-----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, Ngl8JMHBvtEYinLSXoFTCeNfO8Wr7kXDFhQTxDmyd0mQMO+9mdE5SZzpxqhVNGqL F8SFVlJGghO/XD7H0wjtew== 0000898430-96-005248.txt : 19961210 0000898430-96-005248.hdr.sgml : 19961210 ACCESSION NUMBER: 0000898430-96-005248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 001-12257 FILM NUMBER: 96660330 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, 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 November 11, 1996, the Registrant had issued and outstanding an aggregate of 27,496,075 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, 1996 1995 ------------ ------------ Investments: Fixed maturities available for sale (amortized cost $824,392 in 1996 and $742,409 in 1995)..................................... $ 846,880 $ 779,783 Equity securities available for sale (cost $131,273 in 1996 and $113,478 in 1995).............................................. 127,592 114,915 Short-term cash investments, at cost, which approxi- mates market............................................................... 42,972 28,496 ---------- ---------- Total investments..................................................... 1,017,444 923,194 Cash........................................................................... 3,103 2,872 Receivables: Premiums receivable......................................................... 73,676 58,902 Premium notes............................................................... 12,109 11,728 Accrued investment income................................................... 15,404 15,870 Other....................................................................... 6,190 6,108 ---------- ---------- 107,379 92,608 Deferred policy acquisition costs.............................................. 39,441 33,809 Fixed assets, net.............................................................. 29,153 27,464 Other assets................................................................... 1,094 1,709 ---------- ---------- $1,197,614 $1,081,656 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses............................................ $ 279,033 $ 253,546 Unearned premiums.............................................................. 201,354 168,404 Notes payable.................................................................. 25,000 25,000 Loss drafts payable............................................................ 23,518 20,071 Accounts payable and accrued expenses.......................................... 34,331 25,412 Current income taxes........................................................... 2,160 388 Deferred income taxes.......................................................... 2,732 10,158 Other liabilities.............................................................. 17,575 13,489 ---------- ---------- Total liabilities..................................................... 585,703 516,468 ---------- ---------- Shareholders' equity: Common stock without par value or stated value. Authorized 30,000,000 shares; issued and outstanding 27,490,075 shares in 1996 and 27,442,675 shares in 1995...................................................................... 42,012 40,895 Net unrealized investment gains............................................. 12,225 25,227 Unearned ESOP compensation.................................................. (2,250) (3,084) Retained earnings........................................................... 559,924 502,150 ---------- ---------- Total shareholders' equity............................................ 611,911 565,188 ---------- ---------- Commitments and contingencies............................................... $1,197,614 $1,081,656 ========== ==========
2 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995 -------- -------- Revenues: Earned premiums $193,299 $157,179 Net investment income 17,340 16,105 Premium finance fees 464 477 Net realized investment gains 72 110 Other 306 377 -------- -------- Total revenues 211,481 174,248 -------- -------- Expenses: Losses and loss adjustment expenses 126,797 103,589 Policy acquisition costs 40,322 32,743 Other operating expenses 5,838 5,093 Interest 444 518 -------- -------- Total expenses 173,401 141,943 -------- -------- Income before income taxes 38,080 32,305 Income taxes 9,085 7,148 -------- -------- Net income $ 28,995 $ 25,157 ======== ======== EARNINGS PER SHARE (average shares outstanding 27,410,699 in 1996 and 27,318,890 in 1995) $ 1.06 $ .92 ======== ======== Dividends declared per share $ .24 $ .20 ======== ========
3 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995 -------- -------- Revenues: Earned premiums $544,116 $453,587 Net investment income 51,220 46,321 Premium finance fees 1,363 1,382 Net realized investment gains (losses) (1,000) 858 Other 981 1,080 -------- -------- Total revenues 596,680 503,228 -------- -------- Expenses: Losses and loss adjustment expenses 363,712 307,842 Policy acquisition costs 114,741 94,212 Other operating expenses 17,189 16,189 Interest 1,353 1,552 -------- -------- Total expenses 496,995 419,795 -------- -------- Income before income taxes 99,685 83,433 Income taxes 22,197 17,369 -------- -------- Net income $ 77,488 $ 66,064 ======== ======== EARNINGS PER SHARE (average shares outstanding 27,386,326 in 1996 and 27,303,947 in 1995) $ 2.83 $ 2.42 ======== ======== Dividends declared per share $ .72 $ .60 ======== ========
4 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, AMOUNTS EXPRESSED IN THOUSANDS
1996 1995 ---------- ---------- Cash flows from operating activities: Net income $ 77,488 $ 66,064 Adjustments to reconcile net income to net cash provided from operating activities: Increase in unpaid losses and loss adjustment expenses 25,487 18,883 Increase in unearned premiums 32,950 19,455 Increase in premium notes receivable (381) (507) Increase in premiums receivable (14,774) (9,592) Increase in deferred policy acquisition costs (5,632) (3,649) Increase in loss drafts payable 3,447 849 Increase in accrued income taxes, excluding deferred tax on change in unrealized gain 1,348 3,527 Increase in accounts payable and accrued expenses 8,919 4,974 Depreciation 2,878 2,751 Net realized investment (gains) losses 1,000 (858) Bond amortization (accretion), net (705) 89 Other, net 6,169 2,218 --------- -------- Net cash provided from operating activities 138,194 104,204 Cash flows from investing activities: Fixed maturities available for sale: Purchases (174,419) (153,954) Sales 19,855 41,979 Calls or maturities 74,709 49,601 Equity securities available for sale: Purchases (284,611) (264,849) Sales 264,393 245,249 Increase in short-term cash investments, net (14,476) (3,259) Purchase of fixed assets (4,718) (3,561) Sale of fixed assets 151 401 --------- -------- Net cash used in investing activities $(119,116) $(88,393)
(Continued) 5 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
1996 1995 -------- -------- Cash flows from financing activities: Dividends paid to shareholders $(19,714) $(16,376) Proceeds from stock options exercised, excluding related tax benefit 867 301 --------- -------- Net cash used in financing activities (18,847) (16,075) --------- -------- Net increase (decrease) in cash 231 (264) Cash: Beginning of the year 2,872 3,344 -------- -------- End of the year $ 3,103 $ 3,080 ======== ======== Supplemental disclosures of cash flow information: Interest paid during the period $ 1,364 $ 1,492 Income taxes paid during the period $ 20,725 $ 13,798
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 September 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 nine months of 1996 increased 20.0% 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%. Average premiums per policy were substantially unchanged from a year earlier. The loss ratio in the first nine months (loss and loss adjustment expenses related to premiums earned) was 66.8%, compared with 67.9% in 1995. Results in the year earlier period were affected by weather-related claims associated with heavy rainfall and severe flooding in California in the early part of the year. The expense ratio (policy acquisition costs and other expenses related to premiums earned) was 24.3%, unchanged from 1995. The combined ratio of losses and expenses (GAAP basis) was 91.1%, compared with 92.2% in 1995, resulting in an underwriting gain for the period of $48.5 million, compared with $35.3 million a year ago. Investment income in the first nine months was $51.2 million, compared with $46.3 million in 1995. The after-tax yield on average investments of $942.3 million (fixed maturities at cost, equities at market) was 6.56%, compared with 6.90% on average investments of $811.7 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 approximating 6.00%. 7 Realized investment losses before income taxes were $1,000,000 in the 1996 period, compared with realized gains of $858,000 in 1995. The 1996 losses reflect income enhancing swaps of fixed income securities, preferred stocks and 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 nine months of $22.2 million represented an effective tax rate of 22.3%, compared with an effective rate of 20.8% in 1995. Net income for the period of $77.5 million, or $2.83 per share, compares with $66.1 million, or $2.42 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 nine months of 1996 was $138.2 million, while funds derived from the sale, call or maturity of investments was $359.0 million, of which approximately 73.7% was represented by the sale of equities. Fixed-maturity investments, at amortized cost, were increased by $82.0 million during the period. Equity investments, including perpetual preferred stocks, were increased by $17.8 million at cost, and short- term cash investments were increased by $14.5 million. Proceeds from fixed- maturities available for sale which were sold or called during the period was $89.1 million. The market value of all investments (fixed-maturities and equities) held at market as "Available for Sale" exceeded amortized cost of $998.6 million at September 30, 1996 by $18.8 million. That unrealized gain, reflected in shareholders' equity net of applicable tax effects, was $12.2 million at September 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 $46.1 million at September 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 1.8% of total bond holdings at September 30, 1996 were rated below investment grade. The average rating of the $744.3 million bond portfolio (at amortized cost) was A, while the average effective maturity, giving effect to anticipated early call, approximates 8.0 years. The modified duration of the bond portfolio approximates 4.0 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- 8 maturity investments of $824.4 million (at cost) include $80.1 million of sinking fund preferreds, principally utility issues. Equity holdings of $127.6 million at market (cost $131.3 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 20.9% 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 is expected to approximate $35 million. Consummation of the transaction is subject to the signing of a definitive purchase agreement and the satisfaction of a number of conditions, including regulatory approval of a number of states. The transaction is tentatively scheduled to be closed in mid-December 1996. AFI's published statutory surplus (equity) at December 31, 1995 was approximately $35.0 million. Mercury plans to fund the intended purchase with borrowings under an enlarged revolving credit loan facility. The only significant debt of the Company at September 30, 1996 was a $25,000,000 bank loan under a three year revolving credit agreement. 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 loan is variable and related to LIBOR (London Interbank Rate). Based on the rate effective September 16, 1996 through November 15, 1996, the net interest cost of the loan approximates 6.19%. The loan facility is expected to be enlarged to $75 million on substantially the same terms and at a slightly lower interest rate 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 September 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 $524.6 million at September 30, 1996 and net written premiums for the twelve months ended on that date of $740.3 million, the ratio of writings to surplus was approximately 1.4 to 1. Recent Developments - - ------------------- In September 1996, the California Department of Insurance (DOI) issued new rating factor regulations, replacing emergency regulations which, though expired, have been in effect since 1990. The new regulations have been designed to implement the rating factor standards required by Proposition 103, the insurance 9 initiative passed by California voters in November 1988. Under the new regulations, all California automobile insurers are required to file new rating plans with the DOI by February 15, 1997. Rates under the new plan are subject to the approval of the DOI, and the new rates would become effective following such approval. In general, the new regulations attempt to subordinate the role of territory, or proxies for territory, to the standards specified by Proposition 103, namely, driving safety record, years of driving experience and miles driven per year. Although the Company expects that the rate changes required by the new regulations will not be so substantial as to have a significant effect on the Company's competitive position, the Company can give no assurance that that will be the case, since the rating plans and rates of all companies will be changed, possibly giving rise to dislocations in the insurance marketplace which may be adverse to the Company's position. 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. 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 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 846,880 0 0 127,592 0 0 1,017,444 3,103 0 39,441 1,197,614 279,033 201,354 0 0 25,000 0 0 42,012 569,899 1,197,614 544,116 51,220 (1,000) 981 363,712 114,741 17,189 99,685 22,197 77,488 0 0 0 77,488 2.83 0 0 0 0 0 0 0 0
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