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 September 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 November 11, 1996, the Registrant had issued and outstanding an aggregate
of 27,496,075 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
September 30, December 31,
1996 1995
------------ ------------
Investments:
Fixed maturities available for sale (amortized cost
$824,392 in 1996 and $742,409 in 1995)..................................... $ 846,880 $ 779,783
Equity securities available for sale (cost $131,273
in 1996 and $113,478 in 1995).............................................. 127,592 114,915
Short-term cash investments, at cost, which approxi-
mates market............................................................... 42,972 28,496
---------- ----------
Total investments..................................................... 1,017,444 923,194
Cash........................................................................... 3,103 2,872
Receivables:
Premiums receivable......................................................... 73,676 58,902
Premium notes............................................................... 12,109 11,728
Accrued investment income................................................... 15,404 15,870
Other....................................................................... 6,190 6,108
---------- ----------
107,379 92,608
Deferred policy acquisition costs.............................................. 39,441 33,809
Fixed assets, net.............................................................. 29,153 27,464
Other assets................................................................... 1,094 1,709
---------- ----------
$1,197,614 $1,081,656
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses............................................ $ 279,033 $ 253,546
Unearned premiums.............................................................. 201,354 168,404
Notes payable.................................................................. 25,000 25,000
Loss drafts payable............................................................ 23,518 20,071
Accounts payable and accrued expenses.......................................... 34,331 25,412
Current income taxes........................................................... 2,160 388
Deferred income taxes.......................................................... 2,732 10,158
Other liabilities.............................................................. 17,575 13,489
---------- ----------
Total liabilities..................................................... 585,703 516,468
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 30,000,000 shares; issued and outstanding
27,490,075 shares in 1996 and 27,442,675 shares in
1995...................................................................... 42,012 40,895
Net unrealized investment gains............................................. 12,225 25,227
Unearned ESOP compensation.................................................. (2,250) (3,084)
Retained earnings........................................................... 559,924 502,150
---------- ----------
Total shareholders' equity............................................ 611,911 565,188
---------- ----------
Commitments and contingencies............................................... $1,197,614 $1,081,656
========== ==========
2
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995
-------- --------
Revenues:
Earned premiums $193,299 $157,179
Net investment income 17,340 16,105
Premium finance fees 464 477
Net realized investment gains 72 110
Other 306 377
-------- --------
Total revenues 211,481 174,248
-------- --------
Expenses:
Losses and loss adjustment expenses 126,797 103,589
Policy acquisition costs 40,322 32,743
Other operating expenses 5,838 5,093
Interest 444 518
-------- --------
Total expenses 173,401 141,943
-------- --------
Income before income taxes 38,080 32,305
Income taxes 9,085 7,148
-------- --------
Net income $ 28,995 $ 25,157
======== ========
EARNINGS PER SHARE (average shares outstanding
27,410,699 in 1996 and 27,318,890 in 1995) $ 1.06 $ .92
======== ========
Dividends declared per share $ .24 $ .20
======== ========
3
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1996 1995
-------- --------
Revenues:
Earned premiums $544,116 $453,587
Net investment income 51,220 46,321
Premium finance fees 1,363 1,382
Net realized investment gains (losses) (1,000) 858
Other 981 1,080
-------- --------
Total revenues 596,680 503,228
-------- --------
Expenses:
Losses and loss adjustment expenses 363,712 307,842
Policy acquisition costs 114,741 94,212
Other operating expenses 17,189 16,189
Interest 1,353 1,552
-------- --------
Total expenses 496,995 419,795
-------- --------
Income before income taxes 99,685 83,433
Income taxes 22,197 17,369
-------- --------
Net income $ 77,488 $ 66,064
======== ========
EARNINGS PER SHARE (average shares outstanding
27,386,326 in 1996 and 27,303,947 in 1995) $ 2.83 $ 2.42
======== ========
Dividends declared per share $ .72 $ .60
======== ========
4
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
AMOUNTS EXPRESSED IN THOUSANDS
1996 1995
---------- ----------
Cash flows from operating activities:
Net income $ 77,488 $ 66,064
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 25,487 18,883
Increase in unearned premiums 32,950 19,455
Increase in premium notes receivable (381) (507)
Increase in premiums receivable (14,774) (9,592)
Increase in deferred policy acquisition costs (5,632) (3,649)
Increase in loss drafts payable 3,447 849
Increase in accrued income taxes, excluding
deferred tax on change in unrealized gain 1,348 3,527
Increase in accounts payable and accrued expenses 8,919 4,974
Depreciation 2,878 2,751
Net realized investment (gains) losses 1,000 (858)
Bond amortization (accretion), net (705) 89
Other, net 6,169 2,218
--------- --------
Net cash provided from operating activities 138,194 104,204
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (174,419) (153,954)
Sales 19,855 41,979
Calls or maturities 74,709 49,601
Equity securities available for sale:
Purchases (284,611) (264,849)
Sales 264,393 245,249
Increase in short-term cash investments, net (14,476) (3,259)
Purchase of fixed assets (4,718) (3,561)
Sale of fixed assets 151 401
--------- --------
Net cash used in investing activities $(119,116) $(88,393)
(Continued)
5
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
1996 1995
-------- --------
Cash flows from financing activities:
Dividends paid to shareholders $(19,714) $(16,376)
Proceeds from stock options exercised, excluding
related tax benefit 867 301
--------- --------
Net cash used in financing activities (18,847) (16,075)
--------- --------
Net increase (decrease) in cash 231 (264)
Cash:
Beginning of the year 2,872 3,344
-------- --------
End of the year $ 3,103 $ 3,080
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,364 $ 1,492
Income taxes paid during the period $ 20,725 $ 13,798
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
September 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 nine months of 1996 increased 20.0% 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%. Average premiums per policy were substantially
unchanged from a year earlier.
The loss ratio in the first nine months (loss and loss adjustment expenses
related to premiums earned) was 66.8%, compared with 67.9% in 1995. Results in
the year earlier period were affected by weather-related claims associated with
heavy rainfall and severe flooding in California in the early part of the year.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) was 24.3%, unchanged from 1995.
The combined ratio of losses and expenses (GAAP basis) was 91.1%, compared
with 92.2% in 1995, resulting in an underwriting gain for the period of $48.5
million, compared with $35.3 million a year ago.
Investment income in the first nine months was $51.2 million, compared with
$46.3 million in 1995. The after-tax yield on average investments of $942.3
million (fixed maturities at cost, equities at market) was 6.56%, compared with
6.90% on average investments of $811.7 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
approximating 6.00%.
7
Realized investment losses before income taxes were $1,000,000 in the 1996
period, compared with realized gains of $858,000 in 1995. The 1996 losses
reflect income enhancing swaps of fixed income securities, preferred stocks and
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 nine months of $22.2 million
represented an effective tax rate of 22.3%, compared with an effective rate of
20.8% in 1995.
Net income for the period of $77.5 million, or $2.83 per share, compares
with $66.1 million, or $2.42 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 nine months of
1996 was $138.2 million, while funds derived from the sale, call or maturity of
investments was $359.0 million, of which approximately 73.7% was represented by
the sale of equities. Fixed-maturity investments, at amortized cost, were
increased by $82.0 million during the period. Equity investments, including
perpetual preferred stocks, were increased by $17.8 million at cost, and short-
term cash investments were increased by $14.5 million. Proceeds from fixed-
maturities available for sale which were sold or called during the period was
$89.1 million.
The market value of all investments (fixed-maturities and equities) held at
market as "Available for Sale" exceeded amortized cost of $998.6 million at
September 30, 1996 by $18.8 million. That unrealized gain, reflected in
shareholders' equity net of applicable tax effects, was $12.2 million at
September 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 $46.1 million at
September 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 1.8%
of total bond holdings at September 30, 1996 were rated below investment grade.
The average rating of the $744.3 million bond portfolio (at amortized cost) was
A, while the average effective maturity, giving effect to anticipated early
call, approximates 8.0 years. The modified duration of the bond portfolio
approximates 4.0 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-
8
maturity investments of $824.4 million (at cost) include $80.1 million of
sinking fund preferreds, principally utility issues.
Equity holdings of $127.6 million at market (cost $131.3 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 20.9% 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
is expected to approximate $35 million. Consummation of the transaction is
subject to the signing of a definitive purchase agreement and the satisfaction
of a number of conditions, including regulatory approval of a number of states.
The transaction is tentatively scheduled to be closed in mid-December 1996.
AFI's published statutory surplus (equity) at December 31, 1995 was
approximately $35.0 million. Mercury plans to fund the intended purchase with
borrowings under an enlarged revolving credit loan facility.
The only significant debt of the Company at September 30, 1996 was a
$25,000,000 bank loan under a three year revolving credit agreement. 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 loan is
variable and related to LIBOR (London Interbank Rate). Based on the rate
effective September 16, 1996 through November 15, 1996, the net interest cost of
the loan approximates 6.19%. The loan facility is expected to be enlarged to
$75 million on substantially the same terms and at a slightly lower interest
rate 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 September 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 $524.6 million at September 30, 1996 and net
written premiums for the twelve months ended on that date of $740.3 million, the
ratio of writings to surplus was approximately 1.4 to 1.
Recent Developments
- - -------------------
In September 1996, the California Department of Insurance (DOI) issued new
rating factor regulations, replacing emergency regulations which, though
expired, have been in effect since 1990. The new regulations have been designed
to implement the rating factor standards required by Proposition 103, the
insurance
9
initiative passed by California voters in November 1988. Under the new
regulations, all California automobile insurers are required to file new rating
plans with the DOI by February 15, 1997. Rates under the new plan are subject
to the approval of the DOI, and the new rates would become effective following
such approval. In general, the new regulations attempt to subordinate the role
of territory, or proxies for territory, to the standards specified by
Proposition 103, namely, driving safety record, years of driving experience and
miles driven per year. Although the Company expects that the rate changes
required by the new regulations will not be so substantial as to have a
significant effect on the Company's competitive position, the Company can give
no assurance that that will be the case, since the rating plans and rates of all
companies will be changed, possibly giving rise to dislocations in the insurance
marketplace which may be adverse to the Company's position.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herewith:
27 Financial Data Schedule
(b) Not applicable.
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