Condensed Financial Information of Registrant

12 Months Ended

Dec. 31, 2019

Condensed Financial Information Disclosure [Abstract]

Condensed Financial Information of Registrant

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
	December 31,
	2019		2018
	(Amounts in thousands)
ASSETS
Investments, at fair value:
Equity securities (cost $81,802; $110,279)	$	114,668	$	119,037
Short-term investments (cost $29,356; $3,166)	29,356		3,166
Investment in subsidiaries	2,008,163		1,850,582
Total investments	2,152,187		1,972,785
Cash	39,766		24,140
Accrued investment income	90		161
Amounts receivable from affiliates	244		1,172
Current income taxes	—		—
Income tax receivable from affiliates	9,192		19,225
Other assets	312		446
Total assets	$	2,201,791	$	2,017,929
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable	$	372,133	$	371,734
Accounts payable and accrued expenses	17		25
Amounts payable to affiliates	22		3,082
Income tax payable to affiliates	4,106		580
Current income taxes	14,052		17,773
Deferred income taxes	7,059		1,691
Other liabilities	4,900		5,360
Total liabilities	402,289		400,245
Commitments and contingencies
Shareholders’ equity:
Common stock	98,828		98,026
Retained earnings	1,700,674		1,519,658
Total shareholders’ equity	1,799,502		1,617,684
Total liabilities and shareholders’ equity	$	2,201,791	$	2,017,929

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS
	Year Ended December 31,
	2019		2018			2017
	(Amounts in thousands)
Revenues:
Net investment income	$	3,735	$	4,661		$	4,090
Net realized investment gains (losses)	31,682		(10,797		)	19,279
Other	5		2			—
Total revenues	35,422		(6,134		)	23,369
Expenses:
Other operating expenses	2,592		2,343			1,918
Interest	17,036		17,036			14,856
Total expenses	19,628		19,379			16,774
Income (loss) before income taxes and equity in net income of subsidiaries	15,794		(25,513		)	6,595
Income tax expense (benefit)	2,816		(5,144		)	1,572
Income (loss) before equity in net income of subsidiaries	12,978		(20,369		)	5,023
Equity in net income of subsidiaries	307,109		14,641			139,854
Net income (loss)	$	320,087	$	(5,728	)	$	144,877

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
	Year Ended December 31,
	2019			2018			2017
	(Amounts in thousands)
Cash flows from operating activities:
Net cash used in operating activities	$	(5,392	)	$	(16,108	)	$	(14,503	)
Cash flows from investing activities:
Capital contribution to subsidiaries	(125		)	(541		)	(140,125		)
Capital distribution from subsidiaries	30,069			—			—
Distributions received from special purpose entities	5,153			5,998			5,243
Dividends received from subsidiaries	114,431			135,000			109,000
Fixed maturity securities available for sale in nature:
Sales	—			—			1,614
Equity securities available for sale in nature
Purchases	(39,966		)	(22,286		)	(22,406		)
Sales	74,663			33,052			18,876
Calls	—			—			4,000
(Increase) decrease in short-term investments	(25,213		)	18,065			(20,607		)
Other, net	376			605			310
Net cash provided by (used in) investing activities	159,388			169,893			(44,095		)
Cash flows from financing activities:
Dividends paid to shareholders	(139,071		)	(138,478		)	(137,886		)
Proceeds from stock options exercised	701			358			2,162
Net proceeds from issuance of senior notes	—			—			371,011
Payoff of principal on loan and credit facilities	—			—			(180,000		)
Net cash (used in) provided by financing activities	(138,370		)	(138,120		)	55,287
Net increase (decrease) in cash	15,626			15,665			(3,311		)
Cash:
Beginning of year	24,140			8,475			11,786
End of year	$	39,766		$	24,140		$	8,475
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	16,586		$	16,586		$	9,435
Income taxes (refunded) paid, net	$	(12,391	)	$	4,296		$	346

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. The agreement had an initial term of one year, subject to periodic renewal. In July 2018, the agreement was renewed through January 24, 2020. During the fourth quarter of 2019, the underlying obligations were liquidated and the total return swap agreement between FFL and Citibank was terminated. Under the agreement, FFL 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 $31 million of U.S. Treasuries as collateral, which were included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 128 basis points prior to the renewal of the agreement in January 2018, LIBOR plus 120 basis points subsequent to the January 2018 renewal through July 2018, and LIBOR plus105 basis points subsequent to the July 2018 renewal until December 2019, on approximately $100 million of underlying obligations as of December 31, 2018.

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 was renewed for an additional one-year term through February 17, 2018. During June and July 2017, the underlying obligations were liquidated and the total return swap agreement between AFL and Citibank was terminated on. 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 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 until July 2017, on approximately $152 million of underlying obligations as of December 31, 2016.

Distributions of $5.2 million and $6.0 million were received in 2019 and 2018, respectively, from these special purpose entities.

Dividends received from Subsidiaries

Dividends of $114,431,433, $135,000,000 and $109,000,000 were received by Mercury General from its 100% owned insurance subsidiaries in 2019, 2018 and 2017, 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 $125,000, $540,619 and $140,125,000 in 2019, 2018 and 2017, respectively. In addition, Mercury General received a capital distribution from one of its insurance subsidiaries of $30,068,567 in 2019.

Notes Payable

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 the total outstanding balance of $320 million under the existing loan and credit facility agreements and terminated the agreements on March 8, 2017. The remainder of the proceeds from the notes was used 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

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 17.2% at December 31, 2019, resulting in a 15 basis point commitment fee on the $50 million undrawn portion of the credit facility. As of February 6, 2020, 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	Mercury Plus Insurance Services LLC

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.