<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, 1997 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, 1997, the Registrant had issued and outstanding an aggregate
of 55,110,900 shares of its Common Stock.
<PAGE>
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,
1997 1996
------------- ------------
<S> <C> <C>
A S S E T S
Investments:
Fixed maturities available for sale (amortized cost
$1,089,690 in 1997 and $924,793 in 1996).......................... $1,143,160 $ 954,108
Equity securities available for sale (cost $175,399
in 1997 and $148,264 in 1996)..................................... 176,427 148,112
Short-term cash investments, at cost, which approxi-
mates market...................................................... 60,107 66,067
---------- ----------
Total investments......................................... 1,379,694 1,168,287
Cash.................................................................. 4,771 3,605
Receivables:
Premiums receivable................................................ 109,182 83,748
Premium notes...................................................... 13,874 12,395
Accrued investment income.......................................... 18,931 18,410
Other.............................................................. 24,974 29,655
---------- ----------
166,961 144,208
Deferred policy acquisition costs..................................... 56,475 46,783
Fixed assets, net..................................................... 31,275 30,060
Other assets.......................................................... 20,854 26,984
---------- ----------
$1,660,030 $1,419,927
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses................................... $ 393,327 $ 336,685
Unearned premiums..................................................... 311,468 260,878
Notes payable......................................................... 75,000 75,000
Loss drafts payable................................................... 29,449 29,032
Accounts payable and accrued expenses................................. 52,590 36,463
Current income taxes.................................................. 3,609 1,590
Deferred income taxes................................................. 13,897 6,349
Other liabilities..................................................... 34,492 32,708
---------- ----------
Total liabilities......................................... 913,832 778,705
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
55,106,100 shares in 1997 and 55,007,850 shares in
1996............................................................. 46,092 42,644
Net unrealized investment gains.................................... 35,424 18,956
Unearned ESOP compensation......................................... (500) (2,000)
Retained earnings.................................................. 665,182 581,622
---------- ----------
Total shareholders' equity................................ 746,198 641,222
---------- ----------
Commitments and contingencies...................................... $1,660,030 $1,419,927
========== ==========
</TABLE>
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<PAGE>
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>
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Earned premiums $267,212 $193,299
Net investment income 22,225 17,340
Net realized investment gains 2,275 72
Other 945 770
-------- --------
Total revenues $292,657 $211,481
-------- --------
Expenses:
Incurred losses 166,477 126,797
Policy acquisition costs 59,375 40,322
Other operating expenses 10,339 5,838
Interest 1,268 444
-------- --------
Total expenses 237,459 173,401
-------- --------
Income before income taxes 55,198 38,080
Income taxes 14,444 9,085
-------- --------
Net income $ 40,754 $ 28,995
======== ========
EARNINGS PER SHARE (average shares outstanding
55,007,811 in 1997 and 54,821,398 in 1996) $0.74 $0.53
======== ========
Dividends declared per share $.145 $.12
======== ========
</TABLE>
-3-
<PAGE>
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>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Earned premiums $757,910 $544,116
Net investment income 63,004 51,220
Net realized investment gains (losses) 3,108 (1,000)
Other 3,356 2,344
-------- --------
Total revenues $827,378 $596,680
-------- --------
Expenses:
Incurred losses 489,677 363,712
Policy acquisition costs 164,655 114,741
Other operating expenses 26,307 17,189
Interest 3,704 1,353
-------- --------
Total expenses 684,343 496,995
-------- --------
Income before income taxes 143,035 99,685
Income taxes 35,570 22,197
-------- --------
Net income $107,465 $ 77,488
======== ========
EARNINGS PER SHARE (average shares outstanding
54,962,212 in 1997 and 54,772,652 in 1996) $1.96 $1.41
======== ========
Dividends declared per share $0.435 $0.360
======== ========
</TABLE>
-4-
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 107,465 $ 77,488
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 56,642 25,487
Increase in unearned premiums 50,590 32,950
Increase in premium notes receivable (1,479) (381)
Increase in premiums receivable (25,434) (14,774)
Increase in deferred policy acquisition costs (9,692) (5,632)
Increase in loss drafts payable 417 3,447
Increase in accrued income taxes, excluding
deferred tax on change in unrealized gain 702 1,348
Increase in accounts payable and accrued expenses 16,127 8,919
Depreciation 3,675 2,878
Net realized investment (gains) losses (3,108) 1,000
Bond amortization (accretion), net (1,456) (705)
Other, net 15,991 6,169
--------- ---------
Net cash provided from operating activities 210,440 138,194
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (266,757) (174,419)
Sales 54,015 19,855
Calls or maturities 50,502 74,709
Equity securities available for sale:
Purchases (403,760) (284,611)
Sales 378,535 264,393
Decrease (increase) in short-term cash investments,
net 5,960 (14,476)
Purchase of fixed assets (5,458) (4,718)
Sale of fixed assets 458 151
--------- ---------
Net cash used in investing activities $(186,505) $(119,116)
</TABLE>
(Continued)
-5-
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to shareholders $(23,905) $(19,714)
Proceeds from stock options exercised, excluding
related tax benefit 1,136 867
-------- --------
Net cash used in financing activities (22,769) (18,847)
Net increase in cash 1,166 231
Cash:
Beginning of the year 3,605 2,872
-------- --------
End of the year $ 4,771 $ 3,103
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period $ 3,776 $ 1,364
Income taxes paid during the period $ 34,563 $ 20,725
</TABLE>
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<PAGE>
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, 1997 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.
Certain statements in this report on Form 10-Q that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results of the Company to be materially different from historical
results or from any results expressed or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, but are not
limited to, the Company's concentration of business in a single line in a single
state; the effect of weather and other non-controllable factors on the Company's
loss experience; competition and other industry factors, including uncertainties
inherent in the estimate of loss and loss adjustment expense reserves,
reinsurance, importance of ratings and regulatory matters and certain structural
matters, including the Company's holding company structure. These risks and
uncertainties are discussed in more detail in the Company's registration
statement on Form 10-K for the fiscal year 1996.
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 1997, including $47.8
million contributed by the American Mercury Insurance Group (AMI) (formerly
American Fidelity Insurance Group) acquired for cash in December 1996, increased
39.3% from the corresponding period in 1996. Excluding AMI, the year-to-year
increase was 30.5% for the first nine months and 29.8% for the third quarter.
Since the AMI acquisition in December 1996 was accounted for as a purchase, its
operating results have been consolidated only in the current reporting period,
and year-to-year comparisons are not strictly comparable. California premiums
written grew approximately 32% in the period, versus approximately 25% for all
of 1996, reflecting both the Company's highly competitive rates and a new
California law effective January 1, 1997, which requires proof of insurance for
the registration (new or renewal) of a motor vehicle. Compliance with the new
law by previously uninsured drivers produced a surge of new applications early
in the year which has since tapered off.
The loss ratio in the first nine months (loss and loss adjustment
expenses related to premiums earned) was 64.6%, compared with 66.8% in 1996.
The loss ratio for the third quarter was 62.3% in 1997 versus 65.6% in 1996.
The lower loss ratios in 1997 reflect continuing favorable loss experience in
the bodily injury line. In addition, 1996 was adversely affected in the first
quarter by an increase in weather-related claims associated with heavy rainfall
and severe flooding in California. AMI's loss ratio for the nine months was
73.1% and 86.4% for the quarter. Seasonal weather patterns tend to influence
AMI's loss experience favorably in the first quarter of the year and adversely
in the second and third quarters, in contrast to Mercury's exposure to weather-
related losses normally occurs in California's December to March rainy season.
-7-
<PAGE>
The expense ratio (policy acquisition costs and other expenses related
to premiums earned) in the first nine months of 1997 was 25.2%, compared to
24.3% in 1996. The expense ratio in the third quarter was 26.1% in 1997 and
23.9% in 1996. The increase reflects higher commission rates paid to California
agents, the effect of AMI's higher expense ratio and an increase in the
provision for bonuses and profit sharing.
The combined ratio of losses and expenses for the nine months period
(GAAP basis) was 89.8%, compared with 91.1% in 1996, resulting in an
underwriting gain for the period of $77.3 million, compared with $48.5 million a
year ago.
Net investment income in the first nine months, including $4.6 million
from AMI, was $63.0 million, compared with $51.2 million in 1996. The after-tax
yield on average investments of $1,230.3 million (fixed maturities at cost,
equities at market) for the nine months period was 6.1% compared with 6.6% on
average investments of $942.3 million in 1996. The decrease in realized
investment yields reflects lower yields on newly acquired investments, the
redemption of bonds acquired in earlier, higher interest rate environments, a
lower effective yield from equities and a lower after-tax yield on the
securities of AMI. New investments in bonds and equities combined are currently
being made at after-tax yields of approximately 5.5%. The improvement in market
values since December 31, 1996 of approximately $25 million reflects principally
the decrease in interest rates which occurred during the second and third
quarters.
Realized investment gains in 1997 were $3.1 million in the first nine
months and $2.3 million in the third quarter, compared with realized losses of
$1.0 million and gains of $72,000, respectively, in 1996. The gains and losses
in both years were primarily related to bond and preferred stock swaps designed
to increase income, and, in 1996, recapture capital gains taxes paid in prior
years.
The income tax provision in the first nine months of $35.6 million
represented an effective tax rate of 24.9%, compared with an effective rate of
22.3% in 1996. The higher effective tax rate is principally attributable to the
larger proportion of fully taxable underwriting gain compared to the
predominantly tax sheltered investment income.
Net income in the first nine months of $107.5 million, or $1.96 per
share, compares with $77.5 million, or $1.41 per share, in 1996. AMI's net
income contributed $.04 per share to 1997 results on a gross basis, or
approximately $.01 per share after the cost of financing related to the
acquisition. Net income in the third quarter was $40.8 million in 1997 and $29.0
million in 1996. Per share results are based on 55.0 million average shares
outstanding in 1997 and 54.8 million shares in 1996, adjusted for a two-for-one
stock split effective September 16, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from operating activities during the first nine
months of 1997 was $210.4 million, while funds derived from the sale, call or
maturity of investments was $483.1 million, of which approximately 78% was
represented by
-8-
<PAGE>
the sale of equities. Fixed-maturity investments, at amortized cost, increased
by $164.9 million during the period. Equity investments, including perpetual
preferred stocks, increased by $27.1 million at cost, and short-term cash
investments decreased by $6.0 million. The amortized cost of fixed-maturities
available for sale which were sold or called during the period was $97.9
million.
The market value of all investments exceeded amortized cost of
$1,325.2 million at September 30, 1997 by $54.5 million. That unrealized gain,
reflected in shareholders' equity net of applicable tax effects, was $35.4
million at September 30, 1997, compared with an unrealized gain of $19.0 million
at December 31, 1996.
The Company's cash and short term investments totaled $64.9 million at
September 30, 1997. 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 1.1%
of total fixed maturities at September 30, 1997 were rated below investment
grade. The average rating of the $1,024.2 million bond portfolio (at amortized
cost) was Aa3/AA-, while the average effective maturity (giving effect to
anticipated early call provisions), approximates 8.9 years. The modified
duration of the bond portfolio approximates 6.6 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 $1,089.7 million (at
cost) include $65.5 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 $176.4 million at market (cost $175.4 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 23.6% of total shareholders' equity.
As of September 30, 1997, 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 $669.6 million at
September 30, 1997 and net written premiums for the twelve months ended on that
date of $1,046.3 million, the ratio of writings to surplus was approximately 1.6
to 1.
-9-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herewith:
3.1 Articles of Incorporation, as amended to date.
27 Financial Data Schedule
(b) Not applicable.
-10-
<PAGE>
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: November 14, 1997 By:/s/ GEORGE JOSEPH
------------------------------------
George Joseph
Chairman and Chief Executive Officer
Date: November 14, 1997 By:/s/ KEITH L. PARKER
------------------------------------
Keith L. Parker
Chief Financial Officer
-11-
<PAGE>
Exhibit 3.1 Articles of Incorporation, as amended to date.
The Articles of Incorporation were filed as an exhibit to the Company's
Form 10-K for the fiscal year ended December 31, 1994, and are incorporated
herein by this reference. The Articles of Incorporation have been modified since
that time as follows:
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION
George Joseph and Judy Walters certify that:
1. They are the chairman of the board of directors and the secretary,
respectively, of MERCURY GENERAL CORPORATION, a California corporation.
2. Article SEVEN of the articles of incorporation is amended to read:
"SEVEN: The corporation is authorized to issue only one class of shares
to be designated "Common Stock." The total number of said shares which the
corporation shall have the authority to issue is Thirty-Five Million
(35,000,000) shares; and, the shares shall be without par value."
3. The amendment herein set forth has been duly approved by the board of
directors.
4. The amendment herein set forth has been duly approved by the required
vote of the shareholders in accordance with Section 902 of the Corporations
Code. The corporation has only one class of shares and the number of outstanding
shares is 27,531,425. The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The percentage vote required for the
approval of the amendment herein set forth was not less than 66-2/3% of the
voting power of the corporation.
/s/ George Joseph
---------------------------
George Joseph, Chairman of
the Board of Directors
/s/ Judy Walters
----------------------------
Judy Walters, Secretary
The undersigned further declare under penalty of perjury under the laws
of the State of California that they have read the foregoing certificate and
know the contents thereof and that the same is true of their own knowledge.
Executed at Los Angeles, California on August 14, 1997.
/s/ George Joseph
---------------------------
George Joseph
/s/ Judy Walters
----------------------------
Judy Walters
<PAGE>
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION
George Joseph and Judy Walters certify that:
1. They are the chairman of the board of directors and the secretary,
respectively, of MERCURY GENERAL CORPORATION, a California corporation.
2. Article SEVEN of the articles of incorporation is amended to read:
"SEVEN: The corporation is authorized to issue only one class of
-----
shares to be designated "Common Stock." The total number of said shares which
the corporation shall have the authority to issue is Seventy Million
(70,000,000) shares; and, the shares shall be without par value. Upon the
amendment of this Article to read as hereinabove set forth, each outstanding
share is split up and converted into two shares of Common Stock."
3. The amendment herein set forth has been duly approved by the board of
directors.
4. Pursuant to Section 902(c) of the California Corporations Code, the
vote of the shareholders of the corporation is not required to effect the
foregoing amendment of articles of incorporation.
5. The corporation has only one class of shares outstanding and the
amendment effects only a stock split and an increase in the authorized number
of shares in proportion to the split.
/s/ George Joseph
---------------------------
George Joseph, Chairman of
the Board of Directors
/s/ Judy Walters
----------------------------
Judy Walters, Secretary
The undersigned further declare under penalty of perjury under the laws
of the State of California that they have read the foregoing certificate and
know the contents thereof and that the same is true of their own knowledge.
Executed at Los Angeles, California on August 27, 1997.
/s/ George Joseph
---------------------------
George Joseph
/s/ Judy Walters
----------------------------
Judy Walters
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERCURY
GENERAL CORP. 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 1,143,160
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 176,427
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,379,694
<CASH> 4,771
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 56,475
<TOTAL-ASSETS> 1,660,030
<POLICY-LOSSES> 393,327
<UNEARNED-PREMIUMS> 311,468
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 75,000
0
0
<COMMON> 46,092
<OTHER-SE> 700,106
<TOTAL-LIABILITY-AND-EQUITY> 1,660,030
757,910
<INVESTMENT-INCOME> 63,004
<INVESTMENT-GAINS> 3,108
<OTHER-INCOME> 3,356
<BENEFITS> 489,677
<UNDERWRITING-AMORTIZATION> 164,655
<UNDERWRITING-OTHER> 26,307
<INCOME-PRETAX> 143,035
<INCOME-TAX> 35,570
<INCOME-CONTINUING> 107,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,465
<EPS-PRIMARY> 1.96
<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>
