-----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, Uf1HE/fwdopUGUNvYD0c/6hYGLW/nS0fDp9LMMf/4Zo4mQHB2UeaVWa/oQWwkHcO Y78YsB4OsGfKQPY53ZtlHg== 0000898430-99-004151.txt : 19991111 0000898430-99-004151.hdr.sgml : 19991111 ACCESSION NUMBER: 0000898430-99-004151 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991110 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: 99746151 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 FOR PERIOD ENDING 09/30/1999 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 September 30, 1999 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 1, 1999, the Registrant had issued and outstanding an aggregate of 54,654,909 shares of its Common Stock. PART 1 - FINANCIAL INFORMATION Item 1. - Financial Statements MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AMOUNTS EXPRESSED IN THOUSANDS, except share amounts
A S S E T S September 30, December 31, 1999 1998 ---- ---- Investments: (Unaudited) Fixed maturities available for sale (amortized cost $1,319,434 in 1999 and $1,245,440 in 1998).............. $1,320,572 $1,324,908 Equity securities available for sale (cost $243,550 in 1999 and $220,449 in 1998)........................... 227,878 219,745 Short-term cash investments, at cost, which approximates market.................................................. 58,153 45,992 --------- --------- Total investments................................ 1,606,603 1,590,645 Cash........................................................ 7,857 1,887 Receivables: Premiums receivable...................................... 116,664 107,950 Premium notes............................................ 13,589 13,739 Accrued investment income................................ 21,564 22,356 Other.................................................... 21,140 24,884 --------- --------- 172,957 168,929 Deferred policy acquisition costs........................... 65,117 61,947 Fixed assets, net........................................... 33,942 31,901 Current income taxes recoverable............................ 6,573 5,895 Deferred income taxes....................................... 12,519 -0- Other assets................................................ 13,616 15,821 --------- --------- Total assets.................................... $1,919,184 $1,877,025 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses........................ $ 427,172 $ 405,976 Unearned premiums.......................................... 345,249 327,129 Notes payable.............................................. 78,000 78,000 Loss drafts payable........................................ 41,485 38,433 Accounts payable and accrued expenses...................... 64,530 53,196 Deferred income taxes...................................... -0- 22,639 Other liabilities.......................................... 40,320 34,277 --------- --------- Total liabilities.............................. 996,756 959,650 --------- --------- Shareholders' equity: Common stock without par value or stated value. Authorized 70,000,000 shares; issued and outstanding 54,654,909 shares in 1999 and 54,684,438 shares in 1998.................................................. 49,332 48,830 Accumulated other comprehensive income (loss)........... (9,447) 51,196 Unearned ESOP compensation.............................. (3,250) (4,000) Retained earnings....................................... 885,793 821,349 --------- --------- Total shareholders' equity..................... 922,428 917,375 --------- --------- Commitments and contingencies........................... $1,919,184 $1,877,025 ========= =========
2 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, Amounts expressed in thousands, except per share data
1999 1998 ---- ---- Revenues: Earned premiums $300,070 $282,198 Net investment income 24,834 24,132 Net realized investment gains (losses) (6,795) 1,329 Other 1,224 1,541 ------- ------- Total revenues 319,333 309,200 ------- ------- Expenses: Incurred losses 205,412 175,752 Policy acquisition costs 67,217 64,031 Other operating expenses 12,033 13,607 Interest 1,215 1,214 ------- ------- Total expenses 285,877 254,604 ------- ------- Income before income taxes 33,456 54,596 Income taxes 5,760 13,154 ------- ------- Net income $ 27,696 $ 41,442 ======= ======= BASIC EARNINGS PER SHARE (average shares outstanding 54,633,375 in 1999 and 54,979,649 in 1998) $ 0.51 $ 0.75 ======= ======= DILUTED EARNINGS PER SHARE (adjusted weighted average shares 54,818,300 in 1999 and 55,324,399 in 1998) $ 0.51 $ 0.75 ======= ======= Dividends declared per share $ 0.21 $ 0.175 ======= =======
3 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine Months Ended September 30, Amounts expressed in thousands, except per share data
1999 1998 ---- ---- Revenues: Earned premiums $886,522 $835,420 Net investment income 73,942 71,601 Net realized investment gains (losses) (8,189) 4,956 Net realized gain from sale of subsidiary -0- 2,586 Other 3,501 3,877 ------- ------- Total revenues 955,776 918,440 ------- ------- Expenses: Incurred losses 586,523 504,248 Policy acquisition costs 200,598 185,705 Other operating expenses 38,045 32,233 Interest 3,584 3,585 ------- ------- Total expenses 828,750 725,771 ------- ------- Income before income taxes 127,026 192,669 Income taxes 26,325 49,558 ------- ------- Net income $100,701 $143,111 ======= ======= BASIC EARNINGS PER SHARE (average shares outstanding 54,615,320 in 1999 and 55,122,895 in 1998) $ 1.84 $ 2.60 ======= ======= DILUTED EARNINGS PER SHARE (adjusted weighted average shares 54,833,838 in 1999 and 55,493,039 in 1998) $ 1.84 $ 2.58 ======= ======= Dividends declared per share $ 0.63 $ 0.525 ======= =======
4 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended September 30 Amounts expressed in thousands
1999 1998 ---- ---- Net income $ 27,696 $41,442 Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period (46,364) 14,998 Less: reclassification adjustment for net losses (gains) included in net income 6,076 (1,183) ------- ------ Other comprehensive income (loss), before tax (40,288) 13,815 Income tax expense (benefit) related to unrealized holding gains (losses) arising during period (16,227) 5,249 Income tax expense (benefit) related to reclassi- fication adjustment for (gains) losses included in net income 2,126 (414) ------- ------ Comprehensive income, net of tax $ 1,509 $50,422 ======= ======
5 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Nine Months Ended September 30, Amounts expressed in thousands
1999 1998 ---- ---- Net income $100,701 $143,111 Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period (99,361) 17,457 Less: reclassification adjustment for net losses (gains) included in net income 6,064 (2,563) ------- ------- Other comprehensive income (loss), before tax (93,297) 14,894 Income tax expense (benefit) related to unrealized holding gains (losses) arising during period (34,776) 6,110 Income tax expense (benefit) related to reclassi- fication adjustment for (gains) losses included in net income 2,122 (897) ------- ------- Comprehensive income, net of tax $ 40,058 $152,792 ======= =======
6 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, Amounts expressed in thousands
1999 1998 ---- ---- Cash flows from operating activities: Net income $ 100,701 $ 143,111 Adjustments to reconcile net income to net cash provided from operating activities: Increase (decrease) in unpaid losses and loss adjustment expenses 21,196 (601) Increase in unearned premiums 18,120 17,585 Decrease (increase) in premium notes receivable 150 (778) Increase in premiums receivable (8,714) (6,459) Increase in deferred policy acquisition costs (3,170) (3,799) Increase in loss drafts payable 3,052 4,552 Increase in accrued income taxes, excluding deferred tax on change in unrealized gain (3,181) (2,028) Increase in accounts payable and accrued expenses 6,903 4,458 Depreciation 4,863 3,963 Net realized investment (gains) losses 8,189 (4,956) Net realized gain from sale of subsidiary -0- (2,586) Bond accretion, net (3,795) (2,990) Other, net 14,240 10,005 -------- -------- Net cash provided from operating activities 158,554 159,477 Cash flows from investing activities: Fixed maturities available for sale: Purchases (163,182) (262,650) Sales 48,435 109,458 Calls or maturities 44,644 68,552 Equity securities available for sale: Purchases (444,280) (600,345) Sales 412,893 572,614 Proceeds from sale of subsidiary, less cash transferred -0- 11,018 Increase in payable for securities 4,431 3,485 Increase in short-term cash investments, net (12,161) (11,955) Purchase of fixed assets (7,534) (3,949) Sale of fixed assets 778 339 -------- -------- Net cash used in investing activities $(115,976) $(113,433)
(Continued) 7 MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
1999 1998 ---- ---- Cash flows from financing activities: Dividends paid to shareholders $(34,407) $(28,891) Proceeds from stock options exercised, excluding related tax benefit 649 1,812 Purchase and retirement of common stock (1,850) (21,433) Net (decrease) increase in ESOP loan (1,000) 3,000 ------- ------- Net cash used in financing activities (36,608) (45,512) ------- ------- Net increase in cash 5,970 532 Cash: Beginning of the year 1,887 3,011 ------- ------- End of the year $ 7,857 $ 3,543 ======= ======= Supplemental disclosures of cash flow information: Interest paid during the period $ 3,616 $ 3,219 Income taxes paid during the period $ 29,355 $ 50,947 Common stocks tendered at market value to exercise stock options -0- (276)
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, 1999 and the results of operations, comprehensive income and cash flows for the periods presented have been made. Certain reclassifications have been made to the prior year balances to conform to the current year presentation. 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. Accounting for the Costs of Computer Software Developed or Obtained for ----------------------------------------------------------------------- Internal Use ------------ Statement of Position No.98-1 (SOP 98-1) provides guidance on accounting for the capitalization of certain computer software costs developed or obtained for internal use. It is effective for financial statements with fiscal years beginning after December 15, 1998. The Company initially adopted SOP 98-1 in the quarter ended March 31, 1999. The effect of the new accounting pronouncement on the financial statements of the Company was to capitalize a portion of the internal software development costs that would have otherwise been expensed. The impact of SOP 98-1 on the net income for the nine months ended September 30, 1999 was less than $0.01 per share. 3. Accounting by Insurance and Other Enterprises for Insurance-Related ------------------------------------------------------------------- Assessments ----------- Statement of Position 97-3 (SOP 97-3) provides guidance on the timing of recognition and measurement of liabilities for insurance related assessments. It is effective for financial statements with fiscal years beginning after December 15, 1998. The Company initially adopted SOP 97-3 in the quarter ended March 31, 1999. SOP 97-3 prescribes liability recognition when three conditions are met: (1) an assessment has been imposed or information available prior to the issuance of the financial statements indicates that it is probable that an assessment will be imposed, (2) the event obligating an entity to pay an imposed or probable assessment has occurred on or before the date of the financial statements and (3) the amount of the assessment can be reasonably estimated. The adoption of SOP 97-3 resulted in no impact on the Company's 1999 financial statements. 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 1998 accounted for approximately 90% of the Company's direct premiums written. Since 1990, the Company has also written 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 and Texas. During 1998, the Company began writing private passenger automobile coverage in Florida. 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 an April 1998 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. Results of Operations - --------------------- Three Months Ended September 30, 1999 compared to Three Months Ended September 30, 1998 Premiums earned in the third quarter of 1999 increased 6.3% from the corresponding period in 1998. Net premiums written in the third quarter of 1999 increased 4.8% from the corresponding period in 1998. Contributing to the overall third quarter 1999 premiums written growth was the California non- standard auto program, started in October 1998 and the Florida auto program, started in January 1998. These two programs accounted for 2.0% and 1.5%, respectively, of the overall written premium growth in the quarter. California premiums written, representing 91% of the Company's total premiums, grew approximately 4.3% in the third quarter of 1999 compared to an 10 increase of 5.5% for all of 1998. California private passenger automobile policies inforce remained relatively constant during the third quarter of 1999, which compares to a 14.3% rate of growth for all of 1998. The automobile insurance marketplace remains intensely competitive, particularly in California. Most of the major direct writers, which represent 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 68.5%, compared with 62.3% in 1998. The higher loss ratio in 1999, as compared to 1998, was primarily due to the 7% rate reduction taken in California in April 1998, and an increase in loss costs due to higher frequency and severity of California automobile claims. The expense ratio (policy acquisition costs and other expenses related to premiums earned) in 1999 was 26.4% compared to 27.5% in 1998. The decrease is primarily attributable to a reduction in expenses related to contingent commissions. The combined ratio of losses and expenses (GAAP basis) was 94.9% in 1999 compared with 89.8% in 1998, resulting in an underwriting gain for the period of $15.4 million, compared with $28.8 million in 1998. Investment income for the third quarter was $24.8 million, compared with $24.1 million in the third quarter of 1998. The after-tax yield on average investments of $1,613.7 million (fixed maturities valued at cost; equities at market) was 5.53% compared with 5.84% on average investments of $1,505.2 million in 1998. The decrease in realized investment yields reflects the redemption of bonds acquired in earlier, higher interest rate environments. Realized investment losses before income taxes were $6.8 million compared with realized gains of $1.3 million in the third quarter of 1998. Approximately $6.0 million of the loss was related to a permanent impairment in the value of one preferred stock investment. The income tax provision in the third quarter of 1999 of $5.8 million represented an effective tax rate of 17.2%, compared with an effective rate of 24.1% in 1998. The lower effective rate is principally attributable to the larger proportion of pre-tax income derived from tax-exempt investment income as compared to fully taxable underwriting gain. Net income for the third quarter of $27.7 million, or $.51 per share (basic), compares with $41.4 million or $.75 per share (basic) in 1998. Diluted net income per share was $.51 in 1999 and $.75 in 1998. Other comprehensive income represents the change in the unrealized gains and losses on the Company's investments occurring during the period. Other comprehensive losses for the third quarter of $40.3 million compares with other comprehensive income of $13.8 million in 1998. The losses were primarily the result of increased market interest rates which reduced the value of the 11 Company's investment portfolio. Nine Months ended September 30, 1999 compared to Nine Months ended September 30, 1998 Premiums earned in the nine months of 1999 increased 6.1% from the corresponding period in 1998. Net premiums written in the nine months of 1999 increased 6.0% from the corresponding period in 1998. Contributing to the overall nine months of 1999 premiums written growth was the California non standard auto program started in October 1998 and the Florida auto program, started in January 1998. These two programs accounted for 1.7% and 1.9%, respectively, of the overall written premium growth in the nine months of 1999. California premiums written, representing 91% of the Company's total premiums, grew approximately 4.7% in the nine months of 1999 compared to an increase of 5.5% for all of 1998. California private passenger automobile policies inforce grew at an annualized rate of 7% during the nine months of 1999, which compares to a 14.3% rate of growth for all of 1998. The automobile insurance marketplace remains intensely competitive, particularly in California. Most of the major direct writers, which represent the Company's chief competition, have instituted one or more rate cuts over the last two years and many have increased marketing efforts. The loss ratio in the nine months of 1999 (loss and loss adjustment expenses related to premiums earned) was 66.2%, compared with 60.4% in 1998. The higher loss ratio in 1999, as compared to 1998, was primarily due to the 7% rate reduction taken in California in April 1998 and an increase in loss costs due to higher frequency and severity of California automobile claims. The expense ratio (policy acquisition costs and other expenses related to premiums earned) in 1999 was 26.9% compared to 26.1% in 1998. The increase in the expense ratio was largely attributable to expenses related to higher base and contingent commissions, advertising expenses and start up costs from the Company's Florida operations. The combined ratio of losses and expenses (GAAP basis) was 93.1% in 1999 compared with 86.5% in 1998, resulting in an underwriting gain for the period of $61.4 million, compared with $113.2 million in 1998. Investment income for the nine months of 1999 was $73.9 million, compared with $71.6 million in the nine months of 1998. The after-tax yield on average investments of $1,576.8 million (fixed maturities valued at cost; equities at market) was 5.63% compared with 5.91% on average investments of $1,462.8 million in 1998. The decrease in realized investment yields reflects the redemption of bonds acquired in earlier, higher interest rate environments. Realized investment losses before income taxes were $8.2 million compared with realized gains of $7.5 million in the nine months of 1998. Approximately $6.0 million of the loss in 1999 was related to a permanent impairment in the value of one preferred stock investment. Included in 1998 realized gains was a 12 gain of $2.6 million on the sale of Cimarron Insurance Company, a wholly owned subsidiary of the Company. The income tax provision in the nine months of 1999 of $26.3 million represented an effective tax rate of 20.7%, compared with an effective rate of 25.7% in 1998. The lower effective rate is principally attributable to a larger proportion of pre-tax income derived from tax-exempt investment income as compared to fully taxable underwriting gain. Net income for the nine months of $100.7 million, or $1.84 per share (basic), compares with $143.1 million or $2.60 per share (basic) in 1998. Diluted net income per share was $1.84 in 1999 and $2.58 in 1998. Other comprehensive income represents the change in the unrealized gains and losses on the Company's investments occurring during the period. Other comprehensive losses for the nine months of 1999 of $93.3 million compares with other comprehensive income of $14.9 million in 1998. The losses were primarily the result of increased market interest rates which reduced the value of the Company's investment portfolio. Liquidity and Capital Resources - ------------------------------- Net cash provided from operating activities during the nine months of 1999 was $158.6 million, while funds derived from the sale, call or maturity of investments was $506.0 million, of which approximately 82% was represented by the sale of equities. Fixed-maturity investments, at amortized cost, increased by $74.0 million during the period. Equity investments, including perpetual preferred stocks, increased by $23.1 million at cost, and short-term cash investments increased by $12.2 million. The amortized cost of fixed-maturities available for sale which were sold or called during the period was $92.0 million. The market value of all investments (fixed-maturities and equities) held at market as "Available for Sale" was less than amortized cost of $1,563.0 million at September 30, 1999 by $14.5 million. That unrealized loss, reflected as accumulated other comprehensive loss in shareholders' equity net of applicable tax effects, was $9.4 million at September 30, 1999 compared with an unrealized gain of $51.2 million at December 31, 1998. The Company's cash and short term investments totaled $66.0 million at September 30, 1999. Together with funds generated internally, such liquid assets are more than adequate to pay claims without the forced sale of investments. On August 2, 1999 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 bank line and internal cash generation. In late October, the Company renewed its $100 million 364 day credit 13 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 corporate purposes. It has been the Company's policy not to invest in high yield or "junk" bonds. Approximately 1.3% of total fixed maturities at September 30, 1999 were rated below investment grade. The average rating of the $1,285.8 million bond portfolio (at amortized cost) was AA, while the average effective maturity approximates 11.5 years. The modified duration of the bond portfolio approximates 8.1 years. 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 $1,319.4 million (at cost) include $33.6 million of sinking fund preferreds, principally utility issues. 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 $227.9 million at market (cost $243.6 million), including perpetual preferred issues, are largely confined to the public utility, financial and banking sectors and represents 26.4% (at cost) of total shareholders' equity. As of September 30, 1999, 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 $803.1 million at September 30, 1999 and net written premiums for the twelve months ended on that date of $1,195.0 million, the ratio of writings to surplus was approximately 1.49 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. Any 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 14 to both hardware and software. The Company considers policy issuance, premium billing and collections and its claim systems as its critical systems. The modifications completed on the above critical systems represent approximately 95% of the Company's total premiums written. The American Mercury Group which represents approximately 5% of the Company's total premiums written, completed the modifications to its mission critical systems during the first quarter of 1999. A small percentage of insurance policies remain on a non-Year 2000 compliant system. The Company expects to have all of these policies transferred to the Year 2000 compliant system by the end 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 end of 1999. From the inception of Year 2000 remediation efforts in 1997 through September 30, 1999, the Company expensed approximately $600,000, primarily for internal labor costs, related to Year 2000 modification. The Company expects to incur less than $100,000 for the remainder of 1999. It is not possible to quantify the aggregate cost to the Company with respect to the 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 the Company's 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. Mercury General is developing business resumption contingency plans specific to the Year 2000. Business resumption contingency plans address the actions that would be taken if critical business functions cannot be carried out in the normal manner upon entering the next century due to system or supplier failure. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- There have been no material changes in the Company's investment strategies, types of financial instruments held or the risks associated with such instruments which would materially alter the market risk disclosures made in the Company's Annual Statement on Form 10-K for the year ended December 31, 1998. An increase in market interest rates during the nine months of the year negatively impacted the value of the Company's investments. The impact is 15 described in the Results of Operations section above. 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. 16 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 10, 1999 By: GEORGE JOSEPH ------------------------------------ George Joseph Chairman and Chief Executive Officer Date: November 10, 1999 By: GABRIEL TIRADOR ------------------------------------ Gabriel Tirador Vice President and Chief Financial Officer 17 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-31-1999 JAN-01-1999 SEP-30-1999 1,320,572 0 0 227,878 0 0 1,606,603 7,857 0 65,117 1,919,184 427,172 345,249 0 0 78,000 49,332 0 0 873,096 1,919,184 886,522 73,942 (8,189) 3,501 586,523 200,598 38,045 127,026 26,325 100,701 0 0 0 100,701 1.84 1.84 0 0 0 0 0 0 0
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