-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FKUvynrVeIsGpDM9oflJeWZymQyZLrEqRcNsC9HdNMV7Q/Aca5MaHZXkkuHKDRYx 5ofItXKndH7S5lIvpB3m7A== 0000898430-96-003817.txt : 19960918 0000898430-96-003817.hdr.sgml : 19960918 ACCESSION NUMBER: 0000898430-96-003817 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCURY GENERAL CORP CENTRAL INDEX KEY: 0000064996 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 952211612 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-03681 FILM NUMBER: 96612706 BUSINESS ADDRESS: STREET 1: 4484 WILSHIRE BOULEVARD CITY: LOS ANGELES STATE: CA ZIP: 90010 BUSINESS PHONE: 2139371060 MAIL ADDRESS: STREET 1: LOS ANGELES 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1996 Commission File No. 0-3681 MERCURY GENERAL CORPORATION (Exact name of registrant as specified in its charter) California 95-221-1612 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4484 Wilshire Boulevard, Los Angeles, California 90010 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (213) 937-1060 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At August 12, 1996, the Registrant had issued and outstanding an aggregate of 27,488,575 shares of its Common Stock. PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS A S S E T S
June 30, December 31, 1996 1995 ---------- ------------ Investments: Fixed maturities available for sale (amortized cost $786,718 in 1996 and $742,409 in 1995)................ $ 797,714 $ 779,783 Equity securities available for sale (cost $127,296 in 1996 and $113,478 in 1995)......................... 124,732 114,915 Short-term cash investments, at cost, which approxi- mates market.......................................... 34,976 28,496 ---------- ---------- Total investments................................ 957,422 923,194 Cash...................................................... 4,296 2,872 Receivables: Premiums receivable.................................... 66,554 58,902 Premium notes.......................................... 11,959 11,728 Accrued investment income.............................. 16,705 15,870 Other.................................................. 5,194 6,108 ---------- ---------- 100,412 92,608 Deferred policy acquisition costs......................... 37,062 33,809 Fixed assets, net......................................... 28,354 27,464 Deferred income taxes..................................... 1,198 -- Other assets.............................................. 1,014 1,709 ---------- ---------- $1,129,758 $1,081,656 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses........................ $ 267,372 $ 253,546 Unearned premiums.......................................... 188,325 168,404 Notes payable.............................................. 25,000 25,000 Loss drafts payable........................................ 21,745 20,071 Accounts payable and accrued expenses...................... 27,721 25,412 Current income taxes....................................... 1,910 388 Deferred income taxes...................................... -- 10,158 Other liabilities.......................................... 15,491 13,489 -------- ---------- Total liabilities................................. 547,564 516,468 -------- ---------- Shareholders' equity: Common stock without par value or stated value. Authorized 30,000,000 shares; issued and outstanding 27,478,675 shares in 1996 and 27,442,675 shares in 1995.................................................. 41,709 40,895 Net unrealized investment gains......................... 5,481 25,227 Unearned ESOP compensation.............................. (2,500) (3,084) Retained earnings....................................... 537,504 502,150 -------- ---------- Total shareholders' equity........................ 582,194 565,188 -------- ---------- Commitments and contingencies........................... $1,129,758 $1,081,656 ========== ==========
2 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED JUNE 30, AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995 --------- -------- Revenues: Earned premiums $181,254 $151,732 Net investment income 17,443 15,336 Premium finance fees 453 449 Net realized investment gains (losses) (1,275) 146 Other 324 378 -------- -------- Total revenues 198,199 168,041 -------- -------- Expenses: Losses and loss adjustment expenses 119,497 101,636 Policy acquisition costs 38,586 31,350 Other operating expenses 5,493 5,859 Interest 438 517 -------- -------- Total expenses 164,014 139,362 -------- -------- Income before income taxes 34,185 28,679 Income taxes 7,602 6,272 -------- -------- Net income $ 26,583 $ 22,407 ======== ======== EARNINGS PER SHARE (average shares outstanding 27,388,979 in 1996 and 27,300,909 in 1995) $ .97 $ .82 ======== ======== Dividends declared per share $ .24 $ .20 ======== ========
3 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SIX MONTHS ENDED JUNE 30, AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995 --------- -------- Revenues: Earned premiums $350,817 $296,408 Net investment income 33,880 30,216 Premium finance fees 899 905 Net realized investment gains (losses) (1,072) 748 Other 675 703 -------- -------- Total revenues 385,199 328,980 -------- -------- Expenses: Losses and loss adjustment expenses 236,915 204,253 Policy acquisition costs 74,419 61,469 Other operating expenses 11,351 11,096 Interest 909 1,034 -------- -------- Total expenses 323,594 277,852 -------- -------- Income before income taxes 61,605 51,128 Income taxes 13,112 10,221 -------- -------- Net income $ 48,493 $ 40,907 ======== ======== EARNINGS PER SHARE (average shares outstanding 27,374,006 in 1996 and 27,296,352 in 1995) $ 1.77 $ 1.50 ======== ======== Dividends declared per share $ .48 $ .40 ======== ========
4 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, AMOUNTS EXPRESSED IN THOUSANDS
1996 1995 ---- ---- Cash flows from operating activities: Net income $ 48,493 $ 40,907 Adjustments to reconcile net income to net cash provided from operating activities: Increase in unpaid losses and loss adjustment expenses 13,826 9,553 Increase in unearned premiums 19,921 12,446 Increase in premium notes receivable (231) (411) Increase in premiums receivable (7,652) (4,776) Increase in deferred policy acquisition costs (3,253) (2,192) Increase in loss drafts payable 1,674 568 Increase in accrued income taxes, excluding deferred tax on change in unrealized gain 799 3,874 Increase in accounts payable and accrued expenses 2,309 1,088 Depreciation 1,855 1,770 Net realized investment (gains) losses 1,072 (748) Bond amortization (accretion), net (427) 152 Other, net 3,501 550 --------- --------- Net cash provided from operating activities 81,887 62,781 Cash flows from investing activities: Fixed maturities available for sale: Purchases (103,277) (88,836) Sales 17,985 39,125 Calls or maturities 42,034 23,376 Equity securities available for sale: Purchases (195,063) (162,330) Sales 179,549 145,509 Increase in short-term cash investments, net (6,480) (8,080) Purchase of fixed assets (2,829) (2,884) Sale of fixed assets 84 216 --------- --------- Net cash used in investing activities $ (67,997) $ (53,904)
(Continued) 5 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
1996 1995 --------- --------- Cash flows from financing activities: Dividends paid to shareholders $(13,139) $(10,915) Proceeds from stock options exercised, net of related tax benefit 673 91 -------- -------- Net cash used in financing activities (12,466) (10,824) -------- -------- Net increase (decrease) in cash 1,424 (1,947) Cash: Beginning of the year 2,872 3,344 -------- -------- End of the year $ 4,296 $ 1,397 ======== ======== Supplemental disclosures of cash flow information: Interest paid during the period $ 926 $ 963 Income taxes paid during the period $ 12,195 $ 6,335
6 MERCURY GENERAL CORPORATION & SUBSIDIARIES NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The financial data included herein have been prepared by the Company, without audit. In the opinion of management, all adjustments of a normal recurring nature necessary to present fairly the Company's financial position at June 30, 1996 and the results of operations and cash flows for the periods presented have been made. This interim information should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Results of Operations - - --------------------- Premiums earned in the first half of 1996 increased 18.4% from the corresponding period in 1995. The increase reflects new business, aided by a print advertising program instituted in December 1995, and a continuing renewal rate approximating 93%. The loss ratio in the first half (loss and loss adjustment expenses related to premiums earned) was 67.5%, compared with 68.9% in 1995. Weather-related claims associated with heavy rainfall and severe flooding in California adversely affected loss experience in 1995. The expense ratio (policy acquisition costs and other expenses related to premiums earned) was 24.5%, unchanged from 1995. The combined ratio of losses and expenses (GAAP basis) was 92.0%, compared with 93.4% in 1995, resulting in an underwriting gain for the period of $28.1 million, compared with $19.6 million a year ago. Investment income in the first half was $33.9 million, compared with $30.2 million in 1995. The after-tax yield on average investments of $922.6 million (fixed maturities at cost, equities at market) was 6.65%, compared with 6.90% on average investments of $794.7 million in 1995. The decrease in realized investment yields reflects the redemption of bonds acquired in earlier, higher interest rate environments, larger balances in lower yielding money market investments and a lower effective yield from equities. New investments in bonds and equities combined are currently being made at after-tax yields ranging from approximately 6.00% - 6.20%. Realized investment losses before income taxes were $1,072,000 in the 1996 first half, compared with realized gains of $748,000 in 1995. The 1996 losses reflect income enhancing swaps of fixed income securities, preferred stocks and 7 bonds. The gains in 1995 were in part the result of preferred stock swaps and the redemption of higher coupon bonds at a premium. The income tax provision in the first half of $13.1 million represented an effective tax rate of 21.3%, compared with an effective rate of 20.0% in the 1995 first half. Net income for the period of $48.5 million, or $1.77 per share, compares with $40.9 million, or $1.50 per share, in 1995. Per share results are based on 27.4 million average shares in 1996 and 27.3 million shares in 1995. LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- Net cash provided from operating activities during the first half of 1996 was $81.9 million, while funds derived from the sale, call or maturity of investments was $239.6 million, of which approximately 75% was represented by the sale of equities. Fixed-maturity investments, at amortized cost, were increased by $44.3 million during the period. Equity investments, including perpetual preferred stocks, were increased by $13.8 million at cost, and short- term cash investments were increased by $6.5 million. Proceeds from fixed- maturities available for sale which were sold or called during the period was $55.2 million. The market value of all investments (fixed-maturities and equities) held at market as "Available for Sale" exceeded amortized cost of $949.0 million at June 30, 1996 by $8.4 million. That unrealized gain, reflected in shareholders' equity net of applicable tax effects, was $5.5 million at June 30, 1996 compared with an unrealized gain of $25.2 million at December 31, 1995. The decrease in market values since December 31, 1995 reflects principally the increase in interest rates which occurred during the period. The Company's cash and short term investments totaled $39.3 million at June 30, 1996. Together with funds generated internally, such liquid assets are more than adequate to pay claims without the forced sale of investments. It has been the Company's policy not to invest in high yield or "junk" bonds. As the result of downgrades subsequent to purchase, approximately 2.3% of total bond holdings at June 30, 1996 were rated below investment grade. The average rating of the $703.6 million bond portfolio (at amortized cost) was A, while the average effective maturity, giving effect to anticipated early call, approximates 7.8 years. The modified duration of the bond portfolio approximates 7.0 years. Holdings are heavily weighted with relatively high coupon issues which are expected to be called prior to their maturity. Bond holdings are broadly diversified geographically, and, within the tax-exempt sector, consist largely of high coupon revenue issues, including housing bonds subject to sinking funds and special par calls, and other issues, many of which have been pre-refunded and escrowed with U.S. Treasuries. General obligation bonds of the large eastern cities have generally been avoided. Holdings in the taxable sector consist principally of senior public utility issues. Fixed- maturity investments of $786.7 million (at cost) include $83.0 million of sinking fund preferreds, principally utility issues. 8 Equity holdings of $124.7 million at market (cost $127.3 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 21.4% of total shareholders' equity. In June 1996, the Company announced that it had signed a non-binding letter of intent to purchase for cash the American Fidelity Insurance Company (AFI), an independent agency insurer headquartered in Oklahoma City, Oklahoma. AFI had written premium volume of $90 million in 1995, of which approximately 47% was in the automobile lines. AFI writes most of its business in Oklahoma, Kansas and Texas, but it is licensed in more than thirty other states. The purchase price will be 100% of the net shareholders' equity of AFI and its subsidiaries at the time of the closing of the transaction (now estimated to be early October 1996), determined in accordance with generally accepted accounting principles (GAAP). Consummation of the transaction is subject to the satisfaction of a number of conditions, including regulatory approval of a number of states. AFI's published statutory surplus (equity) at December 31, 1995 was approximately $35.0 million. A definitive agreement is expected to be signed in the near future. Mercury plans to fund the purchase with borrowings under an enlarged revolving credit loan facility. The only significant debt of the Company at June 30, 1996 was a three year revolving credit agreement covering two bank loans totaling $25,000,000. The loan agreement renews annually, at which time it may be extended for an additional year to maintain the three year maturity. The interest rate on the loans is variable and related to LIBOR (London Interbank Rate). Based on the rate effective March 19, 1996 through September 16, 1996, the net interest cost of the loans approximate 6.09%. The loan facility is expected to be enlarged to $75 million on substantially the same terms on or before the expected closing of the planned purchase of AFI, with takedowns under the facility expected to be sufficient to fund the purchase price. Except for Company-occupied buildings, the Company has no direct investments in real estate and no holdings of mortgages secured by commercial real estate. As of June 30, 1996, the Company had no other significant commitments for capital expenditures. Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to statutory policyholders' surplus should not exceed 3.0 to 1. Based on the combined surplus of all of the licensed insurance subsidiaries of $505.1 million at June 30, 1996 and net written premiums for the twelve months ended on that date of $698.2 million, the ratio of writings to surplus was approximately 1.4 to 1. 9 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) Mercury General Corporation (the "Company") held its Annual Meeting of Stockholders on May 29, 1996. (c) The matters voted upon at the meeting and the votes cast with respect thereto were as follows: 1. Election of Directors ---------------------
Votes Votes Cast Votes Broker Nominee for Directors Cast For Against Withheld Abstentions Non-Votes - - --------------------- -------- ---------- -------- ----------- --------- George Joseph 21,224,721 12,749 Charles E. McClung 21,224,846 12,624 Gloria Joseph 21,223,629 13,841 Donald R. Spuehler 21,224,843 12,627 Richard E. Grayson 21,223,875 13,595 Donald P. Newell 21,224,847 12,623 Bruce A. Bunner 21,224,675 12,795 Nathan Bessin 21,224,611 12,859 Michael D. Curtius 21,224,879 12,591
Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) The following exhibits are included herewith: 27 Financial Data Schedule (b) Not applicable. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MERCURY GENERAL CORPORATION By: /s/ GEORGE JOSEPH ------------------------------------------ George Joseph Chairman and Chief Executive Officer By: /s/ KEITH L. PARKER ------------------------------------------ Keith L. Parker Chief Financial Officer 11 EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERCURY GENERAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 797,714 0 0 124,732 0 0 957,422 4,296 0 37,062 1,129,758 267,372 188,325 0 0 25,000 0 0 41,709 540,485 1,129,758 350,817 33,880 (1,072) 675 236,915 74,419 11,351 61,605 13,112 48,493 0 0 0 48,493 1.77 0 0 0 0 0 0 0 0
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