Condensed Financial Information of Registrant

12 Months Ended

Dec. 31, 2017

Condensed Financial Information of Parent Company Only Disclosure [Abstract]

Condensed Financial Information of Registrant

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
	December 31,
	2017		2016
	(Amounts in thousands)
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $0; $1,609)	$	—	$	1,605
Equity securities (cost $113,216; $113,943)	141,227		122,717
Short-term investments (cost $21,233; $629)	21,231		629
Investment in subsidiaries	1,976,400		1,810,663
Total investments	2,138,858		1,935,614
Cash	8,475		11,786
Accrued investment income	178		189
Amounts receivable from affiliates	231		226
Current income taxes	8,857		—
Deferred income taxes	—		2,702
Income tax receivable from affiliates	6,338		35,237
Other assets	663		414
Total assets	$	2,163,600	$	1,986,168
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable	$	371,335	$	180,000
Accounts payable and accrued expenses	—		348
Amounts payable to affiliates	507		36
Income tax payable to affiliates	17,213		39,539
Current income taxes	—		10,200
Deferred income taxes	8,242		—
Other liabilities	4,916		3,643
Total liabilities	402,213		233,766
Commitments and contingencies
Shareholders’ equity:
Common stock	97,523		95,529
Retained earnings	1,663,864		1,656,873
Total shareholders’ equity	1,761,387		1,752,402
Total liabilities and shareholders’ equity	$	2,163,600	$	1,986,168

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS
	Year Ended December 31,
	2017		2016			2015
	(Amounts in thousands)
Revenues:
Net investment income	$	4,090	$	4,032		$	4,314
Net realized investment gains (losses)	19,279		6,062			(7,026		)
Other	—		17			—
Total revenues	23,369		10,111			(2,712		)
Expenses:
Other operating expenses	1,918		2,673			7,526
Interest	14,856		2,690			2,127
Total expenses	16,774		5,363			9,653
Income (loss) before income taxes and equity in net income of subsidiaries	6,595		4,748			(12,365		)
Income tax expense (benefit)	1,572		8,514			(4,708		)
Income (loss) before equity in net income of subsidiaries	5,023		(3,766		)	(7,657		)
Equity in net income of subsidiaries	139,854		76,810			82,136
Net income	$	144,877	$	73,044		$	74,479

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
	Year Ended December 31,
	2017			2016			2015
	(Amounts in thousands)
Cash flows from operating activities:
Net cash (used in) provided by operating activities	$	(14,503	)	$	4,731		$	575
Cash flows from investing activities:
Capital contribution to subsidiaries	(140,125		)	(30,125		)	(90,125		)
Distributions received from special purpose entities	5,243			4,898			8,883
Dividends received from subsidiaries	109,000			110,800			133,000
Fixed maturity securities available for sale in nature:
Purchases	(188,467		)	(1,060		)	(571		)
Sales	165,944			—			—
Calls or maturities	4,000			—			—
Equity securities available for sale in nature
Purchases	—			(64,807		)	(146,236		)
Sales	—			73,942			192,005
Net decrease in short-term investments	—			515			8,612
Business acquisition	—			—			(6,000		)
Other, net	310			1,614			1,945
Net cash provided by investing activities	(44,095		)	95,777			101,513
Cash flows from financing activities:
Dividends paid to shareholders	(137,886		)	(137,201		)	(136,386		)
Employee taxes paid with shares related to share-based compensation	—			(3,292		)	—
Proceeds from stock options exercised	2,162			1,632			2,111
Net proceeds from issuance of senior notes	371,011			—			—
Payoff of principal on loan and credit facilities	(180,000		)	—			—
Proceeds from bank loan	—			30,000			—
Net cash used in financing activities	55,287			(108,861		)	(134,275		)
Net decrease in cash	(3,311		)	(8,353		)	(32,187		)
Cash:
Beginning of year	11,786			20,139			52,326
End of year	$	8,475		$	11,786		$	20,139
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	9,435		$	2,397		$	2,153
Income taxes paid (refunded), net	$	346		$	(339	)	$	1,807

The accompanying condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.

Distributions received from Special Purpose Entities

On February 13, 2014, Fannette Funding LLC ("FFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into a total return swap agreement with Citibank. Under the agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap is secured by approximately $30 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 145 basis points prior to the renewal of the agreement in January 2017 and LIBOR plus 128 basis points subsequent to the January 2017 renewal, on approximately $108 million of underlying obligations as of December 31, 2017 and 2016. The agreement had an initial term of one year, subject to annual renewal. In January 2018, the agreement was renewed through August 15, 2018, and the interest rate was changed to LIBOR plus 120 basis points.

On August 9, 2013, Animas Funding LLC ("AFL"), a special purpose investment vehicle, formed and consolidated by the Company, entered into a three-year total return swap agreement with Citibank, which has been renewed for an additional one-year term through February 17, 2018. The total portfolio of underlying obligations was liquidated during June 2017, and the total return swap agreement between AFL and Citibank was terminated on July 7, 2017. Under the agreement, AFL received the income equivalent on underlying obligations due to Citibank and paid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap was secured by approximately $40 million of U.S. Treasuries as collateral, which were included in short-term investments on the consolidated balance sheets. The Company paid interest, which was equal to LIBOR plus 135 basis points prior to the amendment of the agreement in January 2017 and LIBOR plus 128 basis points subsequent to the amendment, on approximately $152 million of underlying obligations as of December 31, 2016.

Distributions of $5.2 million and $4.9 million were received in 2017 and 2016, respectively, from these special purpose entities.

Dividends received from Subsidiaries

Dividends of $109,000,000, $110,800,000 and $133,000,000 were received by Mercury General from its 100% owned insurance subsidiaries in 2017, 2016 and 2015, respectively, and are recorded as a reduction to investment in subsidiaries.

Capitalization of Insurance Subsidiaries

Mercury General made capital contributions to its insurance subsidiaries of $140,125,000, $30,125,000 and $90,125,000 in 2017, 2016 and 2015, respectively.

Business Acquisition

Pursuant to an October 22, 2014 Stock Purchase Agreement, Mercury General purchased all the issued and outstanding shares of Workmen’s Auto Insurance Company ("WAIC"), a California domiciled property and casualty insurance company, on January 2, 2015.

WAIC is a Los Angeles-based non-standard, private passenger automobile insurance company that operates predominantly in California. Mercury General intends to use the WAIC non-standard automobile product to complement its preferred and standard product offerings.

Mercury General paid $8 million in cash for the shares of WAIC, of which $2 million has been held in escrow for up to three years as security for any loss development on claims incurred on or prior to June 30, 2014. Based on the evaluation performed at the acquisition date and at December 31, 2015, of the claims reserves for WAIC for losses and loss adjustment expenses incurred on or prior to June 30, 2014, the Company estimated that it would recover the $2 million held in escrow and, therefore, the Company deducted it from cash consideration to arrive at the fair value of total consideration transferred. The Company recovered the $2 million held in escrow in 2016. In accordance with regulatory approval requirements, the Company made a $15 million cash capital contribution to WAIC on January 12, 2015.

Notes Payable

On July 2, 2013, Mercury General entered into an unsecured $200 million five-year revolving credit facility. Effective December 3, 2014, Mercury General expanded the borrowing capacity from $200 million to $250 million. Total borrowings were $180 million under the credit facility as of December 31, 2016. The interest rate was approximately 1.73% at December 31, 2016.

On March 8, 2017, the $180 million loan and credit facility agreements were terminated and Mercury General repaid the total outstanding amounts with the proceeds from its public offering of $375 million of senior notes.

On March 8, 2017, Mercury General completed a public debt offering issuing $375 million of senior notes. The notes are unsecured senior obligations of Mercury General, with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off amounts outstanding under the existing loan and credit facilities and for general corporate purposes. Mercury General incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate, including debt issuance costs, of approximately 4.45%.

Commitments and Contingencies

The borrowings by MCC, a subsidiary, under the $120 million credit facility and $20 million bank loan were secured by approximately $175 million of municipal bonds owned by MCC, at fair value, held as collateral. The total borrowings of $140 million were guaranteed by Mercury General. On March 8, 2017, these secured credit facility and bank loan agreements were terminated and the Company repaid the total outstanding amounts with the proceeds from its public offering of $375 million of senior notes.

On March 29, 2017, Mercury General entered into an unsecured credit agreement that provides for revolving loans of up to $50 million and matures on March 29, 2022. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is greater than or equal to 25%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 15% to 22.5 basis points when the ratio is greater than or equal to 25%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 17.6% at December 31, 2017, resulting in a 15 basis point commitment fee on the $50 million undrawn portion of the credit facility. As of February 2, 2018, there have been no borrowings under this facility.

Federal Income Taxes

The Company files a consolidated federal income tax return for the following entities:

Mercury Casualty Company	Mercury County Mutual Insurance Company
Mercury Insurance Company	Mercury Insurance Company of Florida
California Automobile Insurance Company	Mercury Indemnity Company of America
California General Underwriters Insurance Company, Inc.	Mercury Select Management Company, Inc.
Mercury Insurance Company of Illinois	Mercury Insurance Services LLC
Mercury Insurance Company of Georgia	AIS Management LLC
Mercury Indemnity Company of Georgia	Auto Insurance Specialists LLC
Mercury National Insurance Company	PoliSeek AIS Insurance Solutions, Inc.
American Mercury Insurance Company	Animas Funding LLC
American Mercury Lloyds Insurance Company	Fannette Funding LLC
Workmen's Auto Insurance Company

The method of allocation between the companies is subject to an agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses incurred by the insurance subsidiaries to the extent it can be used in the current consolidated return.