SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

MERCHANTS GROUP, INC.

Delaware		16-1280763
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o     No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  o     No  þ

Note – checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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  þ     No  o

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.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o     No  þ

As of March 17, 2006, 2,145,652 shares of common stock were outstanding. The aggregate market value of the common shares held by non-affiliates of Merchants Group, Inc. on March 27, 2006 was $31,391,000. 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 2006 Annual Meeting of stockholders are incorporated by reference into Part III.

 

 

MERCHANTS GROUP, INC. ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2005

		PART I
ITEM 1.		BUSINESS.
ITEM 1A.		RISK FACTORS.
ITEM 2.		PROPERTIES.
ITEM 3.		LEGAL PROCEEDINGS.
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
		PART II
ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ITEM 6.		SELECTED FINANCIAL DATA.
ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 9A.		CONTROLS AND PROCEDURES.
ITEM 9B.		OTHER INFORMATION.
		PART III
ITEM 10.		DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11.		EXECUTIVE COMPENSATION.
ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES.
		PART IV
ITEM 15.		EXHIBITS AND FINANCIAL STATEMENTS.
Exhibit 10(F) Property Catastrophe Excess Loss Reinsurance Agrmn
Exhibit 23 Consent of Independent Registered Accounting Firm
Exhibit 31 302 Certifications of SVP/COO & VP/CFO
Exhibit 32 906 Certifications of SVP/COO & VP/CFO

PART I

Item 1. BUSINESS.

General

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

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 services agreement (the Services Agreement) that became effective January 1, 2003. At December 31, 2005, Mutual owned 12.0% of the Company’s issued and outstanding common stock. The Company and MNH do not have any operating assets or employees. Under the Services Agreement, Mutual provides the Company and MNH with the facilities, management and personnel required to operate their day-to-day business.

          The Services Agreement covers substantially the same services previously provided under a management agreement among the Company, MNH and Mutual (the Management Agreement) from 1986 to 2002. The Services Agreement provides for negotiated fees (subject to periodic adjustment) for administrative, underwriting, claims and investment management services. The Company and MNH have the discretion to remove invested assets from their investment portfolios managed by Mutual.

          The Services Agreement contains termination provisions that vary based on the service rendered. Underwriting services may be terminated on one year’s notice, but the termination may not be effective before January 1, 2008. Claims and administrative services may be terminated on 6 months notice. In accordance with the Services Agreement, in June 2005 the Company and MNH notified Mutual that they will terminate the Investment and Cash Management Services Annex (which pertains to the management of the Company’s investment portfolio) to the Services Agreement as of June 30, 2006. The Company and MNH intend to solicit bids, including possibly from Mutual, for the management of their investment portfolio after the effective date of the termination.

          Effective January 1, 2003, Mutual and MNH agreed to “pool,” or share, underwriting results on their traditional insurance business (Traditional Business) by means of a reinsurance pooling agreement (the Pooling Agreement). The Pooling Agreement applies to premiums earned and losses incurred after the effective date. It does not apply to any new endeavor of either Mutual or MNH outside of their Traditional Business, unless the companies agree otherwise. Neither Mutual or MNH has entered into any endeavor outside of their Traditional Business.

          The Pooling Agreement provides for MNH to cede, or transfer, to Mutual all premiums and risks on its Traditional Business during the term of the agreement, and then to assume from Mutual a

percentage of all of Mutual’s and MNH’s Traditional Business (the Pooled Business). MNH assumed 30% of the Pooled Business in 2005, 35% in 2004 and 40% in 2003. MNH’s share of the Pooled Business will be 25% in 2006 and 2007, though not to exceed $42.5 million and $37.5 million in net written premiums, respectively. If the parties agree, MNH may increase its share or maximum amount of assumed net premiums written of the Pooled Business for any year. Mutual retains a share of the risk in MNH’s Traditional Business under Mutual’s control pursuant to a profit and loss sharing arrangement in the Pooling Agreement based on the loss and loss adjustment expense (LAE) experience of the Pooled Business. The Company believes the Pooling Agreement and profit (or loss) sharing feature included therein aligns the interests of MNH and Mutual. The decreasing amount of Traditional Business assumed under the Pooling Agreement is intended to provide MNH with the capacity to pursue insurance opportunities independently of Mutual, thereby reducing its dependence on Mutual as its only source of business. The Company and MNH are seeking to identify new business initiatives and the Company has retained an investment bank to assist in its effort to employ the available capacity. Generally, the new business initiatives are expected to be in lines of business which are complementary to the Traditional Business underwritten through the Pooling Agreement with Mutual.

          The Pooling Agreement may be terminated by either party at the beginning of any calendar year on or after January 1, 2008 upon not less than 6 months notice. Furthermore, the Pooling Agreement may be terminated effective as of January 1, 2007 upon 6 months notice, but only by MNH and only if the ratio of net losses and LAE to net earned premiums on a cumulative basis from the inception of the Pooling Agreement exceeds 76%, as of the date notice is given. As of December 31, 2005, the ratio of net losses and LAE to net earned premiums on a cumulative basis since the inception of the Pooling Agreement was 65.8%.

Marketing

          Mutual markets the Traditional Business of the Company and Mutual jointly through approximately 500 independent agents. The primary marketing efforts of the Company and Mutual (collectively referred to as Merchants) are directed to those independent agents who, through their insurance expertise, the broad range of products they offer, and their focus on service, provide value for the insurance consumer.

          Mutual and the Company offer the same portfolio of insurance products. The Company’s products are generally offered to “preferred” risks while Mutual’s products are generally offered to “standard” risks. Preferred risks meet more restrictive underwriting criteria than standard risks and generally generate fewer losses. Accordingly, the preferred risks are charged premium rates that are typically 10-15% lower than standard rates.

          The Company believes that Merchants, as a regional insurance group, 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 national carriers. The Company believes Merchants distinguishes itself from its competitors by providing its agents and policyholders with superior service and ease of doing business and products that target certain segments of the commercial and personal insurance markets. Merchants also offers an agents’ compensation program which, in addition to standard commission rates, includes a profit sharing plan.

          Through Mutual, the Company services its agents from six Strategic Business Centers (Buffalo, Albany and Hauppauge, New York; Manchester, New Hampshire; Moorestown, New Jersey; and Columbus, Ohio) 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 Regional Manager of a Strategic Business Center appoints new agents, and agrees upon premium objectives and annual unit sales with the principal(s) of each agency. Regional Managers and Territory Managers, or “TM’s,” develop customized business plans for each agency. These plans identify profitable business opportunities and recommend the actions required to achieve the objectives agreed to by the agency and the Company.

          TM’s meet frequently with targeted agencies’ sales staff to review Merchants’ renewal policies, as well as to solicit policies new to the agent and/or Merchants. While TM’s are capable of providing quotes directly to the agent while in an agent’s office, much of that capability has migrated to Merchants’ internet website: www.merchantsgroup.com. There, agents are able to obtain instant quotes for certain commercial and personal lines of business. Presently, the businessowners, contractors coverall, commercial auto, homeowners and personal auto products are available for both instant quoting and “issue from quote”, allowing agents to enter all underwriting information required to issue policies for their customers over the password protected “Agency Gateway” of the website. This allows for rapid responses to agents’ quote requests and reduces expenses associated with manual quoting and policy issuance.

          Each Strategic Business Center has an Agents’ Advisory Council that meets at least twice a year. The Advisory Councils provide a forum for Merchants and its agents to discuss issues of mutual interest, and assure that the agents’ business needs are being considered by Merchants. Additionally, the Co-chairpersons of the Advisory Councils from each Strategic Business Center meet twice each year with senior officers.

          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 total premiums written and the loss and allocated LAE ratio on business placed during each year by the agent with the Company and Mutual. The Company believes the terms of the Agents’ Profit Sharing Plan encourage its agents to increase the volume of profitable Traditional Business they place with Merchants. The Company’s share of payments for the Agents’ Profit Sharing Plan for 2005 assumed under the Pooling Agreement totaled $1,404,000, or 2.4%, and $1,418,000 or 2.1% of the Company’s share of group-wide direct premiums written for 2005 and 2004, respectively.

Insurance Underwriting

          The Company is licensed to issue insurance policies in 13 states, primarily in the northeastern United States. In 2005, net premiums written totaled $45,135,000, with 76% of the net premiums written derived from commercial insurance and 24% from personal insurance.

          The following table sets forth the distribution of the combined Company and Mutual Traditional Business direct premiums written by state for the years indicated. See the “Administration” section of this Item for further discussion.

		As of December 31,
		2003				2004				2005
New York			60	%			63	%			63	%
New Jersey			17				14				13
New Hampshire			9				8				8
Pennsylvania			6				7				7
Rhode Island			3				3				3
Massachusetts			2				3				4
Other			3				2				2
Total			100	%			100	%			100	%

          The Company and Mutual are licensed to underwrite most major lines of property and casualty insurance. They issue policies primarily to individuals and small to medium sized commercial businesses. The types of risks insured include:

	o		Personal automobile — full coverage of standard performance automobiles, generally requiring drivers with good driving records during the past three years at the time of first issuance by Merchants.
	o		Homeowners’ — properties generally with no losses in the last three years that are less than 30 years old and valued between $125,000 and $500,000.
	o		Commercial automobile — primarily light and medium duty vehicles operating in a limited radius, with complete background information required of all drivers.
	o		Commercial multi-peril — properties with medium to high construction quality and low to moderate fire exposure, and occupancies with low to moderate exposure to hazardous materials and processes.
	o		General liability — low hazard service, mercantile and light processing businesses, generally with at least three years of business experience and with no losses in the last three years.
	o		Workers’ compensation — risks with low loss frequency and severity, low to moderate exposure to hazardous materials and processes, and favorable experience modification factors. Generally, workers’ compensation insurance is written in conjunction with other commercial insurance.

          The Company and Mutual use automated underwriting processes for personal automobile, homeowners and certain commercial products, 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.

          Merchants establishes premium rates for most of its products based on its loss experience, in some cases after considering prospective loss costs provided by the Insurance Services Office, Inc., an industry advisory group, for the individual and commercial classes of business that it insures. Merchants 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, 2005 (i) the amount of the Company’s net premiums written attributable to various personal and commercial products and (ii) underwriting results attributable to each such product as measured by the calendar year loss and allocated loss adjustment expense (LALAE) ratio for such product. The LALAE ratio is the ratio of incurred losses and allocated LAE to net premiums earned for a given period.

		Year ended December 31,
		2003												2004												2005
		Premiums												Premiums												Premiums
		Written								LALAE				Written								LALAE				Written								LALAE
		Amount				%				Ratio				Amount				%				Ratio				Amount				%				Ratio
														(dollars in thousands)
Personal
Auto Liability		$	12,202				19.0	%			87.4	%		$	7,467				14.1	%			59.5	%		$	4,395				9.7	%			21.0	%
Auto Physical Damage			7,230				11.3				49.2				3,873				7.3				42.8				2,254				5.0				36.0
Homeowners’ Multi-Peril			6,382				9.9				58.8				5,080				9.6				59.4				4,266				9.5				50.3
Total			25,814				40.2				69.7				16,420				31.0				55.1				10,915				24.2				34.5
Commercial
Auto Liability			12,979				20.3				29.3				12,542				23.6				51.2				11,074				24.5				32.0
Auto Physical Damage			2,899				4.5				39.1				2,734				5.1				38.1				2,235				5.0				37.9
Commercial Multi-Peril			17,018				26.5				79.7				15,701				29.6				76.6				14,926				33.1				63.9
Workers’ Compensation			4,613				7.2				133.7				4,536				8.5				72.8				4,461				9.9				9.1
Other Lines			856				1.3				281.4				1,169				2.2				75.5				1,524				3.3				189.1
Total			38,365				59.8				72.9				36,682				69.0				64.6				34,220				75.8				50.2
Total Personal & Commercial		$	64,179				100.0	%			71.6			$	53,102				100.0	%			61.2			$	45,135				100.0	%			45.9

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

          The following table sets forth the composition of voluntary direct premiums written for 2001 through 2005:

		For the Year Ended December 31,
		2001				2002				2003(1)				2004(1)				2005(1)
Commercial			58	%			40	%			63	%			73	%			79	%
Personal			42				60				37				27				21
Total			100	%			100	%			100	%			100	%			100	%

Commercial Business

          Merchants’ 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. Merchants’ underwriting criteria attempt to exclude classes of risks that are considered to be high hazard or volatile, or which involve substantial risk of latent injury or other long-tail liability exposures. The Company and Mutual offer specialized products within the commercial multi-peril line such as the Contractors Coverall Plus policy for artisan and trade contractors.

          The Company believes that it and Mutual can insure commercial business profitably by selecting those classes of risks that offer better than average profit potential and charging rates commensurate with the quality of the risk insured. Merchants 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. Merchants 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, the degree of competition within a specific territory and a provision for profit. Accordingly, the prices of Merchants’ commercial products may vary considerably from competitors’ prices.

Personal Business

          Merchants offers personal automobile and homeowners’ insurance to preferred risk individuals, generally targeting 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 (e.g. heating, plumbing, electrical) 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. Due to volatility in the size of the New York Automobile Insurance Plan (NYAIP) and the poor loss experience associated with that business in most years, the Company historically had been unable to fully recover costs of the NYAIP business with premium rates charged for its voluntary personal automobile

business. In 2002 the Company implemented a moratorium on writing new voluntary personal automobile business in New York which remains in effect. Further, in order to minimize the adverse impact of assignments from the NYAIP, in 2003 the Company began to purchase territorial credits from an unaffiliated company. The credits against NYAIP assignments were generated by another insurance company for writing private passenger automobile business in localities in New York with private passenger automobile availability problems. The other insurance company, by nature of its concentration in private passenger automobile business in “credit” territories, generated more credits than it required to offset its NYAIP assignments.

Involuntary Business

          As a condition to writing voluntary business in most states in which it operates, the Company and Mutual must participate in state-mandated programs that provide insurance for individuals and businesses unable to obtain insurance voluntarily, primarily for personal automobile insurance. The legislation creating these programs usually allocates a pro rata portion of the risks attributable to such insureds to each company writing voluntary business in the state on the basis of its historical voluntary premiums written or the number of automobiles which it historically insures voluntarily. Due to changing market conditions the Company cannot predict the size of the NYAIP for 2006 or future years.

          The Company’s gross (direct and assumed) premiums written attributable to involuntary policies were $2,518,000, $3,259,000 and $3,430,000 in 2005, 2004 and 2003, respectively, mostly in New York. These amounts represent the Company’s pro-forma share of the applicable amount of pooled direct premiums written.

Pooling Agreement

          The Company believes pooling of risks is advantageous for the following reasons: (1) Mutual’s risk selection, pricing, marketing and claims philosophies and practices are consistent with and complementary to the Company’s; (2) as market conditions change, management can adjust eligibility criteria to permit Merchants as a group to participate in a changing rate environment without concern for any conflict of interest; (3) pooling, especially with Mutual subject to profit and loss sharing, more closely aligns the interests of the Company and Mutual; and (4) by reducing its share of participation in the pool, the Company is able to create more capacity to pursue other endeavors, which it might not otherwise be able to do as a result of regulatory constraints on non-renewal of business, particularly for personal business.

Claims

          Insurance claims on policies written by the Company and by Mutual are investigated and settled by claims adjusters employed by Mutual pursuant to the Services Agreement. Mutual maintains three claims offices within its 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. Merchants’ 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, Merchants 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 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 Merchants receives notice of a claim, it is assigned to an adjuster based upon its type and severity. 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 experienced claims staff.

Loss and Loss Adjustment Expense 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 for 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 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 affecting the claims process and underlying liabilities remains constant. Other assumptions employed by the Company or its actuarial firm may 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 product, in order to balance the advantages and disadvantages of each method. Typically, several estimates are developed for each product using different methods. However, the Company does not believe it is appropriate to sum the high and low values developed using different actuarial methods for each product to determine a range for the Company’s total loss and LAE reserves. Instead the Company’s actuary and its consulting actuary provide the Company with their respective “best estimates” of total loss and LAE reserves by summing their “best estimate” for each product. The Company’s small size, the presence or absence of a limited number of moderate losses, as well as the timing of the reporting of such losses to the Company by claimants, could result in changes in actuarial estimates that are significant to the Company’s net income for a quarter or a year.

          Due to uncertainties inherent in the estimation of incurred losses and LAE, the Company has recorded changes in reserves for prior accident years’ losses and LAE. In 2005 and 2004, the Company decreased reserves for prior years by $3,303,000 and $843,000, respectively, primarily due to favorable loss development related to private passenger auto liability and workers’ compensation policies, somewhat offset by unfavorable development on commercial package policies. In 2003, the Company decreased its reserves for prior years by $90,000.

          The following table sets forth the changes in the reserve for losses and LAE for 2005, 2004 and 2003.

		Year Ended December 31,
		2005				2004				2003
		(in thousands)
Reserve for losses and LAE at beginning of year		$	128,415			$	146,474			$	147,136
Less reinsurance recoverables			(15,630	)			(22,715	)			(19,380	)
Net balance at beginning of year			112,785				123,759				127,756
Provision for losses and LAE for claims occurring in:
Current year			29,711				38,524				49,702
Prior years			(3,303	)			(843	)			(90	)
			26,408				37,681				49,612
Losses and LAE payments for claims occurring in:
Current year			(10,359	)			(13,647	)			(18,441	)
Prior years			(27,450	)			(35,008	)			(35,168	)
			(37,809	)			(48,655	)			(53,609	)
Reserve for losses and LAE at end of year, net			101,384				112,785				123,759
Plus reinsurance recoverables			13,807				15,630				22,715
Balance at end of year		$	115,191			$	128,415			$	146,474

          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, net of reinsurance, 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, net of reinsurance, 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, net of reinsurance, from the end of the year at the top of each column through the end of 2005.

          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 table appearing under the caption “Net paid (cumulative) as of:” 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:

		As of December 31,
		1995				1996				1997				1998				1999				2000				2001				2002				2003				2004
		(in thousands)
Net liability for losses and LAE:
		$	113,718			$	126,260			$	130,781			$	126,820			$	127,458			$	131,178			$	132,113			$	127,756			$	123,759			$	112,785
Liability re- estimated as of:
One year later			120,550				130,768				128,636				123,071				128,886				129,704				128,328				127,666				122,916				109,482
Two years later			128,192				133,029				130,498				120,345				123,299				129,621				132,674				129,722				122,071
Three years later			129,724				132,948				127,893				113,661				124,944				133,769				135,865				129,254
Four years later			131,647				129,210				122,508				114,068				128,121				138,538				137,813
Five years later			127,183				124,238				122,347				117,678				131,977				140,804
Six years later			123,521				124,319				125,741				120,958				133,913
Seven years later			123,679				127,659				128,998				123,359
Eight years later			126,285				130,280				130,907
Nine years later			128,433				131,887
Ten years later			129,291
Net cumulative redundancy (deficiency):
		$	(15,573	)			(5,627	)			(126	)			3,461				(6,455	)			(9,626	)			(5,700	)			(1,498	)			1,688				3,303
		%	(13.7	)			(4.5	)			(.1	)			2.7				(5.1	)			(7.3	)			(4.3	)			(1.2	)			1.4				2.9
Net paid (cumulative) as of:
One year later			38,549				40,954				42,433				37,125				40,970				45,461				40,843				35,168				35,008				27,450
Two years later			64,323				69,035				66,477				63,325				69,393				70,075				64,959				61,03				56,290
Three years later			84,638				86,364				86,313				80,142				86,670				85,772				83,552				78,109
Four years later			96,491				98,300				97,770				89,383				96,222				98,053				96,986
Five years later			104,063				105,787				104,282				94,809				102,892				107,913
Six years later			109,492				109,639				107,431				99,131				108,438
Seven years later			111,851				111,822				110,193				103,180
Eight years later			113,593				114,246				113,200
Nine years later			114,959				116,279
Ten years later			116,589
Initial gross liability for losses and LAE:		$	120,114			$	134,532			$	141,157			$	136,632			$	133,485			$	145,006			$	151,354			$	147,135			$	146,475			$	132,112
Initial ceded liability for losses and LAE:			6,396				8,272				10,376				9,812				6,027				13,828				19,241				19,379				22,716				19,327
Initial net liability		$	113,718			$	126,260			$	130,781			$	126,820			$	127,458			$	131,178			$	132,113			$	127,756			$	123,759			$	112,785
Gross liability as currently re-estimated			137,404				142,021				139,310				131,801				146,704				172,475				170,726				161,139				149,354				132,977
Ceded liability as currently re-estimated			8,113				10,134				8,403				8,442				12,791				31,671				32,913				31,885				27,283				23,495
Net liability as currently re-estimated		$	129,291			$	131,887			$	130,907			$	123,359			$	133,913			$	140,804			$	137,813			$	129,254			$	122,071			$	109,482
Gross cumulative redundancy (deficiency):		$	(17,290	)			(7,489	)			1,847				4,831				(13,219	)			(27,469	)			(19,372	)			(14,004	)			(2,879	)			(865	)
		%	(14.4	)			(5.7	)			1.3				3.5				(9.9	)			(18.9	)			(12.8	)			(9.5	)			(2.0	)			(.7	)

          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:

		As of December 31,
		2005				2004				2003
		(in thousands)
Loss and LAE reserves on a SAP basis		$	101,384			$	112,785			$	123,759
Adjustments:
Ceded reinsurance balances recoverable			13,807				15,630				22,715
Loss and LAE reserves on a GAAP basis		$	115,191			$	128,415			$	146,474

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 reinsurance agreements 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 from 1987 through 1992, the $500,000 threshold was indexed for inflation for casualty lines other than workers’ compensation and New York State no-fault, and applied retroactively to all occurrences until they are settled. There was no index provision for casualty claims occurring after 1992. This coverage was supplemented by additional treaty reinsurance covering losses up to $5,000,000 in excess of the first $5,000,000. Prior to January 1, 1998, property reinsurance agreements provided for recovery of property losses over $500,000 up to $2,000,000 per occurrence without any index provision.

          Beginning January 1, 1998, 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 risk. 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 $10,000,000. Effective January 1, 2002, the Company increased its retention on casualty losses to $750,000. Effective January 1, 2004, the Company adjusted the property loss occurrence limit to $5,000,000 per risk. Individual property facultative reinsurance was purchased for all exposures greater than $5,000,000. Effective January 1, 2005, the Company adjusted the

property loss occurrence limit to $7,000,000 per risk, with individual property facultative reinsurance purchased for exposures exceeding that amount.

          Property catastrophe coverage provides for recovery of 47.5% of the first $5,000,000 and of 95% of the next $55,000,000 above aggregate retained losses of $5,000,000 per occurrence. The property catastrophe reinsurance coverage is shared by the Company and Mutual in accordance with the Pooling Agreement (see Administration above) for a covered event.

          Under the terms of the Pooling Agreement (see Administration above) effective as of January 1, 2003 Mutual and MNH pool, or share, underwriting results on their Traditional Business. The Pooling Agreement does not apply to any new endeavor of either Mutual or MNH outside of their Traditional Business, unless the companies agree otherwise.

          The Pooling Agreement provides for MNH to cede, or transfer, to Mutual all of its premiums and risks on its Traditional Business during the term of the agreement, and then to assume from Mutual a percentage of all of Mutual’s and MNH’s Traditional Business (the “Pooled Business”). MNH assumed 30% of the Pooled Business in 2005, 35% of the Pooled Business in 2004 and 40% of the Pooled Business in 2003. MNH’s share of the Pooled Business will be reduced to 25% in 2006 and 2007, though not to exceed $42.5 million and $37.5 million in assumed net written premiums, respectively. If the parties agree, MNH may increase its share or maximum amount of assumed net premiums written of the Pooled Business for any year. The decreasing amount of Traditional Business assumed under the Pooling Agreement is intended to provide MNH with the capacity to pursue insurance opportunities independently of Mutual, thereby reducing its dependence on Mutual as its only source of business. Mutual retains a share of the risk in MNH’s Traditional Business under Mutual’s control pursuant to a profit and loss sharing arrangement in the Pooling Agreement based on the loss and LAE experience of the Pooled Business. The Company believes the Pooling Agreement and profit (or loss) sharing feature included therein align the interests of MNH and Mutual.

          The Pooling Agreement may be terminated by either party at the beginning of any calendar year upon not less than 6 months notice, but not effective before January 1, 2008. Furthermore, the Pooling Agreement may be terminated effective January 1, 2007 upon 6 months notice, but only by MNH and only if the ratio of net losses and LAE to net earned premiums on a cumulative basis from the inception of the Pooling Agreement exceeds 76%, as of the date notice is given. See Administration above.

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 cash is 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. Other than certain short-term investments held to maintain liquidity, the Company primarily invests in corporate bonds, mortgage-backed and other asset-backed securities including collateralized mortgage obligations, and tax-exempt securities with expected maturities of 10 years or less.

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 $45,257,000 of tax-exempt bonds in its investment portfolio at December 31, 2005. 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 potential greater than comparable taxable securities.

          At December 31, 2005 the Company had $10,650,000 of short-term investments with maturities less than 30 days and $6,123,000 of non-investment grade securities. These non-investment grade securities represented 3% of the investment portfolio as compared to $2,150,000, or 1%, of the investment portfolio at December 31, 2004.

          The table below provides information regarding the Company’s investments as of the dates indicated.

		As of December 31,
		2005								2004								2003
		Amount				%				Amount				%				Amount				%
		(dollars in thousands)
Fixed Maturities (1):
U.S. Government and Agencies		$	7,145				3.9	%		$	5,028				2.5	%		$	8,377				4.1	%
Corporate Securities			17,147				9.4				28,003				14.2				28,714				14.2
Mortgage and Asset Backed Securities			97,044				53.2				110,082				55.7				113,313				55.8
Tax-Exempt Bonds			45,257				24.8				40,979				20.7				43,401				21.4
Total Bonds			166,593				91.3				184,092				93.1				193,805				95.5
Preferred Stocks (1)			4,312				2.4				3,509				1.8				5,797				2.9
Short-Term Investments (2)			10,650				5.9				7,412				3.7				1,118				.6
Other (3)			734				.4				2,696				1.4				2,167				1.0
Total Invested Assets		$	182,289				100.0	%		$	197,709				100.0	%		$	202,887				100.0	%

          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:

		Year Ended December 31,
		2005				2004				2003
		(dollars in thousands)
Average investments		$	185,925			$	196,148			$	200,996
Net investment income			7,733				7,881				8,815
Net investment income as a percentage of average investments (1)			4.2	%			4.0	%			4.4	%
Net gains (losses) on investments		$	—			$	(221	)		$	2,500

          The table below sets forth the carrying value of bonds and percentage distribution of various maturities at the dates indicated. Fixed maturities are included at fair value. Mortgage and asset backed securities are presented based upon their projected cash flows.

		As of December 31,
		2005								2004								2003
		Amount				%				Amount				%				Amount				%
		(dollars in thousands)
1 year or less		$	35,259				21.2	%		$	49,275				26.8	%		$	33,243				17.2	%
1 year through 5 years			104,957				63.0				112,476				61.1				137,234				70.8
5 years through 10 years			18,978				11.4				18,870				10.2				21,065				10.9
More than 10 years			7,399				4.4				3,471				1.9				2,263				1.1
Total		$	166,593				100.0	%		$	184,092				100.0	%		$	193,805				100.0	%

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 independent agent 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. Often times, the down cycle is 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 experienced a cyclical downturn for most of the 1990’s through 2001 due primarily to intense premium rate competition and an excess capacity to write premiums. Beginning in 2002 the property casualty industry experienced price firming primarily within the commercial lines segment. However, some of the circumstances which led to the most recent cyclical downturn in the property and casualty insurance industry have become evident, and the Company believes that this price firming or “hard market” has ended. Generally, since mid-2004 premium rates have been decreasing due to excess capacity in the industry. Notwithstanding significant losses caused by hurricanes in the southern United States in 2004 and 2005, the Company anticipates that price-based competition will intensify in its markets in 2006.

Regulation

General

          MNH is subject to regulation under applicable insurance statutes, including insurance holding company statutes, of the various states in which it writes insurance. Insurance regulation is intended to provide safeguards for policyholders rather than to protect stockholders of insurance companies or their holding companies. Insurance laws of the various states establish regulatory agencies with broad administrative powers including, but not limited to, the power to grant or revoke licenses to transact 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 2006 without the prior approval of the New Hampshire Insurance Commissioner is $6,639,000. MNH paid $800,0000, $1,200,000, $800,000 and $600,000 of dividends to the Company in February 2005, October 2005, November 2005 and December 2005, respectively.

          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, 2005, investments of MNH having a par value of $850,000 were on deposit with regulatory authorities.

          MNH is required to file detailed annual reports with the appropriate regulatory agency in each of the states in which it does 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, 2003. MNH’s annual report as of that date was accepted as submitted, without adjustment.

          The National Association of Insurance Commissioners (NAIC) applies a risk-based capital measurement formula to all property and casualty insurance companies. The formula calculates a minimum required statutory net worth based on the underwriting, investment, credit, loss reserve and other business risks inherent in an individual company’s operations. Any insurance company that does not meet threshold risk-based capital measurement standards could be forced to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. MNH’s capital substantially exceeds the statutory minimum as determined by the risk-based capital measurement formula as of December 31, 2005.

          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 statutory 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 2005 falls within the usual or acceptable range as published by the NAIC.

Rates

          Premium rate regulations vary greatly among states and lines of insurance, but generally require either approval of the regulatory authority or review by the authority prior to changes in rates. Rate filings are based upon an actuarial analysis of historical results and competition in the market. However, in certain states, insurers writing in designated product lines 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.

Renewal of Policies

          Many states restrict the ability of insurers to non-renew insurance policies or to exit a line of business. In particular, New York substantially limits the ability of insurers to non-renew personal automobile insurance. This restricts the Company’s ability to mitigate its exposure to the NYAIP.

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, 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 Business

          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 and MNH have no employees. At December 31, 2005, Mutual had 313 full-time equivalent employees. The Company believes that Mutual’s relationship with its employees is satisfactory.

Executive Officers of the Registrant

     The names of the executive officers of the Company and their ages, titles and biographies as of the date hereof are set forth below.

Name of Executive						Principal Occupation
Officer and Position(s)		Age				During the Past Five Years
Robert M. Zak Senior Vice President and Chief Operating Officer			48			President and Chief Executive Officer of MNH and Mutual since November 1, 1995; Sr. Vice President of MNH and Mutual from 1992 to 1995; Chief Financial Officer of the Company, MNH and Mutual from 1991 through 1996; Vice President – Financial Services of MNH and Mutual from 1989 through 1996; Secretary of MNH and Mutual from 1990 through November 1, 1995.
Edward M. Murphy Vice President, Chief Investment Officer and Assistant Secretary			55			Vice President and Chief Investment Officer of the Company, Mutual and MNH since 1991; Assistant Vice President of Mutual and MNH from 1989 to 1991.
Kenneth J. Wilson Vice President, Treasurer, Chief Financial Officer and Secretary			58			Vice President, Treasurer and Chief Financial Officer of the Company, Mutual and MNH since 1996; President and Chief Executive Officer of Carbadon Corp. and its operating subsidiary, Empire of America Realty Credit Corp., from December 1995 to December 1996 and Chief Financial Officer from November 1992 to December 1996.

Item 1.A. RISK FACTORS.

     The following factors may affect the Company’s business.

     Factors Affecting the Property and Casualty Industry Generally:

If our estimates of loss and LAE prove inaccurate and if we have to make even a relatively small adjustment to our reserves, the adjustments may have a significant impact on our income.

     As discussed in Item 1 BUSINESS, the Company establishes reserves for its estimate of losses and LAE associated with reported and unreported claims for each accounting period. The Company frequently evaluates the adequacy of its reserves and its reserving techniques. Due to uncertainties inherent in the estimation of incurred losses and LAE, the Company is likely to record increases or decreases to its reserves in current periods for losses and LAE that occurred in prior periods. If an increase in reserves is warranted, the Company would record an increase to its incurred losses and LAE and a reduction to its net income in the period in which the deficiency in reserves is identified. Accordingly, an increase in reserves for losses

and LAE could have a material adverse effect on the Company’s results of operations, liquidity and financial condition.

The demand for property and casualty insurance is cyclical, which may adversely affect our operating results for extended periods.

     The property and casualty industry has historically been cyclical in nature. The industry has experienced periods of intense price competition that at times of overcapacity in the industry can result in reduced premium rates. The demand for property and casualty insurance, particularly for commercial products, can vary with the overall level of economic activity .

If catastrophic events affect many of our policy holders at the same time, we may experience significant extraordinary losses.

     The financial results of the Company and those of the property and casualty industry have historically been subject to fluctuations due to unpredictable developments such as natural disasters. Weather-related events such as hurricanes, as well as other natural and unnatural events such as terrorism may adversely affect the financial results of the Company. The frequency and severity of these catastrophes are unpredictable. Although any one year may be free of major weather or other disasters or catastrophes, another year may have several such events, causing results to be materially worse than for other years. The extent of losses resulting from a catastrophe is a function of both the total amount of insured exposures in the affected area and the severity of the event.

     The Company seeks to mitigate the potential impact of such catastrophes through geographic diversification and through the purchase of reinsurance. Reinsurance recoveries may prove inadequate if a catastrophe were to occur and the cost of the catastrophe were to exceed the amount of reinsurance purchased.

Adequate reinsurance may not be available at acceptable prices so that we may not be able to adequately protect the Company against extraordinary losses.

     As discussed in Item 1 BUSINESS, the Company transfers a portion of the risk associated with the insurance that it sells to reinsurance companies through reinsurance contracts. The availability, amount and cost of such arrangements may vary significantly from year to year depending on market conditions, which include the number and severity of recent natural disasters. Any decrease in the amount of reinsurance purchased by the Company would increase its risk of loss. Furthermore, the Company is exposed to credit risk related to amounts recoverable from reinsurers.

Our investment income is very sensitive to prevailing interest rates, and general decreases in interest rates will adversely affect our business.

     The Company, like other property and casualty insurance companies, depends upon income from its investment portfolio for a significant portion of its revenues and its net income. Most of the Company’s investment portfolio is invested in interest bearing securities. Accordingly, a decrease in the general level of interest rates would likely have an adverse effect on the Company’s investment income and on its net income.

Government regulation affecting casualty and insurance companies could restrict our operations in ways that would adversely affect our business.

     The Company is subject to regulation under applicable insurance statutes, including insurance holding company statutes, of the various states in which MNH writes insurance. Insurance regulation is intended to provide safeguards for policyholders rather than to protect stockholders of insurance companies or their holding companies. Insurance laws of the various states establish regulatory agencies with broad

administrative powers, including the power to grant or revoke licenses to transact insurance business and to regulate trade practices, investments, premium rates and the maintenance of specific levels of capital.

     The Company’s business can be affected adversely by insurance regulations and other regulations affecting property and casualty insurance companies. For example, laws and regulations can set rates at levels that the Company does not believe are sufficient to recover the costs of the risks that it insures. Other laws and regulations can limit the Company’s ability to cancel or refuse to renew polices or require the Company to offer coverage to all policy applicants. Federal initiatives such as federal terrorism backstop legislation may also impact the insurance industry.

     Factors Affecting the Company Specifically:

The Company’s and MNH’s current operations are heavily dependent on their relationships with Mutual, and any disruption of those relationships could adversely affect our business.

     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. At December 31, 2005 Mutual owned 12.0% of the Company’s common stock. Under the Services Agreement (see Item 1. BUSINESS), Mutual provides the Company and MNH with all facilities and with personnel to operate their business. The officers of the Company or MNH are employees of Mutual whose services are provided to, and paid for by, the Company and MNH through the Services Agreement. Further, since 2003 the Company and Mutual share underwriting results by means of a reinsurance pooling agreement. The Services Agreement may be cancelled by either party effective January 1, 2008. The Pooling Agreement may be cancelled effective December 31, 2007. If the Services Agreement is terminated the Company will obtain services from an alternate provider or negotiate an extension of the existing Services Agreement.

We compete with other regional and national property and casualty insurance companies, many of which have greater resources than we do.

     The Company competes with many other regional and national property casualty insurance companies, many of which are larger and have greater financial, technical and operating resources. Further, the Company competes with other insurance companies within each agency because each independent agency represents more than one insurance company. If competitors offer better coverage or lower prices, the Company’s ability to sell new policies or to renew existing policies may be adversely impacted.

Our operations are relatively concentrated in one geographic region, and a large disaster in the states that we serve could adversely affect our business.

     The Company writes property and casualty insurance business in the northeast and portions of the Midwest United States. Unusually severe storms or natural or man-made disasters that destroy property in these states could have an adverse impact on the Company’s financial condition. The Company’s revenues and profitability are subject to the prevailing economic conditions in the states in which it writes insurance.

New Hampshire state regulations limit our ability to pay dividends even when we have sufficient cash to pay them.

     As a holding Company, the Company is dependent on cash dividends from MNH to meet its obligations and 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 31^st. Further, if the New Hampshire Insurance Department were to determine that an MNH dividend to the

Company was detrimental to MNH’s policyholders, the Department may limit or prohibit dividends that would otherwise be permitted without prior approval.

     Although the Company has a history of paying dividends to its shareholders, future cash dividends will depend on the Company’s results of operations, its financial condition, its cash requirements and other factors including MNH’s ability to pay dividends to the Company as discussed in the previous paragraph. There can be no assurance that the Company will continue to pay dividends to its shareholders even if it has sufficient cash to do so.

Item 2. PROPERTIES.

     Although the Company has no facilities, it benefits from the facilities of Mutual pursuant to the Services Agreement, under which the Company is charged a fee for a portion of the costs of such facilities.

     The Company’s corporate headquarters are located in Buffalo, New York in a building owned by a subsidiary of 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 certain of these 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.

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.

		High				Low				Dividend
2005:
Fourth Quarter		$	31.60			$	26.65			$	.25
Third Quarter			27.10				24.10				.10
Second Quarter			26.60				24.00				.10
First Quarter			26.15				23.60				.10

		High				Low				Dividend
2004:
Fourth Quarter		$	24.67			$	22.65			$	.10
Third Quarter			26.00				23.08				.10
Second Quarter			26.38				24.40				.10
First Quarter			25.50				23.70				.10

     The number of stockholders of record of the Company’s Common Stock as of February 15, 2006 was 72. Securities held by nominees are counted as one stockholder of record.

     The Company has paid a quarterly cash dividend to its common stockholders since 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 2006 without prior approval of the New Hampshire Insurance Commissioner is $6,639,000.

     During the fourth quarter of its fiscal year, neither the Company nor any “affiliated purchaser” (as defined in SEC Rule 10b-18(a)(3)) made any purchases of any of its equity securities on its behalf.

Equity Compensation Plan Information

Number of Securities

Remaining Available for

Number of Securities to

Weighted-Average

Future Issuance Under

be Issued Upon Exercise

Exercise Price of

Equity Compensation Plans

Of Outstanding Options,

Outstanding Options,

(Excluding Securities)

Plan Category

Warrants and Rights

Warrants and Rights

Reflected in Column (a))

(a)

(b)

(c)

Equity Compensation Plans Approved by Security Holders

0

N/A

0

Equity Compensation Plans Not Approved by Security Holders

13,000

$

21.00

0

Total

13,000

$

21.00

0

     The company did not sell any unregistered equity securities during the 2005 fiscal year.

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, 2005 have been derived from the audited consolidated financial statements of the Company.

		As of December 31,
		2001				2002				2003				2004				2005
		(in thousands, except per share amounts)
Net premiums written		$	93,973			$	70,528			$	64,179			$	53,102			$	45,135
Net premiums earned		$	93,885			$	83,120			$	65,097			$	57,123			$	49,121
Net investment income			13,295				10,403				8,815				7,881				7,733
Net investment gains (losses)			(580	)			953				2,500				(221	)			—
Other revenues			696				635				560				722				571
Total revenues			107,296				95,111				76,972				65,505				57,425
Net losses and loss adjustment expenses			75,144				62,873				49,612				37,681				26,408
Amortization of deferred policy acquisition costs			24,880				22,227				16,925				14,852				12,771
Other underwriting expenses			6,017				5,744				5,031				8,291				8,811
Total expenses			106,041				90,844				71,568				60,824				47,990
Income before income taxes			1,255				4,267				5,404				4,681				9,435
Provision for income taxes			434				1,729				1,039				919				2,736
Net income		$	821			$	2,538			$	4,365			$	3,762			$	6,699
Earnings per share
Basic		$	.35			$	1.19			$	2.07			$	1.78			$	3.17
Diluted		$	.35			$	1.19			$	2.07			$	1.78			$	3.17
Weighted average number of shares outstanding:
Basic			2,343				2,125				2,110				2,114				2,115
Diluted			2,343				2,129				2,111				2,118				2,118
Balance Sheet Data: (at year end)
Total investments		$	213,132			$	209,397			$	202,887			$	197,709			$	182,289
Total assets			285,078				265,900				268,678				255,704				233,978
Reserve for losses and loss adjustment expenses			151,355				147,136				146,474				128,415				115,191
Unearned premiums			50,179				35,119				36,176				33,685				29,662
Stockholders’ equity			68,551				67,924				70,259				71,974				75,894
Dividend Data:
Cash dividend per common share		$	.40			$	.40			$	.40			$	.40			$	.55

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

     On March 20, 2006, the Chairman of the Board of the Company received a letter from the Chairman of Mutual that indicated that Mutual was interested in acquiring the Company and was prepared to negotiate an all cash acquisition (by way of a tender offer and/or merger) for all the outstanding common stock of the Company at $29.00 per share. The letter noted that the per share price of the proposed offer is less than both the GAAP and STAT book values per share of the Company’s stock as well as recent closing prices of the Company’s common stock on the American Stock Exchange, but it stated that the proposed offer would be within the range of values that Mutual believed the Company’s shareholders would find acceptable for an all cash offer for all shares under the circumstances. The letter indicated that the only conditions that Mutual could foresee to a closing would be any approvals required from the State Insurance Departments (which Mutual stated that it was highly confident could be obtained in a relatively short time) and assurances from A.M. Best Company and Fitch Ratings that the respective ratings of Mutual and the Company would not be reduced as a result of the acquisition. The letter indicated that Mutual’s offer to negotiate the proposed offer would remain outstanding until the close of business on April 4, 2006, provided, however, that Mutual would consider extending the period of the offer to negotiate through April 21, 2006 if the Company advises Mutual by April 4, 2006 that its Board of Directors requires additional time to evaluate the proposal.

     For a discussion of the relationship between the Company and Mutual, see “Relationship with Mutual,” below, and “Item 1. BUSINESS — Administration,” above.

2005 Compared to 2004

     The following discussion should be considered in light of the statements under the heading “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995,” at the end of this Item. All capitalized terms used in this Item that are not defined in this Item have the meanings given to them in the Notes to Consolidated Statements contained in Item 15 (a) (1) of this Form 10-K.

     Results of operations for 2005 and 2004 reflect the effects of the Services Agreement and the Reinsurance Pooling Agreement among the Company, its wholly-owned insurance subsidiary, MNH, and Mutual, effective January 1, 2003. The Services Agreement calls for Mutual to provide underwriting, administrative, claims and investment services to the Company and MNH. The Reinsurance Pooling Agreement provides for the pooling, or sharing, of insurance business traditionally written by Mutual and MNH on or after the effective date. MNH’s share of pooled (combined Mutual and MNH) premiums earned and losses and loss adjustment expenses (LAE) for 2005 and 2004 in accordance with the Reinsurance Pooling Agreement was 30% and 35%, respectively. The Reinsurance Pooling Agreement pertains to premiums earned and incurred losses and LAE. Direct premiums written by MNH or Mutual are not pooled. MNH’s share of pooled premiums will be reduced to 25% in 2006 and 2007, though not to exceed $42,500,000 and $37,500,000 in net written premiums, respectively. MNH’s limit on net written premiums in 2005 in accordance with the pooling Agreement was $50,000,000.

     Total combined Mutual and MNH or “group-wide” direct premiums written (DWP) for the year ended December 31, 2005 were $195,228,000, an increase of $4,090,000, or 2%, from $191,138,000 in 2004. The Company’s pro-forma share of combined direct premiums written in 2005, in accordance with the Reinsurance Pooling Agreement, was $58,569,000 compared to $66,900,000 in 2004. The table below shows a comparison of direct premiums written by major category in 2005 and 2004:

														MNH
														Pro Forma
		Group-wide DWP												Share
		Year ended												Year ended
		December 31,												December 31,
		2005				2004				Variance				2005				2004				Variance
		(000’s omitted)												(000’s omitted)
Voluntary Personal		$	40,842			$	50,879				(20	%)		$	12,253			$	17,808				(31	%)
Voluntary Commercial			131,789				119,113				11	%			39,537				41,690				(5	%)
Umbrella Program			19,688				17,536				12	%			5,906				6,138				(4	%)
Involuntary			2,909				3,610				(19	%)			873				1,264				(31	%)
Total Direct Written Premiums		$	195,228			$	191,138				2	%		$	58,569			$	66,900				(12	%)

     The 20% (or $10,037,000) decrease in group-wide voluntary personal direct premiums written resulted from a 30% decrease in private passenger automobile (PPA) direct premiums written and a 1% decrease in homeowners direct premiums written. The decrease in PPA direct premiums written is the result of the companies’ decision, implemented in 2001, not to write new policies in certain jurisdictions and from the approval of the companies’ plan to withdraw from the New Jersey PPA market by the New Jersey Department of Banking and Insurance, which was effective in June 2003 and was completed in May 2005. As a result, voluntary PPA policies in force at December 31, 2005 were 14,640, a decrease of 5,291 or 27%, from 19,931 at December 31, 2004.

     Mutual’s monoline commercial umbrella program (the Umbrella Program) is marketed exclusively through one independent agent and approximately 95% of the premiums related to Umbrella Program policies are reinsured with an “A” rated national reinsurer through a quota share reinsurance treaty.

     Group-wide voluntary commercial direct premiums written were $131,789,000, an increase of $12,676,000, or 11%, from $119,113,000 in 2004. This increase resulted from period to period increases in every significant group-wide commercial product. The average premium per group-wide, non-Umbrella Program commercial policy increased 2% from the year earlier period. Total non-Umbrella Program commercial policies in force at December 31, 2005 were 36,050, an increase of 8% from 33,415 at December 31, 2004.

     The 19% decrease in group-wide involuntary direct premiums written resulted primarily from a decrease in assignments from the New York Automobile Insurance Plan (NYAIP). Direct premiums written related to policies assigned from the NYAIP decreased 16% to $2,329,000 from $2,783,000 for 2004. The NYAIP 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 PPA market share and the size of the NYAIP. The Company is unable to predict the volume of future assignments from the NYAIP.

     In order to minimize the adverse impact of assignments from the NYAIP, the Company purchased territorial credits from an unaffiliated company pursuant to Section 6.A.7. of the NYAIP Manual. The credits against NYAIP assignments were generated by the other insurance company for writing PPA business in certain localities in New York with PPA market availability problems. The other insurance company, by nature of its concentration in PPA business in “credit” territories, generated more credits than it required to offset its NYAIP assignments. The purchased credits reduced the Company’s share of the NYAIP. The purchased credits decreased direct premiums written related to NYAIP assignments during 2005 and 2004 by approximately $1,200,000 and $2,351,000, respectively.

     Group-wide pooled net premiums written for 2005 were $164,302,000, an increase of $756,000, or less than 1%, from $163,546,000 for 2004. This increase resulted from the 2% increase in group-wide direct premiums written, somewhat offset by an increase in 2005 as compared to 2004 of reinsurance premiums ceded to third parties. The Company’s share of pooled net premiums written in 2005 in accordance with the Reinsurance Pooling Agreement was $45,135,000, a decrease of $7,967,000, or 15%, from $53,102,000 in 2004. This decrease resulted primarily from the 5 percentage point decrease in the Company’s participation in the Reinsurance Pooling Agreement.

     Total revenues for 2005 were $57,425,000, a decrease of $8,080,000 or 12%, from $65,505,000 in 2004.

     The Company’s share of pooled net premiums earned in accordance with the Reinsurance Pooling Agreement for 2005 was $49,121,000. The Company’s share of net premiums earned in 2004 was $57,123,000. This $8,002,000, or 14%, decrease in net premiums earned primarily resulted from the 5 percentage point decrease in the Company’s participation in the Reinsurance Pooling Agreement.

     Net investment income was $7,733,000, a decrease of $148,000, or 2%, from $7,881,000 in 2004. The average pre-tax yield on the investment portfolio increased 6 basis points to 4.2% in 2005 compared to 2004. Average invested assets for 2005 decreased 5% from the year earlier period.

     There were no net investment gains or losses in 2005 compared to $221,000 ($.07 per fully diluted share after taxes) of net investment losses in 2004. The 2004 amount included an aggregate $700,000 of investment losses related to an other-than-temporary impairment in the value of two investment securities owned by the Company at December 31, 2004.

     Other revenues were $571,000 in 2005, a decrease of $151,000, or 21%, from $722,000 in 2004, primarily due to the 5 percentage point decrease in the Company’s participation in the Reinsurance Pooling Agreement.

     Net losses and LAE were $26,408,000 for 2005, a decrease of $11,273,000, or 30%, from $37,681,000 for 2004. The decrease in net losses and LAE was due to the 14% decrease in net premiums earned and a 12.2 percentage point decrease in the loss and LAE ratio to 53.8% in 2005 from 66.0% in 2004. This 12.2 percentage point decrease in the loss and LAE ratio was due to a 6.9 percentage point decrease in the loss and LAE ratio for the current accident year to 60.5% in 2005 from 67.4% in 2004 and a $2,460,000 increase in the amount of favorable development of the Company’s estimates of losses incurred related to prior accident years.

     The 6.9 percentage point decrease in the loss and ALAE ratio for the current accident year primarily resulted from:

-		An improvement in the accident year direct loss and ALAE ratio for each of the Company’s primary products, the most significant of which was an improvement from 64.4% to 54.1% in the accident year direct loss and LAE ratio in the Company’s PPA product. This improvement was due to increased fraud prevention, detection and prosecution efforts resulting from certain legislative changes in New York State. PPA liability is one of the Company’s larger products and represents approximately 23% of the Company’s net earned premiums. The decrease in the PPA loss and LAE ratio decreased the Company’s overall loss and LAE ratio by approximately 1.6 percentage points.
-		Mild weather in the Company’s operating territory during 2005 contributed to significant decreases in claim frequency (reported claims per earned policy) in the Company’s homeowners and commercial property products.

     The Company recorded decreases to its estimate of losses and LAE related to prior accident years of $3,303,000 and $843,000 in 2005 and 2004, respectively, a difference of $2,460,000. These decreases in losses and LAE relating to prior accident years reduced the loss and LAE ratio in 2005 and 2004 by 6.7 and 1.5 percentage points, respectively. The reserve development for each product and for each accident year during 2005 was within the range of reasonably likely reserves by product as of December 31, 2004. It is not appropriate to predict future increases or decreases in the estimate of losses and LAE for prior accident years from past experience. See “Critical Accounting Policies and Estimates” for a further discussion of the Company’s Reserves for Losses and LAE. The following table documents the changes in the estimate of losses and LAE related to prior accident years recorded in 2005 for the Company’s primary products.

										Commercial				Workers’
Accident		Home-				PPA				Auto				Compen-				Commercial				General				All
Year		owners				Liability				Liability				sation				Package				Liability				Other				Total
Prior to										Increases (decreases) (in thousands)
2002		$	126			$	(172	)		$	(43	)		$	(1,856	)		$	2,054			$	1,540			$	300			$	1,949
2002			79				(568	)			(132	)			(501	)			(1,216	)			(99	)			21				(2,416	)
2003			211				(333	)			(323	)			(36	)			91				117				(104	)			(377	)
2004			(361	)			(926	)			(731	)			(166	)			4				223				(502	)			(2,459	)
Total		$	55			$	(1,999	)		$	(1,229	)		$	(2,559	)		$	933			$	1,781			$	(285	)		$	(3,303	)

     The Company experienced favorable development during 2005 in its PPA liability product of $1,999,000 of which $926,000 related to accident year 2004, primarily due to lower claims frequency and lower estimated severity on voluntary business. These changes are consistent with increased fraud prevention, detection and prosecution efforts stemming from certain legislative changes in New York State.

     The Company experienced favorable development during 2005 in its workers’ compensation product of $1,856,000 relating to accident years prior to 2002. The development for accident years prior to 2002 primarily resulted from lower than expected emergence of paid losses and incurred losses during 2005, and a resulting reduction in the expected loss per claim.

     The Company made no significant changes to its procedures for processing or reserving for workers’ compensation claims during 2005. In addition to the comments above related to accident years prior to 2002, the favorable loss development on the workers’ compensation product stems from inherent uncertainty in estimating ultimate costs in circumstances that involve the complex and changing medical condition of claimants.

     During 2005, the Company experienced unfavorable development in its commercial package and general liability products amounting to $3,594,000 related to accident years prior to 2002, due to greater than anticipated incurred loss development.

     The Company has made no changes to its procedures for processing or reserving for commercial package and general liability claims and is not aware of any changes to its business that might have caused a change in loss development patterns.

     The Company’s reduction in its estimate of losses and LAE related to prior accident years represented less than 3% of the recorded reserve for losses and LAE at December 31, 2004 and is within a reasonable range of loss reserve volatility for the products being underwritten.

     The Company made no changes to the key assumptions used in evaluating the adequacy of its reserves for losses and LAE during 2005. A reasonable possibility exists in any year that relatively minor fluctuations in the estimate of reserves for losses and LAE may have a significant impact on the Company’s net income. This is due primarily to the size of the Company’s reserves for losses and LAE ($115,191,000 at December 31, 2005) relative to its net income.

     The ratio of amortized deferred policy acquisition costs and other underwriting expenses to net premiums earned increased to 43.9% for 2005 from 40.5% for 2004. A $2,081,000 or 14% decrease in the amortization of deferred acquisition costs was partly offset by a $520,000 or 6% increase in other underwriting expenses. Other underwriting expenses included $3,320,000 (6.8 percentage points of the expense ratio) of retrospective commission expense related to the Reinsurance Pooling Agreement, which provides for retrospective commission income or expense based on actual experience compared to a targeted loss and LAE ratio. The commission is owed to Mutual based on a decrease during 2005 in the estimated cumulative loss and LAE ratio on the “pooled” business since the inception of the Reinsurance Pooling Agreement.

     During 2004 the Company recorded $1,543,000 of retrospective commission expense related to the Reinsurance Pooling Agreement, which increased the 2004 ratio of amortized deferred policy acquisition costs and other underwriting expenses to net premiums earned by 2.7 percentage points. Other underwriting

expenses in 2004 also included $266,000 related to the November 2004 resignation of the Company’s President and $486,000 of consulting and due diligence expenses pertaining to the investigation of business opportunities. Other underwriting expenses also included $329,000 and $462,000 in 2005 and 2004, respectively, related to the purchase of territorial credits against NYAIP assignments discussed earlier in this item. Commissions (other than retrospective commissions under the Reinsurance Pooling Agreement), premium taxes and other state assessments that vary directly with the Company’s premium volume represented 19.7% and 19.9% of net premiums earned in 2005 and in 2004, respectively.

     Tax exempt income reduced the Company’s effective income tax rate by 5 and 8 percentage points, respectively, for the years ended December 31, 2005 and 2004. In addition, the Company reversed excess tax reserves related to uncertain tax positions which reduced the Company’s effective income tax rate by 4 percentage points for the year ended December 31, 2004.

2004 Compared to 2003

     Results of operations for 2004 and 2003 reflect the effects of the Services Agreement and the Reinsurance Pooling Agreement among the Company, its wholly-owned insurance subsidiary, MNH, and Mutual, effective January 1, 2003. MNH’s share of pooled premiums earned and losses and LAE for 2004 and 2003 in accordance with the Reinsurance Pooling Agreement was 35% and 40%, respectively. The Reinsurance Pooling Agreement pertains to premiums earned and incurred losses and LAE.

     Total combined Mutual and MNH or “group-wide” DWP for the year ended December 31, 2004 were $191,138,000, an increase of $15,995,000 or 9%, from $175,143,000 in 2003. The Company’s pro-forma share of combined DWP in 2004, in accordance with the Reinsurance Pooling Agreement, was $66,900,000 compared to $70,057,000 in 2003. The table below shows a comparison of direct premiums written by major category in 2004 and 2003:

														MNH
														Pro Forma
		Group-wide DWP												Share
		Year ended												Year ended
		December 31,												December 31,
		2004				2003				Variance				2004				2003				Variance
		(000’s omitted)												(000’s omitted)
Voluntary Personal		$	50,879			$	63,548				(20	%)		$	17,808			$	25,419				(30	%)
Voluntary Commercial			119,113				103,262				15	%			41,690				41,305				1	%
Umbrella Program			17,536				3,136				459	%			6,138				1,254				389	%
Involuntary			3,610				5,197				(31	%)			1,264				2,079				(39	%)
Total Direct Written Premiums		$	191,138			$	175,143				9	%		$	66,900			$	70,057				(5	%)

     The 20% (or $12,669,000) decrease in group-wide voluntary personal DWP resulted from a 27% decrease in PPA DWP and a 1% decrease in homeowners DWP. The decrease in PPA DWP is the result of the companies’ decision, implemented in 2001, not to write new policies in certain jurisdictions and from the approval of the companies’ plan to withdraw from the New Jersey PPA market by the New Jersey Department of Banking and Insurance, which was effective in June 2003. As a result, voluntary PPA policies in force at December 31, 2004 were 19,931, a decrease of 8,492 or 30%, from 28,423 at December 31, 2003.

     Mutual introduced a monoline commercial umbrella program in the fourth quarter of 2003 (the Umbrella Program). The Umbrella Program is marketed exclusively through one independent agent and

approximately 95% of the premiums related to Umbrella Program policies are reinsured with an “A” rated national reinsurer through a quota share reinsurance treaty.

     Group-wide voluntary commercial DWP were $119,113,000, an increase of $15,851,000, or 15%, from $103,262,000 in 2003. This increase resulted from period to period increases in every significant group-wide commercial product. The average premium per group-wide, non-Umbrella Program commercial policy increased 7% from the year earlier period. Total non-Umbrella Program commercial policies in force at December 31, 2004 were 33,415, an increase of 6% from 31,485 at December 31, 2003.

     The 31% decrease in group-wide involuntary DWP resulted primarily from a decrease in assignments from the NYAIP. DWP related to policies assigned from the NYAIP decreased to $2,783,000 for 2004 from $3,909,000 for 2003. NYAIP credits purchased reduced the Company’s share of the NYAIP. The credits purchased decreased DWP related to NYAIP assignments during 2004 by approximately $2,351,000 and by approximately $2,256,000 for 2003.

     Group-wide pooled net premiums written for 2004 were $163,546,000, an increase of $1,857,000, or 1%, from $161,689,000 for 2003. This increase resulted from the 9% increase in group-wide DWP, offset by an increase in 2004 as compared to 2003 of reinsurance premiums ceded to third parties, primarily for premiums written related to the Umbrella Program. The Company’s share of pooled net premiums written in 2004 in accordance with the Reinsurance Pooling Agreement was $53,102,000, a decrease of $11,077,000 or 17% from $64,179,000 in 2003. This decrease resulted primarily from the 5 percentage point decrease in the Company’s participation in the Reinsurance Pooling Agreement.

     Total revenues for 2004 were $65,505,000, a decrease of $11,467,000 or 15%, from $76,972,000 in 2003.

     The Company’s share of pooled net premiums earned in accordance with the Reinsurance Pooling Agreement for 2004 was $57,123,000. The Company’s share of net premiums earned in 2003 were $65,097,000. This $7,974,000, or 12%, decrease in net premiums earned primarily resulted from the 5 percentage point decrease in the Company’s participation in the Reinsurance Pooling Agreement.

     Net investment income was $7,881,000, a decrease of $934,000 or 11% from $8,815,000 in 2003. The average pre-tax yield on the investment portfolio decreased 40 basis points to 4.0% in 2004 compared to 2003. Average invested assets for 2004 decreased 2% from the year earlier period.

     Net investment losses were $221,000 ($.07 per fully diluted share after taxes) in 2004 compared to $2,500,000 of net investment gains ($.78 per fully diluted share after taxes) in 2003. The 2004 amount included an aggregate $700,000 of investment losses related to an other-than-temporary impairment in the value of two investment securities owned by the Company at December 31, 2004. The 2003 amount related primarily to the sale of an otherwise illiquid security to its issuer through a share repurchase program.

     Other revenues were $722,000 in 2004, an increase of $162,000 or 29% from $560,000 in 2003, primarily due to a $180,000 decrease in premium receivable charge-offs.

     Net losses and LAE were $37,681,000 for 2004, a decrease of $11,931,000 or 24% from $49,612,000 for 2003. The decrease in net losses and LAE was due to the 12% decrease in net premiums earned and a 10.2 percentage point decrease in the loss and LAE ratio to 66.0% in 2004 from 76.2% in 2003. This 10.2 percentage point decrease in the loss and LAE ratio was due to an 9.0 percentage point decrease in

the loss and LAE ratio for the current accident year to 67.4% in 2004 from 76.4% in 2003 and a $753,000 decrease in the change in the Company’s estimates of losses incurred related to prior accident years.

     The 9.0 percentage point decrease in the loss and LAE ratio for the current accident year primarily resulted from:

-

A reduction in PPA liability net earned premium as a percentage of total Company net earned premium to 16.7% in 2004 from 20.2% in 2003. PPA liability was the Company’s highest loss and LAE ratio product and accounted for 1.5 percentage points of the decrease.

-

An improvement in the PPA liability loss and LAE ratio to 86.6% in 2004 from 111.6% in 2003, which accounted for 4.2 percentage points of the decrease. This improvement was due to improved involuntary loss experience, primarily from the NYAIP.

-

An improvement in the commercial package loss and LAE ratio to 69.0% in 2004 from 81.8% in 2003 which accounted for 3.5 percentage points of the decrease. This improvement was the result of a reduction in loss frequency.

     The Company recorded decreases to its estimate of losses and LAE related to prior accident years of $843,000 and $90,000 in 2004 and 2003, respectively, a change of $753,000. These decreases in losses and LAE relating to prior accident years reduced the loss and LAE ratio in 2004 and 2003 by 1.5 and .1 percentage points, respectively. The reserve development for each product and for each accident year during 2004 was within the range of reasonably likely reserves by product as of December 31, 2003. It is not appropriate to predict future increases or decreases in the estimate of losses and LAE for prior accident years from past experience. See “Critical Accounting Policies and Estimates” for a further discussion of the Company’s Reserves for Losses and LAE. The following table documents the changes in the estimate of losses and LAE related to prior accident years recorded in 2004 for the Company’s primary products.

										Commercial				Workers’
Accident		Home-				PPA				Auto				Compen-				Commercial				General				All
Year		owners				Liability				Liability				sation				Package				Liability				Other				Total
Prior to										Increases (decreases) (in thousands)
2001		$	(109	)		$	455			$	764			$	533			$	2,183			$	1,119			$	(176	)		$	4,769
2001			152				(17	)			121				(1,221	)			(450	)			(123	)			(41	)			(1,579	)
2002			60				(269	)			(1,072	)			(921	)			915				59				94				(1,134	)
2003			(7	)			(1,529	)			268				(433	)			(909	)			(299	)			10				(2,899	)
Total		$	96			$	(1,360	)		$	81			$	(2,042	)		$	1,739			$	756			$	(113	)		$	(843	)