-----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, Typ0IYUQgzRkjFH2R9VzxRLvKfcpv+LPSTKxoQvQL7wBuFly6JQZFYmB6JFKIsqU pDmyA1vrPeyukoAJGO2xbg== 0000898430-98-003975.txt : 19981113 0000898430-98-003975.hdr.sgml : 19981113 ACCESSION NUMBER: 0000898430-98-003975 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCURY GENERAL CORP CENTRAL INDEX KEY: 0000064996 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952211612 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12257 FILM NUMBER: 98745227 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 September 30, 1998 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: (323) 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 November 11, 1998, the Registrant had issued and outstanding an aggregate of 54,746,438 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
September 30, December 31, 1998 1997 ---- ---- Investments: Fixed maturities available for sale (amortized cost $1,229,676 in 1998 and $1,147,594 in 1997) ...................... $ 1,317,004 $ 1,214,986 Equity securities available for sale (cost $201,463 in 1998 and $169,943 in 1997) ................................... 200,000 173,522 Short-term cash investments, at cost, which approxi- mates market .................................................... 70,006 59,740 --------- --------- Total investments ................................. 1,587,010 1,448,248 Cash ................................................................ 3,543 3,011 Receivables: Premiums receivable .............................................. 110,675 104,216 Premium notes .................................................... 14,340 13,562 Accrued investment income ........................................ 20,606 21,895 Other ............................................................ 24,142 26,476 --------- --------- 169,763 166,149 Deferred policy acquisition costs ................................... 61,063 57,264 Fixed assets, net ................................................... 30,236 30,493 Current income taxes recoverable .................................... 1,181 -0- Other assets ........................................................ 16,286 20,367 --------- --------- $ 1,869,082 $ 1,725,532 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses ................................. $ 408,460 $ 409,061 Unearned premiums ................................................... 326,961 309,376 Notes payable ....................................................... 75,000 75,000 Loss drafts payable ................................................. 36,610 32,058 Accounts payable and accrued expenses ............................... 58,685 50,742 Current income taxes ................................................ -0- 3,317 Deferred income taxes ............................................... 27,339 19,722 Other liabilities ................................................... 36,423 26,664 --------- --------- Total liabilities ................................. 969,478 925,940 --------- --------- Shareholders' equity: Common stock without par value or stated value. Authorized 70,000,000 shares; issued and outstanding 54,745,238 shares in 1998 and 55,124,579 shares in 1997 ........................................................... 48,750 47,412 Accumulated other comprehensive income ........................... 55,812 46,131 Unearned ESOP compensation ....................................... (4,250) -0- Retained earnings ................................................ 799,292 706,049 --------- --------- Total shareholders' equity ........................ 899,604 799,592 --------- --------- Commitments and contingencies..................................... $ 1,869,082 $ 1,725,532 ========= =========
-2- MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, Amounts expressed in thousands, except per share data
1998 1997 -------- -------- Revenues: Earned premiums $282,198 $267,212 Net investment income 24,132 22,225 Net realized investment gains 1,329 2,275 Other 1,541 945 -------- -------- Total revenues 309,200 292,657 -------- -------- Expenses: Incurred losses 175,752 166,477 Policy acquisition costs 64,031 59,375 Other operating expenses 13,607 10,339 Interest 1,214 1,268 -------- -------- Total expenses 254,604 237,459 -------- -------- Income before income taxes 54,596 55,198 Income taxes 13,154 14,444 -------- -------- Net income $ 41,442 $ 40,754 ======== ======== BASIC EARNINGS PER SHARE (average shares outstanding 54,979,649 in 1998 and 55,007,811 in 1997) $ 0.75 $ 0.74 ======== ======== DILUTED EARNINGS PER SHARE (adjusted weighted average shares 55,324,399 in 1998 and 55,413,950 in 1997) $ 0.75 $ 0.74 ======== ======== Dividends declared per share $ 0.175 $ 0.145 ======== ========
-3- MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine Months Ended September 30, Amounts expressed in thousands, except per share data
1998 1997 -------- --------- Revenues: Earned premiums $835,420 $757,910 Net investment income 71,601 63,004 Net realized investment gains 4,956 3,108 Net realized gain from sale of subsidiary 2,586 -0- Other 3,877 3,356 -------- -------- Total revenues 918,440 827,378 -------- -------- Expenses: Incurred losses 504,248 489,677 Policy acquisition costs 185,705 164,655 Other operating expenses 32,233 26,307 Interest 3,585 3,704 -------- -------- Total expenses 725,771 684,343 -------- -------- Income before income taxes 192,669 143,035 Income taxes 49,558 35,570 -------- -------- Net income $143,111 $107,465 ======== ======== BASIC EARNINGS PER SHARE (average shares outstanding 55,122,895 in 1998 and 54,962,212 in 1997) $ 2.60 $ 1.96 ======== ======== DILUTED EARNINGS PER SHARE (adjusted weighted average shares 55,493,039 in 1998 and 55,335,152 in 1997) $ 2.58 $ 1.94 ======== ======== Dividends declared per share $ 0.525 $ 0.435 ======== ========
-4- MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended September 30, 1998 Amounts expressed in thousands
1998 1997 ------- ------- Net income $41,442 $40,754 Other comprehensive income, before tax: Unrealized gains on securities: Unrealized holding gains arising during period 14,998 18,560 Less: reclassification adjustment for net gains included in net income (1,183) (1,672) ------- ------- Other comprehensive income, before tax 13,815 16,888 Income tax expense related to unrealized holding gains arising during period 5,249 6,496 Income tax benefit related to reclassification adjustment for gains included in net income (414) (585) ------- ------- Comprehensive income, net of tax $50,422 $51,731 ======= =======
-5- MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Nine Months Ended September 30, Amounts expressed in thousands
1998 1997 ---- ---- Net income $143,111 $107,465 Other comprehensive income, before tax: Unrealized gains on securities: Unrealized holding gains arising during period 17,457 27,485 Less: reclassification adjustment for net gains included in net income (2,563) (2,150) -------- -------- Other comprehensive income, before tax 14,894 25,335 Income tax expense related to unrealized holding gains arising during period 6,110 9,620 Income tax benefit related to reclassification adjustment for gains included in net income (897) (753) -------- -------- Comprehensive income, net of tax $152,792 $123,933 ======== ========
-6- MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, Amounts expressed in thousands
1998 1997 ------------ ---------- Cash flows from operating activities: Net income $ 143,111 $ 107,465 Adjustments to reconcile net income to net cash provided from operating activities: (Decrease) increase in unpaid losses and loss adjustment expenses (601) 56,642 Increase in unearned premiums 17,585 50,590 Increase in premium notes receivable (778) (1,479) Increase in premiums receivable (6,459) (25,434) Increase in deferred policy acquisition costs (3,799) (9,692) Increase in loss drafts payable 4,552 417 (Decrease) increase in accrued income taxes, excluding deferred tax on change in unrealized gain (2,028) 702 Increase in accounts payable and accrued expenses 7,943 16,127 Depreciation 3,963 3,675 Net realized investment gains (4,956) (3,108) Net realized gain from sale of subsidiary (2,586) -0- Bond accretion, net (2,990) (1,456) Other, net 10,005 16,991 ----------- --------- Net cash provided from operating activities 162,962 211,440 Cash flows from investing activities: Fixed maturities available for sale: Purchases (262,650) (266,757) Sales 109,458 54,015 Calls or maturities 68,552 50,502 Equity securities available for sale: Purchases (600,345) (403,760) Sales 572,614 378,535 Proceeds from sale of subsidiary, less cash transferred 11,018 -0- Increase (decrease) in short-term cash investments, net (11,955) 5,960 Purchase of fixed assets (3,949) (5,458) Sale of fixed assets 339 458 ----------- --------- Net cash used in investing activities $ (116,918) $(186,505)
(Continued) -7- MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
1998 1997 -------- -------- Cash flows from financing activities: Dividends paid to shareholders $(28,891) $(23,905) Proceeds from stock options exercised, excluding related tax benefit 1,812 1,136 Purchase and retirement of common stock (21,433) -0- Net increase (decrease) in ESOP loan 3,000 (1,000) -------- -------- Net cash used in financing activities (45,512) (23,769) -------- -------- Net increase in cash 532 1,166 Cash: Beginning of the year 3,011 3,605 -------- -------- End of the year $ 3,543 $ 4,771 ======== ======== Supplemental disclosures of cash flow information: Interest paid during the period $ 3,219 $ 3,776 Income taxes paid during the period $ 50,947 $ 34,563 Common stocks tendered at market value to exercise stock options (276) -0-
-8- MERCURY GENERAL CORPORATION & SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. 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 September 30, 1998 and the results of operations, comprehensive income 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. 2. Comprehensive Income -------------------- Statement of Financial Accounting Standards No. 130 requires the reporting of comprehensive income for fiscal years beginning after December 15, 1997. The Company's comprehensive income reflects net income adjusted for the change in unrealized gains and losses. Other comprehensive income was $9.7 million for the period ended September 30, 1998 compared to $16.5 million for the period ended September 30, 1997. Other comprehensive income primarily relates to changes in market interest rates which directly impact the market value of the Company's fixed maturity portfolio. Certain statements in this report on Form 10-Q that are not historical fact constitute "Forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the risks inherent to the cyclical nature of the property and casualty insurance industry, the Company's concentration of business largely in one line (automobile) in one state (California), uncertainties regarding the growth in future written premiums in relation to recent historical experience, the effect of a recent rate reduction in California on future loss ratios of the Company, the impact of the Year 2000 and uncertainties regarding the success of the Company's operations outside California, including particularly in the Florida and Texas markets, competition and other industry factors, including uncertainties inherent in the estimate of loss and loss adjustment expense (LAE) reserves, insurance regulatory matters and certain structural matters, including restrictions on intercompany transactions within the Company's holding company structure. -9- Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- General - ------- The Company is engaged primarily in writing all risk classifications of automobile insurance in California, which in 1997 accounted for approximately 88% of the Company's direct premiums written. The Company also writes small amounts of automobile insurance in Georgia and Illinois. In December 1996 the Company acquired the American Mercury Insurance Group (formerly named American Fidelity Insurance Group) which was licensed in 36 states but writes automobile and mechanical breakdown insurance predominantly in Oklahoma, Kansas and Texas. During 1998, the Company began writing private passenger automobile coverage in Florida, and has recently increased its marketing activities in both Florida and Texas. Results of Operations - --------------------- THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Premiums earned in the third quarter of 1998 increased 5.6% from the corresponding period in 1997. California premiums written, representing 91% of the Company's total premiums, grew approximately 1.2% in the period compared to an increase of 31.2% in 1997. A large portion of the 1997 premium growth was the result of a new California law made effective January 1, 1997 which requires proof of insurance for the registration (new or renewal) of a motor vehicle. This requirement produced a large influx of new business during much of 1997 that was unmatched in 1998. Also, a large portion of this new business written during 1997 did not qualify for the Company's persistency discount because many of these new insureds did not have prior insurance coverage. During 1998, as many of these policies renewed they became eligible for the Company's persistency discount. Consequently, the average premium per policy declined in 1998 as compared to 1997. In addition, the 1998 California premiums written growth was affected by a 7% rate reduction that became effective on April 1, 1998. The combination of this 7% rate reduction and the effect of the persistency discount produced only a small increase in the premiums written for the quarter. In addition, the Company launched an integrated advertising campaign in late April that has not met Company expectations. Although the campaign has not met expectations, the Company believes continuing the advertising program is necessary in the current competitive climate. The California automobile insurance marketplace remains intensely competitive. Most of the major direct writers, which represents the Company's chief competition, have instituted one or more rate cuts over the last twenty-four months and many have increased their marketing efforts. The loss ratio in the third quarter (loss and loss adjustment expenses related to premiums earned) was 62.3% in 1998 and 1997. The favorable loss experience is largely related to the effectiveness of Proposition 213, an initiative made effective January 1, 1997 which prohibits recovery of non- -10- economic (pain and suffering) losses by uninsured motorists or drunk drivers injured in automobile accidents. The 7% rate reduction taken on April 1, 1998 affected the Company's loss ratio in the third quarter of 1998 and will have a larger effect on the Company's loss ratio in succeeding quarters as a higher percentage of the Company's premiums earned will reflect the 7% rate reduction. The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) in 1998 was 27.5% compared to 26.1% in 1997. The increase in the expense ratio was largely attributable to a higher provision for agent contingent commission bonuses, higher base commissions and expenses related to the Company's integrated advertising campaign launched in late April. The combined ratio of losses and expenses (GAAP basis) was 89.8% in 1998 compared with 88.4% in 1997, resulting in an underwriting gain for the period of $28.8 million, compared with $31.0 million in 1997. Investment income for the third quarter was $24.1 million, compared with $22.2 million in the third quarter of 1997. The after-tax yield on average investments of $1,505.2 million (fixed maturities valued at cost; equities at market) was 5.84% compared with 6.16% on average investments of $1,294.4 million in 1997. The decrease in realized investment yields reflects the redemption of bonds acquired in earlier, higher interest rate environments and a lower effective yield from equities. The income tax provision in the third quarter of 1998 of $13.2 million represented an effective tax rate of 24.1%, compared with an effective rate of 26.2% in 1997. The lower effective tax rate in 1998 is principally attributable to the higher proportion of tax-exempt investment income in 1998. Net income for the third quarter of $41.4 million, or $.75 per share (basic), compares with $40.8 million or $.74 per share (basic) in 1997. Diluted net income per share was $.75 in 1998 and $.74 in 1997. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Premiums earned in the first nine months of 1998 increased 10.2% from the corresponding period in 1997. California premiums written, representing 92% of the Company's total premiums, grew approximately 5.8% in the period versus 31.8% in 1997. A large portion of the 1997 premium growth was the result of the California proof of insurance law that became effective January 1, 1997. This requirement produced a large influx of new business during much of 1997 that was unmatched in 1998. The lower 1998 California premium growth also reflected the 7% rate reduction taken on April 1, 1998 and the effects of the persistency discount during 1998. The loss ratio in the first nine months (loss and loss adjustment -11- expenses-related to premiums earned) was 60.4%, compared with 64.6% in 1997. The lower loss ratio in 1998 reflects continuing favorable loss experience in the bodily injury line. The favorable loss experience is largely related to the effectiveness of Proposition 213, an initiative made effective January 1, 1997 which prohibits recovery of non-economic (pain and suffering) losses by uninsured motorists or drunk drivers injured in automobile accidents. The 7% rate reduction taken on April 1, 1998 affected the Company's loss ratio in the second and third quarter of 1998 and will have a larger effect on the Company's loss ratio in succeeding quarters as a higher percentage of the Company's premiums earned will reflect the 7% rate reduction. The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) in 1998 was 26.1% compared to 25.2% in 1997. The increase in the expense ratio was largely attributable to a higher provision for agent contingent commissions, higher base commissions and expenses related to the Company's integrated advertising campaign launched in late April. The combined ratio of losses and expenses (GAAP basis) was 86.5% in 1998 compared with 89.8% in 1997, resulting in an underwriting gain for the period of $113.2 million, compared with $77.3 million a year ago. Investment income in the first nine months was $71.6 million, compared with $63.0 million in 1997. The after-tax yield on average investments of $1,462.8 million (fixed maturities at cost, equities at market) was 5.91% compared with 6.12% on average investments of $1,230.3 million in 1997. The decrease in realized investment yields reflects the redemption of bonds acquired in earlier, higher interest rate environments and a lower effective yield from equities. In June 1998, the Company sold Cimarron Insurance Company ("Cimarron"), a wholly owned subsidiary acquired December 1996 as part of the American Fidelity Insurance Group acquisition. The total sales proceeds were approximately $11.1 million with a pre-tax realized gain of approximately $2.6 million. Realized investment gains before income taxes, including the sale of Cimarron, were $7.5 million in the first nine months of 1998 compared with realized gains of $3.1 million in the same period in 1997. The income tax provision in the first nine months of 1998 of $49.6 million represented an effective tax rate of 25.7%, compared with an effective rate of 24.9% in 1997. The higher effective tax rate is principally attributable to the larger proportion of fully taxable underwriting gain compared to the predominantly tax-exempt investment income. Net income in the first nine months of 1998 of $143.1 million, or $2.60 per share (basic), compares with $107.5 million or $1.96 per share (basic), in 1997. Diluted net income per share was $2.58 per share in 1998 and $1.94 in 1997. -12- Liquidity and Capital Resources - ------------------------------- Net cash provided from operating activities during the first nine months of 1998 was $163.0 million, while funds derived from the sale, redemption or maturity of investments, excluding the sale of Cimarron, was $750.6 million, of which approximately 76% was represented by the sale of equity securities. Fixed-maturity investments, at amortized cost, increased by $82.1 million during the period. Equity investments, including perpetual preferred stocks, increased by $31.5 million at cost, and short-term cash investments increased by $10.3 million. The amortized cost of fixed-maturities available for sale which were sold or called during the period was $176.7 million. The market value of all investments (fixed-maturities and equities) held at market as "Available for Sale" exceeded amortized cost of $1,431.1 million at September 30, 1998 by $85.9 million. That unrealized gain, reflected as accumulated other comprehensive income in shareholders' equity net of applicable tax effects, was $55.8 million at September 30, 1998 compared with an unrealized gain of $46.1 million at December 31, 1997. The Company's cash and short term investments totaled $73.5 million at September 30, 1998. Together with funds generated internally, such liquid assets are more than adequate to pay claims without the forced sale of investments. On August 10, 1998 the Company announced that its Board of Directors authorized the repurchase over a one year period of up to $200 million of Mercury General's Common Stock. The purchases may be made from time to time in the open market at the discretion of management. The program will be funded by the sale of lower yielding tax-exempt bonds, the proceeds of a $100 million credit facility and internal cash generation. During the third quarter of 1998, the Company purchased $21.4 million of the Company's stock in the open market at an average price of $41.78. In late October, the Company successfully closed on a $100 million 364 day credit facility with a consortium of banks led by The Bank of New York. The facility may be used to fund the Company's stock buy back program as well as for general purposes. It has been the Company's policy not to invest in high yield or "junk" bonds. Approximately 2.0% of total fixed maturities at September 30, 1998 were rated below investment grade. The average rating of the $1,186.6 million bond portfolio (at amortized cost) was AA-. Bond holdings are broadly diversified geographically, and, within the tax-exempt sector, consist largely of 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 $1,229.7 million (at cost) include $43.1 million of sinking fund preferreds, principally utility issues. -13- Except for Company-occupied buildings, the Company has no direct investments in real estate and no holdings of mortgages secured by commercial real estate. Equity holdings of $200.0 million at market (cost $201.5 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent 22.4% (at cost) of total shareholders' equity. As of September 30, 1998, the Company had no material 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 to 1. Based on the combined surplus of all of the licensed insurance subsidiaries of $684.6 million at September 30, 1998 and net written premiums for the twelve months ended on that date of $1,145.8 million, the ratio of writings to surplus was approximately 1.67 to 1. Impact of Year 2000 - ------------------- The Year 2000 Issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, or as no date. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business operations. In March of 1998, the Company completed the modifications necessary to its computer programs and systems for all of its "critical" systems for business written in California, Georgia, Illinois and Florida. Modifications were made to both hardware and software. The Company considers policy issuance, premium billing and collections and its claims systems as its critical systems. The modifications completed on the above critical systems represents approximately 94% of the Company's total premiums written. The American Mercury Group, acquired by the Company in December 1996 and which represents approximately 6% of the Company's total premiums written, is in the process of completing the modifications necessary, including the conversion to new critical systems, to become Year 2000 compliant. The Company expects to have their critical systems to be Year 2000 compliant by the second quarter of 1999. Other non-critical systems are already Year 2000 compliant or are in the process of being modified or converted to become Year 2000 compliant. The Company expects to have its non-critical systems to be Year 2000 compliant by the second quarter of 1999. The Company expensed approximately $125,000 in 1997 and $475,000 in 1998, primarily for internal labor costs, related to Year 2000 modifications. -14- The Company expects to incur an amount less than what has previously been expensed for the remaining part of 1998 and 1999. It is not possible to quantify the aggregate cost to the Company with respect to Year 2000 problems, although the Company does not anticipate it will have a material adverse impact on its business. While the Year 2000 considerations are not expected to materially impact the Company's internal operations, they may have a material effect on some of the Company's agents, suppliers and financial institutions with whom the Company conducts business, and thus indirectly affect the Company. The Company has commenced a program to ascertain the compliance status of those companies with whom the Company conducts material business. This program includes sending out questionnaires to our major business partners regarding their Year 2000 readiness. Based on the responses received to date, the Company does not anticipate any material impact on its operations or financial condition. Item 3. Quantitive and Qualitative Disclosures About Market Risk -------------------------------------------------------- Not applicable. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) The following exhibits are included herewith: 27 Financial Data Schedule (b) Not applicable. -15- 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 Date: November 11, 1998 By: /s/ GEORGE JOSEPH ------------------------------------ George Joseph Chairman and Chief Executive Officer Date: November 11, 1998 By: /s/ GABRIEL TIRADOR ------------------------------------ Gabriel Tirador Vice President and Chief Financial Officer -16- 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 9-MOS DEC-31-1997 JAN-01-1998 SEP-30-1998 1,317,004 0 0 200,000 0 0 1,587,010 3,543 0 61,063 1,869,082 408,460 326,961 0 0 75,000 48,750 0 0 850,854 1,869,082 835,420 71,601 7,542 3,877 504,248 185,705 32,233 192,669 49,558 143,111 0 0 0 143,111 2.60 2.58 0 0 0 0 0 0 0
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