscribing
             Underwriting Members of Lloyd's, London specifically identified
             on the schedules attached to this agreement dated January 1,
             2000 (incorporated by reference to Exhibit 10h to the Company's
             2000 Annual Report on Form 10-K filed on March 28, 2001).


                                       36
<PAGE>

       * (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, fifth amendment,
             effective January 1, 1999 (incorporated by reference to Exhibit
             10j to the Company's 2000 Annual Report on Form 10-K filed on
             March 28, 2001).

       * (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 Adjusted Return on Equity
              Incentive Compensation Plan January 1, 2000 (incorporated by
              reference to Exhibit 10p to the Company's 2000 Annual Report on
              Form 10-K filed on March 28, 2001).

       * (q)  Merchants Mutual Insurance Company Adjusted Return on Equity Long
              Term Incentive Compensation Plan January 1, 2000 (incorporated by
              reference to Exhibit 10q to the Company's 2000 Annual Report on
              Form 10-K filed on March 28, 2001).

       * (r)  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).

       * (s)  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).


                                       37
<PAGE>


       * (t)  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).

       * (u)  Consulting Agreement between Stephen C. June and Merchants
              Insurance Company of New Hampshire, Inc. ("MNH") dated as of May
              7, 2001 (filed herewith).

       * (v)  Employment Agreement between Stephen C. June and MNH dated as of
              April 1, 2002 (filed herewith).

     (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).


* Indicates a management contract or compensation plan or arrangement.



     The Company will forward upon request any exhibit not contained herein upon
payment of a fee equal to the Company's reasonable expenses in furnishing the
exhibits. Requests should be directed to:


                               INVESTOR RELATIONS
                              MERCHANTS GROUP, INC.
                                 250 MAIN STREET
                             BUFFALO, NEW YORK 14202



                                       38
<PAGE>



                              MERCHANTS GROUP, INC.
                      SCHEDULE I - SUMMARY OF INVESTMENTS -
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                                December 31, 2001
                                 (in thousands)

<TABLE>
<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         $ 41,422               $ 41,965           $ 41,965
Corporate bonds                                   71,035                 72,450             72,450
Mortgage and asset backed securities              70,595                 72,791             71,798
Tax exempt bonds                                   8,805                  8,999              8,999
                                                --------               --------           --------

       Total fixed maturities                    191,857                196,205            195,212

Preferred stocks                                   9,389                  9,422              9,422

Short-term investments                             6,905                  6,905              6,905

Other                                              1,593                  1,593              1,593
                                                --------               --------           --------
                                                $209,744               $214,125           $213,132
                                                ========               ========           ========
</TABLE>



                                       39
<PAGE>


                              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, 1999, 2000 and 2001
                                 (in thousands)

<TABLE>
<CAPTION>

                                                        1999            2000          2001
                                                        ----            ----          ----
<S>                                                     <C>           <C>           <C>
Receivable from (payable to) Merchants Mutual
    Insurance Company(1):

Balance at beginning of period                          $(1,321)      $  (618)      $  (608)
Change during the period                                    703            10          (244)
                                                        -------       -------       -------

Balance at end of period                                $  (618)      $  (608)      $  (852)
                                                        =======       =======       =======
</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.



                                       40
<PAGE>



                              MERCHANTS GROUP, INC.
          SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                (in thousands except per share and share amounts)

<TABLE>
<CAPTION>

BALANCE SHEET
-------------                                                              December 31,
                                                                           ------------
                                                                        2000        2001
                                                                        ----        ----
<S>                                                                   <C>         <C>
       ASSETS
Investment in subsidiary                                              $ 69,937    $ 68,454
Other assets                                                               243         354
                                                                      --------    --------
    Total assets                                                      $ 70,180    $ 68,808
                                                                      ========    ========

    LIABILITIES AND STOCKHOLDERS' EQUITY

Other liabilities                                                     $     58    $     57
Demand loan                                                               --           200
                                                                      --------    --------
    Total liabilities                                                       58         257
                                                                      --------    --------

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,
         2000 or 2001                                                     --          --
    Common stock, $.01 par value, authorized 10,000,000
         shares; issued and outstanding of 2,430,752
         shares at December 31, 2000 and 2,224,452 shares
         at December 31, 2001                                               32          32
    Additional paid in capital                                          35,680      35,795
    Treasury stock, 811,100 shares at December 31, 2000
         and 1,025,400 shares at December 31, 2001                     (16,063)    (20,332)
    Accumulated other comprehensive income (loss)                         (875)      1,812
    Accumulated earnings                                                51,348      51,244
                                                                      --------    --------

       Total stockholders' equity                                       70,122      68,551
                                                                      --------    --------

       Total liabilities and stockholders' equity                     $ 70,180    $ 68,808
                                                                      ========    ========
</TABLE>



                                       41
<PAGE>




                              MERCHANTS GROUP, INC.
          SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                    Continued
                                 (in thousands)



INCOME STATEMENT
------------------

                                                      Year Ended December 31,
                                                   ----------------------------
                                                    1999       2000       2001
                                                    -----      ----       ----

Revenues:
       Equity in net income of subsidiary         $ 6,937    $ 4,462    $   887
       Investment income (loss)                        39        (23)        44
                                                  -------    -------    -------
              Total revenues                        6,976      4,439        931

Expenses:
       General and administrative expenses            237        174        174
                                                  -------    -------    -------
       Operating income before income taxes         6,739      4,265        757
       Income tax benefit                             (54)       (74)       (64)
                                                  -------    -------    -------
              Net income                          $ 6,793    $ 4,339    $   821
                                                  =======    =======    =======




                                       42
<PAGE>



                              MERCHANTS GROUP, INC.
          SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 (in thousands)

<TABLE>
<CAPTION>

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

Increase (Decrease) in Cash and Cash Equivalents:

                                                                             Year Ended December 31,
                                                                             -----------------------
                                                                             1999      2000      2001
                                                                             ----      ----      ----
                                                                                  (in thousands)
<S>                                                                       <C>        <C>        <C>
Cash flows from operating activities:                                     $  (142)   $  (169)   $    (5)
                                                                          -------    -------    -------
Cash flows from investing activities:
       Receipt of subsidiary common stock dividend                          5,000      5,200      5,060
       Sale (purchase) of other investments, net                              936        (86)      (175)
                                                                          -------    -------    -------
       Cash flows from investing activities                                 5,936      5,114      4,885
                                                                          -------    -------    -------

Cash flows from financing activities:
       Purchase of treasury stock                                          (6,042)    (2,924)    (4,269)
       Proceeds from (repayment of) demand loan, net                        1,025     (1,025)       200
       Cash dividends                                                        (955)      (993)      (925)
       Exercise of common stock options                                       169       --          115
                                                                          -------    -------    -------
       Cash flows from financing activities                                (5,803)    (4,942)    (4,879)
                                                                          -------    -------    -------

Net increase (decrease) in cash and cash equivalents                           (9)         3          1
Cash and cash equivalents, beginning of year                                   10          1          4
                                                                          -------    -------    -------
Cash and cash equivalents, end of year                                    $     1    $     4    $     5
                                                                          =======    =======    =======


Reconciliation of net income to net cash provided by operations:

Net income                                                                $ 6,793    $ 4,339    $   821

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

              Equity in income of subsidiary                               (6,937)    (4,462)      (887)
              Increase (decrease) in other liabilities                       --           10         (1)
              (Increase) decrease in other
                 (non-investment) assets                                     --          (56)        64
              Other, net                                                        2       --           (2)
                                                                          -------    -------    -------
Net cash used in operating activities                                     $  (142)   $  (169)   $    (5)
                                                                          =======    =======    =======
</TABLE>



                                       43
<PAGE>



                              MERCHANTS GROUP, INC.
                 SCHEDULE III - CONDENSED FINANCIAL INFORMATION



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

     Cash dividends of $5,000,000, $5,200,000 and $5,060,000 were paid to the
Registrant by its consolidated subsidiary in the years ended December 31, 1999,
2000 and 2001, respectively.



                                       44
<PAGE>




                              MERCHANTS GROUP, INC.
                            SCHEDULE VI - REINSURANCE
                    YEARS ENDED DECEMBER 31, 1999, 2000, 2001
                        (in thousands except percentages)

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

Year Ended December 31, 2000
Property and Casualty Premiums             $107,234           $13,532             $640           $94,342             .7%

Year ended December 31, 2001
Property and Casualty Premiums             $100,953            $8,392           $1,412           $93,973            1.5%
</TABLE>



                                       45
<PAGE>




                              MERCHANTS GROUP, INC.
           SCHEDULE X - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
                        PROPERTY - CASUALTY SUBSIDIARIES
                  Years ended December 31, 1999, 2000, and 2001
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                             Losses & loss
                      Deferred  Reserves     Discount                                      adjustment expenses     Amortiza-
                      policy    for losses   if any,                                       incurred related to     tion of
                      acquis-   and loss     deducted                Net          Net          (1)       (2)       deferred
                      ition     adjustment   from       Unearned    earned     investment    Current   Prior       acquisition
                      costs     expenses     reserves   premiums    premiums    income       years     years       costs
                      --------  ----------   --------   --------    --------   ----------    -----     -----       -----------
<S>                   <C>        <C>         <C>        <C>         <C>         <C>          <C>       <C>         <C>
Year ended:

December 31, 1999     $12,309    $133,526    $8,492     $49,616     $94,775     $13,147     $69,835   $(3,749)     $25,115

December 31, 2000     $12,331    $145,075    $7,170     $50,857     $94,259     $13,903     $69,946   $ 1,428      $24,979

December 31, 2001     $12,354    $151,355    $6,714     $50,179     $93,885     $13,295     $76,618   $(1,474)     $24,880
</TABLE>


<TABLE>
<CAPTION>

                       Paid losses
                       & loss ad-     Direct
                       justment       premium
                       expenses       written
                       ----------     -------
<S>                     <C>            <C>
Year ended:

December 31, 1999       $65,455        $100,227

December 31, 2000       $67,625        $107,234

December 31, 2001       $74,280        $100,953
</TABLE>



                                       46
<PAGE>


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 21, 2002    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 21, 2002
--------------------                     of the Board
Richard E. Garman


/s/BRENT D. BAIRD                        Director, President                    March 21, 2001
-----------------
Brent D. Baird


/s/ROBERT M. ZAK                         Director, Sr. VP &                     March 21, 2002
----------------                         Chief Operating
Robert M. Zak                            Officer

/s/KENNETH J. WILSON                     Vice President & CFO                   March 21, 2002
--------------------                     (principal financial
Kenneth J. Wilson                        and accounting officer)

/s/ANDREW A. ALBERTI                     Director                               March 21, 2002
--------------------
Andrew A. Alberti


/s/FRANK J. COLANTUONO                   Director                               March 21, 2002
----------------------
Frank J. Colantuono


/s/THOMAS E. KAHN                        Director                               March 21, 2002
-----------------
Thomas E. Kahn


/s/HENRY P. SEMMELHACK                   Director                               March 21, 2002
----------------------
Henry P. Semmelhack
</TABLE>



                                       47
<PAGE>
                        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) on page 35 present fairly, in all material
respects, the financial position of Merchants Group, Inc. and its subsidiaries
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statements schedules
appearing under Item 14(a)(2) on page 35 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, 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 our opinion.




PricewaterhouseCoopers LLP
Buffalo, New York
February 13, 2002


                                       F-1


<PAGE>


                              MERCHANTS GROUP, INC.

                           CONSOLIDATED BALANCE SHEET

                                 (in thousands)

<TABLE>
<CAPTION>

                                                                December 31,
                                                                ------------
                  Assets                                     2000        2001
                  -----                                      ----        ----
<S>                                                        <C>          <C>
Investments:
     Fixed maturities:
         Held to maturity at amortized cost                $ 12,874     $ 13,042
         Available for sale at fair value                   183,283      182,170
     Preferred stock at fair value                           13,911        9,422
     Other long-term investments at fair value                1,036        1,593
     Short-term investments                                   4,550        6,905
                                                           --------     --------

                  Total investments                         215,654      213,132

Cash                                                              5        1,197
Interest due and accrued                                      2,816        2,309
Premiums receivable, net of allowance for
     doubtful accounts of $395 in 2000 and
     $431 in 2001                                            19,843       21,685
Deferred policy acquisition costs                            12,331       12,354
Ceded reinsurance balances receivable                        13,089       18,810
Prepaid reinsurance premiums                                  4,326        3,559
Deferred income taxes                                         6,263        4,790
Other assets                                                  7,537        8,727
                                                           --------     --------

                  Total assets                             $281,864     $286,563
                                                           ========     ========
</TABLE>



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


                                       F-2



<PAGE>

                              MERCHANTS GROUP, INC.

                           CONSOLIDATED BALANCE SHEET

                (in thousands except share and per share amounts)

<TABLE>
<CAPTION>

                                                                                December 31,
                                                                                ------------
     Liabilities and Stockholders' Equity                                   2000             2001
     ------------------------------------                                   ----             ----
<S>                                                                       <C>           <C>
Liabilities:
     Reserve for losses and loss adjustment expenses                      $ 145,075    $ 151,355
     Unearned premiums                                                       50,857       50,179
     Demand loan                                                               --            200
     Payable to affiliate                                                       608          852
     Other liabilities                                                       15,202       15,426
                                                                          ---------    ---------

              Total liabilities                                             211,742      218,012
                                                                          ---------    ---------

Stockholders' equity:
     Common stock, $.01 par value, authorized 10,000,000 shares,
     issued and outstanding 2,430,752 shares at December 31, 2000
     and 2,224,452 shares at December 31, 2001                                   32           32
Additional paid in capital                                                   35,680       35,795
Treasury stock, 811,100 shares at December 31, 2000
     and 1,025,400 shares at December 31, 2001                              (16,063)     (20,332)
Accumulated other comprehensive income (loss)                                  (875)       1,812
Accumulated earnings                                                         51,348       51,244
                                                                          ---------    ---------

              Total stockholders' equity                                     70,122       68,551
                                                                          ---------    ---------

Commitments and contingencies                                                  --           --

              Total liabilities and stockholders' equity                  $ 281,864    $ 286,563
                                                                          =========    =========
</TABLE>



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

                                       F-3

<PAGE>


                              MERCHANTS GROUP, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS

                     (in thousands except per share amounts)

<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                                                -----------------------
                                                              1999       2000        2001
                                                              ----       ----        ----
<S>                                                      <C>         <C>         <C>
Revenues:
     Net premiums earned                                 $  94,775   $  94,259   $  93,885
     Net investment income                                  13,147      13,903      13,295
     Net realized investment gains (losses)                     60         109        (580)
     Other revenues                                            434         355         696
                                                         ---------   ---------   ---------
         Total revenues                                    108,416     108,626     107,296
                                                         ---------   ---------   ---------

Expenses:
     Net losses and loss adjustment expenses                66,086      71,374      75,144
     Amortization of deferred policy acquisition costs      25,115      24,979      24,880
     Other underwriting expenses                             6,801       5,266       6,017
                                                         ---------   ---------   ---------
         Total expenses                                     98,002     101,619     106,041
                                                         ---------   ---------   ---------

Income before income taxes                                  10,414       7,007       1,255
Income tax provision                                         3,621       2,668         434
                                                         ---------   ---------   ---------
         Net income                                      $   6,793   $   4,339   $     821
                                                         =========   =========   =========

Earnings per share:
     Basic                                                   $2.48       $1.75       $.35
                                                             =====       =====       ====
     Diluted                                                 $2.48       $1.74       $.35
                                                             =====       =====       ====

Weighted average number of shares outstanding
     Basic                                                   2,738       2,485       2,343
     Diluted                                                 2,743       2,487       2,343
</TABLE>




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


                                       F-4

<PAGE>



                              MERCHANTS GROUP, INC.

                 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

                                 (in thousands)


                                                      Year Ended December 31,
                                                      -----------------------
                                                    1999       2000       2001
                                                    ----       ----       ----

Net income                                        $ 6,793    $ 4,339    $   821
                                                  -------    -------    -------
Other comprehensive income (loss) before tax:
     Unrealized gains (losses) on securities       (3,540)       482      4,454
     Reclassification adjustment for gains
         included in net income                       (37)      (100)      (124)
                                                  -------    -------    -------
Other comprehensive income (loss) before tax       (3,577)       382      4,330
Income tax provision (benefit) related to items
     of other comprehensive income                 (1,216)        69      1,643
                                                  -------    -------    -------
Other comprehensive income (loss)                  (2,361)       313      2,687
                                                  -------    -------    -------

Comprehensive income                              $ 4,432    $ 4,652    $ 3,508
                                                  =======    =======    =======


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



                                       F-5


<PAGE>



                              MERCHANTS GROUP, INC.

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                     (in thousands except per share amounts)


<TABLE>
<CAPTION>

                                                     Year Ended December 31,
                                                     -----------------------
                                                   1999        2000        2001
                                                   ----        ----        ----
<S>                                             <C>         <C>         <C>
Common stock:
     Beginning and end of year                  $     32    $     32    $     32
                                                --------    --------    --------

Additional paid in capital:
     Beginning of year                            35,511      35,680      35,680
     Exercise of common stock options                169        --           115
                                                --------    --------    --------
     End of year                                  35,680      35,680      35,795
                                                --------    --------    --------

Treasury stock:
     Beginning of year                            (7,097)    (13,139)    (16,063)
     Purchase of treasury shares                  (6,042)     (2,924)     (4,269)
                                                --------    --------    --------
     End of year                                 (13,139)    (16,063)    (20,332)
                                                --------    --------    --------

Accumulated other comprehensive income (loss)
     Beginning of year                             1,173      (1,188)       (875)
     Other comprehensive income (loss)            (2,361)        313       2,687
                                                --------    --------    --------
     End of year                                  (1,188)       (875)      1,812
                                                --------    --------    --------

Accumulated earnings:
     Beginning of year                            42,164      48,002      51,348
     Net income                                    6,793       4,339         821
     Cash dividends ($.35/share in 1999,
         $.40/share in 2000 and in 2001)            (955)       (993)       (925)
                                                --------    --------    --------
     End of year                                  48,002      51,348      51,244
                                                --------    --------    --------

                  Total stockholders' equity    $ 69,387    $ 70,122    $ 68,551
                                                ========    ========    ========
</TABLE>


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

                                      F-6


<PAGE>


                              MERCHANTS GROUP, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                 (in thousands)

<TABLE>
<CAPTION>

                                                                      Year Ended December 31,
                                                                      -----------------------
                                                                   1999         2000        2001
                                                                   ----         ----        ----
<S>                                                            <C>          <C>          <C>
Cash flows from operations:
     Collection of premiums                                    $  95,612    $  94,497    $  91,807
     Payment of losses and loss adjustment expenses              (65,455)     (67,625)     (74,280)
     Payment of underwriting expenses                            (33,381)     (30,643)     (31,414)
     Investment income received                                   13,141       12,949       12,999
     Investment expenses paid                                       (381)        (387)        (304)
     Income taxes paid                                            (3,064)      (2,436)      (1,133)
     Other cash receipts                                             388          209          776
                                                               ---------    ---------    ---------
         Net cash provided by (used in) operations                 6,860        6,564       (1,549)
                                                               ---------    ---------    ---------

Cash flows from investing activities:
     Proceeds from fixed maturities sold or matured               98,624       70,453      104,712
     Purchase of fixed maturities                               (100,385)     (68,326)     (99,685)
     Net (increase) decrease in preferred stock                   (2,977)      (1,491)       5,261
     Net increase in other long-term investments                     (62)        (239)        (557)
     Net (increase) decrease in short-term investments             3,736       (2,006)      (2,355)
     Disposition of equipment                                        696         --           --
                                                               ---------    ---------    ---------
         Net cash provided by (used in) investing activities        (368)      (1,609)       7,376
                                                               ---------    ---------    ---------

Cash flows from financing activities:
     Settlement of affiliate balances, net                          (703)         (10)         244
     Proceeds (repayment) of demand loan, net                      1,025       (1,025)         200
     Purchase of treasury stock                                   (6,042)      (2,924)      (4,269)
     Proceeds from exercise of common stock options                  169         --            115
     Cash dividends                                                 (955)        (993)        (925)
                                                               ---------    ---------    ---------
         Net cash used in financing activities                    (6,506)      (4,952)      (4,635)
                                                               ---------    ---------    ---------
     Increase (decrease) in cash                                     (14)           3        1,192
Cash, beginning of year                                               16            2            5
                                                               ---------    ---------    ---------
Cash, end of year                                                     $2           $5    $   1,197
                                                               =========    =========    =========
</TABLE>


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


                                       F-7
<PAGE>


                              MERCHANTS GROUP, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
         RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATONS

                                 (in thousands)

<TABLE>
<CAPTION>

                                                             Year Ended December 31,
                                                             -----------------------
                                                          1999        2000        2001
                                                          ----        ----        ----
<S>                                                    <C>         <C>         <C>
Net income                                             $  6,793    $  4,339    $    821

Adjustments:
     Depreciation and amortization                         (143)       (642)     (1,104)
     Net realized investment (gains) losses                 (60)       (109)        580

(Increase) decrease in assets:
     Interest due and accrued                              (194)       (699)        507
     Premiums receivable                                    665         121      (1,842)
     Deferred policy acquisition costs                       81         (22)        (23)
     Ceded reinsurance balances receivable                4,345      (7,693)     (5,721)
     Prepaid reinsurance premiums                          (539)     (1,158)        767
     Deferred income taxes                                  270        (331)       (170)
     Other assets                                        (1,432)        117      (1,190)

Increase (decrease) in liabilities:
     Reserve for losses and loss adjustment expenses     (3,159)     11,549       6,280
     Unearned premiums                                      234       1,241        (678)
     Other liabilities                                       (1)       (149)        224
                                                       --------    --------    --------
         Net cash provided by (used in) operations     $  6,860    $  6,564    $ (1,549)
                                                       ========    ========    ========
</TABLE>


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


                                       F-8

<PAGE>


                              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 $50,607,000 and $52,626,000 at
       December 31, 2000 and 2001, respectively. MNH's net income as reported in
       its Annual Statement was $7,141,000 in 1999, $3,981,000 in 2000 and
       $443,000 in 2001. All significant intercompany balances and transactions
       have been eliminated.

       The National Association of Insurance Commissioners has published the
       "Accounting Practices and Procedures Manual effective January 1, 2001"
       (the "Codification"). This publication codifies statutory accounting
       principles effective as of that date. The Codification has been adopted
       by the New Hampshire Insurance Department. MNH followed the statutory
       accounting guidance contained in the Codification when preparing its 2001
       statutory financial statements. The statutory accounting principles
       prescribed by the Codification vary in certain instances from those
       previously used by MNH to prepare its Annual Statement at December 31,
       2000 as filed with regulatory authorities. The effect of adopting
       Codification as of January 1, 2001 was an increase to MNH's surplus of
       $4,826,000.

       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.


                                       F-9

<PAGE>

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.

Fixed maturities include mortgage backed and asset backed securities that 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.


                                      F-10
<PAGE>


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.

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, 2000 and 2001 is $7,170,000 and $6,714,000,
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 of $6,699,000
and $7,475,000 at December 31, 2000 and 2001, respectively, are recorded in the
Company's consolidated balance sheet.

INCOME TAXES

The Company and its wholly-owned subsidiaries 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.


                                      F-11
<PAGE>


2.     RELATED PARTY TRANSACTIONS

       The Company and MNH have one paid employee. Under a management agreement
       Merchants Mutual Insurance Company ("Mutual"), which owns 11.5% of the
       Company's outstanding common stock at December 31, 2001, provides the
       Company and MNH with the facilities, management and personnel required to
       manage their day-to-day business. All underwriting, administrative,
       claims and investment expenses incurred on behalf of Mutual and MNH are
       shared on an allocated cost basis, determined as follows: for
       underwriting and administrative expenses, the respective share of total
       direct premiums written for Mutual and MNH serves as the basis of
       allocation; for claims expenses, the average number of outstanding claims
       is used; investment expenses are shared based on each company's share of
       total invested assets. 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 July 23, 2003.

       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>


3.     INVESTMENTS

       INVESTMENTS IN FIXED MATURITIES AND PREFERRED STOCKS

     The amortized cost and estimated fair value 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>

                                                     Gross            Gross
                                      Amortized    Unrealized      Unrealized     Estimated
                                      Cost/cost      Gains            Losses      Fair Value
                                      ---------      ------           ------      ----------
                                                         (in thousands)
<S>                                    <C>         <C>             <C>            <C>
DECEMBER 31, 2000

FIXED MATURITIES:

HELD TO MATURITY

Mortgage and asset backed
     securities                        $ 12,874    $    702        $   --         $ 13,576
                                       ========    ========        ========       ========

AVAILABLE FOR SALE

U.S. Treasury securities and
     obligations of U.S.
     government corporations
     and agencies                      $ 43,883    $    215        $     43       $ 44,055
Obligations of states and
     political subdivisions              16,074         133            --           16,207
Corporate securities                     56,219         369           1,127         55,461
Mortgage and asset backed
     securities                          67,216         441              97         67,560
                                       --------    --------        --------       --------
         Total                         $183,392    $  1,158        $  1,267       $183,283
                                       ========    ========        ========       ========

Preferred stocks                       $ 14,611    $     57        $    757       $ 13,911
                                       ========    ========        ========       ========
</TABLE>


                                      F-13
<PAGE>


<TABLE>
<CAPTION>

DECEMBER 31, 2001
                                                     Gross        Gross
                                       Amortized   Unrealized   Unrealized     Estimated
                                       Cost/cost     Gains        Losses       Fair Value
                                       ---------     -----        ------       ----------
                                                      (in thousands)
<S>                                    <C>         <C>          <C>           <C>
FIXED MATURITIES:

HELD TO MATURITY

Mortgage and asset backed
     securities                        $ 13,042    $    993     $   --        $ 14,035
                                       ========    ========     ========      ========

AVAILABLE FOR SALE

U.S. Treasury securities and
     obligations of U.S.
     government corporations
     and agencies                      $ 41,422    $    666     $    123      $ 41,965
Obligations of states and
     political subdivisions               8,805         202            8         8,999
Corporate securities                     71,035       1,535          120        72,450
Mortgage and asset backed
     securities                          57,553       1,231           28        58,756
                                       --------    --------     --------      --------
         Total                         $178,815    $  3,634     $    279      $182,170
                                       ========    ========     ========      ========

Preferred stocks                       $  9,389    $    105     $     72      $  9,422
                                       ========    ========     ========      ========
</TABLE>


The amortized cost and fair value of fixed maturities by expected maturity at
December 31, 2001 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>


<TABLE>
<CAPTION>

                                                                          Estimated
                                                                           Fair
                                                       Amortized Cost      Value
                                                       --------------     ----------
                                                              (in thousands)
<S>                                                      <C>            <C>
Held to maturity
Due in one year or less                                  $   --         $   --
Due after one year through five years                      11,787         12,684
Due after five years through ten years                      1,255          1,351
Due after ten years                                          --             --
                                                         --------       --------
    Total                                                $ 13,042       $ 14,035
                                                         ========       ========

Available for sale
Due in one year or less                                  $ 39,599       $ 40,356
Due after one year through five years                      97,607         99,659
Due after five years through ten years                     37,352         37,773
Due after ten years                                         4,257          4,382
                                                         --------       --------
    Total                                                $178,815       $182,170
                                                         ========       ========
</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,
2001 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:

                                             Year Ended December 31,
                                             ----------------------
                                    1999            2000            2001
                                    ----            ----            ----
                                              (in thousands)


Proceeds from sales                $16,968        $ 5,555        $10,938
Gross realized gains                    76            109            218
Gross realized losses                   16           --               17







                                      F-15

<PAGE>

     NET INVESTMENT INCOME

     Net investment income consists of:
<TABLE>
<CAPTION>

                                                          Year Ended December 31,
                                                       -----------------------------
                                                 1999               2000               2001
                                                 ----               ----               ----
                                                                (in thousands)

<S>                                            <C>                 <C>                 <C>
     Fixed maturities                          $  12,118           $  12,718           $  12,366
     Short-term investments                          464                 404                 277
     Other                                           946               1,168                 954
                                               ---------           ---------           ---------
        Total investment income                   13,528              14,290              13,597
     Investment expenses                             381                 387                 302
                                               ---------           ---------           ---------
        Net investment income                  $  13,147           $  13,903           $  13,295
                                               =========           =========           =========
</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, 1999, 2000 and 2001 is as follows:
<TABLE>
<CAPTION>

                                             1999                         2000                        2001
                                             ----                         ----                       ------
                                   Premiums      Premiums       Premiums       Premiums       Premiums      Premiums
                                   Written        Earned         Written        Earned         Written        Earned
                                  ---------      ---------      ---------      ---------      ---------      ---------
                                                                      (in thousands)

<S>                               <C>            <C>            <C>            <C>            <C>            <C>
     Direct                       $ 100,227      $  99,943      $ 107,234      $ 105,919      $ 100,953      $ 101,871
     Assumed                          1,612          1,663            640            714          1,412          1,173
     Ceded                           (7,369)        (6,831)       (13,532)       (12,374)        (8,392)        (9,159)
                                  ---------      ---------      ---------      ---------      ---------      ---------
     Net Premiums                 $  94,470      $  94,775      $  94,342      $  94,259      $  93,973      $  93,885
                                  =========      =========      =========      =========      =========      =========
</TABLE>

     Reinsurance ceded transactions decreased net losses and LAE by $9,506,000
     and $9,987,000 for the years ended December 31, 2000 and 2001 respectively.

     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, 2001, MNH has recognized
     amounts to be recovered from its primary

                                      F-16
<PAGE>

     reinsurers related to ceded losses and ceded unearned premiums totaling
     $21,589,000. MNH generally does not require collateral for reinsurance
     recoverable.

5.   RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

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

<TABLE>
<CAPTION>
                                                                        2000              2001
                                                                        ----              ----
                                                                             (in thousands)
<S>                                                                  <C>                  <C>
     Reserve for losses and LAE at beginning of year                 $ 133,526            $ 145,075
         Less reinsurance recoverables                                   6,026               13,826
                                                                     ---------            ---------
         Net balance at beginning of year                              127,500              131,249
                                                                     ---------            ---------

     Provision for losses and LAE for claims occurring in:
         Current year                                                   69,946               76,618
         Prior years                                                     1,428               (1,474)
                                                                     ---------            ---------
                                                                        71,374               75,144
                                                                     ---------            ---------

     Loss and LAE payments for claims occurring in:
         Current year                                                   26,655               28,719
         Prior years                                                    40,970               45,561
                                                                     ---------            ---------
                                                                        67,625               74,280
                                                                     ---------            ---------

     Reserve for losses and LAE at end of year, net                    131,249              132,113
         Plus reinsurance recoverables                                  13,826               19,242
                                                                     ---------            ---------
         Balance at end of year                                      $ 145,075            $ 151,355
                                                                     =========            =========
</TABLE>


     In 2000, the Company increased its reserves for prior years by $1,428,000
     primarily due to unfavorable loss experience related to its automobile and
     workers' compensation policies. In 2001, the Company decreased its reserves
     for prior years by $1,474,000 primarily due to favorable loss experience
     related to its workers' compensation policies.

6.   DEMAND LOAN

     The Company has 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.




                                      F-17
<PAGE>

7.   INCOME TAXES

     The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>

                                                               Year Ended December 31,
                                                    ---------------------------------------------
                                                    1999                2000                 2001
                                                    ----                ----                 ----
                                                                     (in thousands)

<S>                                               <C>                 <C>                 <C>
         Current                                  $   3,351           $   2,999           $     605
         Deferred                                       270                (331)               (171)
                                                  ---------           ---------           ---------
         Total income tax provision               $   3,621           $   2,668           $     434
                                                  =========           =========           =========
</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,
                                                       -------------------------------------------
                                                       1999                2000                 2001
                                                       ----                ----                 ----
                                                                     (in thousands)

<S>                                               <C>                 <C>                 <C>
         Computed provision at statutory rate     $   3,541           $   2,382           $     427
         Adjustments:
             State income taxes, net of
                  federal effect                        495                 640                 274
             Tax-exempt investment income              (298)               (214)               (115)
             Dividend exclusion                        (150)               (208)               (165)
             Other items                                 33                  68                  13
                                                  ---------           ---------           ---------
         Total income tax provision               $   3,621           $   2,668           $     434
                                                  =========           =========           =========


</TABLE>













                                      F-18
<PAGE>

     Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                       -----------------------------------
                                                                         2000                      2001
                                                                         ----                      ----
                                                                                 (in thousands)
<S>                                                                    <C>                      <C>
     Deferred policy acquisition costs                                 $ (4,458)                $ (4,706)
     Unrealized investment gains                                           --                       (811)
     Bond discounts                                                        --                       (607)
     Other                                                                 (520)                    (234)
                                                                       --------                 --------
     Total deferred tax liabilities                                      (4,978)                  (6,358)
                                                                       --------                 --------

     Discounting of reserve for losses and
         loss adjustment expenses                                         7,149                    7,456
     Unearned premiums                                                    3,164                    3,200
     Unrealized investment losses                                           542                     --
     Other                                                                  386                      492
                                                                       --------                 --------
     Total deferred tax assets                                           11,241                   11,148
                                                                       --------                 --------
         Net deferred income taxes                                     $  6,263                 $  4,790
                                                                       ========                 ========
</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 2002, without the prior approval of the New Hampshire
     Insurance Commissioner, is $5,263,000.

     STOCK OPTION PLAN

     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

                                      F-19
<PAGE>

     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 date of grant. Options granted
     under the Plan have a 10 year life and vested in cumulative annual
     increments of 25% commencing one year from the date of grant. In accounting
     for the Plan, 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 Statement of
     Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based
     Compensation". No options were granted in 1999, 2000 or 2001 and,
     therefore, no compensation expense was recognized in those years.

     Had compensation expense for stock options granted under the Company's Plan
     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 year ended December 31, 1999 would have been as shown
     below. There would have been no effect on the Company's net income or
     earnings per share for the years ended December 31, 2000 or 2001.

                                                  1999
                                                  ----
     Net income:
         As reported                         $   6,793,000
         Pro forma                           $   6,777,000
     Diluted earnings per share:
         As reported                         $        2.48
         Pro forma                           $        2.47

     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.















                                      F-20
<PAGE>

     A summary of the status of the Company's outstanding options as of December
     31, 1999, 2000 and 2001, and changes during the years ending on those dates
     is presented below:
<TABLE>
<CAPTION>

                                      1999                            2000                         2001
                          ----------------------------    ----------------------------   -------------------------
                                            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               71,500          $18.38          47,000          $19.87          45,500          $19.84
     Granted                   --              --              --              --              --              --
     Exercised              (12,000)          14.05            --              --            (8,000)          14.38
     Forfeited              (12,500)          17.12          (1,500)          21.00          (2,000)          21.00
                           --------                       ---------                        --------
     End of year             47,000           19.87          45,500           19.84          35,500           21.00
                           ========                       =========                        ========
     Options
       exercisable
       at year-end           37,250           19.58          45,500           19.84          35,500           21.00
                           ========                       =========                        ========
</TABLE>

     The following table summarizes information about the Company's outstanding
stock options at December 31, 2001:

<TABLE>
<CAPTION>
                   Number                Remaining            Average             Number
                Outstanding              Contractual          Exercise          Exercisable
                at 12/31/01             Life in Years           Price           at 12/31/01
                -----------             -------------           -----           -----------
<S>               <C>                        <C>                <C>                <C>
                  35,500                     4.1                $21.00             35,500
                  ======                                        ======
</TABLE>

     COMMON STOCK REPURCHASES

     During 1999, 2000 and 2001, the Company repurchased 267,600, 165,100 and
     214,300 shares of its common stock, respectively. The Company was holding
     811,100 and 1,025,400 of these shares in treasury as of December 31, 2000
     and 2001, respectively.

     PREFERRED STOCK

     The Company's Preferred stock, no par value, $424.30 stated value, consists
     of 10,000 shares authorized; no shares were issued or outstanding at
     December 31, 2000 or December 31, 2001. The Company also has 3,000,000
     shares of $.01 par value preferred stock which is authorized and unissued.





                                      F-21
<PAGE>

9.   EARNINGS PER SHARE

     The computations for basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                                  -------------------------------
                                                              1999             2000             2001
                                                              ----             ----             ----
                                                               (in thousands except per share amounts)
<S>                                                       <C>                 <C>                 <C>
     Basic:
     Net income                                           $   6,793           $   4,339           $     821
     Weighted average shares outstanding                      2,738               2,485               2,343
     Basic earnings per share                             $    2.48           $    1.75           $     .35

     Diluted:
     Net income                                           $   6,793           $   4,339           $     821
     Weighted average shares outstanding                      2,738               2,485               2,343
     Plus incremental shares from assumed
         conversion of stock options                              5                   2                --
                                                          ---------           ---------           ---------
     Weighted average shares
         outstanding-adjusted                                 2,743               2,487               2,343
                                                          =========           =========           =========
     Diluted earnings per share                           $    2.48           $    1.74           $     .35
                                                          =========           =========           =========
</TABLE>

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
     $580,000, $606,000 and $486,000 for the years ended December 31, 1999, 2000
     and 2001, 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.








                                      F-22

<PAGE>


     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-23