SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended June 30, 1996 Commission File No. 0-3681
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
California 95-221-1612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4484 Wilshire Boulevard, Los Angeles, California 90010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(213) 937-1060
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
At August 12, 1996, the Registrant had issued and outstanding an aggregate of
27,488,575 shares of its Common Stock.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS
A S S E T S
June 30, December 31,
1996 1995
---------- ------------
Investments:
Fixed maturities available for sale (amortized cost
$786,718 in 1996 and $742,409 in 1995)................ $ 797,714 $ 779,783
Equity securities available for sale (cost $127,296
in 1996 and $113,478 in 1995)......................... 124,732 114,915
Short-term cash investments, at cost, which approxi-
mates market.......................................... 34,976 28,496
---------- ----------
Total investments................................ 957,422 923,194
Cash...................................................... 4,296 2,872
Receivables:
Premiums receivable.................................... 66,554 58,902
Premium notes.......................................... 11,959 11,728
Accrued investment income.............................. 16,705 15,870
Other.................................................. 5,194 6,108
---------- ----------
100,412 92,608
Deferred policy acquisition costs......................... 37,062 33,809
Fixed assets, net......................................... 28,354 27,464
Deferred income taxes..................................... 1,198 --
Other assets.............................................. 1,014 1,709
---------- ----------
$1,129,758 $1,081,656
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses........................ $ 267,372 $ 253,546
Unearned premiums.......................................... 188,325 168,404
Notes payable.............................................. 25,000 25,000
Loss drafts payable........................................ 21,745 20,071
Accounts payable and accrued expenses...................... 27,721 25,412
Current income taxes....................................... 1,910 388
Deferred income taxes...................................... -- 10,158
Other liabilities.......................................... 15,491 13,489
-------- ----------
Total liabilities................................. 547,564 516,468
-------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 30,000,000 shares; issued and outstanding
27,478,675 shares in 1996 and 27,442,675 shares in
1995.................................................. 41,709 40,895
Net unrealized investment gains......................... 5,481 25,227
Unearned ESOP compensation.............................. (2,500) (3,084)
Retained earnings....................................... 537,504 502,150
-------- ----------
Total shareholders' equity........................ 582,194 565,188
-------- ----------
Commitments and contingencies........................... $1,129,758 $1,081,656
========== ==========
2
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995
--------- --------
Revenues:
Earned premiums $181,254 $151,732
Net investment income 17,443 15,336
Premium finance fees 453 449
Net realized investment gains (losses) (1,275) 146
Other 324 378
-------- --------
Total revenues 198,199 168,041
-------- --------
Expenses:
Losses and loss adjustment expenses 119,497 101,636
Policy acquisition costs 38,586 31,350
Other operating expenses 5,493 5,859
Interest 438 517
-------- --------
Total expenses 164,014 139,362
-------- --------
Income before income taxes 34,185 28,679
Income taxes 7,602 6,272
-------- --------
Net income $ 26,583 $ 22,407
======== ========
EARNINGS PER SHARE (average shares outstanding
27,388,979 in 1996 and 27,300,909 in 1995) $ .97 $ .82
======== ========
Dividends declared per share $ .24 $ .20
======== ========
3
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995
--------- --------
Revenues:
Earned premiums $350,817 $296,408
Net investment income 33,880 30,216
Premium finance fees 899 905
Net realized investment gains (losses) (1,072) 748
Other 675 703
-------- --------
Total revenues 385,199 328,980
-------- --------
Expenses:
Losses and loss adjustment expenses 236,915 204,253
Policy acquisition costs 74,419 61,469
Other operating expenses 11,351 11,096
Interest 909 1,034
-------- --------
Total expenses 323,594 277,852
-------- --------
Income before income taxes 61,605 51,128
Income taxes 13,112 10,221
-------- --------
Net income $ 48,493 $ 40,907
======== ========
EARNINGS PER SHARE (average shares outstanding
27,374,006 in 1996 and 27,296,352 in 1995) $ 1.77 $ 1.50
======== ========
Dividends declared per share $ .48 $ .40
======== ========
4
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
AMOUNTS EXPRESSED IN THOUSANDS
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 48,493 $ 40,907
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 13,826 9,553
Increase in unearned premiums 19,921 12,446
Increase in premium notes receivable (231) (411)
Increase in premiums receivable (7,652) (4,776)
Increase in deferred policy acquisition costs (3,253) (2,192)
Increase in loss drafts payable 1,674 568
Increase in accrued income taxes, excluding deferred
tax on change in unrealized gain 799 3,874
Increase in accounts payable and accrued expenses 2,309 1,088
Depreciation 1,855 1,770
Net realized investment (gains) losses 1,072 (748)
Bond amortization (accretion), net (427) 152
Other, net 3,501 550
--------- ---------
Net cash provided from operating activities 81,887 62,781
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (103,277) (88,836)
Sales 17,985 39,125
Calls or maturities 42,034 23,376
Equity securities available for sale:
Purchases (195,063) (162,330)
Sales 179,549 145,509
Increase in short-term cash investments, net (6,480) (8,080)
Purchase of fixed assets (2,829) (2,884)
Sale of fixed assets 84 216
--------- ---------
Net cash used in investing activities $ (67,997) $ (53,904)
(Continued)
5
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
1996 1995
--------- ---------
Cash flows from financing activities:
Dividends paid to shareholders $(13,139) $(10,915)
Proceeds from stock options exercised, net of
related tax benefit 673 91
-------- --------
Net cash used in financing activities (12,466) (10,824)
-------- --------
Net increase (decrease) in cash 1,424 (1,947)
Cash:
Beginning of the year 2,872 3,344
-------- --------
End of the year $ 4,296 $ 1,397
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 926 $ 963
Income taxes paid during the period $ 12,195 $ 6,335
6
MERCURY GENERAL CORPORATION & SUBSIDIARIES
NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The financial data included herein have been prepared by the Company,
without audit. In the opinion of management, all adjustments of a normal
recurring nature necessary to present fairly the Company's financial position at
June 30, 1996 and the results of operations and cash flows for the periods
presented have been made.
This interim information should be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
- - ---------------------
Premiums earned in the first half of 1996 increased 18.4% from the
corresponding period in 1995. The increase reflects new business, aided by a
print advertising program instituted in December 1995, and a continuing renewal
rate approximating 93%.
The loss ratio in the first half (loss and loss adjustment expenses related
to premiums earned) was 67.5%, compared with 68.9% in 1995. Weather-related
claims associated with heavy rainfall and severe flooding in California
adversely affected loss experience in 1995.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) was 24.5%, unchanged from 1995.
The combined ratio of losses and expenses (GAAP basis) was 92.0%, compared
with 93.4% in 1995, resulting in an underwriting gain for the period of $28.1
million, compared with $19.6 million a year ago.
Investment income in the first half was $33.9 million, compared with $30.2
million in 1995. The after-tax yield on average investments of $922.6 million
(fixed maturities at cost, equities at market) was 6.65%, compared with 6.90% on
average investments of $794.7 million in 1995. The decrease in realized
investment yields reflects the redemption of bonds acquired in earlier, higher
interest rate environments, larger balances in lower yielding money market
investments and a lower effective yield from equities. New investments in bonds
and equities combined are currently being made at after-tax yields ranging from
approximately 6.00% - 6.20%.
Realized investment losses before income taxes were $1,072,000 in the 1996
first half, compared with realized gains of $748,000 in 1995. The 1996 losses
reflect income enhancing swaps of fixed income securities, preferred stocks and
7
bonds. The gains in 1995 were in part the result of preferred stock swaps and
the redemption of higher coupon bonds at a premium.
The income tax provision in the first half of $13.1 million represented an
effective tax rate of 21.3%, compared with an effective rate of 20.0% in the
1995 first half.
Net income for the period of $48.5 million, or $1.77 per share, compares
with $40.9 million, or $1.50 per share, in 1995. Per share results are based on
27.4 million average shares in 1996 and 27.3 million shares in 1995.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Net cash provided from operating activities during the first half of 1996
was $81.9 million, while funds derived from the sale, call or maturity of
investments was $239.6 million, of which approximately 75% was represented by
the sale of equities. Fixed-maturity investments, at amortized cost, were
increased by $44.3 million during the period. Equity investments, including
perpetual preferred stocks, were increased by $13.8 million at cost, and short-
term cash investments were increased by $6.5 million. Proceeds from fixed-
maturities available for sale which were sold or called during the period was
$55.2 million.
The market value of all investments (fixed-maturities and equities) held at
market as "Available for Sale" exceeded amortized cost of $949.0 million at June
30, 1996 by $8.4 million. That unrealized gain, reflected in shareholders'
equity net of applicable tax effects, was $5.5 million at June 30, 1996 compared
with an unrealized gain of $25.2 million at December 31, 1995. The decrease in
market values since December 31, 1995 reflects principally the increase in
interest rates which occurred during the period.
The Company's cash and short term investments totaled $39.3 million at June
30, 1996. Together with funds generated internally, such liquid assets are more
than adequate to pay claims without the forced sale of investments.
It has been the Company's policy not to invest in high yield or "junk"
bonds. As the result of downgrades subsequent to purchase, approximately 2.3%
of total bond holdings at June 30, 1996 were rated below investment grade. The
average rating of the $703.6 million bond portfolio (at amortized cost) was A,
while the average effective maturity, giving effect to anticipated early call,
approximates 7.8 years. The modified duration of the bond portfolio
approximates 7.0 years. Holdings are heavily weighted with relatively high
coupon issues which are expected to be called prior to their maturity. Bond
holdings are broadly diversified geographically, and, within the tax-exempt
sector, consist largely of high coupon revenue issues, including housing bonds
subject to sinking funds and special par calls, and other issues, many of which
have been pre-refunded and escrowed with U.S. Treasuries. General obligation
bonds of the large eastern cities have generally been avoided. Holdings in the
taxable sector consist principally of senior public utility issues. Fixed-
maturity investments of $786.7 million (at cost) include $83.0 million of
sinking fund preferreds, principally utility issues.
8
Equity holdings of $124.7 million at market (cost $127.3 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 21.4% of total shareholders' equity.
In June 1996, the Company announced that it had signed a non-binding letter
of intent to purchase for cash the American Fidelity Insurance Company (AFI), an
independent agency insurer headquartered in Oklahoma City, Oklahoma. AFI had
written premium volume of $90 million in 1995, of which approximately 47% was in
the automobile lines. AFI writes most of its business in Oklahoma, Kansas and
Texas, but it is licensed in more than thirty other states. The purchase price
will be 100% of the net shareholders' equity of AFI and its subsidiaries at the
time of the closing of the transaction (now estimated to be early October 1996),
determined in accordance with generally accepted accounting principles (GAAP).
Consummation of the transaction is subject to the satisfaction of a number of
conditions, including regulatory approval of a number of states. AFI's
published statutory surplus (equity) at December 31, 1995 was approximately
$35.0 million. A definitive agreement is expected to be signed in the near
future. Mercury plans to fund the purchase with borrowings under an enlarged
revolving credit loan facility.
The only significant debt of the Company at June 30, 1996 was a three year
revolving credit agreement covering two bank loans totaling $25,000,000. The
loan agreement renews annually, at which time it may be extended for an
additional year to maintain the three year maturity. The interest rate on the
loans is variable and related to LIBOR (London Interbank Rate). Based on the
rate effective March 19, 1996 through September 16, 1996, the net interest cost
of the loans approximate 6.09%. The loan facility is expected to be enlarged to
$75 million on substantially the same terms on or before the expected closing of
the planned purchase of AFI, with takedowns under the facility expected to be
sufficient to fund the purchase price.
Except for Company-occupied buildings, the Company has no direct
investments in real estate and no holdings of mortgages secured by commercial
real estate.
As of June 30, 1996, the Company had no other significant commitments for
capital expenditures.
Industry and regulatory guidelines suggest that the ratio of a property and
casualty insurer's annual net premiums written to statutory policyholders'
surplus should not exceed 3.0 to 1. Based on the combined surplus of all of the
licensed insurance subsidiaries of $505.1 million at June 30, 1996 and net
written premiums for the twelve months ended on that date of $698.2 million, the
ratio of writings to surplus was approximately 1.4 to 1.
9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) Mercury General Corporation (the "Company") held its Annual Meeting of
Stockholders on May 29, 1996.
(c) The matters voted upon at the meeting and the votes cast with respect
thereto were as follows:
1. Election of Directors
---------------------
Votes Votes Cast Votes Broker
Nominee for Directors Cast For Against Withheld Abstentions Non-Votes
- - --------------------- -------- ---------- -------- ----------- ---------
George Joseph 21,224,721 12,749
Charles E. McClung 21,224,846 12,624
Gloria Joseph 21,223,629 13,841
Donald R. Spuehler 21,224,843 12,627
Richard E. Grayson 21,223,875 13,595
Donald P. Newell 21,224,847 12,623
Bruce A. Bunner 21,224,675 12,795
Nathan Bessin 21,224,611 12,859
Michael D. Curtius 21,224,879 12,591
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herewith:
27 Financial Data Schedule
(b) Not applicable.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCURY GENERAL CORPORATION
By: /s/ GEORGE JOSEPH
------------------------------------------
George Joseph
Chairman and Chief Executive Officer
By: /s/ KEITH L. PARKER
------------------------------------------
Keith L. Parker
Chief Financial Officer
11