PROPERTIES Our main office is located at 10 North Highway 31, Pennington, New Jersey in a 14,357 square foot facility owned by Mercer Insurance Company. Mercer Insurance Company is constructing an 11,012 square foot addition to the main office. The addition is expected to be completed in 2004 at an estimated cost of $2.7 million. We also own a tract of land adjacent to our main office property.
(1) Costs and expenses related to the stock conversion incurred in the years ended December 31, 2003 and 2002, and expenses related to an aborted conversion in 1999. These costs and expenses are reported separately in our consolidated income statements within income from continuing operations before income taxes. Stock conversion expenses consist primarily of the costs of engaging independent accounting, valuation, legal and other consultants to advise us and our insurance regulators as to the stock conversion process and related matters, as well as printing and postage costs relating to our communications with our policyholders. These costs and expenses are reported in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 00-3, “Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and for Certain Long-Duration Participating Contracts.” SOP 00-3 addresses financial statement presentation and accounting for stock conversion expenses and accounting for retained earnings and other comprehensive income at the date of the stock conversion.
Costs and expenses of $2,170 were incurred in 1999 in connection with a previous attempt to convert to a stock company which was terminated, and were charged against income when the conversion attempt was aborted.
(2) Income of the Company attributable to the minority interest in Franklin Holding Company, which interest was acquired immediately after the Conversion for shares of the Company.
(4) The sum of losses, loss adjustment expenses, underwriting expenses and dividends to policyholders divided by net premiums earned. A combined ratio of less than 100% means a company is making an underwriting profit.
(5) The sum of the ratio of underwriting expenses divided by net premiums written, and the ratio of losses, loss adjustment expenses, and dividends to policyholders divided by net premiums earned.
(6) The ratio of net premiums written divided by ending statutory surplus, except for 2003, where a weighted average of statutory surplus is used.
(7) Earnings per share data reflects only net loss for the period from December 16, 2003, the date of the Conversion, through December 31, 2003. Net loss during this period was $477,000.
The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with the condensed consolidated financial statements and notes thereto included in this report, and the “Description of Business” contained in Item. 1 of this report. This discussion contains forward-looking information that involves risks and uncertainties. Actual results could differ significantly from these forward-looking statements. See “Forward-Looking Statements”.
The Company and its subsidiaries underwrite property and casualty insurance in New Jersey and Pennsylvania. Our consolidated operating insurance company subsidiaries are:
• Mercer Insurance Company, a Pennsylvania property and casualty stock insurance company offering insurance coverage to businesses and individuals in New Jersey and Pennsylvania,
• Mercer Insurance Company of New Jersey, Inc., a New Jersey property and casualty stock insurance corporation that currently offers only workers’ compensation insurance to businesses located in New Jersey; and
Nevertheless, reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss settlement expenses will likely differ from the amount recorded at December 31, 2003. Changes in estimates or differences between estimates and amounts ultimately paid are reflected in current operations. Loss reserving techniques and assumptions have been consistently applied during the periods presented.
The property and casualty industry has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental remediation, product and construction defect liability, mold, and other uncertain exposures. We have not experienced significant losses from these types of claims.
The table below summarizes loss and loss adjustment reserves by major line of business:
market price of the security. A write-down to a value other than the market price requires objective evidence in support of that value. All write downs during 2003 and 2002 were to quoted market prices.
We have one significant non-traded equity security, a non-voting common stock in Excess Reinsurance Company, which is carried at $1.2 million. Its fair value is estimated at the statutory book value as reported to the National Association of Insurance Commissioners (NAIC). Other non-traded securities, which are not material in the aggregate, are carried at cost.
A fixed maturity security generally is written down if we are unable to hold it or otherwise intend to sell a security with an unrealized loss, or if it is probable that we will be unable to collect all amounts due according to the contract terms of a debt security not impaired at acquisition.
On June 1, 2001, we acquired 49% of the outstanding shares of common stock of Franklin Holding and thereafter consolidated the financial condition and results of operations of Franklin Holding with Mercer Insurance Company. For the period between June 1, 2001 and December 15, 2003, we allocated a portion of Franklin Holding’s net income to the minority interest in Franklin Holding. This resulted in allocations of income to minority interest of $131,000, $138,000 and $100,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The minority interest in Franklin Holding was acquired by the Company immediately after the Conversion, through an exchange of shares in which the owners of the minority interest received 502,525 shares of the Company in
exchange for all minority shares in Franklin Holding. Since Franklin Holding Company, Inc. is now wholly owned within the group, no further income after December 15, 2003 will be allocated to the minority interest.
Consistent with our goal of increasing commercial business, we increased direct commercial multi-peril premiums written, the largest component of our commercial lines segment, by 37.8% to $18.6 million in 2003, compared to $13.5 million for 2002, and increased commercial multi-peril net premiums earned by 31.6% to $12.7 million in 2003, as compared to $9.6 million for 2002. We expect this trend of increasing commercial writings to continue by targeting certain types of risks with selected producers.
Personal automobile direct written premiums, written exclusively in Pennsylvania, increased 14.8% to $7.9 million in 2003, compared to $6.9 million for 2002. Net earned premiums for personal automobile increased by 15.9% to $6.9 million for 2003, from $5.9 million for 2002. Despite the increases in personal lines premiums, we will continue to focus principally on our commercial lines growth. Our personal auto premium is currently being evaluated to determine whether we will seek an appropriate rate increase.
The following table summarizes the length of time equity securities with unrealized losses at December 31, 2003 have been in an unrealized loss position:
For 2003, we had a combined ratio of 103.8%, a loss and loss adjustment expense ratio of 57.9% and an underwriting expense ratio of 45.9%, compared to a combined ratio of 96.4%, a loss and loss adjustment expense ratio of 49.6% and an underwriting expense ratio of 46.8% for 2002.
settlement of reported cases has been favorable. In addition, we originally had expected a development of losses that was more in line with the industry, but this has not occurred. These factors have resulted in the favorable development indicated and are a reflection of the disciplined underwriting employed by the Company. Favorable development was also present in other lines of business and resulted from the normal claims review process, and not from changes in key assumptions or reserving philosophy.
For the year ended December 31, 2002, Mercer Mutual had net income of $2.2 million compared to $3.3 million for the year ended December 31, 2001, a decline of 33.3%. Although the underwriting gain from our commercial lines segment in 2002 increased from the prior year by $1.4 million to $2.9 million, our personal lines segment incurred an underwriting loss of $1.4 million, which represented a decrease of $1.9 million from the prior year. See note 9 of the notes to our consolidated financial statements for a reconciliation of underwriting gain (loss) by segment to consolidated amounts determined in accordance with GAAP. In addition, segment income from our investment function decreased in 2002 by $600,000 to $1.8 million.
Direct premiums written increased by 22.6% to $50.9 million in 2002, from $41.5 million in 2001 and consisted of $27.5 million of commercial lines premiums and $23.4 million of personal lines premiums in 2002, compared to $20.3 million in commercial lines premiums and $21.2 million in personal lines premiums in 2001. Net premiums earned increased by 31.7% to $40.5 million from $30.7 million in 2001. Commercial lines comprised $20.1 million and personal lines comprised $20.4 million of net premiums earned in 2002, compared to $15.1 million and $15.6 million, respectively, in 2001. The overall increases in direct premiums written and net premiums earned reflect continued strong growth in our commercial lines business and firmer pricing, as well as a full year of operations of Franklin Holding. Our controlling interest in Franklin Holding was acquired on June 1, 2001, and thus only seven months of operations for Franklin Holding were consolidated in the 2001 results.
Consistent with our goal of increasing commercial business, we increased direct commercial multi-peril premiums written, the largest component of our commercial lines segment, by 39.2% to $13.5 million in 2002, compared to $9.7 million in 2001, and increased commercial multi-peril net premiums earned by 35.2% to $9.6 million in 2002, compared to $7.1 million in 2001.
For the same comparative periods, net premiums earned for our homeowners insurance, the largest component of our personal lines segment, increased 8.2% to $11.9 million in 2002 compared to $11.0 million in 2001 while the increase in homeowners premiums written increased a smaller 3.0% to $13.7 million in 2002 from $13.3 million in 2001. The declining growth rate for homeowners insurance reflects our strategy of focusing on commercial lines and decreasing our personal lines exposure. Notably, for the first time in our history, commercial multi-peril premiums written in 2002 were approximately equal to homeowners premiums written in the same period.
Although our focus is on commercial lines premium growth, Franklin Holding’s business model, which uses Internet-based technology to process commodity personal lines business, made it an attractive acquisition candidate. The acquisition of Franklin Holding actually reversed a declining trend in homeowners premiums written that existed from 1998 to 2000 and added a meaningful book of Pennsylvania personal automobile business that totaled $6.9 million in written premiums in 2002 and $4.9 million in written premiums in 2001.
Equity securities with unrealized losses at December 31, 2002 in general were determined to have temporary declines in value due to geopolitical rather than fundamental reasons. Certain other equity securities also were determined to have temporary declines in value as a reaction to their particular industry rather than specifically to those companies. We believed it was more likely than not that those securities would appreciate in value.
Of the $268,000 in realized losses from equity securities sold during the year ended December 31, 2002, realized losses of $11,000 were from a security that had been written down in 2001. Realized losses of $257,000 were from securities that had been expected to appreciate in value but after reevaluation were sold so that sale proceeds could be reinvested. Securities were sold due to a desire to reduce exposure to certain issuers and industries or in light of changing economic conditions.
In the commercial lines segment in 2002, we had an underwriting gain of $2.9 million, a combined ratio of 85.6%, a loss and loss adjustment expense ratio of 36.3% and an underwriting expense ratio of 49.3%, compared to an underwriting gain of $1.5 million, a combined ratio of 90.4%, a loss and loss adjustment expense ratio of 42.5% and an underwriting expense ratio of 47.9% for 2001. In the personal lines segment in 2002, we had an underwriting loss of $1.4 million, a combined ratio of 107.0%, a loss and loss adjustment expense ratio of 62.8% and an underwriting expense ratio of 44.2%, compared to an underwriting gain of $500,000, a combined ratio of 96.8%, a loss and loss adjustment expense ratio of 52.0% and an underwriting expense ratio of 44.8% for 2001.
Net loss and loss adjustment expenses incurred increased overall by $5.5 million, or 38.1%, to $20.1 million for the year ended December 31, 2002, from the same period in 2001. The increase in loss and loss adjustment expenses reflects the increase in commercial and personal lines volume, a full year of Franklin Holding business, an increase in our reinsurance retention, and a slightly higher frequency of losses. The loss and loss adjustment expense ratio increase was largely attributable to the acquisition of Franklin Holding, resulting in increased personal lines business that carries a significantly higher loss ratio (62.8% versus a 36.3% commercial lines loss and loss adjustment ratio), an increase in our reinsurance retention from $250,000 to $300,000 per policy and the fact that 2002 witnessed a slightly higher frequency of smaller, mostly personal lines losses, none of which pierced this higher retention level.
Prior to its payment of any dividends to Mercer Insurance Company, Mercer Insurance Company of New Jersey, Inc. is required to provide notice of the intended dividends to the New Jersey Department of Banking and Insurance. New Jersey law sets the maximum amount of dividends that may be paid, which amount cannot exceed the greater of 10% of Mercer Insurance Company of New Jersey, Inc.’s statutory surplus as reported on the most recent annual statement filed with New Jersey, or the net income, not including realized capital gains, for the period covered by the annual statement. The New Jersey Department has the power to limit or prohibit dividend payments if certain conditions exist. These restrictions or any subsequently imposed restrictions may affect our future liquidity. As of December 31, 2003, the amount available for payment of dividends by Mercer Insurance Company of New Jersey, Inc. to Mercer Insurance Company in 2004 without the prior approval of New Jersey Department of Banking and Insurance is approximately $1.5 million.
As a Pennsylvania domiciled insurance company, dividends payable to Mercer Insurance Company by Franklin Insurance Company (through Franklin Holding) are subject to the same formula limitation described above for Mercer Insurance Company. As of December 31, 2003, the amount available for payment of dividends from Franklin Insurance Company to Mercer Insurance Company and the Company in 2004, without the prior approval of the Pennsylvania Insurance Department, is approximately $0.6 million.
Total assets increased 66.2%, or $70.0 million to $175.9 million, at December 31, 2003 from December 31, 2002. Increased premium volume drove increases in premium receivables of $2.0 million, or 28%, and deferred policy acquisition costs of $1.6 million, or 28%. Reinsurance recoverable on unpaid losses and loss expenses increased $670,000, or 19%, due to loss activity above the Company’s loss retention under its reinsurance agreements. Investments increased $53.8 million, or 77%, to $123.3 million, and cash balances increased $8.1 million, or 113% due to cash proceeds of the Conversion. Other assets increased $1.8 million, or 193%, to $2.7 million, principally due to a Federal Income Tax refund accrued for the 2003 tax year.
Contemporaneous with the Conversion, the Company and its subsidiaries engaged a new manager for its fixed income portfolio. The manager will invest the proceeds of the Conversion and reallocate the fixed maturity securities with a view to achieving an appropriate duration, initially targeted at 4.07 years, and proportionately higher yields. Given the large amount of new capital to invest, the need to reallocate some existing investment funds, and a bond market presenting investment challenges, we anticipate that it will take at least through March 31,
2004 before the portfolio is substantially invested in accordance with the goals of the Company. Until fully invested in targeted securities, the funds under management in the fixed maturity portfolio which are not yet committed to longer investments will be invested in high quality, very short-term investments with appropriate yields.
Total liabilities increased 18%, or $11.8 million, in 2003, to $77.5 million. Increased premium volume is primarily responsible for the increase in unearned premium reserves of $5.4 million, or 22%. Loss and loss expense reserves increased $5.9 million, or 19%, as a result of premium volume increases and the related increases in loss exposures, and the higher level of losses experienced in 2003.
In connection with the Conversion, the ESOP was established, and purchased 626,111 shares from the Company in return for a note bearing interest at 4% on the principal amount of $6,261,110. Mercer Insurance Company will make annual employee benefit contributions to the ESOP sufficient to repay that loan to the Company. It is anticipated that the loan will be repaid in 10 equal annual installments, and that, in proportion to annual principal and interest payments, approximately 10% of the original ESOP shares will be allocated annually to employee participants of the ESOP. An expense charge will be booked ratably during each year for the shares committed to be allocated to participants that year, determined with reference to the fair market value of the Company’s stock at the time the commitment to allocate the shares is accrued and recognized. The issuance of the shares to the ESOP was fully recognized in the Additional Paid-in Capital account at Conversion, with a contra account entitled Unearned ESOP Shares established in the Shareholders’ Equity section of the balance sheet for the unallocated shares at an amount equal to their original per-share purchase price.
The Company was not a party to any unconsolidated arrangement or financial instrument with special purpose entities or other vehicles at December 31, 2003 which would give rise to previously undisclosed market, credit or financing risk.
The Company and its subsidiaries have no significant contractual obligations at December 31, 2003.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
Mercer Insurance Group, Inc. and Subsidiaries (collectively, the Group) includes Mercer Insurance Company (MIC), its subsidiaries Queenstown Holding Company, Inc. (QHC) and BICUS Services Corporation (BICUS), QHC’s subsidiary Mercer Insurance Company of New Jersey, Inc. (MICNJ), and Franklin Holding Company, Inc. (FHC). Mercer Insurance Group, Inc. (MIG) is a holding company owning all the outstanding shares of MIC, the company resulting from the conversion of Mercer Mutual Insurance Company from the mutual to the stock form of ownership on December 15, 2003 (“the Conversion”). On June 1, 2002, FHC was added to the Group when MIC purchased a 49% controlling interest in FHC and its wholly owned insurance subsidiary, Franklin Insurance Company (FIC) (note 12). The remaining 51% of FHC was purchased by MIG in conjunction with the Conversion. The companies in the Group are operated under common management. The Group provides property and casualty insurance to both individual and commercial customers in New Jersey and Pennsylvania. The Group’s business activities can be separated into three operating segments, which include commercial lines of insurance, personal lines of insurance and the investment function. The commercial lines of business consist primarily of multi-peril and general liability coverage. These two commercial lines represented 29% and 15%, respectively, of the Group’s net premiums written in 2003. The personal lines of business consist primarily of homeowners and private passenger automobile insurance. These two personal lines represented 25% and 13%, respectively, of net written premiums in 2003.
Cash, cash equivalents, and short-term investments are carried at cost which approximates market value. The Group considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The fair value of an equity security in a reinsurance company is estimated based on statutory book value because the security is not traded and because of restrictions placed on the investors. After receipt of a bona fide offer to purchase this security, the stock must first be offered to the investee or its other shareholders at the lower of statutory book value or the offered price. The investee also has the ability to determine that the potential purchaser is not appropriate and void such an offer. The carrying value of this investment was $1,203 and $1,228 at December 31, 2003 and 2002, respectively.
Cash, cash equivalents, and short-term investments - The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
Acquisition costs such as commissions, premium taxes, and certain other expenses which vary with and are directly related to the production of business, are deferred and amortized over the effective period of the related insurance policies. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to premiums to be earned, anticipated investment income, loss and loss adjustment expenses, and certain other maintenance costs expected to be incurred as the premiums are earned. To the extent that deferred policy acquisition costs are not realizable, the deficiency is charged to income currently.
In connection with SFAS No. 142’s transitional goodwill impairment evaluation, SFAS No. 142 required the Group to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. To accomplish this, the Group was required to identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill to those reporting units as of January 1, 2002. The Group has only one reporting unit with goodwill. Based on the results of this assessment, the fair value of this reporting unit exceeded its carrying value, including existing goodwill, as of January 1, 2002. SFAS No. 142 also requires that an impairment test be performed annually or more frequently if changes in circumstances or the occurrence of events indicate goodwill may be impaired. The Group performed the annual impairment tests as of December 31, 2003 and 2002 and the results indicated that the fair value of the reporting unit exceeded its carrying amounts.
The estimated fair value and unrealized loss for securities in a temporary unrealized loss position as of December 31, 2003 are as follows :
The gross realized investment losses included write-downs for the other than temporary impairment of securities totaling $454, $647, and $185 for the years ended 2003, 2002 and 2001, respectively.
Accumulated other comprehensive income included deferred income taxes of $2,306 and $1,548 applicable to net unrealized investment gains at December 31, 2003 and 2002, respectively.
The amortized cost of invested securities on deposit with regulatory authorities at both December 31, 2003 and 2002 amounted to $202.
As a result of changes in estimates of insured events in prior years, the liabilities for losses and loss adjustment expense decreased by $596, $2,144, and $3,279, in 2003, 2002, and 2001, respectively. These redundancies are primarily concentrated in the commercial multi-peril and workers’ compensation lines in 2003, in the commercial multi-peril and other liability lines in 2002, and in the homeowners and commercial multi-peril lines in 2001.
The Group has geographic exposure to catastrophe losses in its operating region. Catastrophes can be caused by various events including hurricanes, windstorms, earthquakes, hail, explosion, severe weather, and fire. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas. However, hurricanes and
earthquakes may produce significant damage in large, heavily populated areas. The Group generally seeks to reduce its exposure to catastrophe through individual risk selection and the purchase of catastrophe reinsurance.
In the ordinary course of business, the Group seeks to limit its exposure to loss on individual claims and from the effects of catastrophes by entering into reinsurance contracts with other insurance companies. Reinsurance is ceded on excess of loss and pro-rata bases with the Group’s retention in 2003 and 2002 not exceeding $300 per occurrence, and in 2001, $250 per occurrence. Insurance ceded by the Group does not relieve its primary liability as the originating insurer. The Group also assumes reinsurance from other companies on a pro-rata basis.
The effect of reinsurance on unearned premiums as of December 31, 2003 and 2002 is as follows:
The effect of reinsurance on the liabilities for losses and loss adjustment and losses and loss adjustment expenses incurred is as follows:
Effective January 1, 1997, the Group implemented a defined contribution pension plan to replace a defined benefit pension plan. The plan covers substantially all of its employees. Benefits are based on years of service and the employee’s annual compensation. Pension expense from the defined contribution plan amounted to $223, $181, and $129, for 2003, 2002, and 2001, respectively.
The Group also maintains a 401(k) retirement savings plan covering substantially all employees. The Group matches a percentage of each employees’ pre-tax contribution and also contributes an amount equal to 2% of each employee’s annual compensation. The cost of this plan amounted to $135, $119, and $90, for the years ended December 31, 2003, 2002, and 2001, respectively. The Group maintains a nonqualified unfunded retirement plan for its directors. The plan provides for monthly payments for ten years upon retirement. The expense for this plan amounted to $102, $93, and $86, for 2003, 2002, and 2001 respectively. Costs accrued under this plan amounted to $627 and $558 at December 31, 2003 and 2002, respectively.
The Group also maintains a deferred compensation plan for its directors and officers. Under the plan, participants may elect to defer receipt of all or a portion of their fees. Amounts deferred, together with accumulated interest, are distributed either as a lump sum or in installments over a period of not greater than ten years. Deferred compensation, including accumulated interest, amounted to $749 and $661 at December 31, 2003 and 2002, respectively.
The Group has purchased Company-owned life insurance covering key individuals. The Group’s cost for the Company-owned life insurance was $762 and $350 for the years ended December 31, 2003 and 2002, respectively. The cash surrender value of the Company-owned life insurance totaled $597 and $217 at December 31, 2003 and 2002, respectively, and is included in other assets.
In conjunction with the Conversion described in note 1, the Group established an Employee Stock Ownership Plan (ESOP) and issued 626,111 shares to the ESOP at the Conversion offering price. The ESOP signed a promissory note in the amount of $6,261 to purchase the shares which is due in 10 equal installments including interest at 4%. Shares purchased are held in a suspense account for allocation among participating employees as the loan is repaid. Shares are allocated to participants based on compensation as described in the plan. During the period December 16, 2003 to December 31, 2003, 62,611 shares were allocated to employees. Compensation expense equal to the fair value of the shares released is recognized ratably over the period that the shares are committed to be released to the employees. In 2003, the Group recognized compensation expense of $778 related to the ESOP. As of December 31,2003, the cost of the 563,500 shares issued to the ESOP but not yet released are classified within equity as unearned ESOP shares.
Actual income tax expense differed from expected tax expense, computed by applying the United States federal corporate tax rate of 34% to income before income taxes, as follows:
Assets are not allocated to the commercial and personal lines, and are reviewed in total by management for purposes of decision making.
A reconciliation of the Group’s statutory net income and surplus to the Group’s net income and stockholder’s equity, under accounting principles generally accepted in the United States of America (GAAP), is as follows:
The Group’s insurance companies are required to file statutory financial statements with various state insurance regulatory authorities. Statutory financial statements are prepared in accordance with accounting principles and practices prescribed or permitted by the various states of domicile. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Furthermore, the NAIC adopted the Codification of Statutory Accounting Principles effective January 1, 2001. The codified principles are intended to provide a comprehensive basis of accounting recognized and adhered to in the absence of conflict with, or silence of, state statutes and regulations. The effects of such do not affect financial statements prepared under accounting principles generally accepted in the United States of America.
The Group’s insurance companies are required by law to maintain a certain minimum surplus on a statutory basis, and are subject to risk-based capital requirements and to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. A condition imposed in connection with the approval by the Pennsylvania Department of Insurance to allow the Conversion is that for a period of three years after the Conversion, Mercer Insurance Company may not declare or pay any dividend to Mercer Insurance Group without the approval of the Pennsylvania Insurance Department. After this three-year period, Mercer Insurance Company will be restricted by the insurance laws of Pennsylvania as to the amount of dividends or other distributions it may pay to its holding company. Under Pennsylvania law, there is a maximum amount that may be paid by Mercer Insurance Company during any twelve-month period after notice to, but without prior approval of, the Pennsylvania Insurance Department. This limit is the greater of 10% of Mercer Insurance Company’s statutory surplus as reported on its most recent annual statement filed with the Pennsylvania Insurance Department, or the net income of Mercer Insurance Company for the period covered by such annual statement. If the dividend restrictions imposed on Mercer Insurance Company related to the Conversion were not in effect, then as of December 31, 2003, the amounts available for payment of dividends from Mercer Insurance Company in 2004, without the prior approval of the Pennsylvania Insurance Department would have been approximately $5.8 million.
On June 1, 2001, MIC purchased certain holdings in FHC and its wholly owned insurance subsidiary, FIC (note 1). For an investment of $3,500, MIC acquired 49% of all outstanding voting common stock; 50% of all common stock options; 50% of convertible, redeemable Series A preferred stock and certain rights to purchase the remaining voting common stock in the future. The transaction resulted in goodwill totaling $3,310. In 2002, MIC and a minority interest shareholder exercised options to purchase Series B, nonvoting common stock and paid $662 and $689, respectively, for such shares. These exercises did not change MIC’s ownership percentage in FHC.
In accordance with SFAS No. 109, the Group reduced the valuation allowance on deferred tax assets which resulted in a $336 reduction in goodwill in 2002.
Van Rensselaer, Ltd., which is owned by William V.R. Fogler, a director, has provided investment management services to the Group since the year 2000. Fees to Van Rensselaer, Ltd. amounted to $141 in 2003, $139 in 2002, and $136 in 2001.
Note 2 - Earnings per share for the periods prior to December 16, 2003 are not applicable.