SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 1998 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 May 6, 1998 the Registrant had issued and outstanding an aggregate of
55,226,113 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
March 31, December 31,
1998 1997
---------- ------------
Investments:
Fixed maturities available for sale (amortized cost
$1,182,921 in 1998 and $1,147,594 in 1997)................... $1,250,252 $1,214,986
Equity securities available for sale (cost $182,143
in 1998 and $169,943 in 1997)................................ 185,104 173,522
Short-term cash investments, at cost, which approxi-
mates market................................................. 69,233 59,740
---------- ----------
Total investments......................................... 1,504,589 1,448,248
Cash............................................................. 6,878 3,011
Receivables:
Premiums receivable........................................... 112,001 104,216
Premium notes................................................. 13,855 13,562
Accrued investment income..................................... 20,398 21,895
Other......................................................... 26,338 26,476
---------- ----------
172,592 166,149
Deferred policy acquisition costs................................ 60,109 57,264
Fixed assets, net................................................ 30,238 30,493
Other assets..................................................... 18,600 20,367
---------- ----------
$1,793,006 $1,725,532
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses............................. $ 404,389 $ 409,061
Unearned premiums............................................... 322,442 309,376
Notes payable................................................... 75,000 75,000
Loss drafts payable............................................. 35,551 32,058
Accounts payable and accrued expenses........................... 43,042 50,742
Current income taxes............................................ 18,381 3,317
Deferred income taxes........................................... 19,429 19,722
Other liabilities............................................... 33,013 26,664
-------- --------
Total liabilities........................................ 951,247 925,940
-------- --------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
55,222,513 shares in 1998 and 55,124,579 shares in
1997....................................................... 48,269 47,412
Accumulated other comprehensive income....................... 45,690 46,131
Retained earnings............................................ 747,800 706,049
-------- --------
Total shareholders' equity............................... 841,759 799,592
-------- --------
Commitments and contingencies................................
$1,793,006 $1,725,532
========= =========
2
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1998 1997
---- ----
Revenues:
Earned premiums $274,454 $235,579
Net investment income 23,867 20,323
Net realized investment gains 1,824 509
Other 1,087 1,305
------- -------
Total revenues 301,232 257,716
------- -------
Expenses:
Incurred losses 161,351 158,024
Policy acquisition costs 59,630 50,502
Other operating expenses 8,941 8,105
Interest 1,203 1,215
------- --------
Total expenses 231,125 217,846
------- -------
Income before income taxes 70,107 39,870
Income taxes 18,693 9,052
------- -------
Net income $ 51,414 $ 30,818
------- -------
BASIC EARNINGS PER SHARE (average shares outstanding
55,156,013 in 1998 and 54,910,578 in 1997) $ 0.93 $ 0.56
======= =======
DILUTED EARNINGS PER SHARE (adjusted weighted
average shares 55,557,730 in 1998 and 55,255,469 in
1997) $ 0.93 $ 0.56
======= ========
Dividends declared per share $ 0.175 $ 0.145
======= =======
3
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
1998 1997
---- ----
Net income $ 51,414 $ 30,818
Other comprehensive income (losses), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period 166 (13,383)
Less: reclassification adjustment for net gains
included in net income (845) (504)
------- -------
Other comprehensive losses, before tax (679) (13,887)
Income tax expense (benefit) related to unrealized
holding gains (losses) arising during period 58 (4,684)
Income tax benefit related to reclassification
adjustment for net gains included in net income (296) (177)
------- -------
Comprehensive income, net of tax $ 50,973 $ 21,792
========= =========
4
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
AMOUNTS EXPRESSED IN THOUSANDS
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 51,414 $ 30,818
Adjustments to reconcile net income to net cash
provided from operating activities:
(Decrease) increase in unpaid losses and loss
adjustment expenses (4,672) 12,291
Increase in unearned premiums 13,066 20,556
Increase in premium notes receivable (293) (543)
Increase in premiums receivable (7,785) (12,254)
Increase in deferred policy acquisition costs (2,845) (3,867)
Increase (decrease) in loss drafts payable 3,493 (1,589)
Increase in accrued income taxes, excluding deferred
tax on change in unrealized gain 15,008 6,346
Decrease in accounts payable and accrued expenses (7,700) (3,879)
Depreciation 1,335 1,121
Net realized investment gains (1,824) (509)
Bond amortization, net (829) (433)
Other, net 9,735 11,540
--------- --------
Net cash provided from operating activities 68,103 59,598
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (103,610) (81,219)
Sales 51,097 5,228
Calls or maturities 18,096 18,991
Equity securities available for sale:
Purchases (248,852) (121,014)
Sales 238,396 110,464
Decrease (increase) in short-term cash
investments, net (9,493) 19,269
Purchase of fixed assets (1,152) (1,572)
Sale of fixed assets 88 205
--------- --------
Net cash used in investing activities $ (55,430) $(49,648)
(Continued)
5
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
1998 1997
---- ----
Cash flows from financing activities:
Dividends paid to shareholders $(9,663) $(7,965)
Proceeds from stock options exercised 857 701
------ ------
Net cash used in financing activities (8,806) (7,264)
------ ------
Net increase in cash 3,867 2,686
Cash:
Beginning of the year 3,011 3,605
------ ------
End of the period $ 6,878 $ 6,291
====== ======
Supplemental disclosures of cash flow information
and non-cash financing activities:
Interest paid during the period $ 874 $ 1,205
Income taxes paid during the period $ 3,348 $ 2,520
Common stocks tendered at market value to exercise
stock options $ 276 $ -0-
6
MERCURY GENERAL CORPORATION & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The financial data included herein have been prepared by the Company,
without audit. In the opinion of management, all adjustments of a normal
recurring nature necessary to present fairly the Company's financial position at
March 31, 1998 and the results of operations, comprehensive income 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.
2. Comprehensive Income
--------------------
Statement of Financial Accounting Standards No. 130 requires the reporting
of comprehensive income for fiscal years beginning after December 15, 1997. The
Company's comprehensive income reflects net income adjusted for the change in
unrealized gains and losses.
Other comprehensive losses were $0.4 million for the period ended March 31,
1998 compared to $9.0 million for the period ended March 31, 1997. Other
comprehensive losses primarily relate to changes in market interest rates which
directly impact the market value of the Company's fixed maturity portfolio.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Results of Operations
- ---------------------
Premiums earned in the first quarter of 1998 increased 16.5% from the
corresponding period in 1997. California premiums written, representing 92% of
the Company's total premiums, grew approximately 13.6% in the quarter versus
33.9% in the first quarter of 1997 and approximately 28.5% for all of 1997. A
large portion of the 1997 premium growth was the result of a new California law
effective January 1, 1997 which requires proof of insurance for the registration
(new or renewal) of a motor vehicle. This requirement produced a large influx
of new business during much of 1997 which was unmatched in 1998. In addition,
the California automobile insurance marketplace has become intensely
competitive, with many new entrants, including some major companies which had
previously left the state altogether. Most of the major direct writers, which
represent the Company's chief competition, have instituted one or more rate cuts
over the last twelve
months.
The loss ratio in the first quarter (loss and loss adjustment expenses
related to premiums earned) was 58.8%, compared with 67.1% in the first quarter
of 1997. The lower loss ratio in 1998 reflects continuing favorable loss
experience in the bodily injury line. The favorable loss experience is largely
7
related to the effectiveness of Proposition 213, an initiative made effective
January 1, 1997 which prohibits recovery of non-economic (pain and suffering)
losses by uninsured motorists or drunk drivers injured in automobile accidents.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in 1998 was 25.0%, compared to 24.9% in 1997.
The combined ratio of losses and expenses (GAAP basis) was 83.8%, compared
with 92.0% in 1997, resulting in an underwriting gain for the period of $44.5
million, compared with $18.9 million a year ago.
Investment income in the quarter was $23.9 million, compared with $20.3
million in the first quarter of 1997. The after-tax yield on average
investments of $1,421.7 million (fixed maturities at cost, equities at market)
was 6.1%, compared with 6.2% on average investments of $1,169.7 million in the
first quarter of 1997. The decrease in realized investment yields reflects the
redemption of bonds acquired in earlier, higher interest rate environments and a
lower effective yield from equities. New investments are currently being made
at after-tax yields ranging from approximately 5.2% - 5.5%, or approximately 50-
75 basis points lower than the average yield realized during 1997.
Realized investment gains were $1,824,000 in the 1998 first quarter,
compared with realized gains of $509,000 in 1997.
The income tax provision in the first quarter of $18.7 million represented
an effective tax rate of 26.7%, compared with an effective rate of 22.7% in the
1997 first quarter. The higher effective tax rate is principally attributable
to the larger proportion of fully taxable underwriting gain compared to the
predominantly tax-exempt investment income.
Net income in the quarter of $51.4 million, or $.93 per share (basic),
compares with $30.8 million, or $.56 per share (basic), in 1997. Diluted net
income per share was $.93 in 1998 and $.56 in 1997. Per share (basic) results
are based on 55.2 million average shares outstanding in 1998 and 54.9 million
shares in 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from operating activities during the first quarter of
1998 was $68.1 million, while funds derived from the sale, call or maturity of
investments was $307.6 million, of which approximately 78% was represented by
the sale of equities. Fixed-maturity investments, at amortized cost, increased
by $35.3 million during the period. Equity investments, including perpetual
preferred stocks, increased by $12.2 million at cost, and short-term cash
investments increased by $9.5 million. The amortized cost of fixed-maturities
available for sale which were sold or called during the period was $69.1
million.
The market value of all investments (fixed-maturities and equities) held at
market as "Available for Sale" exceeded amortized cost of $1,365.1 million at
March 31, 1998 by $70.3 million. That unrealized gain, reflected as accumulated
8
other comprehensive income in shareholders' equity net of applicable tax
effects, was $45.7 million at March 31, 1998 compared with an unrealized gain of
$46.1 million at December 31, 1997.
The Company's cash and short term investments totaled $76.1 million at
March 31, 1998. 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 1.0%
of total fixed maturities at March 31, 1998 were rated below investment grade.
The average rating of the $1,116.5 million bond portfolio (at amortized cost)
was AA-, while the average nominal maturity approximates 16.6 years. The
modified duration of the bond portfolio approximates 6.2 years. Bond holdings
are broadly diversified geographically, and, within the tax-exempt sector,
consist largely of 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 $1,182.9 million (at cost) include $66.4 million of sinking fund
preferreds, principally utility issues.
Except for Company-occupied buildings, the Company has no direct
investments in real estate and no holdings of mortgages secured by commercial
real estate.
Equity holdings of $185.1 million at market (cost $182.1 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represents 21.6% (at cost) of total shareholders'
equity.
As of March 31, 1998, the Company had no material 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 $716.4 million at March 31, 1998 and net
written premiums for the twelve months ended on that date of $1,117.6 million,
the ratio of writings to surplus was approximately 1.56 to 1.
Item 3. Quantitive and Qualitative Disclosures About Market Risk
--------------------------------------------------------
Not applicable.
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.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCURY GENERAL CORPORATION
Date: May 6, 1998 By: GEORGE JOSEPH
------------------------------------
George Joseph
Chairman and Chief Executive Officer
Date: May 6, 1998 By: GABRIEL TIRADOR
------------------------------------
Gabriel Tirador
Chief Financial Officer
10