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 March 31, 2001 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 May 1, 2001, the Registrant had issued and outstanding an aggregate of
54,203,623 shares of its Common Stock.
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Amounts expressed in thousands, except share amounts
A S S E T S
March 31, December 31,
2001 2000
---------- ----------
Investments:
Fixed maturities available for sale (amortized cost
$1,472,452 in 2001 and $1,463,897 in 2000)........... $1,527,607 $1,509,474
Equity securities available for sale (cost $253,183
in 2001 and $250,593 in 2000)........................ 249,066 252,510
Short-term cash investments, at cost, which
approximates market.................................. 45,189 32,977
---------- ----------
Total investments.......................... 1,821,862 1,794,961
Cash..................................................... 4,869 5,935
Receivables:
Premiums receivable................................... 129,972 123,070
Premium notes......................................... 14,885 14,205
Accrued investment income............................. 25,484 25,707
Other................................................. 27,646 36,410
---------- ----------
197,987 199,392
Deferred policy acquisition costs........................ 74,600 71,126
Fixed assets, net........................................ 37,558 35,208
Other assets............................................. 33,039 35,641
---------- ----------
Total assets $2,169,915 $2,142,263
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses...................... $ 482,716 $ 492,220
Unearned premiums........................................ 381,401 365,579
Notes payable............................................ 107,578 107,889
Loss drafts payable...................................... 54,084 49,954
Accounts payable and accrued expenses.................... 41,223 39,715
Current income taxes..................................... 3,765 3,471
Deferred income taxes.................................... 9,350 8,336
Other liabilities........................................ 43,934 42,194
---------- ----------
Total liabilities.......................... 1,124,051 1,109,358
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
54,198,623 shares in 2001 and 54,193,423 shares in
2000................................................ 52,209 52,162
Accumulated other comprehensive income................ 33,175 30,871
Unearned ESOP compensation............................ (1,750) (2,000)
Retained earnings..................................... 962,230 951,872
---------- ----------
Total shareholders' equity.................. 1,045,864 1,032,905
---------- ----------
Commitments and contingencies.........................
$2,169,915 $2,142,263
========= ==========
2
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
Amounts expressed in thousands, except per share data
2001 2000
-------- --------
Revenues:
Earned premiums.................................... $323,772 $304,655
Net investment income.............................. 28,019 25,484
Net realized investment gains...................... 4,384 1,482
Other.............................................. 1,274 1,757
-------- --------
Total revenues................................. 357,449 333,378
-------- --------
Expenses:
Losses and loss adjustment expenses................ 240,217 213,644
Policy acquisition costs........................... 71,501 67,106
Other operating expenses........................... 15,271 14,919
Interest........................................... 1,863 1,671
-------- --------
Total expenses................................. 328,852 297,340
-------- --------
Income before income taxes......................... 28,597 36,038
Income taxes............................................ 3,889 6,100
-------- --------
Net income......................................... $ 24,708 $ 29,938
======== ========
BASIC EARNINGS PER SHARE (average shares outstanding
54,154,216 in 2001 and 54,160,431 in 2000)............. $ 0.46 $ 0.55
======== ========
DILUTED EARNINGS PER SHARE (adjusted weighted average
shares 54,350,923 in 2001 and 54,263,243 in 2000)...... $ 0.45 $ 0.55
======== ========
Dividends declared per share............................ $ 0.265 $ 0.240
======== ========
3
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31,
Amounts expressed in thousands
2001 2000
------- -------
Net income............................................... $24,708 $29,938
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period.................................... 7,610 26,902
Less: reclassification adjustment for net gains
included in net income........................... (4,065) (1,067)
------- -------
Other comprehensive income, before tax....... 3,545 25,835
Income tax expense related to unrealized holding gains
arising during period................................... 2,664 9,416
Income tax benefit related to reclassification
adjustment for gains included in net income............. (1,423) (374)
------- -------
Comprehensive income, net of tax......................... $27,012 $46,731
======= =======
4
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31
Amounts expressed in thousands
2001 2000
-------- --------
Cash flows from operating activities:
Net income........................................................ $ 24,708 $ 29,938
Adjustments to reconcile net income to net cash
provided from operating activities:
Decrease in unpaid losses and loss adjustment expenses......... (9,504) (2,228)
Increase in unearned premiums.................................. 15,822 16,779
Increase in premium notes receivable........................... (680) (623)
Increase in premiums receivable................................ (6,902) (6,611)
Increase in deferred policy acquisition costs.................. (3,474) (3,430)
Increase in loss drafts payable................................ 4,130 6,421
Increase in accrued income taxes, excluding deferred
tax on change in unrealized gain.............................. 68 6,952
Increase (decrease) in accounts payable and accrued expenses... 1,508 (6,099)
Depreciation................................................... 1,482 1,625
Net realized investment gains.................................. (4,384) (1,482)
Bond accretion, net............................................ (2,162) (1,573)
Other, net..................................................... 15,760 5,701
-------- --------
Net cash provided from operating activities............... 36,372 45,370
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases...................................................... (85,285) (68,801)
Sales.......................................................... 73,059 27,096
Calls or maturities............................................ 8,310 15,278
Equity securities available for sale:
Purchases...................................................... (24,425) (14,379)
Sales.......................................................... 23,739 10,974
Increase in receivable from securities............................ (1,266) (1,393)
Decrease (increase) in short-term cash investments, net........... (12,212) 2,209
Purchase of fixed assets.......................................... (4,375) (1,529)
Sale of fixed assets.............................................. 600 517
-------- --------
Net cash used in investing activities..................... $(21,855) $(30,028)
(Continued)
5
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
2001 2000
-------- --------
Cash flows from financing activities:
Addition to notes payable.......................... $ 189 $ 3,000
Principal payments on notes payable................ (500) -0-
Dividends paid to shareholders..................... (14,350) (12,971)
Proceeds from stock options exercised.............. 78 30
Purchase and retirement of common stock............ -0- (6,979)
Net decrease in ESOP loan.......................... (1,000) (1,000)
-------- --------
Net cash used in financing activities... (15,583) (17,920)
-------- --------
Net decrease in cash.................................. (1,066) (2,578)
Cash:
Beginning of the year.............................. 5,935 8,052
-------- --------
End of the period.................................. $ 4,869 $ 5,474
======== ========
Supplemental disclosures of cash flow information
and non-cash financing activities:
Interest paid during the period.................... $ 1,888 $ 1,652
Income taxes paid (received) during the period..... $ 3,734 $ (616)
Tax benefit realized on stock options exercised.... $ 16 -0-
6
MERCURY GENERAL CORPORATION & SUBSIDIARIES
NOTE 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
March 31, 2001 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. Earnings Per Share
------------------
Average shares outstanding used in calculating the diluted earnings per
share were adjusted for the effect of unexercised dilutive stock options. The
effect of the dilutive options on the adjusted weighted average shares used in
the diluted earnings pr share calculation was an increase to the average shares
outstanding by 196,707 and 102,812 in the first quarter of 2001 and 2000,
respectively.
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 2000 accounted for approximately
86% 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. In January 2000, the Company began assuming
automobile risks in the state of Texas on business produced by Concord Insurance
Services, Inc., an entity controlled by the Company. In January 2001, the
Company began writing private passenger automobile coverage in Virginia.
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. Factors that could cause or contribute to such differences include,
among others, the intense competition currently existing in the California
automobile insurance markets, the success of the Company in integrating and
profitably operating the business of AMI, and in expanding generally in Florida,
Texas and other states outside of California, the impact of potential third
party "bad-faith" legislation, the ability of the Company to obtain the approval
of the California Insurance Commissioner for premium rate changes for private
passenger automobile policies issued in California and to obtain similar rate
approvals in other states and the level of investment yields obtainable in the
Company's
7
investment portfolio in comparison to recent yields, as well as the cyclical and
general competitive nature of the property and casualty insurance industry and
general uncertainties regarding loss reserve estimates and legislative and
regulatory changes, particularly in California.
Results of Operations
- ---------------------
Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000
Premiums earned in the first quarter of 2001 increased 6.3% from the
corresponding period in 2000. Premiums written in the first quarter of 2001
increased 6.5% from the corresponding period in 2000. California non-standard
automobile premiums and California homeowners premiums were the largest
contributors to first quarter written premium growth.
California premiums written, representing 88% of the Company's total
premiums, grew approximately 6.4% in the first quarter of 2001 compared to an
increase of 3.1% for all of 2000. The California premium growth was primarily
due to an increase in unit sales on the Company's homeowners business and non-
standard automobile business. Total California automobile policies in-force
increased during the first quarter of 2001. The automobile insurance
marketplace remains competitive.
The loss ratio in the first quarter (loss and loss adjustment expenses
related to premiums earned) was 74.2% in 2001 and 70.1% in 2000. The higher
loss ratio in the quarter, as compared to the first quarter of 2000, was largely
due to an increase in the severity recorded on California automobile claims.
Increased frequency, due to winter rain storms, on the homeowners line of
business in California and increased losses in Texas also contributed to the
higher loss ratio.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in the first quarter of 2001 was 26.8% compared to 26.9% in the
corresponding period of 2000.
The combined ratio of losses and expenses (GAAP basis) was 101.0% in the
first quarter of 2001 compared with 97.0% in 2000, resulting in an underwriting
loss for the period of $3.2 million, compared with a gain of $9.0 million in the
corresponding period of 2000.
Investment income for the first quarter of 2001 was $28.0 million, compared
with $25.5 million in the first quarter of 2000. The after-tax yield on average
investments (fixed maturities and equities valued at cost) was 5.52% in both
first quarter 2001 and the corresponding period of 2000 on average invested
assets of $1,769.9 million and $1,666.8 million, respectively.
The income tax provision in the first quarter of 2001 of $3.9 million
represented an effective tax rate of 13.6%, compared with an effective rate of
16.9% in the corresponding period of 2000. The lower rate in 2001 is primarily
attributable to the increased proportion of investment income which consists
primarily of tax-exempt interest and tax sheltered dividend income in contrast
to underwriting income, which is taxed at the full corporate rate of 35%.
8
Net income for the first quarter 2001 of $24.7 million, or $.45 per share
(diluted), compares with $29.9 million or $.55 per share (diluted) in the
corresponding period of 2000. Basic net income per share was $.46 in 2001 and
$.55 in 2000.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operating activities during the first three months
of 2001 was $36.4 million, while funds derived from the sale, redemption or
maturity of investments was $105.1 million. Fixed-maturity investments, at
amortized cost, increased by $8.6 million during the period. Equity
investments, including perpetual preferred stocks, increased by $2.6 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 $78.5 million.
The market value of all investments (fixed-maturities and equities) held
at market as "Available for Sale" exceeded amortized cost of $1,725.6 million at
March 31, 2001 by $51.0 million. That unrealized gain, reflected as accumulated
other comprehensive loss, net of applicable tax effects, was $33.2 million at
March 31, 2001 compared with an unrealized gain of $30.9 million at December 31,
2000.
The Company's cash and short term investments totaled $50.1 million at
March 31, 2001. $3 million of this cash is restricted. Together with funds
generated internally, such liquid assets are adequate to pay claims without the
forced sale of investments.
Approximately 1.0% of total fixed maturities at March 31, 2001 were rated
below investment grade. The average rating of the $1,453.0 million bond
portfolio (at amortized cost) was AA. Bond holdings are broadly diversified
geographically, within the tax-exempt sector. Holdings in the taxable sector
consist principally of investment grade issues. Fixed-maturity investments of
$1,472.4 million (at cost) include $19.4 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 $249.1 million at market (cost $253.2 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent 24.2% (at cost) of total shareholders' equity.
As of March 31, 2001, the Company had no material commitments for capital
expenditures.
The Company had outstanding debt at March 31, 2001 of $108 million.
Included in this amount, is $75 million due November 21, 2001 and $27 million
due October 26, 2001. The Company is currently evaluating repayment and
refinancing alternatives including a public issuance of debt securities and bank
refinancing.
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 $992.7 million at March 31, 2001 and net
written premiums for the twelve months ended on that date
9
of $1,293.4 million, the ratio of writings to surplus was approximately 1.3
to 1.
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, 2000.
A decrease in market interest rates during the first three months of the
year positively impacted the value of the Company's investments. The impact is
described in the Liquidity and Capital Resources section above.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 9, 2001. The
matters voted upon at the meeting included the election of all nine directors
and the approval of the auditors for the 2001 fiscal year. The votes cast with
respect to these two matters were as follows:
1. Election of Directors Number of shares Number of shares
Nominee voted FOR Withheld
--------------------- ---------------- ----------------
Nathan Bessin 51,702,352 242,836
Bruce A. Bunner 51,695,921 249,267
Michael D. Curtius 51,669,350 275,838
Richard E. Grayson 51,702,603 242,585
George Joseph 51,498,264 446,924
Gloria Joseph 51,699,920 245,268
Charles E. McClung 51,699,372 245,816
Donald P. Newell 51,464,781 480,407
Donald R. Spuehler 51,691,251 253,937
2. Proposal to approve KPMG LLP as auditors for the year 2001
----------------------------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
51,903,309 15,552 26,327
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) None
(b) None
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
Date: May 11, 2001 By: /s/ George Joseph
------------------------------------
George Joseph
Chairman and Chief Executive Officer
Date: May 11, 2001 By: /s/ Gabriel Tirador
------------------------------------
Gabriel Tirador
Chief Financial Officer
11