<PAGE>
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, 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
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 9, 1995, the Registrant had issued and outstanding an aggregate of
27,434,575 shares of its Common Stock.
1
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale (amortized cost
$718,789 in 1995 and $656,782 in 1994)................ $ 738,672 $644,297
Equity securities available for sale (cost $112,462
in 1995 and $91,726 in 1994).......................... 113,264 84,622
Short-term cash investments, at cost, which approxi-
mates market.......................................... 25,954 22,695
---------- --------
Total investments................................ 877,890 751,614
Cash...................................................... 3,080 3,344
Receivables:
Premiums receivable.................................... 58,333 48,741
Premium notes.......................................... 12,069 11,562
Accrued investment income.............................. 14,447 14,642
Other.................................................. 7,144 7,795
---------- --------
91,993 82,740
Deferred policy acquisition costs......................... 33,717 30,068
Fixed assets, net......................................... 27,988 27,579
Current income taxes...................................... 1,030 4,699
Deferred income taxes..................................... -- 10,190
Other assets.............................................. 1,339 1,459
---------- --------
$1,037,037 $911,693
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses....................... $ 246,382 $227,499
Unearned premiums......................................... 168,109 148,654
Notes payable............................................. 25,000 25,000
Loss drafts payable....................................... 18,628 17,779
Accounts payable and accrued expenses..................... 26,899 21,925
Deferred income taxes..................................... 3,764 --
Other liabilities......................................... 14,133 13,675
---------- --------
Total liabilities................................ 502,915 454,532
---------- --------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 30,000,000 shares; issued and outstanding
27,431,975 shares in 1995 and 27,415,275 shares in
1994................................................. 40,627 40,250
Net unrealized investment gains (losses)............... 13,445 (12,733)
Unearned ESOP compensation............................. (3,324) (4,042)
Retained earnings...................................... 483,374 433,686
---------- --------
Total shareholders' equity....................... 534,122 457,161
---------- --------
Commitments and contingencies.......................... $1,037,037 $911,693
========== ========
</TABLE>
2
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Revenues:
Earned premiums $157,179 $134,022
Net investment income 16,105 13,795
Premium finance fees 477 508
Net realized investment gains (losses) 110 (4,076)
Other 377 309
-------- --------
Total revenues 174,248 144,558
-------- --------
Expenses:
Losses and loss adjustment expenses 103,589 89,500
Policy acquisition costs 32,743 29,123
Other operating expenses 5,093 5,206
Interest 518 297
-------- --------
Total expenses 141,943 124,126
-------- --------
Income before income taxes 32,305 20,432
Income taxes 7,148 4,160
-------- --------
Net income $ 25,157 $ 16,272
======== ========
EARNINGS PER SHARE (average shares outstanding
27,318,890 in 1995 and 27,244,664 in 1994) $ .92 $ .60
======== ========
Dividends declared per share $ .20 $ .175
======== ========
</TABLE>
3
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Revenues:
Earned premiums $453,587 $388,575
Net investment income 46,321 40,590
Premium finance fees 1,382 1,473
Net realized investment gains (losses) 858 (9,407)
Other 1,080 919
-------- --------
Total revenues 503,228 422,150
-------- --------
Expenses:
Losses and loss adjustment expenses 307,842 258,529
Policy acquisition costs 94,212 82,353
Other operating expenses 16,189 16,669
Interest 1,552 704
-------- --------
Total expenses 419,795 358,255
-------- --------
Income before income taxes 83,433 63,895
Income taxes 17,369 12,491
-------- --------
Net income $ 66,064 $ 51,404
======== ========
EARNINGS PER SHARE (average shares outstanding
27,303,947 in 1995 and 27,279,476 in 1994) $ 2.42 $ 1.88
======== ========
Dividends declared per share $ .60 $ .525
======== ========
</TABLE>
4
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 66,064 $ 51,404
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 18,883 2,911
Increase in unearned premiums 19,455 16,986
Increase in premium notes receivable (507) (2,070)
Increase in premiums receivable (9,592) (9,006)
Increase in deferred policy acquisition costs (3,649) (3,519)
Increase in loss drafts payable 849 1,245
Increase (decrease) in accrued income taxes, excluding
deferred tax on change in unrealized gain 3,527 (1,854)
Increase (decrease) in accounts payable and accrued
expenses 4,974 (4,687)
Depreciation 2,751 2,515
Net realized investment (gains) losses (858) 9,407
Bond amortization, net 89 1,298
Other, net 2,218 684
--------- --------
Net cash provided from operating activities 104,204 65,314
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (153,954) (164,422)
Sales 41,979 66,377
Calls or maturities 49,601 44,037
Equity securities available for sale:
Purchases (264,849) (95,534)
Sales 245,249 92,684
Decrease (increase) in short-term cash
investments, net (3,259) 8,191
Purchase of fixed assets (3,561) (2,569)
Sale of fixed assets 401 231
--------- --------
Net cash used in investing activities $ (88,393) $(51,005)
</TABLE>
(Continued)
5
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to shareholders $(16,376) $(14,330)
Proceeds from stock options exercised, excluding
related tax benefit 301 257
-------- --------
Net cash used in financing activities (16,075) (14,073)
-------- --------
Net increase (decrease) in cash (264) 236
Cash:
Beginning of the year 3,344 2,039
-------- --------
End of the year $ 3,080 $ 2,275
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 1,492 $ 623
Income taxes paid during the period $ 13,798 $ 14,285
</TABLE>
6
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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, 1995 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 nine months of 1995 increased 16.7% from the
corresponding period in 1994. The increase reflects new business (unit growth)
and a continuing renewal rate approximating 93%.
The loss ratio for the nine month period (loss and loss adjustment expenses
related to premiums earned) was 67.9%, compared with 66.5% in 1994. The higher
loss ratio in 1995 is attributable in part to an increase in weather-related
claims associated with heavy rainfall and severe flooding in California in the
first quarter. The loss ratio in the third quarter was 65.9%, compared with
66.8% in 1994. Loss experience in both 1995 and 1994 reflects favorable trends
in accident frequency and severity, particularly in the bodily injury lines.
Recoveries of flood-related catastrophe losses in January under the Company's
reinsurance treaty then in effect approximated $2.5 million, which reduced the
nine months loss ratio by less than one point.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) was 24.3%, compared with 25.5% in 1994. The improvement
reflects in part economies of scale associated with growth and improved
efficiency related to the recently instituted computer linkage with the
Company's agents. The lower expense ratio also reflects smaller provisions for
agent and management incentive bonuses. A year ago, unusually large bonus
awards were related to exceptionally good underwriting results in 1993.
The combined ratio of losses and expenses (GAAP basis) was 92.2%, compared
with 92.0% in 1994, resulting in an underwriting gain for the period of $35.3
million, compared with $31.0 million a year ago.
7
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Investment income in the first nine month period was $46.3 million,
compared with $40.6 million in 1994. The after-tax yield on average investments
of $811.7 million (fixed maturities at cost, equities at market) was 6.90%,
compared with 6.84% on average investments of $719.9 million in 1994. The
increase in realized investment yields reflects in part yield enhancing bond
swaps undertaken in a rising rate environment in 1994. It also reflects
increased holdings of high yielding perpetual preferred issues and yield-
enhancing swaps in that sector. New investments in bonds and perpetual
preferred stocks combined are currently being made at after-tax yields averaging
approximately 6.30%.
Realized investment gains (before income taxes) were $858,000 in the first
nine months of 1995, compared with realized losses of $9.4 million in 1994.
The gains in 1995 were largely the result of swaps in the perpetual preferred
sector of the Company's portfolio. The losses in 1994 were related to the bond
swap program noted above.
The income tax provision in the first nine months of 1995 was $17.4
million, representing an effective tax rate of 20.8%, compared with an effective
rate of 19.5% in 1994.
Net income in the first nine months was $66.1 million, or $2.42 per share,
compared with $51.4 million, or $1.88 per share, in 1994. Per share results are
based on 27.3 million average shares in both 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Net cash provided from operating activities during the first nine months of
1995 was $104.2 million, while funds derived from the sale, call or maturity of
investments was $336.8 million, of which approximately 73% was represented by
the sale of equities. Fixed-maturity investments, at amortized cost, were
increased by $62.0 million, net of sales, during the period. Equity investments,
including perpetual preferred stocks, were increased by $20.7 million at cost,
net of sales, and short-term cash investments were increased by $3.3 million.
The amortized cost of fixed-maturities available for sale which were sold or
called during the period was $89.5 million.
The market value of investments (fixed-maturities and equities) held at
market as "Available for Sale" exceeded amortized cost of $831.3 million at
September 30, 1995 by $20.7 million. That unrealized gain, reflected in
shareholders' equity net of applicable tax effects, was $13.4 million at
September 30, 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 declining trend of long term interest rates in 1995.
The Company's cash and short term investments totaled $29.0 million at
September 30, 1995. 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, historically, not to invest in high yield
or "junk" bonds. Because of alternative minimum tax considerations, and the
need to optimize the investment mix in order to maintain a satisfactory after-
tax
8
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yield, the Company recently 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/BB without specific board approval. Bond holdings rated
below investment grade by both of the leading independent rating firms, Moody's
and Standard & Poor's, constituted less than 2% of total bond holdings at
September 30, 1995. The average rating and nominal maturity of the $622.5
million bond portfolio (at cost) was A1/A+ and 15.6 years, respectively. The
average effective maturity, giving effect to anticipated early call,
approximates 7.8 years, and the modified duration of the entire bond portfolio
approximates 5.6 years. Tax-exempt issues represent approximately 96.2% of
total bond holdings and 70.1% of total investments. 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 over $8.0 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 significantly affected by investments in
the Orange County pool approximates $2.3 million based on market value at
September 30, 1995 ($2.3 million at cost). 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 $718.8 million (at
cost) include $96.3 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 $113.3 million at market (cost $112.5 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 21.2% of total shareholders' equity.
As of September 30, 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 $462.4 million at September 30, 1995 and net
written premiums for the twelve months ended on that date of $618.2 million, the
ratio of writings to surplus was approximately 1.3 to 1.
9
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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: GEORGE JOSEPH
----------------------------------------
George Joseph
Chairman and Chief Executive Officer
By: KEITH L. PARKER
-----------------------------------------
Keith L. Parker
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERCURY
GENERAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 738,672
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 113,264
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 877,890
<CASH> 3,080
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 33,717
<TOTAL-ASSETS> 1,037,037
<POLICY-LOSSES> 246,382
<UNEARNED-PREMIUMS> 168,109
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 25,000
<COMMON> 40,627
0
0
<OTHER-SE> 493,495
<TOTAL-LIABILITY-AND-EQUITY> 1,037,037
453,587
<INVESTMENT-INCOME> 46,321
<INVESTMENT-GAINS> 858
<OTHER-INCOME> 1,080
<BENEFITS> 307,842
<UNDERWRITING-AMORTIZATION> 94,212
<UNDERWRITING-OTHER> 16,189
<INCOME-PRETAX> 83,433
<INCOME-TAX> 17,369
<INCOME-CONTINUING> 66,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,064
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
