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, 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 October 26, 2001, the Registrant had issued and outstanding an aggregate of
54,226,048 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,
2001 2000
---- ----
(Unaudited)
Investments:
Fixed maturities available for sale (amortized cost
$1,523,215 in 2001 and $1,463,897 in 2000).......... $1,584,118 $1,509,474
Equity securities available for sale (cost $278,399
in 2001 and $250,593 in 2000)....................... 273,421 252,510
Short-term cash investments, at cost, which
approximates market................................. 99,024 32,977
---------- ----------
Total investments......................... 1,956,563 1,794,961
Cash.................................................... 5,102 5,935
Receivables:
Premiums receivable.................................. 141,459 123,070
Premium notes........................................ 17,084 14,205
Accrued investment income............................ 25,850 25,707
Other................................................ 33,036 36,410
---------- ----------
217,429 199,392
Deferred policy acquisition costs....................... 81,665 71,126
Fixed assets, net....................................... 39,470 35,208
Other assets............................................ 28,816 35,641
---------- ----------
Total assets $2,329,045 $2,142,263
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses....................... $ 512,091 $ 492,220
Unearned premiums......................................... 413,041 365,579
Notes payable............................................. 130,423 107,889
Loss drafts payable....................................... 53,235 49,954
Accounts payable and accrued expenses..................... 51,221 39,715
Current income taxes...................................... 10,564 3,471
Deferred income taxes..................................... 11,274 8,336
Other liabilities......................................... 67,513 42,194
---------- ----------
Total liabilities........................... 1,249,362 1,109,358
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
54,219,348 shares in 2001 and 54,193,423 shares in
2000................................................. 52,540 52,162
Accumulated other comprehensive income................. 36,352 30,871
Unearned ESOP compensation............................. (1,250) (2,000)
Retained earnings...................................... 992,041 951,872
---------- ----------
Total shareholders' equity................... 1,079,683 1,032,905
---------- ----------
Commitments and contingencies.......................... $2,329,045 $2,142,263
========== ==========
2
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30,
Amounts expressed in thousands, except share and per share data
2001 2000
---- ----
Revenues:
Earned premiums................................ $351,896 $315,108
Net investment income.......................... 29,043 26,865
Net realized investment gains.................. 2,784 625
Other.......................................... 1,355 538
-------- --------
Total revenues.......................... 385,078 343,136
-------- --------
Expenses:
Losses and loss adjustment expenses............ 250,939 226,706
Policy acquisition costs....................... 76,805 68,002
Other operating expenses....................... 15,393 14,546
Interest....................................... 1,974 1,837
-------- --------
Total expenses.......................... 345,111 311,091
-------- --------
Income before income taxes..................... 39,967 32,045
Income taxes........................................... 7,912 4,624
-------- --------
Net income....................................... $ 32,055 $ 27,421
======== ========
BASIC EARNINGS PER SHARE (average shares outstanding
54,182,065 in 2001 and 54,074,298 in 2000)............ $ 0.59 $ 0.51
======== ========
DILUTED EARNINGS PER SHARE (adjusted weighted average
shares 54,385,345 in 2001 and 54,223,764 in 2000)..... $ 0.59 $ 0.51
======== ========
Dividends declared per share........................... $ 0.265 $ 0.240
======== ========
3
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended September 30,
Amounts expressed in thousands, except share and per share data
2001 2000
---- ----
Revenues:
Earned premiums................................... $1,013,839 $ 931,950
Net investment income............................. 85,003 78,536
Net realized investment gains..................... 7,077 2,784
Other............................................. 3,067 4,383
---------- ----------
Total revenues............................... 1,108,986 1,017,653
---------- ----------
Expenses:
Loss and loss adjustment expenses................. 734,577 664,609
Policy acquisition costs.......................... 222,562 204,768
Other operating expenses.......................... 46,162 44,742
Interest.......................................... 5,323 5,219
---------- ----------
Total expenses............................... 1,008,624 919,338
---------- ----------
Income before income taxes........................ 100,362 98,315
Income taxes........................................... 17,134 14,954
---------- ----------
Net income........................................ $ 83,228 $ 83,361
========== ==========
BASIC EARNINGS PER SHARE (average shares outstanding
54,167,910 in 2001 and 54,098,916 in 2000)............ $ 1.54 $ 1.54
========== ==========
DILUTED EARNINGS PER SHARE (adjusted weighted average
shares 54,363,277 in 2001 and 54,230,720 in 2000)..... $ 1.53 $ 1.54
========== ==========
Dividends declared per share........................... $ 0.795 $ 0.720
========== ==========
4
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30,
Amounts expressed in thousands
2001 2000
Net income $32,055 $27,421
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising
during period 6,895 32,408
Less: reclassification adjustment for net
gains included in net income (1,682) (42)
------- -------
Other comprehensive income, before tax 5,213 32,366
Income tax expense related to unrealized
holding gains arising during the period 2,413 11,342
Income tax benefit related to reclassification
adjustment for gains included in net income (588) (14)
------- -------
Comprehensive income, net of tax $35,443 $48,459
======= =======
5
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Nine Months Ended September 30,
Amounts expressed in thousands
2001 2000
---- ----
Net income $ 83,228 $ 83,361
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising
during period 13,450 59,130
Less: reclassification adjustment for net
gains included in net income (5,018) (1,238)
-------- ---------
Other comprehensive income, before tax 8,432 57,892
Income tax expense related to unrealized
holding gains arising during period 4,707 20,695
Income tax benefit related to reclassification
adjustment for gains included in net income (1,756) (433)
-------- ---------
Comprehensive income, net of tax $ 88,709 $ 120,991
======== =========
6
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
Amounts expressed in thousands
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 83,228 $ 83,361
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 19,871 27,134
Increase in unearned premiums 47,462 21,886
Increase in premium notes receivable (2,879) (1,276)
Increase in premiums receivable (18,389) (6,717)
Increase in deferred policy acquisition costs (10,539) (4,354)
Increase in loss drafts payable 3,281 6,166
Increase in accrued income taxes, excluding deferred
tax on change in unrealized gain 7,080 5,802
Increase in accounts payable and accrued expenses 11,506 1,871
Depreciation 4,925 5,039
Net realized investment gains (7,077) (2,784)
Bond accretion, net (6,556) (5,201)
Other, net 23,484 8,455
--------- ---------
Net cash provided from operating activities 155,397 139,382
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (243,917) (231,627)
Sales 157,373 94,945
Calls or maturities 38,431 44,142
Equity securities available for sale:
Purchases (72,805) (62,334)
Sales 47,427 57,879
Cash acquired in Elm County Mutual Insurance
Company transaction -0- 1,862
Increase in payable for securities 14,814 6,440
Increase in short-term cash investments, net (66,048) (9,754)
Purchase of fixed assets (10,664) (5,044)
Sale of fixed assets 1,622 827
--------- ---------
Net cash used in investing activities $(133,767) $(102,664)
(Continued)
7
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
2001 2000
---- ----
Cash flows from financing activities:
Net proceeds from issuance of senior notes $ 123,309 $ -0-
Net (payments) borrowings under credit arrangements (102,000) 8,000
Decrease in notes payable (122) -0-
Dividends paid to shareholders (43,059) (38,920)
Proceeds from stock options exercised 409 345
Purchase and retirement of common stock -0- (6,979)
Net decrease in ESOP loan (1,000) (1,000)
--------- --------
Net cash used in financing activities (22,463) (38,554)
--------- --------
Net decrease in cash (833) (1,836)
Cash:
Beginning of the year 5,935 8,052
--------- --------
End of the year $ 5,102 $ 6,216
========= ========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 4,561 $ 5,642
Income taxes paid during the period $ 10,070 $ 9,323
Debt issuance costs $ 1,345 $ -0-
Non-cash investing and financing transactions:
Notes payable issued in exchange for right to
manage and control Elm County Mutual Insurance
Company $ -0- $ 12,889
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, 2001 and the results of operations, comprehensive income and cash
flows for the periods presented have been made. Operating results for the three
and nine months ended September 30, 2001, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001.
2. Recently Issued Accounting Standards
------------------------------------
In July 2001, the Financial Accounting Standard Board issued SFAS No. 141,
Business Combinations (SFAS No. 141), and SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS No. 141 requires companies to apply the
purchase method of accounting for all business combinations initiated after June
30, 2001 and prohibits the use of the pooling-of-interest method. SFAS No. 142
changes the method by which companies may recognize intangible assets in
purchase business combinations and generally requires identifiable intangible
assets to be recognized separately from goodwill. In addition, it eliminates
the amortization of all existing and newly acquired goodwill on a prospective
basis and requires companies to assess goodwill for impairment, at least
annually, based on the fair value of the reporting unit. The Company will be
required to adopt SFAS Nos. 141 and 142 on January 1, 2002. Management is
currently evaluating the impact, if any, that these statements will have on the
Company's financial statements.
3. Public Debt Offering
--------------------
On August 7, 2001, the Company completed a public debt offering issuing
$125 million of senior notes payable under a $300 million shelf registration
filed with the SEC in July 2001. The notes are unsecured, senior obligations of
the Company that mature on August 15, 2011 and bear interest at 7.25% per annum,
payable semi-annually on August 15 and February 15 each year, commencing
February 15, 2002. The company incurred debt issuance costs of approximately
$1.3 million, inclusive of underwriter's fees. These costs are deferred and
then amortized as a component of interest expense over the term of the notes.
The notes were issued at a slight discount at 99.723%, making the effective
annualized interest rate including debt issuance costs, approximately 7.44%. On
August 7, 2001 the Company retired $102 million of bank debt with the proceeds
from the senior note issuance.
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.
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 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., a controlled entity. In January 2001, the Company began writing
private passenger automobile coverage in Virginia and in September 2001 began
writing private passenger automobile coverage in New York.
Certain statements in this report on Form 10-Q that are not historical fact
and constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may address,
among other things, our strategy for growth, business development, regulatory
approvals, market position, expenditures, financial results and reserves.
Forward-looking statements are not guarantees of performance and are subject to
important factors and events that could cause our actual business, prospects and
results of operations to differ materially from the historical information
contained in this Form 10-Q and from those that may be expressed or implied by
the 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, our success in expanding our
business in states outside of California, the impact of potential third party
"bad-faith" legislation, changes in laws or regulations, third party relations
and approvals, and decisions of courts, regulators and governmental bodies,
particularly in California, our ability to obtain the approval of the California
Insurance Commissioner for premium rate changes for private passenger automobile
policies issued in California and similar rate approvals in other states where
we do business, our success in integrating and profitably operating the
businesses we have acquired, the level of investment yields we are able to
obtain with our investments in comparison to recent yields, the cyclical and
general competitive nature of the property and casualty insurance industry and
general uncertainties regarding loss reserve estimates, and other uncertainties,
all of which are difficult to predict and many of which are beyond our control.
We assume no obligation to update any forward-looking statements as a result of
new information or future events or developments. Investors are cautioned not
to place undue reliance on any forward-looking statements, which speak only as
of the date of this Form 10-Q or, in the case of any document we incorporate by
reference, the date of that document. Investors also should understand that it
is not possible to predict or identify all factors and should not consider the
risks set forth above to be a complete statement of all potential risks and
uncertainties. If the expectations or assumptions underlying our forward-
looking statements prove inaccurate or if risks or uncertainties arise, actual
results could differ materially from those predicted in any forward-looking
statements.
10
Results of Operations
- ---------------------
Three Months Ended September 30, 2001 compared to Three Months Ended September
30, 2000
Premiums earned in the third quarter of 2001 increased 11.7% from the
corresponding period in 2000. Net premiums written in the third quarter of 2001
increased 16.6% from the corresponding period in 2000. Contributing to the
overall third quarter 2001 premiums written growth were increased policy sales
in the California automobile insurance lines as well as increased production in
California homeowners insurance, Florida automobile insurance and Texas
automobile insurance lines. Many competitors have instituted rate increases over
the past year which has helped Mercury attract new customers.
California premiums written, representing 87% of the Company's total
premiums, grew approximately 14.9% in the third quarter of 2001 compared to an
increase of 1.6% for the comparative period of 2000.
The loss ratio in the third quarter (loss and loss adjustment expenses
related to premiums earned) was 71.3%, compared with 71.9% in 2000.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) was 26.2% in both 2001 and 2000.
The combined ratio of losses and expenses (GAAP basis) was 97.5% in 2001
compared with 98.1% in 2000, resulting in an underwriting gain for the period of
$8.8 million, compared with $5.9 million in 2000.
Investment income for the third quarter was $29.0 million, compared with
$26.9 million in the third quarter of 2000. The after-tax yield on average
investments of $1,849.1 million (fixed maturities and equities valued at cost)
was 5.38% compared with 5.56% on average investments of $1,731.1 million in the
third quarter of 2000.
Realized investment gains before income taxes were $2.8 million compared to
$0.6 million in the third quarter of 2000.
The income tax provision in the third quarter of 2001 of $7.9 million
represented an effective tax rate of 19.8%, compared with an effective rate of
14.4% in 2000. The higher effective rate is principally attributable to the
larger proportion of pre-tax income derived from fully taxable underwriting gain
and taxable investment income compared to tax exempt investment income.
Net income for the third quarter of $32.1 million, or $.59 per share
(diluted), compares with $27.4 million or $.51 per share (diluted) in 2000.
Basic net income per share was $.59 in 2001 and $.51 in 2000.
Other comprehensive income represents the change in the unrealized gains
and losses on the Company's investments occurring during the period. Other
comprehensive income, before tax for the third quarter was $5.2 million in 2001
and $32.4 million in 2000 which represents the change in the unrealized gains
and losses on the Company's investments occurring during the period.
11
Nine Months ended September 30, 2001 compared to Nine Months ended September 30,
2000
Premiums earned in the first nine months of 2001 increased 8.8% from the
corresponding period in 2000. Net premiums written in the first nine months of
2001 increased 11.7% from the corresponding period in 2000. Contributing to the
overall first nine months of 2001 premiums written growth were increased policy
sales in the California automobile insurance lines as well as increased
production in California homeowners insurance, Florida automobile insurance and
Texas automobile insurance lines.
California premiums written, representing 88% of the Company's total
premiums, grew approximately 10.6% in the first nine months of 2001 compared to
an increase of 2.8% for the comparative period of 2000.
The loss ratio in the first nine months of 2001 (loss and loss adjustment
expenses related to premiums earned) was 72.5%, compared with 71.3% in 2000.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in 2001 was 26.5% compared to 26.8% in 2000.
The combined ratio of losses and expenses (GAAP basis) was 99.0% in 2001
compared with 98.1% in 2000, resulting in an underwriting gain for the period of
$10.5 million, compared with $17.8 million in 2000.
Investment income for the first nine months of 2001 was $85.0 million,
compared with $78.5 million in the first nine months of 2000. The after-tax
yield on average investments of $1,805.2 million (fixed maturities and equities
valued at cost), was 5.43% compared with 5.55% on average investments of
$1,696.7 million in 2000.
Realized investment gains before income taxes were $7.1 million compared
with $2.8 million in the first nine months of 2000.
The income tax provision in the first nine months of 2001 of $17.1 million
represented an effective tax rate of 17.1%, compared with an effective rate of
15.2% in 2000. The higher rate in 2001 reflects a shift in a portion of the
Company's investments from tax-exempt issues to taxable issues.
Net income for the first nine months of $83.2 million, or $1.53 per share
(diluted), compares with $83.4 million or $1.54 per share (diluted) in 2000.
Basic net income per share was $1.54 in both 2001 and 2000.
Other comprehensive income represents the change in the unrealized gains
and losses on the Company's investments occurring during the period. Other
comprehensive income, before tax for the first nine months of 2001 of $8.4
million compares with $57.9 million in 2000. The gains were primarily the
result of decreased market interest rates which increased the value of the
Company's investment portfolio.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operating activities during the nine months of 2001
was $155.4 million, while funds derived from the sale, call or maturity of
investments was $243.2 million,
12
of which approximately 19% was represented by the sale of equities. Fixed-
maturity investments, at amortized cost, increased by $59.3 million during the
period. Equity investments, including perpetual preferred stocks, increased by
$27.8 million at cost, and short-term cash investments increased by $66.0
million. The amortized cost of fixed-maturities available for sale which were
sold or called during the period was $186.9 million.
The market value of all investments (fixed-maturities and equities) held at
market as "Available for Sale" exceeded amortized cost of $1,801.6 million at
September 30, 2001 by $55.9 million. That unrealized gain, reflected as
accumulated other comprehensive income in shareholders' equity net of applicable
tax effects, was $36.4 million at September 30, 2001 compared with an unrealized
gain of $30.9 million at December 31, 2000.
The Company's cash and short term investments totaled $104.1 million at
September 30, 2001, of which $3 million is restricted. Together with funds
generated internally, such liquid assets are adequate to pay claims without the
forced sale of investments.
Approximately 1.4% of total assets at September 30, 2001 were bonds rated
below investment grade. The average rating of the $1,507.0 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
$1,523.2 million (at cost) include $16.2 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 $273.4 million at market (cost $278.4 million),
including perpetual preferred issues, are largely confined to the public
utility, financial and banking sectors and represent 25.8% (at cost) of total
shareholders' equity.
As of September 30, 2001, the Company had no material commitments for
capital expenditures.
On August 7, 2001, the Company completed a public debt offering issuing
$125 million of senior notes payable under a $300 million shelf registration
filed with the SEC in July 2001. The notes are unsecured, senior obligations of
the Company that mature on August 15, 2011 and bear interest at 7.25% per annum,
payable semi-annually on August 15 and February 15 each year, commencing
February 15, 2002. The Company incurred debt issuance costs of approximately
$1.3 million, inclusive of underwriter's fees. These costs are deferred and
then amortized as a component of interest expense over the term of the notes.
The notes were issued at a slight discount at 99.723%, making the effective
annualized interest rate including debt issuance costs, approximately 7.44%.
The Company had outstanding debt at September 30, 2001 of $130.4 million.
Prior to the $125 million senior note issuance, the Company had $75 million
payable under a revolving credit facility due November 21, 2001 and $27 million
payable under a $30 million revolving credit facility due October 26, 2001. The
interest on these two loans was variable and through August 7, 2001 was priced
off of the Eurodollar London Interbank Rate (LIBOR) making the effective
interest rate 5.77% and 5.78%, respectively. On August 7, 2001, the Company
repaid the entire balance of both the $75 million and $27 million borrowings
with proceeds received from the $125
13
million senior note issuance. The Company also terminated the $75 million
revolving credit facility. The $30 million facility that expired on October
26,2001 was not renewed.
Prior to the issuance of the senior notes, the Company used short-term
floating rate debt as part of its capital structure. From time to time the
Company may evaluate the possibility of entering into an agreement to swap its
fixed interest rate on the senior notes to a variable interest rate. See Item
3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
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
Company's licensed insurance subsidiaries of $1,020.0 million at September 30,
2001 and net written premiums for the twelve months ended on that date of
$1,384.0 million, the ratio of writings to surplus was approximately 1.4 to 1.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
As of September 30, 2001, 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 or Form 10-K for the
year ended December 31, 2000.
As discussed in the Liquidity and Capital Resources section, on August 7,
2001 the Company repaid total short-term floating rate bank debt of $102 million
with the proceeds from the issuance of the $125 million fixed-rate senior notes
maturing on August 15, 2011. To the extent market interest rates fluctuate, the
fair value of the fixed rate debt will fluctuate in the opposite direction.
A common measure of the market rate interest sensitivity of fixed maturity
debt is modified duration, a calculation that takes maturity, coupon rate, yield
and call terms to calculate an average age of expected cash flows. The modified
duration of the senior notes is calculated to be approximately 6.7 years. This
compares to the modified duration of the Company's $1.5 billion investment in
bonds (at market) of approximately 5.7 years, at September 30, 2001. Given a
hypothetical decrease of 100 basis points in market interest rates, the fair
value of the $1.5 billion investment in bonds would increase by approximately
$89 million. A similar 100 basis points decrease in market interest rates would
result in an increase in the fair value of the senior notes of approximately $8
million. The converse would hold true for a hypothetical 100 basis point
increase in market interest rates.
From time to time, the Company may evaluate the possibility of entering
into an agreement to swap its fixed interest rate on the senior notes to a
variable interest rate. A swap would have the effect of lowering the current
borrowing costs compared to the interest rate on the senior notes but could
expose the Company to higher borrowing costs in the future, if short-term market
interest rates increase.
A decrease in market interest rates during the first nine 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.
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
1. Current Report on Form 8-K, dated July 30, 2001, related to the
Company's results of operations for the three month period ending
June 30, 2001.
2. Current Report on Form 8-K, dated August 6, 2001, related to the
issuance of the Company's senior notes due August 15, 2011.
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 8, 2001 By: /s/ GABRIEL TIRADOR
-----------------------------------------
Gabriel Tirador
President and Chief Operating Officer
Date: November 8, 2001 By: /s/ THEODORE STALICK
-----------------------------------------
Theodore Stalick
Vice President and Chief Financial
Officer
16