SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995 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
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
Common Stock
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant at March 22, 1996, was approximately $567,702,856
(based upon the closing sales price of such date, as reported by the Wall Street
Journal).
At March 22, 1996, the Registrant had issued and outstanding an aggregate of
27,463,475 shares of its Common Stock.
Documents Incorporated by Reference
Proxy statement for the Annual Meeting of Stockholders of Registrant to be held
on May 29, 1996 (only portions of which are incorporated by reference).
PART I
Item 1. Business
--------
General
The Company is engaged primarily in writing all risk classifications of
automobile insurance in California, which in 1995 accounted for approximately
98% of the Company's direct premiums written. In 1990, the Company commenced
writing small amounts of automobile insurance in Georgia and Illinois. During
1995, private passenger automobile insurance and commercial automobile insurance
accounted for 93.1% and 4.5%, respectively, of the Company's direct premiums
written. The Company also writes homeowners insurance, commercial and dwelling
fire insurance and commercial property insurance. In 1995, the non-automobile
lines of insurance accounted for 2.4% of direct premiums written, of which
approximately 55% was in commercial lines.
The Company offers automobile policyholders the following types of
coverage: bodily injury liability coverage, including underinsured and
uninsured motorist coverage, property damage liability coverage and physical
damage coverage, including fire, theft, collision and other hazards specified in
the policy. The Company's published maximum limits of liability for bodily
injury are $250,000 per person injured, $500,000 per accident and, for property
damage, $250,000 per accident. Subject to special underwriting approval, the
combined policy limits may be as high as $1,000,000 for vehicles written under
the Company's commercial automobile plan. Under the majority of the Company's
automobile policies, however, the limits of liability are less than $100,000 per
person injured, $300,000 per accident and $50,000 for property damage.
In 1995, A.M. Best & Co. rated Mercury Casualty Company and Mercury
Insurance Company, the Company's chief operating subsidiaries, A+ (Superior).
This is the second highest of the fifteen rating categories in the A.M. Best
rating system, which range from A++ (Superior) to F (In Liquidation).
The principal executive offices of Mercury General Corporation are located
in Los Angeles, California. The home office of its California insurance
subsidiaries and the Company's computer and operations center is located in
Brea, California. The Company maintains branch offices in a number of locations
in California, in Vernon Hills, Illinois and in Atlanta, Georgia. The Company
has approximately 1400 employees.
Organization
Mercury General Corporation ("Mercury General"), an insurance holding
company, is the parent of Mercury Casualty Company, a California automobile
insurer founded in 1961 by George Joseph, its Chief Executive Officer. Its
insurance operations in California are conducted through three California
insurance company subsidiaries, Mercury Casualty Company ("Mercury Casualty"),
Mercury Insurance Company ("Mercury Insurance"), and California Automobile
Insurance Company. Two subsidiaries, Mercury Insurance Company of Georgia and
Mercury Insurance Company of Illinois, received authority in late 1989 to write
1
automobile insurance in those two states. In 1992, Mercury Indemnity Company of
Georgia and Mercury Indemnity Company of Illinois were formed to write preferred
risk automobile insurance in those two states.
Mercury General furnishes management services to its insurance company
subsidiaries. Mercury General and its insurance company subsidiaries are
referred to as the "Company" unless the context indicates otherwise, and Mercury
General Corporation individually is referred to as "Mercury General."
Underwriting
The Company sets its own automobile insurance premium rates, subject to
rating factor regulations issued by the California Department of Insurance
(DOI). Automobile insurance rates on voluntary business in California have been
subject to approval by the DOI since November 1989 pursuant to regulations
required by an initiative known as Proposition 103, which was passed by
California voters in November, 1988. Judicial proceedings and administrative
hearings delayed implementation of prior approval proceedings until after July
1990, when the Insurance Commissioner then in office issued initial prior
approval regulations and rating factor regulations. The Company submitted a new
classification and rating plan in accordance with the new regulations, which the
DOI approved for implementation in February of 1991. The Company uses its own
extensive data base to establish its classification and rating factor plans. In
January 1991, a new, elected Insurance Commissioner rescinded the prior approval
regulations of his predecessor. No prior approval regulations are currently in
effect, but the DOI continues to process rate applications. The regulations
pertaining to the rating factor criteria were left intact and remain in effect
as of this date. The present Insurance Commissioner took office in January
1995. After conducting hearings in April 1995 and December 1995, the
Commissioner issued proposed rating factor regulations in March 1996. See
"Regulation - Automobile Insurance Rating Factor Regulations."
On February 25, 1994, the DOI approved a revised rating plan and rates for
the Company which became effective on May 1, 1994. These rates were designed to
improve the Company's competitive position for new insureds and included a
modest overall rate reduction. Further rate modifications were approved and
made effective on October 15, 1995. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Overview."
Approximately 80% of the Company's new applications for automobile
insurance during 1995 were placed in the lowest risk classifications, known as
"good drivers" (as defined by the California Insurance Code), while
approximately 20% of new applications were accepted in higher risk
classifications at increased rate levels. Policies are reclassified at the time
of renewal and may be changed to a higher or lower risk classification.
At December 31, 1995, "good drivers" accounted for approximately 78% of all
voluntary private passenger automobile policies in force, while the higher risk
categories accounted for 22%. The Company's renewal rate (the rate of
acceptance of offers to renew) averages approximately 93%.
2
Production and Servicing of Business
The Company sells its policies through 910 independent agents located in
California, Georgia and Illinois, of which 780 are located in California.
Approximately half of the agents have represented the Company for more than ten
years. These agents, most of whom also represent one or more competing
insurance companies, are independent contractors selected and appointed by the
Company.
One agency produced direct premiums written of approximately 15%, 13% and
12% during 1995, 1994 and 1993, respectively, of the Company's total direct
premiums. No other agent accounted for more than 2% of direct premiums written.
The Company believes that its agents' compensation is higher than the
industry average. During 1995 total commissions and bonuses incurred averaged
15.8% of direct premiums written. The Company is not responsible for any of
its agents' expenses.
Traditionally, any advertising done has been handled by the individual
agents. During the fourth quarter of 1995, the Company began its first
advertising program in major newspapers in Southern California. While the
Company plans, coordinates and executes the program, the agents are responsible
for the cost of the advertisements. The program has been satisfactory and was
expanded to Northern California in early 1996.
Claims
Claims operations are supervised by the Company's Vice President and Chief
Claims Officer. The claims staff administers all claims and directs all legal
and adjustment aspects of the claims process. The Company adjusts most claims
without the assistance of outside adjusters.
Loss and Loss Adjustment Expense Reserves
The Company maintains reserves for the payment of losses and loss
adjustment expenses for both reported and unreported claims. Loss reserves are
estimated based upon a case-by-case evaluation of the type of claim involved and
the expected development of such claim. The amount of loss reserves and loss
adjustment expense reserves for unreported claims are determined on the basis of
historical information by line of insurance. Inflation is reflected in the
reserving process through analysis of cost trends and reviews of historical
reserving results.
Ultimate liability may be greater or lower than stated loss reserves.
Reserves are closely monitored and are analyzed quarterly by the Company's
actuarial consultant using new information on reported claims and a variety of
statistical techniques. The Company does not discount to a present value that
portion of its loss reserves expected to be paid in future periods. The Tax
Reform Act of 1986 does, however, require the Company to discount loss reserves
for Federal income tax purposes.
3
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses, net of reinsurance deductions,
as shown on the Company's consolidated financial statements for the periods
indicated.
Year ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(Amounts in thousands)
Net reserves for losses and loss adjustment
expenses, beginning of year.............................. $223,392 $214,525 $239,203
Incurred losses and loss adjustment expenses:
Provision for insured events of the
current year.................................... 423,264 370,631 323,932
Decrease in provision for insured events
of prior years.................................. (6,708) (10,074) (34,724)
-------- -------- --------
Total incurred losses and loss adjustment
expenses...................................... 416,556 360,557 289,208
-------- -------- --------
Payments:
Losses and loss adjustment expenses attribu-
table to insured events of the current
year............................................ 243,294 208,418 178,698
Losses and loss adjustment expenses attribu-
table to insured events of prior years.......... 145,664 143,272 135,188
-------- -------- --------
Total payments.................................. 388,958 351,690 313,886
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at the end of the period......................... 250,990 223,392 214,525
Reinsurance recoverable.................................... 2,556 4,107 776
-------- -------- --------
Gross liability at end of year............................. $253,546 $227,499 $215,301
======== ======== ========
The difference between the reserves reported in the Company's consolidated
financial statements prepared in accordance with generally accepted accounting
principles (GAAP) and those reported in the statements filed with the DOI in
accordance with statutory accounting principles (SAP) is as follows:
December 31,
---------------------------
1995 1994 1993
---- ---- ----
(Amounts in thousands)
Reserves reported on a SAP basis....................... $250,990 $223,392 $214,525
Reinsurance recoverable................................ 2,556 $ 4,107 776
-------- -------- --------
Reserves reported on a GAAP basis...................... $253,546 $227,499 $215,301
======== ======== ========
The following table represents the development of loss reserves for the
period 1986 through 1995. The top line of the table shows the reserves at the
balance sheet date net of reinsurance recoverable for each of the indicated
years. This represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the cumulative amounts paid as of
successive years with respect to that reserve liability. The lower portion of
the table shows the re-estimated amount of the previously recorded reserves
based on experience as of the end of each succeeding year, including cumulative
payments made since the end of the respective year. The estimate changes as
more
4
information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the original reserve
estimate is greater (less) than the re-estimated reserves at December 31, 1995.
In evaluating the information in the table, it should be noted that each
amount includes the effects of all changes in amounts for prior periods. This
table does not present accident or policy year development data. Conditions and
trends that have affected development of the liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
As of December 31,
-------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
(Amounts in thousands)
Net reserves for
losses and loss
adjustment
expenses................. $114,158 $178,605 $241,037 $291,408 $301,354 $280,157 $239,203 $214,525 $223,392 $250,990
Paid (cumulative)
as of:
One year later.......... 78,469 112,099 139,874 167,850 181,781 151,866 135,188 143,272 145,664
Two years later......... 106,461 147,641 195,453 227,503 238,030 197,640 184,119 187,641
Three years later....... 117,118 166,477 218,335 249,371 254,884 213,824 197,371
Four years later........ 123,105 175,232 226,384 256,659 261,058 218,067
Five years later........ 125,040 177,328 229,168 259,147 263,011
Six years later......... 125,661 177,938 229,773 259,781
Seven years later....... 125,757 178,178 229,815
Eight years later....... 125,939 178,215
Nine years later........ 126,018
Net reserves re-estimated
as of:
One year later.......... 124,818 173,325 230,249 269,934 285,212 230,991 204,479 204,451 216,684
Two years later......... 125,549 175,876 233,607 269,652 265,618 218,404 204,999 207,089
Three years later....... 126,938 179,157 234,757 259,635 259,624 220,620 203,452
Four years later........ 126,276 180,084 228,909 256,694 264,259 221,118
Five years later........ 126,137 177,591 228,326 260,365 264,127
Six years later......... 125,479 177,335 230,102 260,402
Seven years later....... 125,340 178,364 229,998
Eight years later....... 125,994 178,303
Nine years later........ 126,035
Net Cumulative Redundancy
(deficiency)............. (11,877) 302 11,039 31,006 37,227 59,039 35,751 7,436 6,708
Gross liability - end of year 240,183 215,30 227,499 253,546
Reinsurance recoverable (980) (776) (4,107) (2,556)
-------- -------- -------- --------
Net liability - end of year 239,203 214,525 223,392 250,990
======== ======== ======== ========
Gross re-estimated liability - latest 206,821 209,427 222,953
Re-estimated recoverable - latest (3,369) (2,338) (6,269)
-------- -------- --------
Net re-estimated liability - latest 203,452 207,089 216,684
======== ======== ========
Gross cumulative redundancy 38,140 8,998 8,870
======== ======== ========
The deficiency in calendar year loss reserves for the year 1986 was
experienced during a period of rapidly escalating premium growth for the
Company. The Company attributes this change to greater than anticipated
inflation in California private passenger automobile claims costs and expenses
experienced generally by California insurers during the mid-1980's and, to a
lesser extent, to the addition and training of claims adjusters and
supervisorial claims personnel to deal with the expanded claims volume resulting
from the Company's significant premium growth. These factors stabilized in
1987. For the calendar years 1988 through 1994, the Company's previously
estimated loss reserves produced redundancies. The Company attributes this
favorable loss development to several factors. First, the Company had completed
its development of a full
5
complement of claims personnel. Second, during 1988, the California Supreme
Court reversed what was known as the "Royal Globe" doctrine, which, since 1978,
had permitted third party plaintiffs to sue insurers for alleged "bad faith" in
resolving claims, even when the plaintiff had voluntarily agreed to a
settlement. This doctrine had placed undue pressures on claims representatives
to settle legitimate disputes at unfairly high settlement amounts. After the
reversal of Royal Globe, the Company believes that it has been able to achieve
fairer settlements, because both parties are in a more equal bargaining
position. Third, during the years 1988 through 1990, the volume of business
written in the Assigned Risk Program expanded substantially as rates were
suppressed at grossly inadequate levels. Following the Insurance Commissioner's
approval of an 85% temporary rate increase in September 1990, the volume of
assigned risk business has declined by nearly 80%. Many of the claims
associated with the high volume of assigned risk business in the 1988-1990
period were later found to be fraudulent or grossly exaggerated and were settled
in subsequent periods for substantially less than had been initially reserved.
Fourth, a number of factors have combined to produce favorable frequency and
severity trends in recent years, and actuarial assumptions based on historical
trends have proved to be conservative.
Operating Ratios
Loss and Expense Ratios
-----------------------
Loss and underwriting expense ratios are used to interpret the underwriting
experience of property and casualty insurance companies. Losses and loss
adjustment expenses, on a statutory basis, are stated as a percentage of
premiums earned because losses occur over the life of a policy. Underwriting
expenses on a statutory basis are stated as a percentage of premiums written
rather than premiums earned because most underwriting expenses are incurred when
policies are written and are not spread over the policy period. The statutory
underwriting profit margin is the extent to which the combined loss and
underwriting expense ratios are less than 100%. The Company's loss ratio,
expense ratio and combined ratio, and the private passenger automobile industry
combined ratio, on a statutory basis, are shown in the following table. The
1992 ratios exclude the effect of the Proposition 103 settlement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company's ratios include lines of insurance other than private
passenger automobile. Since these other lines represent only a small percentage
of premiums written, the Company believes its ratios can be compared to the
industry ratios included in the table.
Year ended December 31,
---------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------- ------- -------
Loss Ratio.......................... 67.8% 68.4% 61.3% 60.8% 69.8%
Expense Ratio....................... 24.0 24.6 24.8 24.2 24.2
---- ---- ---- ---- ----
Combined Ratio...................... 91.8% 93.0% 86.1% 85.0% 94.0%
==== ==== ==== ==== ====
Industry combined ratio (all
writers) (1)...................... 102.3%(2) 101.3% 101.7% 102.0% 104.7%
Industry combined ratio (excluding
direct writers) (1)............... N.A. 102.5% 103.1% 104.9% 107.2%
- - --------------------
6
(1) Source: A.M. Best, Aggregates & Averages (1995), for all property and
casualty insurance companies (private passenger automobile line only, after
policyholder dividends).
(2) Source: A.M. Best, "Best's Review, January 1996," "Review and Preview."
(N.A.) Not available.
Premiums to Surplus Ratio
-------------------------
The following table shows, for the periods indicated, the insurance
companies' statutory ratios of net premiums written to policyholders' surplus.
While there is no statutory requirement applicable to the Company which
establishes a permissible net premium writings to surplus ratio, widely
recognized guidelines established by the National Association of Insurance
Commissioners (NAIC) indicate that this ratio should be no greater than 3 to 1.
Year ended December 31,
-----------------------------------------------
1994 1993 1992 1991 1995
---- ---- ---- ---- ----
(Amounts in thousands, except ratios)
Net premiums written (1)........... $636,590 $550,838 $484,097 $455,685 $467,523
Policyholders' surplus............. $479,114 $411,898 $314,136 $294,374 $236,140
Ratio.............................. 1.3 to 1 1.3 to 1 1.5 to 1 1.6 to 1 2.0 to 1
(1) The 1992 amounts exclude the effect of the Proposition 103 settlement.
Risk-Based Capital Requirements
- - -------------------------------
In December 1993, the NAIC adopted a risk-based capital formula for
casualty insurance companies which establishes recommended minimum capital
requirements for casualty companies. The formula has been designed to capture
the widely varying elements of risks undertaken by writers of different lines of
insurance having differing risk characteristics, as well as writers of similar
lines where differences in risk may be related to corporate structure,
investment policies, reinsurance arrangements and a number of other factors.
Based on the formula adopted by the NAIC, the Company has estimated the Risk-
Based Capital Requirements of each of its insurance subsidiaries as of December
31, 1995. Each of the companies exceeded the highest level of recommended
capital requirements.
Investments and Investment Results
The investments of the Company are made by the Company's Chief Financial
Officer under the supervision of the Company's Board of Directors. The Company
follows an investment policy which is regularly reviewed and revised. The
Company's policy emphasizes investment grade, fixed income securities and
maximization of after-tax yields. The Company does not invest with a view to
achieving realized gains, and does not maintain a trading account. However,
sales of securities are undertaken, with resulting gains or losses, in order to
enhance after-tax yield and keep its portfolio in line with current market
7
conditions. Tax considerations are important in portfolio management, and have
been made more so since 1986 when the alternative minimum tax was imposed on
casualty companies. Changes in loss experience, growth rates and profitability
produce significant changes in the Company's exposure to alternative minimum tax
liability, requiring appropriate shifts in the investment asset mix between
taxable bonds, tax-exempt bonds and equities in order to maximize after-tax
yield. The optimum asset mix is subject to continuous review. At year-end,
approximately 72% of the Company's portfolio, at market values, was invested in
medium to long term, investment grade tax-exempt revenue and municipal bonds.
The average Standard & Poor's rating of the Company's bond holdings was A at
December 31, 1995.
The nominal average maturity of the bond portfolio was 14.0 years at
December 31, 1995, but the call-adjusted average maturity of the portfolio is
shorter, approximately 7.2 years, because holdings are heavily weighted with
high coupon issues which are expected to be called prior to maturity. The
modified duration of the bond portfolio reflecting anticipated early calls was
5.8 years at December 31, 1995. Duration is a measure of how long it takes, on
average, to receive all the cash flows produced by a bond, including
reinvestment of interest. Because of its sensitivity to interest rates, it is a
proxy for a bond's price volatility. The longer the duration, the greater the
price volatility in relation to changes in interest rates.
Holdings of lower than investment grade bonds constitute less than 2% of
total investments. All but $2.7 million of such holdings were downgraded to
their current ratings subsequent to purchase. Equity holdings consist primarily
of perpetual preferred stocks and relatively high yielding electric utility
common stocks on which dividend income is partially tax-sheltered by the 70%
corporate dividend exclusion.
The following table summarizes the investment results of the Company for
the five years ended December 31, 1995.
Year ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Amounts in thousands)
Averaged invested assets (includes
short-term cash investments)(1)....... $827,861 $727,866 $683,874 $649,001 $628,441
Net investment income:
Before income taxes........... 62,964 54,586 54,121 52,994 53,670
After income taxes............ 57,035 49,787 48,223 46,376 46,005
Average annual return on investments:
Before income taxes........... 7.6% 7.5% 7.9% 8.2% 8.5%
After income taxes............ 6.9% 6.8% 7.1% 7.2% 7.3%
Net realized investment gains
(losses) after income taxes........... $ 681 $ (6,485) $ 1,954 $ 3,415 $ 730
Net increase (decrease) in un-
realized gains on all invest-
ments after income taxes......... $ 37,960 $(36,503) $ 556 $ (2,501) $ 20,747
(1) Fixed maturities at cost, equities at market.
8
The following table sets forth the composition of the investment portfolio
of the Company at the dates indicated.
December 31,
-----------------------------------------------------------------
1995 1994 1993
---------------- ---------------- ----------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Amounts in thousands)
Taxable Bonds................... $ 21,518 $ 22,539 $ 18,332 $ 18,128 $ 22,590 $ 24,387
Tax-Exempt State and
Municipal Bonds................ 630,811 663,163 529,592 520,748 455,516 483,022
Sinking Fund Preferred
Stocks......................... 90,080 94,081 108,858 105,421 110,647 117,732
-------- -------- -------- -------- -------- --------
Total Fixed Maturity
Investments.................. 742,409 779,783 656,782 644,297 588,753 625,141
Equity Investments incl.
Perpetual Preferred
Stocks......................... 113,478 114,915 91,726 84,622 85,417 85,598
Short-term Cash Invest-
ments.......................... 28,496 28,496 22,695 22,695 29,741 29,741
-------- -------- -------- -------- -------- --------
Total Investments............... $884,383 $923,194 $771,203 $751,614 $703,911 $740,480
======== ======== ======== ======== ======== ========
At December 31, 1995, the Company had a net unrealized gain on all investments
of $38,811,000 before income taxes.
Competitive Conditions
The property and casualty insurance industry is highly competitive. The
insurance industry consists of a large number of companies, many of which
operate in more than one state, offering automobile, homeowners and commercial
property insurance, as well as insurance coverage in other lines. Many of the
Company's competitors have larger volumes of business and greater financial
resources than the Company. Based on regularly published statistical
compilations concerning insurance company operations, the Company in 1995 was
the seventh largest writer of private passenger automobile insurance in
California. All of the insurance companies having greater shares of the
California market sell insurance either directly or through exclusive agents to
policyholders, rather than through independent agents.
The property and casualty insurance industry is highly cyclical, character-
ized by periods of high premium rates and shortages of underwriting capacity
followed by periods of severe price competition and excess capacity. In the
Company's view, competitive pressures have become more pronounced in the last
several years. The current level of profits makes the market attractive for new
companies, although some of the small companies who entered the California
private passenger automobile market in recent years have already experienced
unsatisfactory results.
Price and reputation for service are the principal means by which the
Company competes with other automobile insurers. The Company believes that it
has a good reputation for service, and it has, historically, been among the
9
lowest-priced insurers doing business in California according to surveys
conducted by the California Department of Insurance. In the most recent survey
conducted in 1995, the Company's rates for most classes of insureds were among
the lowest available in most territories throughout the state. In addition to
good service and competitive pricing, for those insurers dealing through
independent agents, as the Company does, the marketing efforts of agents is a
means of competition.
The current and future competitive climate for private passenger automobile
insurance in California remains uncertain. All rates charged by private
passenger automobile insurers are subject to the prior approval of the
California Insurance Commissioner. Newly proposed revised rating factor
regulations have recently been issued but have not yet been approved, and a bill
has been introduced in the California legislature which would codify the rating
factors currently in effect. See "Underwriting" and "Regulation - Automobile
Insurance Rating Factor Regulations."
Reinsurance
The Company no longer maintains reinsurance for its liability coverages.
Effective January 1, 1994, the Company terminated its liability reinsurance
coverage with Employers Reinsurance Corporation (ERC) because of rising premiums
and underutilization of such coverage. The Company regularly evaluates the need
for liability reinsurance.
The Company maintains property reinsurance under a treaty which was
effective April 1, 1995 with National Reinsurance Corporation, which is rated A+
by A.M. Best & Co. The treaty provides $900,000 coverage in excess of $100,000
for each risk subject to a maximum of $2,700,000 for any one occurrence. A
second layer of coverage provides an additional $1,000,000 in excess of the
first $1,000,000 per risk subject to a maximum of $2,000,000 for any one
occurrence.
Prior to February 1, 1995, ERC provided catastrophe reinsurance for
property and auto physical damage business. Under the treaty, ERC agreed to pay
95% of $9,000,000 in excess of $1,000,000 for any single occurrence and 95% of
$18,000,000 for all occurrences in one calendar year. Effective February 1,
1995, the treaty with ERC was amended to provide coverage for 95% of $7,500,000
in excess of $5,000,000 each occurrence subject to an aggregate limit of 95% of
$15,000,000 for all occurrences. Effective April 1, 1995 this treaty was
replaced with a new catastrophe treaty covering all physical damage and property
lines with several reinsurers arranged through E.W. Blanch Company, a
reinsurance intermediary. The main reinsurers are rated A or better by A.M.
Best. Under the new treaty, the first layer of protection is 95% of $7,500,000
in excess of $10,000,000, for a single occurrence, with a second layer providing
95% of $12,500,000 in excess of $17,500,000.
If the reinsurers were unable to perform their obligations under the
reinsurance treaty, the Company would be required, as primary insurer, to
discharge all obligations to its insureds in their entirety.
10
Regulation
The Company's business in California is subject to regulation and
supervision by the DOI, which has broad regulatory, supervisory and
administrative powers.
The powers of the DOI primarily include the prior approval of insurance
rates and rating factors; the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature of and
limitation of insurers' investments; the issuance of securities by insurers;
periodic examinations of the affairs of insurers; the annual and other reports
required to be filed on the financial condition of such insurers or for other
purposes; and the establishment of reserves required to be maintained for
unearned premiums, losses, and other purposes. The regulation and supervision
by the DOI are designed principally for the benefit of policyholders and not for
insurance company shareholders. The DOI conducts periodic examinations of the
Company's insurance subsidiaries. The DOI recently conducted an examination of
the California insurance subsidiaries as of December 31, 1994. The reports on
the results of that examination have not yet been issued, but the drafts
recently submitted to the Company recommend no adjustments to the statutory
financial statements as filed by the Company.
The Georgia and Illinois insurance subsidiaries are subject to the
regulatory powers of the insurance departments of those two states. Those
powers are similar to the regulatory powers in California enumerated above.
Generally, the regulations relate primarily to standards of solvency and are
designed for the benefit of policyholders and not for insurance company
shareholders. The Georgia DOI recently conducted an examination of Mercury
Insurance Company of Georgia and Mercury Indemnity Company of Georgia as of
December 31, 1994. The reports on that audit have not been issued but the
auditors have indicated there will be no changes recommended to the statutory
financial statements as filed. The DOI of Illinois has just begun an
examination of Mercury Insurance Company of Illinois and Mercury Indemnity
Company of Illinois as of December 31, 1995.
In California, insurance rates have required prior approval since November
1989. Georgia is also a prior approval state, while Illinois only requires that
rates be filed with the Department of Insurance prior to their use. In each
state, the insurance code provides that rates must not be "excessive, inadequate
or unfairly discriminatory."
The operations of the Company are dependent on the laws of the States of
California, Georgia and Illinois, and changes in those laws can materially
affect the revenue and expenses of the Company. The Company retains its own
legislative advocates in California. The Company also makes financial
contributions to officeholders and candidates. In 1995 and 1994, those
contributions amounted to $209,000 and $434,000, respectively. The Company
believes in supporting the political process and intends to continue to make
such contributions in amounts which it determines are appropriate.
11
Insurance Guarantee Association
-------------------------------
In 1969, the California Insurance Guarantee Association (the "Association")
was created pursuant to California law to provide for payment of claims for
which insolvent insurers of most casualty lines are liable but which cannot be
paid out of such insurers' assets. The Company is subject to assessment by the
Association for its pro-rata share of such claims based on premiums written in
the particular line in the year preceding the assessment by insurers writing
that line of insurance in California. Such assessments are based upon estimates
of losses to be incurred in liquidating an insolvent insurer. In a particular
year, the Company cannot be assessed an amount greater than 1% of its premiums
written in the preceding year. The only assessment imposed during the past five
years was an immaterial amount in 1994. Assessments are recouped through a
mandated surcharge to policyholders the year after the assessment. Insurance
subsidiaries in Illinois and Georgia are subject to the provisions of similar
insurance guaranty associations.
Holding Company Act
-------------------
The Company's California subsidiaries are subject to regulation by the DOI
pursuant to the provisions of the California Insurance Holding Company System
Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company
Act, the DOI may examine the affairs of each company at any time. The Holding
Company Act requires disclosure of any material transactions by or among the
companies. Certain transactions defined to be of an "extraordinary" type may
not be effected without the prior approval of the DOI. Such transactions
include, but are not limited to, sales, purchases, exchanges, loans and
extensions of credit, and investments made within the immediately preceding 12
months involving, in the net aggregate, more than the lesser of 5% of the
company's admitted assets or 25% of surplus as to policyholders, as of the
preceding December 31. An extraordinary transaction also includes a dividend
which, together with other dividends or distributions made within the preceding
12 months, exceeds the greater of 10% of the insurance company's policyholders'
surplus as of the preceding December 31 or the insurance company's net income
for the preceding calendar year. An insurance company is also required to
notify the DOI of any dividend after declaration, but prior to payment.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
that controls a California insurance company, such as Mercury General. A person
seeking to acquire "control," directly or indirectly, of the Company must
generally file with the Commissioner an application for change of control
containing certain information required by statute and published regulations and
provide a copy of the application to the Company. The Holding Company Act also
effectively restricts the Company from consummating certain reorganizations or
mergers without prior regulatory approval. The insurance subsidiaries in
Georgia and Illinois are subject to holding company acts in those states, the
provisions of which are substantially similar to those of California.
12
Assigned Risks
--------------
Automobile liability insurers in California are required to sell bodily
injury liability, property damage liability, medical expense and uninsured
motorist coverage to a proportionate number (based on the insurer's share of the
California automobile casualty insurance market) of those drivers applying to
the DOI for placement as "assigned risks." Drivers seek placement as assigned
risks because their driving records or other relevant characteristics make them
difficult to insure in the voluntary market. During the last five years,
approximately 1.2% of the direct automobile insurance premium written was for
assigned risk business. In 1995, assigned risks represented 0.8% of total
automobile direct premiums written and earned. Premium rates for assigned risk
business are set by the DOI. In October, 1990 more stringent rules for gaining
entry into the plan were approved, resulting in a substantial reduction in the
number of assigned risks insured by the Company since 1991. Effective January
1, 1994, the Insurance Code requires that rates established for the Plan be
adequate to support the Plan's losses and expenses. The last rate increase
approved by the Commissioner approximated 4.8% and became effective June 1,
1995.
No-Fault Automobile Insurance Initiative/Legislation
----------------------------------------------------
A proposed No-Fault automobile insurance measure, Proposition 200, has been
qualified and is on the ballot to be voted on in California's primary elections
on March 26, 1996. Entitled the "Pure No-Fault Insurance Act," the measure
would radically change the reparations system for bodily injury, removing most
bodily injury claims from the judiciary/tort system. Instead of requiring
insurance coverage for injuries caused to others as a result of the insured's
negligence or fault, automobile insurers would be required to offer, and all
motor vehicle owners would be required to obtain, a Personal Injury Protection
Policy (PIP) which would cover the bodily injury losses of all occupants of a
vehicle involved in an accident, irrespective of who is at fault for the
accident. The present tort system for dealing with property damage liability
would not be changed.
All automobile insurers would be required to offer PIP coverage ranging
from a minimum of $50,000 to $1,000,000 for each occupant of the insured
vehicle. Insurers, such as the Company, who write over $100 million of
automobile insurance premiums in the state of California would be required to
offer up to $5.0 million of coverage for each occupant of the insured vehicle.
Required benefits would cover all medical and rehabilitation costs, death
benefits up to a maximum of $200,000 and lost wage benefits up to a maximum of
$2500 per month.
All vehicle owners would be required to offer proof of insurance annually
to the Department of Motor Vehicles in order to register or reregister a
vehicle.
The right to sue to recover damages for bodily injury or death would no
longer be allowed, except for accidents caused by drunk drivers or drivers
committing a felony. Unlike damages sought and paid under the tort system,
where the injured person recovers his losses from the insurer of the at-fault
driver and, in addition, is typically compensated for pain and suffering as
well, under the "Pure No-Fault" law, the injured person would recover only his
actual economic losses, including lost wages, from his own insurer under the PIP
13
coverage and would receive no compensation for pain and suffering. Insurers
would, however, be required to offer up to $250,000 of coverage for pain and
suffering resulting from a permanent and serious injury.
While fault would no longer be a factor in determining responsibility for
injuries and losses, a determination of fault would still be required to settle
property damage claims and to classify drivers for the establishment of
appropriate premiums.
The initiative has received little, if any, support from the insurance
industry, and the Company has not supported it. Contrary to the stated
expectation of the Proposition's backers that enactment of the measure would
reduce losses and, therefore, premium rates, the Company is uncertain that such
a reduction in loss costs and rates would materialize. The proposition makes no
provision for a reduction in automobile insurance premium rates.
The opponents have mounted a well-financed media campaign opposing the no-
fault proposition. An earlier no-fault proposition was on the California ballot
in November 1988 and was defeated. No-fault legislation has been frequently
introduced in the California legislature, but all such proposals have met
serious opposition and have been defeated.
If the no-fault initiative passes, and is not nullified by an initiative
planned by the trial lawyers to be on the November 1996 general election ballot,
it would become effective on July 1, 1997. Passage would require substantial
changes in the Company's loss settlement procedures, and the Company cannot
predict the effect such changes would have on future loss experience, rates and
profitability.
Automobile Insurance Rating Factor Regulations
----------------------------------------------
Commencing November 8, 1989, Proposition 103 required that property and
casualty insurance rates must be approved by the Commissioner prior to their
use, and that no rate shall be approved which is excessive, inadequate, unfairly
discriminatory or otherwise in violation of the provisions of the initiative.
The proposition specified three statutory factors required to be applied in
"decreasing order of importance" in determining rates for private passenger
automobile insurance: (1) the insured's driving safety record, (2) the number
of miles the insured drives annually, and (3) the number of years of driving
experience of the insured. The new law also gave the Commissioner discretion to
adopt other factors by regulation that have a substantial relationship to risk
of loss. The new statute further provided that insurers are required to give a
20% discount to "good drivers," as defined, from rates that would otherwise be
charged to such drivers and that no insurer may refuse to insure a "good
driver."
The Company, and most other insurers, historically charged different rates
for residents of different geographical areas within California. The rates for
urban areas, particularly in Los Angeles, have been generally substantially
higher than for suburban and rural areas. The Company's geographical rate
differentials have been derived by actuarial analysis of the claims costs in a
given area.
14
On July 26, 1990, the DOI promulgated interim cost-based rating factor
regulations which are still in effect. These regulations include both the three
mandatory rating factors and a number of optional rating factors that are
applied on a sequentially weighted basis. Pursuant to those regulations, all
writers of private passenger automobile insurance, including the Company, were
required to submit new rating classification plans in October 1990. In October
1990 the Company filed its new rating plan, which was approved on December 21,
1990.
The present Commissioner, who took office in January 1995, conducted
hearings in April 1995 to consider the appropriate methodology and weighting of
the mandated and optional rating factors. In September 1995, he issued for
comment newly proposed rating factor regulations which had the effect of
tempering certain factors, particularly loss experience by territory, thus
narrowing geographical rating differentials. Further hearings were conducted in
December 1995. The Company and other insurers submitted comments and testimony
at those hearings which, in general, argued that the tempering of the weight
given to differences in geographical loss experience would result in rates which
would lead to dislocations in the automobile insurance market-place and would be
unlawfully discriminatory. On March 7, 1996, the Commissioner issued revised
rating factor regulations which are substantially unchanged from those proposed
in September 1995. Following a fifteen day comment period, the regulations will
be submitted to the Office of Administrative law, and, if approved and formally
promulgated, would require the filing by automobile insurers of new rating plans
unless legal action is undertaken to restrain their enforcement. The impact of
the new regulations, if approved, is not determinable at this time.
In the meantime, a bill has been introduced in the California legislature
which would codify the present cost-based rating factor regulations which have
been applied with minimal disruption and dislocation since they were first
promulgated in July 1990.
Under the Company's prior rating plan as well as the new plans approved in
1994 and 1995, the weights applied to the various rating factors conform to
present regulations and are cost-based as determined by the mandated sequential
regression analysis, and are not artificially "tempered." Since this
methodology captures the widely varying loss experience of different areas,
urban, suburban and rural, the historically wide geographical rate differentials
remain substantially unchanged.
Item 2. Properties
----------
The home office of the California insurance subsidiaries and the Company's
computer facilities are located in Brea, California in an 80,000 sq.ft. office
building owned by the Company.
Since December 1986, Mercury General's executive offices are located in a
40,000 sq. ft. office building owned by Mercury Casualty Company. The Company
occupies approximately 95% of the building and leases the remaining office space
to others.
In October 1992, the Company purchased a 158,000 square foot office
building in Brea, California. The Company occupies approximately 37% of the
15
facility and leases the remaining office space to others.
The Company leases most of its other California offices under short-term
leases. Office location is not material to the Company's operations, and the
Company anticipates no difficulty in extending these leases or obtaining
comparable office space.
Item 3. Legal Proceedings
-----------------
The Company is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In most of these actions, plaintiffs
assert claims for punitive damages which are not insurable under California
judicial decisions. The Company vigorously defends these actions, unless a
reasonable settlement appears appropriate. The Company believes that adverse
results, if any, in the actions currently pending should not have a material
effect on the Company's operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders by the Company
during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets certain information concerning the executive
officers of the Company as of March 25, 1996:
Name Age Position
- - ---- --- --------
George Joseph 74 Chairman of the Board and Chief
Executive Officer
Michael D. Curtius 46 President and Chief Operating Officer
Cooper Blanton, Jr. 69 Executive Vice President
Keith L. Parker 68 Vice President and Chief Financial Officer
Bruce E. Norman 47 Vice President in charge of Marketing
Joanna Y. Moore 40 Vice President and Chief Claims Officer
Kenneth G. Kitzmiller 49 Vice President in charge of Underwriting
Donna J. Moore 40 Vice President and Controller
Judy A. Walters 49 Secretary
Mr. Joseph, Chief Executive Officer of the Company and Chairman of its
Board of Directors, has served in those capacities since 1961. Mr. Joseph has
more than 40 years experience in all phases of the property and casualty
insurance business.
Mr. Curtius, President and Chief Operating Officer, has been employed by
the Company since 1977. In October 1987, Mr. Curtius was named Vice President
and Chief Claims Officer, and in August 1991 he was appointed Executive Vice
President. He was elected President and Chief Operating Officer of Mercury
General and its four California insurance company subsidiaries in May 1995. Mr.
Curtius has over 20 years of experience in the insurance industry.
16
Mr. Blanton, Executive Vice President, joined the Company in 1966 and
supervised its underwriting activities from 1967 until September 1995. He was
appointed Executive Vice President of Mercury Casualty and Mercury Insurance in
1983 and was named Executive Vice President of Mercury General in 1985. In May
of 1995 he was named President of the Georgia and Illinois insurance company
subsidiaries. Mr. Blanton has over 30 years of experience in underwriting and
other aspects of the property and casualty insurance business.
Mr. Parker, Vice President and Chief Financial Officer, has been employed
by the Company or its subsidiaries since 1970 and has held his present position
since October 1985. Mr. Parker has over 40 years of investment management
experience and has been primarily responsible for management of the Company's
investment portfolio since 1972.
Mr. Norman, Vice President in charge of Marketing, has been employed by the
Company since 1971. Mr. Norman was named to this position in October 1985, and
has been a Vice President of Mercury Casualty since 1983. Mr. Norman has
supervised the selection and training of agents and managed relations between
agents and the Company since 1977.
Ms. Joanna Moore, Vice President & Chief Claims Officer, joined the Company
in the claims department in March 1981. She was named Vice President of Claims
of Mercury General in August 1991 and has held her present position since July
1995.
Mr. Kitzmiller, Vice President in charge of Underwriting, has been employed
by the Company in the underwriting department since 1972. In August 1991 he
was appointed Vice President of Underwriting of Mercury General and has
supervised the underwriting activities of the Company since early 1996.
Ms. Donna Moore, Vice President and Controller, joined the Company in June
1983 as its Controller. She was appointed Vice President in October 1985. Ms.
Moore has over 15 years of experience in the insurance industry and is a
Certified Public Accountant in the state of California.
Ms. Walters has been employed by the Company since 1967, and has served as
its Secretary since 1982.
17
PART II
Item 5. Market for the Registrant's Common Equity and Related Security Holder
---------------------------------------------------------------------
Matters
-------
Price Range of Common Stock
The following table shows the price range per share in each quarter as
reported on the Nasdaq National Market. These quotations do not include
adjustments for retail mark-ups, mark-downs or commissions.
1994 High Low
------- -------
1st Quarter......................... $31.500 $26.750
2nd Quarter......................... $30.750 $25.500
3rd Quarter......................... $30.000 $26.750
4th Quarter......................... $30.500 $27.000
1995 High Low
------- -------
1st Quarter......................... $34.250 $28.250
2nd Quarter......................... $35.000 $28.750
3rd Quarter......................... $39.000 $31.750
4th Quarter......................... $49.750 $37.750
1996
1st Quarter (January 1 - March 22).. $52.000 $41.625
Dividends
Following the public offering of its Common Stock in November 1985, the
Company has paid regular quarterly dividends on its common stock. On February
2, 1996, the Directors declared a $0.24 quarterly dividend ($.96 annually)
payable on March 28, 1996 to stockholders of record on March 15, 1996. The
dividend rate has been increased twelve times since dividends were initiated in
January, 1986, at an annual rate of $0.10, adjusted for the two-for-one stock
split in September 1992. For financial statement purposes, the Company records
dividends on the declaration date. The Company expects to continue the payment
of quarterly dividends. The continued payment and amount of cash dividends will
depend upon, among other factors, the Company's operating results, overall
financial condition, capital requirements and general business conditions.
As a holding company, Mercury General is largely dependent upon dividends
from its subsidiaries to pay dividends to its shareholders. These subsidiaries
are subject to state laws that restrict their ability to distribute dividends.
California law permits a casualty insurance company to pay dividends and
advances within any 12-month period, without any prior regulatory approval, in
an amount up to the greater of ten percent of statutory surplus at the preceding
December 31 or net income for the calendar year preceding the date the dividend
is paid. Under this test, Mercury Casualty and California Automobile Insurance
Company,
18
the direct California insurance subsidiaries of the Company, are entitled to pay
dividends to Mercury General during 1996 of up to approximately $50.9 million.
See Note 8 of Notes to Consolidated Financial Statements and "Business --
Regulation -- Holding Company Act."
Shareholders of Record
The approximate number of holders of record of the Company's Common Stock
as of March 1, 1996 was 218. The approximate number of beneficial holders as of
March 21, 1996 was 4,618 according to U.S. Stock Transfer Corporation, the
Company's transfer agent.
19
Item 6. Selected Consolidated Financial Data
------------------------------------
Year ended December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
-------- --------- -------- -------- ---------
(Amounts in thousands, except per share data)
Income Data:
Premiums earned.......................... $616,326 $529,390 $474,093 $455,508 $473,532
Net investment income.................... 62,964 54,586 54,121 52,994 53,670
Premium finance fees..................... 1,840 1,947 1,828 1,438 1,138
Realized investment gains(losses)........ 1,048 (9,853) 3,006 5,174 1,106
Other.................................... 1,501 1,176 716 168 49
-------- -------- -------- -------- --------
Total Revenues.................... 683,679 577,246 533,764 515,282 529,495
-------- -------- -------- -------- --------
Losses and loss adjustment
expenses............................... 416,556 360,557 289,208 276,088 328,615
Policy acquisition costs................. 128,743 112,682 99,738 94,672 98,943
Other operating expenses................. 22,017 20,566 18,564 16,688 16,046
Impact of rate refund.................... -- -- -- 18,621 2,102
Interest................................. 2,040 1,025 793 1,192 1,577
-------- -------- -------- -------- --------
Total Expenses.................... 569,356 494,830 408,303 407,261 447,283
-------- -------- -------- -------- --------
Income before income taxes............... 114,323 82,416 125,461 108,021 82,212
Income taxes............................. 24,022 16,121 29,252 24,695 16,719
-------- -------- -------- -------- --------
Net Income........................ $ 90,301 $ 66,295 $ 96,209 $ 83,326 $ 65,493
======== ======== ======== ======== ========
Per Share Data:
Net income per share..................... $ 3.31 $ 2.43 $ 3.52 $ 3.06 $ 2.42
======== ======== ======== ======== ========
Dividends paid $ .80 $ .70 $ .60 $ .50 $ .40
======== ======== ======== ======== ========
December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
Balance Sheet Data:
Total investments........................ $ 923,194 $751,614 $740,480 $661,672 $640,981
Premiums receivable...................... 58,902 48,741 38,227 35,454 37,649
Total assets............................. 1,081,656 911,693 863,962 775,402 765,867
Unpaid losses and loss adjust-
ment expenses........................... 253,546 227,499 215,301 240,183 280,933
Unearned premiums........................ 168,404 148,654 128,828 117,524 117,417
Notes payable............................ 25,000 25,000 15,000 15,000 16,500
Deferred income tax liability
(asset)................................ 10,158 (10,190) 8,758 466 (13,969)
Shareholders' equity..................... 565,188 457,161 450,275 353,704 277,209
Book value per share..................... 20.67 16.75 16.44 12.95 10.20
__________________
20
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
- - --------
The operating results of property and casualty insurance companies are
subject to significant fluctuations from quarter-to-quarter and from year-to-
year due to the effect of competition on pricing, the frequency and severity of
losses, including the effect of natural disasters on losses, general economic
conditions, the general regulatory environment in those states in which an
insurer operates, state regulation of premium rates and other factors such as
changes in tax laws. The property and casualty industry has been highly
cyclical, with periods of high premium rates and shortages of underwriting
capacity followed by periods of severe price competition and excess capacity.
The Company did business only in the state of California until 1990, when
it began operations in Georgia and Illinois. During 1995, approximately 98% of
its direct premiums written were in California. Since November 1988, the
Company's California insurance operations have been subject to the provisions of
Proposition 103, a state-wide initiative passed by the California voters. The
provision of Proposition 103 that has the most significant current impact on the
Company is a requirement that no rate may be used by a property and casualty
insurer in California after November 8, 1989 that has not been approved by the
California Insurance Commissioner (the "Commissioner").
In February 1994, the Commissioner approved new rates which were designed
to improve the Company's competitive position for new insureds. These rate
changes, which became effective on May 1, 1994, provided for decreases in
premium rates for insureds new to the Company or its agents. Further rate
modifications were approved and made effective on October 15, 1995. The 1994
and 1995 rate changes have resulted in a substantial increase in new business
being submitted to the Company. Automobile policies in force in California have
increased by approximately 87,000 to 391,898 since the new rates were first
established, an annual rate of increase of over 18%, compared with an annualized
growth rate of 9.1% over the prior eighteen month period. Net premiums written
since July 1, 1994 have increased at a compounded rate of 15.6%, compared with
average annual premium growth of 3.7% over the preceding five and one-half years
following passage of Proposition 103 in 1988.
Results of Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
---------------------------------------------------------------------
Premiums earned in 1995 increased 16.4%, primarily reflecting unit growth.
Average premium per policy for the year was substantially unchanged. Net
premiums written in 1995 increased 15.6% over a year earlier, continuing a
growth trend which began in the second quarter of 1993.
The loss ratio in 1995 (loss and loss adjustment expenses related to
premiums earned) was 67.6%, compared with 68.1% in 1994. In contrast to the
previous several years, the 1995 and 1994 loss ratios reflect smaller
contributions from favorable loss reserve development from prior periods.
21
The expense ratio (policy acquisition costs and other operating expenses
related to premiums earned) was 24.4%, compared with 25.2% in 1994. The
improvement reflects both economies related to greater premium volume and
smaller provisions for agent and employee incentive bonuses in 1995.
Total losses and expenses, excluding interest expense of $2.0 million, were
$567.4 million, resulting in an underwriting gain for the period of $49.0
million, compared with an underwriting gain of $35.6 million in 1994.
Investment income in 1995 was $63.0 million, compared with $54.6 million in
1994. The after-tax yield on average investments of $827.9 million (fixed
maturities at cost, equities at market) was 6.89%, compared with 6.84% on
average investments of $727.9 million in 1994. The effective tax rate on
investment income was 9.4% in 1995, compared with 8.8% in 1994. The slightly
higher tax rate reflects an increase in the proportion of investment income
derived from dividend income on equities, principally perpetual preferred
stocks, compared to tax-exempt income. The maintenance of above-average yields
during a period of declining interest rates is, in part, the result of the bond
restructuring program undertaken in 1994 when bonds acquired in lower interest
rate environments were sold with proceeds reinvested at significantly higher
rates. The redemption of bonds acquired during higher interest periods has been
a negative influence on realized yields which will continue in 1996 and 1997.
Bonds matured and called in 1995 totaled $71.0 million, compared with $53.4
million in 1994, and approximately $83.1 million of calls and maturities are
expected in 1996. Average yields being obtained during the first quarter of
1996 on new investments are some 50-75 basis points lower than the average 1995
portfolio yield.
Realized investment gains in 1995 were $1.0 million, compared with realized
losses of $9.9 million in 1994. The 1994 losses reflect principally yield-
enhancing swaps of both fixed maturities and equity securities, including
perpetual preferred stocks, undertaken to recapture capital gains taxes paid in
prior years. The 1995 gains arose in part from the early redemption of fixed-
maturity investments.
The income tax provision of $24.0 million in 1995 represented an effective
tax rate of 21.0%, compared with an effective rate of 19.6%, in 1994. The
increase in the rate is attributable principally to the realization of capital
gains in 1995, in contrast to the realization of losses in 1994.
Net income in 1995 was $90.3 million, or $3.31 per share, compared with
$66.3 million, or $2.43 per share, in 1994. Per share results are based on 27.3
million average shares in both years.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
---------------------------------------------------------------------
Premiums earned in 1994 increased 11.7%, reflecting unit growth. Average
premium per policy was substantially unchanged by the May 1, 1994 rate
revisions. Direct premiums written in the first half of 1994 increased 10.7%
over a year earlier, continuing the growth trend which began in the second
quarter of 1993. During the last half of 1994, this increase accelerated to
14.1% over the prior year as a result of the May 1, 1994 rate revisions.
22
The loss ratio in 1994 was 68.1%, compared with 61.0% in 1993. The higher
loss ratio in 1994 reflects a much smaller contribution from favorable loss
reserve development from prior periods and a reduction in the estimate of
salvage and subrogation recoverable for prior accident years. The major
earthquake which struck Southern California on January 17, 1994 resulted in net
loss claims, after reinsurance recoveries, of approximately $1.2 million, which
added less than 0.25% to the 1994 loss ratio. Earthquake losses were immaterial
as the Company writes only a small amount of homeowners' insurance.
Approximately one half of the net earthquake losses incurred were related to the
Company's principal line, automobile insurance, while the other half was related
to the homeowners' line.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) was 25.2%, compared with 25.0% in 1993.
Total losses and expenses, excluding interest expense of $1,025,000, were
$493.8 million, resulting in an underwriting gain for the period of $35.6
million, compared with an underwriting gain of $66.6 million in 1993.
Investment income in 1994 was $54.6 million, compared with $54.1 million in
1993. The after-tax yield on average investments of $727.9 million (fixed
maturities at cost, equities at market) was 6.84%, compared with 7.05% on
average investments of $683.9 million in 1993. The effective tax rate on
investment income was 8.8% in 1994, compared with 10.9% in 1993, reflecting an
increase in the proportion of tax-exempt interest income. The decline in
realized investment yields reflects principally the redemption and maturity of
bonds and preferred stocks acquired in higher interest rate environments.
Realized investment losses in 1994 were $9.9 million, compared with
realized gains of $3.0 million in 1993. The losses reflect principally yield-
enhancing swaps of both fixed maturities and equity securities, including
perpetual preferred stocks. The 1993 gains arose in significant part from the
redemption of fixed-maturity investments. The realized capital losses were
undertaken to recapture capital gains taxes paid in prior years.
The income tax provision of $16.1 million in 1994 represented an effective
tax rate of 19.6%, compared with an effective rate of 23.3%, in 1993. The
decrease in the rate is attributable principally to the decrease in fully
taxable underwriting income, and the resulting higher proportion of tax exempt
investment income.
Net income in 1994 was $66.3 million, or $2.43 per share, compared with
$96.2 million, or $3.52 per share, in 1993. Per share results are based on 27.3
million average shares in 1994 and 27.4 million average shares in 1993.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
---------------------------------------------------------------------
Premiums earned in 1993 increased 4.1%. The year-to-year increase in the
final quarter was 8.4%, following sequential quarterly increases (decreases) of
(0.4%), 2.7% and 5.7%. Premiums written in 1993 increased 6.2%, with the
quarterly pattern increasing sequentially throughout the year. This improvement
largely reflects new business submitted by newly appointed agents who had
previously represented other insurers which had withdrawn from the California
23
market. Premium rates were unchanged from a year earlier.
The loss ratio in 1993 was 61.0%, compared with 60.6% in 1992. The 1992
ratio was computed without adjustment for the impact of the Proposition 103 rate
refund provision. The historically low loss ratios in both years reflect,
principally, the seasoned characteristics of the Company's existing book of
business and the continued favorable loss severity trends in the automobile
bodily injury line in California. Reduced exposure to unprofitable assigned
risk business contributed to the improvement, as did continued favorable loss
reserve development. The more competitive rates which will apply to new
business effective on May 1, 1994 are expected to produce an increase in the
proportion of new, unseasoned risks insured by the Company. Loss experience on
new business is characteristically less favorable than that of seasoned
business.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) was 25.0% in 1993, compared with 24.5% in 1992. The expense
ratio has remained at or below 25% in each of the last five years.
Total losses and expenses, excluding interest expense of $793,000, were
$407.5 million, resulting in an underwriting gain for the year of $66.6 million,
or 14.0% of premiums earned, compared with an underwriting gain of $68.1 million
in 1992, or 14.9% of premiums earned in 1992. The latter result excludes a
provision of $18.6 million for rate refunds relating to the Proposition 103 rate
rollback mandate. The rollback issue was resolved in May 1992 by a negotiated
settlement reached with the California Department of Insurance (DOI). Refunds
were completed in August 1992, fully extinguishing the Company's Proposition 103
rollback liability.
Net investment income in 1993 was $54.1 million, compared with $53.0
million in 1992. Average invested assets in 1993 (fixed maturities at
cost/equities at market) were $683.9 million, a year-to-year increase of 5.4%.
Reflecting the declining trends in interest rates in 1993, the average pre-tax
yield for the period was 7.9% in 1993 and 8.2% in 1992. The effective tax rate
on investment income was 10.9% in 1993 and 12.5% in 1992. The year-to-year
decrease of approximately 25 basis points in the overall portfolio yield was
significantly related to the maturity and call of approximately $134.4 million
of relatively high coupon fixed maturity investments acquired in prior higher
interest rate environments.
Realized investment gains were $3.0 million in 1993 and $5.2 million in
1992. The 1993 gains arose in significant part from calls of fixed-maturity
investments. Sales of equity securities in 1993, particularly in the fourth
quarter, produced losses of $1.7 million, partially offsetting the taxable gains
generated by the early call of fixed maturity investments.
Income before taxes was $125.5 million, compared with $108.0 million in
1992. The provision for final settlement of the Proposition 103 refund
obligation in 1992 reduced income before income taxes by $18.6 million.
The income tax provision in 1993 was $29.3 million, an effective tax rate
of 23.3%, compared with a tax provision of $24.7 million, an effective rate of
22.9%, in the corresponding 1992 period. Excluding the impact of the rate
refund
24
in 1992, the effective tax rate in 1992 was 24.5%. The effective tax rate is
lower than the statutory corporate rate, 35% in 1993 and 34% in 1992, because a
substantial part of net investment income is derived from tax-exempt bonds and
dividends entitled to the corporate dividend exclusion. Except for the increase
in the corporate statutory tax rate to 35% from 34%, effective as of January 1,
1993, the impact of the Omnibus Tax Reconciliation Act of 1993 was
insignificant.
Net income in 1993 was $96.2 million, or $3.52 per share, compared with
$83.3 million, or $3.06 per share, in 1992. Per share results are based on 27.4
million average shares in 1993 and 27.2 million shares in 1992. The provision
for final settlement of rate refunds in the 1992 period reduced net income by
$12.3 million, or $.45 per share.
Liquidity and Capital Resources
Net cash provided from operating activities in 1995 was $136.6 million,
while funds derived from the sale, redemption or maturity of investments was
$484.5 million, of which approximately 75% was represented by the sale of equity
securities. The amortized cost of fixed-maturity investments increased by $85.6
million during the year. Equity investments, including perpetual preferred
stocks, increased by $21.8 million at cost, and short-term cash investments
increased by $5.8 million. The amortized cost of fixed-maturities available for
sale that were sold, called or matured during the year was $118.8 million.
The market value of all investments (fixed-maturities and equity
securities) held at market as "Available for Sale" exceeded the amortized cost
of $855.9 million at December 31, 1995 by $38.8 million. That unrealized gain,
reflected in shareholders' equity net of applicable tax effects, was $25.2
million at December 31, 1995 compared with an unrealized loss of $12.7 million
at December 31, 1994. The increase in market values since December 31, 1994
reflects principally the substantial decline in intermediate and long term
interest rates which occurred during the period.
The Company's cash and short term investments totaled $31.4 million at
December 31, 1995. Together with funds generated internally, such liquid assets
are more than adequate to pay claims without the sale of investments.
Traditionally, it has been the Company's policy not to invest in high yield
or "junk" bonds. In 1995, the Company adopted a policy to place a small
proportion of its investments in the taxable sector in bonds rated lower than
investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's.
At December 31, 1995 bond holdings rated below investment grade totaled $16.4
million at market (cost $16.0 million), or 1.8% of total investments. All but
$2.7 million of such holdings were downgraded to their current ratings
subsequent to purchase. The average rating of the $652 million bond portfolio
(at amortized cost) was A, while the average effective maturity, giving effect
to anticipated early call, approximates 7.2 years. The modified duration of the
bond portfolio at year-end was 5.8 years, reflecting the heavy weighting of high
coupon issues, including housing issues subject to sinking funds and other
issues which are pre-refunded or are expected to be called prior to their
maturities. Duration measures the length of time it takes to receive all the
cash flows produced by a bond, including reinvestment of interest. Because it
measures four factors
25
(maturity, coupon rate, yield and call terms) which determine sensitivity to
changes in interest rates, modified duration is a much better indicator of price
volatility than simple maturity alone. Bond holdings are broadly diversified
geographically, and, within the tax-exempt sector, consist largely of high
coupon revenue 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.
The Company holds no direct obligations of Orange County, California, which
has filed for protection under the bankruptcy laws. The Company does, however,
hold $8.8 million principal amount of bonds issued by entities within Orange
County, some of which may be affected by losses arising from participation in
the Orange County investment pool. Exclusive of those bonds that have been
either insured or pre-refunded with U.S. Treasuries, the Company's total
holdings of issues affected by investments in the Orange County pool
approximates $7.7 million based on market value at December 31, 1995. The
Company has reviewed those holdings and believes that it will incur no losses as
a result of the Orange County bankruptcy filing.
Holdings in the taxable sector consist principally of senior public utility
issues. Fixed-maturity investments of $742.4 million (at amortized cost)
include $90.1 million of sinking fund preferreds, principally utility issues.
Included in the sinking fund preferred holdings are two investment grade utility
issues which are held in trust and structured as "inverse floaters," dividends
on which vary inversely to short term interest rates. The aggregate market
value and cost of those holdings was $4.4 million and $4.2 million,
respectively, at December 31, 1995. The year-end yield at market on those
holdings approximated 8.8%. The only other securities which may be considered
derivatives are a small amount of adjustable rate preferred stocks.
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 $114.9 million at market (cost $113.5 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 20.3% of total shareholders' equity.
The only significant debt of the Company at December 31, 1995, was a three
year revolving credit agreement covering two bank loans totalling $25,000,000
dated December 20, 1994. The proceeds of the loans were used to repay a prior
$15,000,000 loan, and to contribute $10,000,000 to the Company's insurance
subsidiaries. The agreement renews annually, at which time it may be extended
for an additional year to maintain the three year maturity date. The interest
cost of the loans is variable and related to LIBOR (London Interbank Rate).
Based on the rate effective March 19 through September 16, 1996, the net
interest cost of the loans approximates 6.09%. The Company expects that the
revolving loans will be renewed and extended to 1998 with no difficulty. The
loans may be repaid in whole or in part with no penalty. The source of any
repayments are expected to be derived from dividends from the Company's
insurance subsidiaries or other external financing.
26
In March 1994, the Company's Employee Stock Ownership Plan (the Plan)
purchased 161,000 shares of Mercury's common stock in the open market at a price
of $29.75 per share. The purchases were funded by a $5.0 million bank loan to
the Plan which is guaranteed by the Company. The shares are being allocated to
employees over a five year period, with the initial allocation made in December
1994, and the debt is being retired by Company contributions to the Plan over
the same time period. Since dividends on unallocated shares held by the Plan
are tax deductible if they are used for debt service, as are Company
contributions to the Plan, the net, after-tax interest cost to the Company for
the borrowed funds used for the Plan stock purchase is less than the nominal
6.98% fixed rate of interest on the loan.
In December 1993, the NAIC adopted a risk-based capital formula for
casualty insurance companies which establishes recommended minimum capital
requirements for casualty companies. The formula has been designed to capture
the widely varying elements of risks undertaken by writers of different lines of
insurance having differing risk characteristics, as well as writers of similar
lines where differences in risk may be related to corporate structure,
investment policies, reinsurance arrangements and a number of other factors.
The Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 1995. Each of the companies'
policyholders' surplus exceeded the highest level of recommended capital
requirements.
As of December 31, 1995, the Company had no 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 $479.1 million at December 31, 1995, and net
written premiums for the twelve months ended on that date of $636.6 million, the
ratio of writings to surplus was approximately 1.3 to 1.
Supplementary Data
Summarized quarterly financial data for 1995 and 1994 is as follows (in
thousands except per share data):
Quarter Ended
--------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
1995
- - ----
Earned premiums................................ $144,676 $151,732 $157,179 $162,739
Income before income taxes .................... $ 22,449 $ 28,679 $ 32,305 $ 30,890
Net income..................................... $ 18,500 $ 22,407 $ 25,157 $ 24,237
Earnings per share............................. $ .68 $ .82 $ .92 $ .89
Dividends declared per share................... $ .20 $ .20 $ .20 $ .20
1994
- - ----
Earned premiums................................ $126,918 $127,635 $134,022 $140,815
Income before income taxes..................... $ 22,043 $ 21,420 $ 20,432 $ 18,521
Net income..................................... $ 17,766 $ 17,366 $ 16,272 $ 14,891
Earnings per share............................. $ .65 $ .64 $ .60 $ .55
Dividends declared per share................... $ .175 $ .175 $ .175 $ .175
27
Item 8. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report........................................... 29
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1994...... 30
Consolidated Statements of Income for Each of the Years in the
Three-Year Period Ended December 31, 1995........................ 31
Consolidated Statements of Shareholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1995........... 32
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1995.................... 33
Notes to Consolidated Financial Statements........................ 35
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mercury General Corporation:
We have audited the accompanying consolidated balance sheets of
Mercury General Corporation and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Mercury General Corporation and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 22, 1996
29
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
AMOUNTS EXPRESSED IN THOUSANDS, except share amounts
A S S E T S
1995 1994
---------- --------
Investments:
Fixed maturities available for sale (amortized cost
$742,409 in 1995 and $656,782 in 1994).......................... $ 779,783 $644,297
Equity securities available for sale (cost $113,478 in
1995 and $91,726 in 1994)....................................... 114,915 84,622
Short-term cash investments, at cost, which approxi-
mates market.................................................... 28,496 22,695
---------- --------
Total investments............................................. 923,194 751,614
Cash.............................................................. 2,872 3,344
Receivables:
Premiums receivable.............................................. 58,902 48,741
Premium notes.................................................... 11,728 11,562
Accrued investment income........................................ 15,870 14,642
Other............................................................ 6,108 7,795
---------- --------
92,608 82,740
Deferred policy acquisition costs................................. 33,809 30,068
Fixed assets, net................................................. 27,464 27,579
Current income taxes.............................................. -- 4,699
Deferred income taxes............................................. -- 10,190
Other assets...................................................... 1,709 1,459
---------- --------
$1,081,656 $911,693
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses............................... $ 253,546 $227,499
Unearned premiums................................................. 168,404 148,654
Notes payable..................................................... 25,000 25,000
Loss drafts payable............................................... 20,071 17,779
Accounts payable and accrued expenses............................. 25,412 21,925
Current income taxes.............................................. 388 --
Deferred income taxes............................................. 10,158 --
Other liabilities................................................. 13,489 13,675
---------- --------
Total liabilities............................................. 516,468 454,532
---------- --------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 30,000,000 shares; issued and outstanding
27,442,675 shares in 1995 and 27,415,275 in 1994............... 40,895 40,250
Net unrealized investment gains (losses)......................... 25,227 (12,733)
Unearned ESOP compensation....................................... (3,084) (4,042)
Retained earnings................................................ 502,150 433,686
---------- --------
Total shareholders' equity.................................... 565,188 457,161
---------- --------
Commitments and contingencies.................................... $1,081,656 $911,693
========== ========
See accompanying notes to consolidated financial statements.
30
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three years ended December 31, 1995
Amounts expressed in thousands, except per share data
1995 1994 1993
-------- -------- --------
Revenues:
Earned premiums.......................................... $616,326 $529,390 $474,093
Net investment income ................................... 62,964 54,586 54,121
Premium finance fees..................................... 1,840 1,947 1,828
Net realized investment gains (losses)(note 2) 1,048 (9,853) 3,006
Other.................................................... 1,501 1,176 716
-------- -------- --------
Total revenues.......................................... 683,679 577,246 533,764
-------- -------- --------
Expenses:
Losses and loss adjustment expenses...................... 416,556 360,557 289,208
Policy acquisition costs ................................ 128,743 112,682 99,738
Other operating expenses................................. 22,017 20,566 18,564
Interest................................................. 2,040 1,025 793
-------- -------- --------
Total expenses.......................................... 569,356 494,830 408,303
-------- -------- --------
Income before income taxes............................... 114,323 82,416 125,461
Income taxes ............................................. 24,022 16,121 29,252
-------- -------- --------
Net income............................................... $ 90,301 $ 66,295 $ 96,209
======== ======== ========
Earnings per share ....................................... $ 3.31 $ 2.43 $ 3.52
======== ======== ========
See accompanying notes to consolidated financial statements.
31
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three years ended December 31, 1995
Amounts expressed in thousands
1995 1994 1993
-------- -------- --------
Common stock, beginning of year................................................ $ 40,250 $ 40,014 $ 39,389
Proceeds of stock options exercised............................................ 384 206 436
Tax benefit on sales of incentive stock
options....................................................................... 74 69 189
Release of common stock by the ESOP............................................ 187 (39) --
-------- -------- --------
Common stock, end of year...................................................... 40,895 40,250 40,014
-------- -------- --------
Net unrealized investment gains (losses) on
securities, beginning of year................................................. (12,733) 23,770 7,610
Net increase (decrease) in unrealized invest-
ment gains (losses) on securities............................................. 37,960 (36,503) 16,160
-------- -------- --------
Net unrealized investment gains (losses) on
securities, end of year....................................................... 25,227 (12,733) 23,770
-------- -------- --------
Unearned ESOP compensation relating to common
stock purchases by ESOP....................................................... (4,042) (5,000) --
Amortization of unearned ESOP compensation..................................... 958 958 --
-------- -------- --------
Unearned ESOP compensation, end of year........................................ (3,084) (4,042) --
-------- -------- --------
Retained earnings, beginning of year........................................... 433,686 386,491 306,705
Net income..................................................................... 90,301 66,295 96,209
Dividends paid to shareholders................................................. (21,837) (19,100) (16,423)
-------- -------- --------
Retained earnings, end of year................................................. 502,150 433,686 386,491
-------- -------- --------
Total shareholders' equity................................................... $565,188 $457,161 $450,275
======== ======== ========
See accompanying notes to consolidated financial statements.
32
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1995
Amounts expressed in thousands
1995 1994 1993
--------- --------- ---------
Cash flows from operating activities:
Net income $ 90,301 $ 66,295 $ 96,209
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase (decrease) in unpaid losses and loss
adjustment expenses 26,047 12,198 (24,882)
Increase in unearned premiums 19,750 19,826 11,304
Increase in premium notes receivable (166) (1,618) (778)
Increase in premiums receivable (10,161) (10,514) (2,773)
Increase in deferred policy acquisition costs (3,741) (4,345) (2,763)
Increase (decrease) in loss drafts payable 2,292 3,018 (3,661)
Increase (decrease) in accrued income taxes,
excluding deferred tax on change in unrealized
gain 4,995 (3,260) (5,664)
Increase (decrease) in accounts payable and accrued
expenses 3,487 (2,698) 5,001
Depreciation 3,736 3,486 2,661
Net realized investment (gains) losses (1,048) 9,853 (3,006)
Bond amortization (accretion), net (103) 1,466 3,052
Other, net 1,169 (1,523) (1,940)
--------- --------- ---------
Net cash provided from operating activities 136,558 92,184 72,760
Cash flows from investing activities:
Fixed maturities, at amortized cost:
Purchases -- -- (19,201)
Transfer from fixed maturities available for sale -- -- (2,238)
Sales -- -- 740
Calls or maturities -- -- 101,355
Transfer to fixed maturities, available for sale -- -- 281,937
Fixed maturities available for sale:
Purchases (204,360) (239,193) (146,233)
Transfer from fixed maturities, at amortized cost -- -- (281,937)
Sales 47,824 111,773 23,664
Calls or maturities 70,954 53,351 37,393
Transfer to fixed maturities, at amortized cost -- -- 2,238
Equity securities available for sale:
Purchases (386,343) (120,537) (308,127)
Sales 365,696 108,949 269,457
Decrease (increase) in short-term cash investments,
net (5,801) 7,046 (12,863)
Purchase of fixed assets (4,115) (3,711) (7,139)
Sale of fixed assets 494 268 434
--------- --------- ---------
Net cash used in investing activities $(115,651) $ (82,054) $ (60,520)
(Continued)
33
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
1995 1994 1993
--------- --------- ---------
Cash flows from financing activities:
Additions to notes payable $ -- $ 25,000 $ --
Principal payments on notes payable -- (15,000) --
Dividends paid to shareholders (21,837) (19,100) (16,423)
Proceeds from stock options exercised 458 275 625
--------- --------- ---------
Net cash used in financing activities (21,379) (8,825) (15,798)
--------- --------- ---------
Net increase (decrease) in cash (472) 1,305 (3,558)
Cash:
Beginning of the year 3,344 2,039 5,597
--------- --------- ---------
End of the year $ 2,872 $ 3,344 $ 2,039
========= ========= =========
See accompanying notes to consolidated financial statements.
34
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
(1) Significant Accounting Policies
Principles of Consolidation and Presentation
The Company is primarily engaged in the underwriting of private
passenger automobile insurance in the state of California.
The consolidated financial statements include the accounts of Mercury
General Corporation (the Company) and its wholly-owned subsidiaries, Mercury
Casualty Company, Mercury Insurance Company, California Automobile Insurance
Company, California General Underwriters Insurance Company, Inc., Mercury
Insurance Company of Georgia, Mercury Insurance Company of Illinois, Mercury
Indemnity Company of Georgia and Mercury Indemnity Company of Illinois.
Collectively, the subsidiaries are referred to as the Insurance Companies. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) which differ in some respects
from those filed in reports to insurance regulatory authorities. All
significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Investments
The Company adopted Statement of Financial Accounting Standards No.
115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities" on December 31, 1993. The Company transferred all $281,937,000 of
Fixed Maturities, at amortized cost on that date to Fixed Maturities Available
for Sale. Fixed maturities available for sale include those securities that
management intends to hold for indefinite periods, but which may be sold in
response to changes in interest rates, tax planning considerations or other
aspects of asset/liability management. Short-term investments are carried at
cost, which approximates market. Investments in equity securities, which
include common stocks and non-redeemable preferred stocks, are carried at
market.
35
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(1) Significant Accounting Policies (Continued)
In most cases, the market valuations were drawn from standard trade
data sources. In no case were any valuations made by the Company's management.
Equity holdings, including non sinking fund preferred stocks, are, with minor
exceptions, actively traded on national exchanges, and were valued at the last
transaction price.
Temporary unrealized investment gains and losses on securities
available for sale are credited or charged directly to shareholders' equity, net
of applicable tax effects. When a decline in value of fixed maturities or
equity securities is considered other than temporary, a loss is recognized in
the consolidated statement of income. Realized gains and losses are included in
the consolidated statements of income based upon the specific identification
method.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments", and Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments", require disclosure of estimated fair
value information about financial instruments, for which it is practicable to
estimate that value. Under SFAS No. 115, the Company categorizes all of its
investments in debt and equity securities as available for sale. Accordingly,
all investments, including cash and short term cash investments, are carried on
the balance sheet at their fair value. The carrying amounts and fair values for
investment securities are disclosed in Note 2 and were drawn from standard trade
data sources such as market and broker quotes. The estimated fair value of
notes payable equals their carrying value, which was based on borrowing rates
currently available to the Company for bank loans with similar terms and
maturities. The terms of the notes are discussed in Note 5.
Premium Income Recognition
Insurance premiums are recognized as income ratably over the term of
the policies. Unearned premiums are computed on the monthly pro rata basis.
The liability is stated gross of reinsurance deductions, with the reinsurance
deduction recorded in other assets.
Net premiums written during 1995, 1994 and 1993 were $636,590,000,
$550,838,000 and $484,097,000, respectively.
One agent produced direct premiums written of approximately 15%, 13%
and 12% of the Company's total direct premiums written during 1995, 1994 and
1993, respectively.
36
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(1) Significant Accounting Policies (Continued)
Premium Notes and Premium Finance Fees
Premium notes receivable represent the balance due to the Company from
policyholders who elect to finance their premiums over the policy term. The
Company requires both a downpayment and monthly payments as part of its
financing program. Premium finance fees are charged to policyholders who elect
to finance premiums. The fees are charged at rates that vary with the amount
of premium financed. Premium finance fees are recognized over the term of the
premium note based upon the effective yield.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, which consist of
commissions, premium taxes and certain other underwriting costs, which vary
directly with and are directly related to, the production of business, are
deferred and amortized to income ratably over the terms of the policies.
Deferred acquisition costs are limited to the amount which will remain after
deducting from unearned premiums and anticipated investment income, the
estimated losses and loss adjustment expenses and the servicing costs that will
be incurred as the premiums are earned.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses is based upon
the accumulation of individual case estimates for losses reported prior to the
close of the accounting period, plus estimates, based upon past experience, of
ultimate developed costs which may differ from case estimates and of unreported
claims. The liability is stated net of anticipated salvage and subrogation
recoveries. The amount of reinsurance recoverable is included in other
receivables. Management believes that the liability for losses and loss
adjustment expenses is adequate to cover the ultimate net cost of losses and
loss adjustment expenses incurred to date. Since the provisions are necessarily
based upon estimates, the ultimate liability may be more or less than such
provisions.
Depreciation
Buildings and furniture and equipment are depreciated over 30-year and
5-year to 10-year periods, respectively, on a combination of straight-line and
accelerated methods. Automobiles are depreciated over 5 years, using an
accelerated method.
37
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(1) Significant Accounting Policies (Continued)
Earnings per Share
Earnings per share are computed by dividing earnings by the weighted
average number of common shares outstanding of 27,311,707 for 1995, 27,273,192
for 1994 and 27,361,831 for 1993.
Income Taxes
Effective January 1, 1993, the Company provides for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No.
109") "Accounting for Income Taxes." Deferred income taxes result from
temporary differences in the recognition of income and expense for tax and
financial reporting purposes. The adoption of SFAS No. 109 on January 1, 1993
did not have a material effect on the Company's financial condition or its
results of operations. The recoverability of the deferred tax asset is
demonstrated by the recoverability of taxes paid in previous years and the
availability of tax planning strategies.
Reinsurance
In December 1992 the Financial Accounting Standards Board issued SFAS
No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts." Among other provisions, SFAS No. 113 requires a balance
sheet gross up of reinsurance accounts and increases the degree of analysis
required to assess risk transfer. SFAS No. 113 was adopted by the Company on
January 1, 1993. The impact of the adoption of SFAS No. 113 was not material to
the consolidated financial statements.
In accordance with SFAS No. 113, the liabilities for unearned premiums
and unpaid losses are stated in the accompanying consolidated financial
statements before deductions for ceded reinsurance. The ceded amounts are
immaterial and are carried in other assets and other receivables. Earned
premiums are stated net of deductions for ceded reinsurance.
The Insurance Companies, as primary insurers, would be required to pay
losses in their entirety in the event that the reinsurers were unable to
discharge their obligations under the reinsurance agreements.
38
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(1) Significant Accounting Policies (Continued)
Statements of Cash Flows
Interest paid during 1995, 1994, and 1993 was $1,970,000, $1,001,000,
and $791,000 respectively. Income taxes paid were $18,954,000 in 1995,
$19,315,000 in 1994, and $34,679,000 in 1993.
Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning
after December 15, 1995. Presently, management expects to continue use of the
accounting methods prescribed by Accounting Principles Board Opinion No. 25 and
expand its disclosure of stock-based compensation as permitted by SFAS No. 123.
Accordingly, adoption of this pronouncement is not expected to have a material
effect on the financial statements of the Company.
(2) Investments and Investment Income
A summary of net investment income is shown in the following table:
Year ended December 31,
(Amounts in thousands)
---------------------------
1995 1994 1993
------- ------- -------
Interest and dividends on fixed maturities............. $50,099 $46,636 $45,645
Dividends on equity securities......................... 11,855 7,483 8,154
Interest on short-term cash investments................ 1,456 894 742
------- ------- -------
Total investment income.............................. 63,410 55,013 54,541
Investment expense..................................... 446 427 420
------- ------- -------
Net investment income................................ $62,964 $54,586 $54,121
======= ======= =======
A summary of net realized investment gains (losses) is as follows:
Year ended December 31,
(Amounts in thousands)
---------------------------
1995 1994 1993
------- ------- -------
Net realized investment gains (losses):
Fixed maturities..................................... $ (57) $(4,574) $ 4,332
Equity securities.................................... 1,105 (5,279) (1,326)
------- ------- -------
$ 1,048 $(9,853) $ 3,006
======= ======= =======
39
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(2) Investments and Investment Income (Continued)
Gross gains and losses realized on the sales of investments (excluding
calls) are shown below:
Year ended December 31,
(Amounts in thousands)
----------------------------
1995 1994 1993
------- ------- -------
Fixed maturities, at amortized cost:
Gross realized gains............... $ -- $ -- $ 37
Gross realized losses.............. -- -- --
------- ------- -------
Net.............................. $ -- $ -- $ 37
======= ======= =======
Fixed maturities available for sale:
Gross realized gains............... $ 346 $ 718 $ 152
Gross realized losses.............. (822) (5,633) (106)
------- ------- -------
Net.............................. $ (476) $(4,915) $ 46
======= ======= =======
Equity securities available for sale:
Gross realized gains............... $ 5,154 $ 472 $ 3,382
Gross realized losses.............. (4,049) (5,751) (4,708)
------- ------- -------
Net.............................. $ 1,105 $(5,279) $(1,326)
======= ======= =======
A summary of the net increase (decrease) in unrealized investment
gains (losses) less applicable income tax expense (benefit), is as follows:
Year ended December 31,
(Amounts in thousands)
-----------------------------
1995 1994 1993
------- -------- --------
Net increase (decrease) in net unrealized
investment gains (losses):
Fixed maturities, at amortized cost..... $ -- $ -- $(23,642)
Income tax (benefit).................... -- -- (8,038)
------- -------- --------
$ -- $ -- $(15,604)
======= ======== ========
Fixed maturities available for sale..... $49,859 $(48,873) $ 26,627
Income tax expense (benefit)............ 17,451 (17,106) 9,417
------- -------- --------
$32,408 $(31,767) $ 17,210
======= ======== ========
Equity securities....................... $ 8,541 $ (7,285) $ (1,588)
Income tax expense (benefit)............ 2,989 (2,549) (538)
------- -------- --------
$ 5,552 $ (4,736) $ (1,050)
======= ======== ========
40
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(2) Investments and Investment Income (Continued)
Accumulated unrealized gains and losses on securities available for sale
follows:
December 31,
(Amounts in thousands)
----------------------
1995 1994
-------- --------
Fixed maturities available for sale:
Unrealized gains................................. $ 41,326 $ 10,757
Unrealized losses................................ (3,952) (23,242)
Tax effect....................................... (13,081) 4,370
-------- --------
24,293 (8,115)
-------- --------
Equity securities available for sale:
Unrealized gains................................. $ 3,135 948
Unrealized losses................................ (1,698) (8,052)
Tax effect....................................... (503) 2,486
-------- --------
934 (4,618)
-------- --------
Net unrealized investment gains (losses)........... $ 25,227 $(12,733)
======== ========
The amortized cost and estimated market values of investments in fixed
maturities available for sale as of December 31, 1995 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies.................... $ 3,659 $ 82 $ 3 $ 3,738
Obligations of states and political
subdivisions................................. 630,811 34,197 1,845 663,163
Public utilities.............................. 10,177 783 2 10,958
Corporate securities.......................... 7,682 242 81 7,843
Redeemable preferred stock.................... 90,080 6,022 2,021 94,081
-------- ------- ------ --------
Totals.................................... $742,409 $41,326 $3,952 $779,783
======== ======= ====== ========
41
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(2) Investments and Investment Income (Continued)
The amortized cost and estimated market values of investments in fixed
maturities available for sale as of December 31, 1994 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies.................... $ 3,515 $ 5 $ 348 $ 3,172
Obligations of states and political
subdivisions................................. 529,592 8,657 17,501 520,748
Public utilities.............................. 8,521 164 10 8,675
Corporate securities.......................... 6,296 31 46 6,281
Redeemable preferred stock.................... 108,858 1,900 5,337 105,421
-------- ------- ------- --------
Totals.................................... $656,782 $10,757 $23,242 $644,297
======== ======= ======= ========
Traditionally, it has been the Company's policy not to invest in high yield or
non-investment grade bonds. In 1995, the Company adopted a policy allowing a
small percentage of its investments to be placed in bonds rated lower than
investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's.
At December 31, 1995 bond holdings rated below investment grade totaled
approximately 1.7% of total investments. All but $2.7 million of such holdings
were downgraded subsequent to purchase. The average Standard and Poor's rating
of the bond portfolio is A.
The amortized cost and estimated market value of fixed maturities available for
sale at December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized Market
Cost Value
--------- ---------
(Amounts in thousands)
----------------------
Fixed maturities available for sale:
Due in one year or less................. $ 80,872 $ 83,137
Due after one year through five years... 154,953 163,235
Due after five years through ten years.. 311,125 323,117
Due after ten years..................... 195,459 210,294
-------- --------
$742,409 $779,783
======== ========
42
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(3) Fixed Assets
A summary of fixed assets follows:
December 31,
(Amounts in thousands)
----------------------
1995 1994
-------- --------
Land............................ $ 6,084 $ 6,084
Buildings....................... 20,432 20,271
Furniture and equipment......... 18,410 15,943
Leasehold improvements.......... 1,128 1,085
-------- --------
46,054 43,383
Less accumulated depreciation.... (18,590) (15,804)
-------- --------
Net fixed assets............... $ 27,464 $ 27,579
======== ========
(4) Deferred Policy Acquisition Costs
Policy acquisition costs incurred and amortized to income are as follows:
Years ended December 31,
(Amounts in thousands)
--------------------------------
1995 1994 1993
--------- --------- --------
Balance, beginning of year................... $ 30,068 $ 25,723 $ 22,960
Costs deferred during the year............... 132,484 117,027 102,501
Amortization charged to expense.............. (128,743) (112,682) (99,738)
--------- --------- --------
Balance, end of year......................... $ 33,809 $ 30,068 $ 25,723
========= ========= ========
(5) Notes Payable
Notes payable at December 31, 1995 consists of two unsecured notes
payable dated December 20, 1994. The combined principal amount on the notes of
$25,000,000 is payable on December 20, 1997. The interest cost of the loans is
variable and related to the London Interbank Rate (LIBOR). Based on the rate
effective through March 19, 1996, the net interest cost on the loans at December
31, 1995 is 6.4%.
The terms of the debt agreement include certain affirmative covenants, all
of which are met by the Company at December 31, 1995.
43
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(6) Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return.
The provision for income tax expense (benefit) consists of the following
components:
Year ended December 31,
(Amounts in thousands)
---------------------------
1995 1994 1993
------- ------- -------
Federal
Current....................... $24,016 $15,318 $29,669
Deferred...................... (92) 707 (523)
------- ------- -------
$23,924 $16,025 $29,146
======= ======= =======
State
Current....................... $ 98 $ 96 $ 153
Deferred...................... -- -- (47)
------- ------- -------
$ 98 $ 96 $ 106
======= ======= =======
Total
Current....................... $24,114 $15,414 $29,822
Deferred...................... (92) 707 (570)
------- ------- -------
Total.............................. $24,022 $16,121 $29,252
======= ======= =======
The income tax provision reflected in the consolidated statements of
income is less than the expected federal income tax on income before income
taxes as shown in the table below:
Year ended December 31,
(Amounts in thousands)
------------------------------
1995 1994 1993
-------- -------- --------
Computed tax expense at 35% ............................. $ 40,013 $ 28,846 $ 43,911
Tax-exempt interest income............................... (13,718) (12,216) (10,436)
Dividends received deduction............................. (4,936) (4,253) (4,751)
Reduction of losses incurred deduction for 15% of
income on securities purchased after August 7, 1986 2,546 2,220 1,877
Other, net............................................... 117 1,524 (1,349)
-------- -------- --------
Income tax expense .................................. $ 24,022 $ 16,121 $ 29,252
======== ======== ========
44
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(6) Income Taxes (Continued)
The Omnibus Budget Reconciliation Act of 1993 increased the corporate
tax rate from 34% to 35% effective January 1, 1993. Under SFAS No. 109, the
effects of the higher corporate tax rate are recognized in determining tax on
deferred items in the period that includes the date of enactment. The effect of
the tax rate change on the deferred liability was not material to the
consolidated financial position of the Company.
The "temporary differences" that give rise to a significant portion of
the deferred tax asset (liability) relate to the following:
December 31,
(Amounts in thousands)
------------------------------
1995 1994 1993
-------- -------- --------
Deferred tax assets
Discounting of loss reserves and salvage
and subrogation recoverable for tax
purposes................................... $ 5,030 $ 5,030 $ 5,631
Tax benefit on net unrealized loss on
securities carried at market value......... -- 6,856 --
Other deferred tax assets................... 638 534 534
-------- -------- --------
Total gross deferred tax assets.......... 5,668 12,420 6,165
Less valuation allowance............... -- -- --
-------- -------- --------
Net deferred tax assets................ 5,668 12,420 6,165
-------- -------- --------
Deferred tax liabilities
Tax liability on net unrealized gain on
securities carried at market value......... (13,584) -- (12,799)
Tax depreciation in excess of book
depreciation............................... (1,184) (1,192) (1,149)
Accretion on bonds.......................... (742) (574) (549)
Other deferred tax liabilities.............. (316) (464) (426)
-------- -------- --------
Total gross deferred tax liabilities... (15,826) (2,230) (14,923)
-------- -------- --------
Net deferred tax assets (liabilities).. $(10,158) $ 10,190 $ (8,758)
======== ======== ========
45
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(7) Reserves for Losses and Loss Adjustment Expenses
Activity in the reserves for losses and loss adjustment expenses is
summarized as follows:
Year ended December 31,
(Amounts in thousands)
------------------------------
1995 1994 1993
-------- -------- --------
Gross reserves for losses and loss
adjustment expenses at beginning of year..... $227,499 $215,301 $240,183
Less reinsurance recoverable............... (4,107) (776) (980)
-------- -------- --------
Net reserves, beginning of year............... 223,392 214,525 239,203
Incurred losses and loss adjustment expenses
related to:
Current year............................... 423,264 370,631 323,932
Prior years................................ (6,708) (10,074) (34,724)
-------- -------- --------
Total incurred losses and loss adjustment
expenses.................................... 416,556 360,557 289,208
-------- -------- --------
Loss and loss adjustment expense payments
related to:
Current year............................... 243,294 208,418 178,698
Prior years................................ 145,664 143,272 135,188
-------- -------- --------
Total payments................................ 388,958 351,690 313,886
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at end of year...................... 250,990 223,392 214,525
Reinsurance recoverable....................... 2,556 4,107 776
-------- -------- --------
Gross reserves, end of year................... $253,546 $227,499 $215,301
======== ======== ========
Decreases in incurred losses relating to prior years reflects the favorable loss
experience during these years attributable to a number of combined factors which
have produced favorable frequency and severity trends in recent years. In
addition, actuarial assumptions based on historical trends have proved to be
conservative.
46
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(8) Dividend Restrictions
The Insurance Companies are subject to the financial capacity
guidelines established by the Office of the Commissioner of Insurance of their
domicile states. The payment of dividends from statutory unassigned surplus of
the Insurance Companies is restricted, subject to certain statutory limitations.
For the year 1996, Mercury Casualty Company and California Automobile Insurance
Company are permitted to pay approximately $50,869,000 in dividends to the
Company without the prior approval of the California Commissioner of Insurance.
The above statutory regulations may have the effect of indirectly limiting the
ability of the Company to pay dividends.
(9) Statutory Balances and Accounting Practices
The Insurance Companies prepare their statutory financial statements
in accordance with accounting practices prescribed or permitted by the various
state insurance departments. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. As of December 31, 1995, there were no material permitted
statutory accounting practices utilized by the Insurance Companies. The NAIC is
working on a project to codify statutory accounting practices, the result of
which is expected to constitute the only source of "prescribed" statutory
accounting practices. When complete, that project will most likely change the
definition of prescribed versus permitted statutory accounting practices and may
result in changes to the accounting policies that insurance enterprises use to
prepare their statutory financial statements.
The Insurance Companies' statutory net income, as reported to
regulatory authorities, was $86,210,000, $62,861,000 and $93,877,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. The statutory
policyholders' surplus of the Insurance Companies, as reported to regulatory
authorities, as of December 31, 1995 and 1994 was $479,114,000 and $411,898,000,
respectively.
The Company has estimated the Risk-Based Capital Requirements of each
of its insurance subsidiaries as of December 31, 1995 according to the formula
issued by the NAIC. Each of the companies' policyholders' surplus exceeded the
highest level of recommended capital requirements.
47
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(10) Commitments and Contingencies
The Company is obligated under several noncancellable lease agreements
providing for office space that expire at various dates through the year 2000.
Total rent expense under these lease agreements, all of which are operating
leases, was $1,461,000, $1,492,000 and $1,653,000 for the years ended December
31, 1995, 1994 and 1993, respectively. Mercury Casualty Company will receive
minimum future rentals on various noncancellable operating leases on a building
purchased in Brea in October 1992. The annual rental commitments, expressed in
thousands, are as follows:
Rent Rent
Year Expense Income
---- ------- --------
1996.............. $1,401 $(1,016)
1997.............. $ 828 $ (830)
1998.............. $ 735 $ (488)
1999.............. $ 538 $ (35)
2000.............. $ 129 $ --
Thereafter........ $ -- $ --
The Company and its subsidiaries are defendants in various lawsuits
generally incidental to their business. In most of these actions, plaintiffs
assert claims for exemplary and punitive damages which are not insurable under
California judicial decisions. The Company vigorously defends these actions,
unless a reasonable settlement appears appropriate. Management does not expect
the ultimate disposition of these lawsuits to have a material effect on the
Company's consolidated operations or financial position.
(11) Profit Sharing Plan
The Company, at the option of the Board of Directors, may make annual
contributions to an employee profit sharing plan. The contributions are not to
exceed the greater of the Company's net income for the plan year or its retained
earnings at that date. In addition, the annual contributions may not exceed an
amount equal to 15% of the compensation paid or accrued during the year to all
participants under the plan. The annual contribution was $1,000,000, $1,000,000
and $2,000,000 for the plan years ended December 31, 1995, 1994 and 1993.
The Profit Sharing Plan also includes an option for employees to make
salary deferrals under Section 401(k) of the Internal Revenue Code. Company
matching contributions, at a rate set by the Board of Directors, totaled
$773,000, $762,000 and $593,000 for the plan years ended December 31, 1995, 1994
and 1993.
48
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(11) Profit Sharing Plan (Continued)
Effective March 11, 1994 the Profit Sharing Plan also includes a
leveraged employee stock ownership plan (ESOP) that covers substantially all
employees. The Company makes annual contributions to the ESOP equal to the
ESOP's debt service less dividends received by the ESOP. Dividends received by
the ESOP on unallocated shares are used to pay debt service and the ESOP shares
serve as collateral for its debt. As the debt is repaid, shares are released
from collateral and allocated to employees, based on the proportion of debt
service paid in the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the debt of the ESOP, which was
$4,000,000 and $5,000,000 at December 31, 1995 and 1994, respectively, is
recorded in the balance sheet as other liabilities. The shares pledged as
collateral are reported as unearned ESOP compensation in the shareholders'
equity section of the balance sheet. As shares are committed to be released
from collateral, the Company reports compensation expense equal to the current
market price of the shares, and reduces unearned ESOP compensation by the
original cost of the shares. The difference between the market price and cost
of the shares is charged to common stock. As shares are committed to be
released from collateral, the shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of accrued interest. ESOP compensation expense was $1,145,000 and
$919,000 in 1995 and 1994, respectively. The ESOP shares as of December 31 were
as follows:
1995 1994
---------- ----------
Allocated shares 32,200 --
Shares committed-to-be released 32,200 32,200
Unreleased shares 96,600 128,800
---------- ----------
Total ESOP shares 161,000 161,000
========== ==========
Market value of unreleased shares at
December 31, $4,613,000 $3,703,000
========== ==========
(12) Common Stock
The Company adopted a stock option plan in October 1985 (the "1985
Plan") under which 2,700,000 shares were reserved for issuance. Options granted
during 1985 were exercisable immediately. Subsequent options granted become
exercisable 20% per year beginning one year from the date granted. All options
were granted at the market price on the date of the grant.
49
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
(12) Common Stock (Continued)
In May 1995 the Company adopted The 1995 Equity Participation Plan
(the "1995 Plan") which succeeds the Company's 1985 Plan. Under the 1995 Plan,
2,700,000 shares of Common Stock are authorized for issuance upon exercise of
options, stock appreciation rights and other awards, or upon vesting of
restricted or deferred stock awards. During 1995, the Company granted incentive
stock options under the 1994 and 1995 Plans. The options granted during 1995
become exercisable 20% per year beginning one year from the date granted and
were granted at the market price on the date of the grant.
Activity pursuant to the plans, was as follows:
Total Exercisable
Shares Shares Option Price
---------- ------------ -------------
Outstanding December 31, 1992............ 220,200 188,200 $5.00 - 8.00
=======
Granted in 1993........................ 115,000 30.125
Exercised in 1993...................... (70,460) 5.00 - 8.00
------- ------------
Outstanding December 31, 1993............ 264,740 135,940 $5.00-30.125
=======
Granted in 1994........................ 4,000 27.00
Exercised in 1994...................... (27,815) 5.00 - 8.00
Cancelled or expired in 1994........... (3,000) 30.125
------- ------------
Outstanding December 31, 1994............ 237,925 142,725 $5.00-30.125
=======
Granted in 1995........................ 155,000 30.00-31.875
Exercised in 1995...................... (27,600) 5.00-30.125
------- ------------
Outstanding December 31, 1995............ 365,325 141,725 $6.75-31.875
======= ======= ============
50
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
directors, officers and certain other employees of the registrant, and
persons who own more than ten percent of a registered class of the
registrant's equity securities, ("Reporting Persons") to file with the
Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock of the registrant.
Due dates for these reports have been established and the registrant
is required to disclose any failure to file by these dates during
1995. To the registrant's knowledge, all of these requirements were
satisfied.
Item 11. Executive Compensation
----------------------
Item 12. Security ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Information regarding executive officers of the Company is included in Part
I. For this and other information called for by Items 10, 11, 12 and 13,
reference is made to the Company's definitive proxy statement for its Annual
Meeting of Shareholders, to be held on May 29, 1996, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1995,
and which is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Financial Statements: The Consolidated Financial Statements for the
year ended December 31, 1995 are contained herein as listed in the Index to
Consolidated Financial Statements on page 28.
2. Financial Statement Schedules:
Title
-----
Auditors' Report on Financial Statement Schedules
Schedule I -- Summary of Investments -- Other than Investments in
Related Parties
Schedule II -- Condensed Financial Information of Registrant
51
Schedule IV -- Reinsurance
All other schedules are omitted as the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
Notes thereto.
3. Exhibits:
3.1** Articles of Incorporation of the Company, as amended to
date.
3.2 By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among
the Company, George Joseph and Gloria Joseph.
10.1* Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992,
among the Company, Mercury Casualty Company, Mercury
Insurance Company and California Automobile Insurance
Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11,
1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells
Fargo Bank, N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank,
N.A., as Trustee, of the Mercury General Corporation ESOP
Feature Trust dated as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by
Mercury General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit
Sharing Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit
Sharing Plan.
10.9** Revolving Credit Agreement by and among Mercury General
Corporation, the Lenders Party Hereto and The Bank of New
York, as Agent.
10.10** Property Per Risk Excess of Loss Reinsurance Agreement
between National Reinsurance Corporation and Mercury
Casualty Company, effective April 1, 1995.
10.11** Endorsement No. 1 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.12 Endorsement No. 2 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.13 Endorsement No. 3 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.14 Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Illinois.
10.15 Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Illinois.
10.16 Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Georgia.
52
10.17 Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Georgia.
10.18 Draft, Second and Third Excess Property Catastrophe
Reinsurance Contract Effective April 1, 1995 issued to
Mercury Casualty Company, Mercury Insurance Company,
California Automobile Insurance Company and California
General Underwriters Insurance Company, Inc.
10.19@ The 1995 Equity Participation Plan.
21.1## Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule
28.1 Consolidated Schedule P of the Annual Statement provided to
----
state insurance regulatory authorities for the year ended
December 31, 1995.
* This document was filed as an exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-899, and is incorporated herein by this
reference.
# This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1992, and is incorporated herein by this
reference.
## This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1993, and is incorporated herein by this
reference.
** This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1994, and is incorporated herein by this
reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed on
March 8, 1996 and is incorporated herein by this reference.
(b) Reports on Form 8-K:
None
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 GEORGE JOSEPH
-------------------------------------
George Joseph
Chief Executive Officer and
Chairman of the Board
March 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer
and
Chairman of the Board
GEORGE JOSEPH (Principal Executive Officer) March 22, 1996
- - --------------------------
George Joseph
Chief Financial Officer
KEITH L. PARKER (Principal Financial Officer) March 22, 1996
- - --------------------------
Keith L. Parker
Vice President and Controller
DONNA J. MOORE (Principal Accounting Officer) March 22, 1996
- - --------------------------
Donna J. Moore
NATHAN BESSIN Director March 22, 1996
- - --------------------------
Nathan Bessin
BRUCE A. BUNNER Director March 22, 1996
- - --------------------------
Bruce A. Bunner
RICHARD E. GRAYSON Director March 22, 1996
- - --------------------------
Richard E. Grayson
54
Signature Title Date
--------- ----- ----
GLORIA JOSEPH Director March 22, 1996
- - --------------------------
Gloria Joseph
CHARLES MCCLUNG Director March 22, 1996
- - ---------------------------
Charles McClung
DONALD P. NEWELL Director March 22, 1996
- - ---------------------------
Donald P. Newell
DONALD R. SPUEHLER Director March 22, 1996
- - ---------------------------
Donald R. Spuehler
55
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Mercury General Corporation:
Under date of March 22, 1996, we reported on the consolidated balance
sheets of Mercury General Corporation and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995, as contained in the annual report on Form 10-K for the year
1995. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedules as listed under Item 14(a)2. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, the related financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 22, 1996
S-1
SCHEDULE I
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
Amounts in Thousands
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- - ------------------ -------- -------- -------------
Fixed maturities available for sale
Bonds:
U.S. Government................................ $ 3,659 $ 3,738 $ 3,738
States, Municipalities......................... 630,811 663,163 663,163
Public utilities............................... 10,177 10,958 10,958
All other corporate bonds...................... 7,682 7,843 7,843
Redeemable preferred stock....................... 90,080 94,081 94,081
-------- -------- --------
Total fixed maturities available for
sale.......................................... 742,409 779,783 779,783
-------- -------- --------
Equity securities:
Common stocks:
Public utilities............................... 18,787 19,714 19,714
Banks, trust and insurance companies........... 535 469 469
Industrial, Miscellaneous and
all other..................................... 1,133 1,524 1,524
Nonredeemable preferred stocks................... 93,023 93,208 93,208
-------- -------- --------
Total equity securities available for
sale.......................................... 113,478 114,915 114,915
-------- -------- --------
Short-term investments.................................... 28,496 28,496
-------- --------
Total investments.............................. $884,383 $923,194
======== ========
S-2
SCHEDULE I, Continued
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1994
Amounts in Thousands
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- - ------------------ -------- -------- -------------
Fixed maturities available for sale
Bonds:
U.S. Government................................ $ 3,515 $ 3,172 $ 3,172
States, Municipalities......................... 529,592 520,748 520,748
Public utilities............................... 8,521 8,675 8,675
All other corporate bonds...................... 6,296 6,281 6,281
Redeemable preferred stock....................... 108,858 105,421 105,421
-------- -------- --------
Total fixed maturities available for
sale.......................................... 656,782 644,297 644,297
-------- -------- --------
Equity securities:
Common stocks:
Public utilities............................... 16,890 15,577 15,577
Banks, trust and insurance companies........... 535 431 431
Industrial, Miscellaneous and
all other..................................... 1,038 1,197 1,197
Nonredeemable preferred stocks................... 73,263 67,417 67,417
-------- -------- --------
Total equity securities available for
sale.......................................... 91,726 84,622 84,622
-------- -------- --------
Short-term investments.................................... 22,695 22,695
-------- --------
Total investments.............................. $771,203 $751,614
======== ========
S-3
SCHEDULE II
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 1995 and 1994
Amounts in thousands
ASSETS
1995 1994
-------- --------
Investments:
Fixed maturities available for sale (amortized
cost $3,771 in 1995 and $3,456 in 1994)............................ $ 3,770 $ 3,377
Equity securities, available for sale (cost
$12,943 in 1995 and $12,126 in 1994)............................... 12,841 11,297
Short-term cash investments......................................... 4,746 2,038
Investment in subsidiaries.......................................... 574,224 470,746
-------- --------
Total investments.............................................. 595,581 487,458
Amounts due from affiliates............................................... 3,834 4,795
Income taxes.............................................................. 2,615 1,637
Other assets.............................................................. 2,110 1,905
-------- --------
$604,140 $495,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable............................................................. $ 25,000 $ 25,000
Accounts payable and accrued expenses..................................... 8,611 7,433
Other liabilities......................................................... 5,341 6,201
-------- --------
Total liabilities.................................................... 38,952 38,634
-------- --------
Shareholders' equity:
Common stock......................................................... 40,895 40,250
Net unrealized investment gains (losses)............................. 25,227 (12,733)
Unearned ESOP compensation........................................... (3,084) (4,042)
Retained earnings.................................................... 502,150 433,686
-------- --------
Total shareholders' equity..................................... 565,188 457,161
-------- --------
$604,140 $495,795
======== ========
See notes to condensed financial information
S-4
SCHEDULE II, Continued
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Three years ended December 31, 1995
Amounts in thousands
1995 1994 1993
-------- -------- -------
Revenues:
Net investment income............................................... $ 1,824 $ 1,389 $ 1,300
Management fee income from subsidiaries............................. 101,823 101,858 87,376
Other............................................................... 27 (704) 107
-------- -------- -------
Total revenues................................................... 103,674 102,543 88,783
-------- -------- -------
Expenses:
Loss adjustment expenses............................................ 68,048 68,771 59,851
Policy acquisition costs............................................ 17,087 17,953 15,174
Other operating expenses............................................ 16,627 15,544 12,832
Interest............................................................ 2,040 1,025 793
-------- -------- -------
Total expenses................................................... 103,802 103,293 88,650
-------- -------- -------
Income (loss) before income taxes and equity
in net income of subsidiaries...................................... (128) (750) 133
Income tax benefit.................................................... (386) (506) (350)
-------- -------- -------
Income (loss) before equity in net income
of subsidiaries.................................................... 258 (244) 483
Equity in net income of subsidiaries.................................. 90,043 66,539 95,726
-------- -------- -------
Net income....................................................... $ 90,301 $ 66,295 $96,209
======== ======== =======
See notes to condensed financial information.
S-5
SCHEDULE II, Continued
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Three Years ended December 31, 1995
Amounts in thousands
1995 1994 1993
-------- -------- --------
Cash flows from operating activities:
Net cash provided from operating activities......................... $ 25,526 $ 20,367 $ 24,039
Cash flows from investing activities:
Capital contribution to subsidiaries................................ (500) (10,000) (6,000)
Fixed maturities, at amortized cost:
Calls or maturities............................................... -- -- 44
Transfer to fixed maturities, at market........................... -- -- 3,113
Fixed maturities, at market:
Transfer from fixed maturities, at amortized
cost............................................................. -- -- (3,113)
Purchases......................................................... (1,051) (547)
Sales............................................................. 335 -- --
Calls or maturities............................................... 349 2,632 2,243
Equity securities:
Purchases......................................................... (49,390) (20,105) (25,219)
Sales............................................................. 48,675 16,461 21,376
Increase in short term cash investments, net........................ (2,708) (365) (1,490)
Other, net.......................................................... -- 31 259
-------- -------- --------
Net cash used in investing activities........................ (4,290) (11,893) (8,787)
Cash flows from financing activities:
Additions to notes payable.......................................... -- 25,000 --
Principal payments on notes payable................................. -- (15,000) --
Dividends paid to shareholders...................................... (21,837) (19,100) (16,423)
Stock options exercised............................................. 458 275 625
-------- -------- --------
Net cash used in financing activities........................ (21,379) (8,825) (15,798)
Net decrease in cash.................................................. (143) (351) (546)
Cash:
Beginning of the year............................................... (1,197) (846) (300)
-------- -------- --------
End of the year..................................................... $ (1,340) $ (1,197) $ (846)
======== ======== ========
See notes to condensed financial information.
S-6
SCHEDULE II, Continued
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
December 31, 1995 and 1994
The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes included in
this statement.
Management Fee Income
Under a management agreement, the Company performs management services for
its subsidiaries which include all underwriting and claims servicing functions.
The Company is compensated by monthly reimbursement of expenses paid.
Dividends Received From Subsidiaries
Dividends of $24,500,000, $20,000,000, and $26,700,000 were received by the
Company from its wholly-owned subsidiaries in 1995, 1994 and 1993, respectively
and are recorded as a reduction to Investment in Subsidiaries.
Cash Overdraft
At December 31, 1995 and 1994, the Company had cash overdrafts of
$1,340,000 and $1,197,000, respectively which are classified in "other
liabilities" in the accompanying condensed balance sheet.
S-7
SCHEDULE IV
MERCURY GENERAL CORPORATION
REINSURANCE
Three years ended December 31, 1995
Amounts in thousands
Ceded to
Gross other Net
amount companies Assumed amount
-------- --------- ------- --------
Property and Liability insurance
1995......................... $619,404 $3,444 $366 $616,326
1994......................... $530,224 $1,321 $487 $529,390
1993......................... $477,737 $4,229 $585 $474,093
S-8
EXHIBIT INDEX
3.1** Articles of Incorporation of the Company, as amended to date.
3.2 By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among the Company,
George Joseph and Gloria Joseph.
10.1* Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992, among the
Company, Mercury Casualty Company, Mercury Insurance Company and
California Automobile Insurance Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11, 1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells Fargo Bank,
N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank, N.A., as
Trustee, of the Mercury General Corporation ESOP Feature Trust dated
as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by Mercury
General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit Sharing
Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit Sharing
Plan.
10.9** Revolving Credit Agreement by and among Mercury General Corporation,
the Lenders Party Hereto and The Bank of New York, as Agent.
10.10** Property Per Risk Excess of Loss Reinsurance Agreement between
National Reinsurance Corporation and Mercury Casualty Company,
effective April 1, 1995.
10.11** Endorsement No. 1 to the Property Per Risk Excess of Loss Agreement
effective April 1, 1995.
10.12 Endorsement No. 2 to the Property Per Risk Excess of Loss Agreement
effective April 1, 1995.
10.13 Endorsement No. 3 to the Property Per Risk Excess of Loss Agreement
effective April 1, 1995.
10.14 Management Agreement effective January 1, 1995 between the Company and
Mercury Insurance Company of Illinois.
10.15 Management Agreement effective January 1, 1995 between the Company and
Mercury Indemnity Company of Illinois.
10.16 Management Agreement effective January 1, 1995 between the Company and
Mercury Insurance Company of Georgia.
10.17 Management Agreement effective January 1, 1995 between the Company and
Mercury Indemnity Company of Georgia.
10.18 Draft, Second and Third Excess Property Catastrophe Reinsurance
Contract Effective April 1, 1995 issued to Mercury Casualty Company,
Mercury Insurance Company, California Automobile Insurance Company and
California General Underwriters, Inc.
10.19@ The 1995 Equity Participation Plan.
21.1## Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule.
28.1 Consolidated Schedule P of the Annual Statement provided to state
- - ----
insurance regulatory authorities for the year ended December 31, 1995.
* This document was filed as an exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-899, and is incorporated herein by this
reference.
# This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1992, and is incorporated herein by this
reference.
## This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1993, and is incorporated herein by this
reference.
** This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1994, and is incorporated herein by this
reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed on
March 8, 1996 and is incorporated herein by this reference.
(b) Reports on Form 8-K:
None