<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 June 30, 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 August 12, 1998, the Registrant had issued and outstanding an aggregate
of 55,249,488 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
A S S E T S
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized cost
$1,237,935 in 1998 and $1,147,594 in 1997)........................ $1,308,845 $1,214,986
Equity securities available for sale (cost $187,930
in 1998 and $169,943 in 1997)..................................... 189,068 173,522
Short-term cash investments, at cost, which approxi-
mates market...................................................... 67,482 59,740
---------- ----------
Total investments............................................ 1,565,395 1,448,248
Cash................................................................ 4,940 3,011
Receivables:
Premiums receivable................................................ 103,628 104,216
Premium notes...................................................... 14,609 13,562
Accrued investment income.......................................... 22,038 21,895
Other.............................................................. 25,417 26,476
---------- ----------
165,692 166,149
Deferred policy acquisition costs................................... 59,008 57,264
Fixed assets, net................................................... 29,922 30,493
Other assets........................................................ 17,237 20,367
---------- ----------
$1,842,194 $1,725,532
========== ==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Losses and loss adjustment expenses................................. $ 402,474 $ 409,061
Unearned premiums................................................... 317,150 309,376
Notes payable....................................................... 75,000 75,000
Loss drafts payable................................................. 32,833 32,058
Accounts payable and accrued expenses............................... 50,643 50,742
Current income taxes................................................ 9,607 3,317
Deferred income taxes............................................... 19,866 19,722
Other liabilities................................................... 50,475 26,664
---------- ----------
Total liabilities........................................... 958,048 925,940
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
55,245,638 shares in 1998 and 55,124,579 shares in
1997........................................................... 48,927 47,412
Accumulated other comprehensive income........................... 46,832 46,131
Retained earnings................................................ 788,387 706,049
---------- ----------
Total shareholders' equity.................................. 884,146 799,592
---------- ----------
Commitments and contingencies ..................................... $1,842,194 $1,725,532
========== ==========
</TABLE>
2
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Earned premiums $278,768 $255,119
Net investment income 23,602 20,456
Net realized investment gains 1,803 324
Net realized gain from sale of subsidiary 2,586 -0-
Other 1,249 1,106
-------- --------
Total revenues 308,008 277,005
------- -------
Expenses:
Incurred losses 167,145 165,176
Policy acquisition costs 62,044 54,778
Other operating expenses 9,685 7,863
Interest 1,168 1,221
------- -------
Total expenses 240,042 229,038
------- -------
Income before income taxes 67,966 47,967
Income taxes 17,711 12,074
------- -------
Net income $50,255 $35,893
======= =======
BASIC EARNINGS PER SHARE (average shares
outstanding 55,234,961 in 1998 and
54,967,800 in 1997) $ 0.91 $ 0.65
======= =======
DILUTED EARNINGS PER SHARE (adjusted weighted
average shares 55,607,946 in 1998 and
55,335,589 in 1997) $ 0.90 $ 0.65
======= =======
Dividends declared per share $ 0.175 $ 0.145
======= =======
</TABLE>
3
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Earned premiums $553,222 $490,698
Net investment income 47,469 40,779
Net realized investment gains 3,627 833
Net realized gain from sale of subsidiary 2,586 -0-
Other 2,336 2,411
-------- --------
Total revenues 609,240 534,721
-------- --------
Expenses:
Incurred losses 328,496 323,200
Policy acquisition costs 121,674 105,280
Other operating expenses 18,626 15,968
Interest 2,371 2,436
-------- -------
Total expenses 471,167 446,884
-------- -------
Income before income taxes 138,073 87,837
Income taxes 36,404 21,126
-------- -------
Net income $101,669 $ 66,711
======== =======
BASIC EARNINGS PER SHARE (average shares
outstanding 55,195,705 in 1998 and
54,939,348 in 1997) $1.84 $1.21
===== =====
DILUTED EARNINGS PER SHARE (adjusted weighted
average shares 55,580,888 in 1998 and
55,295,688 in 1997) $1.83 $1.21
===== =====
Dividends declared per share $0.35 $0.29
===== =====
</TABLE>
4
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Net income $50,255 $35,893
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising
during period 2,293 22,308
Less: reclassification adjustment for net losses
(gains) included in net income (535) 26
------- -------
Other comprehensive income, before tax 1,758 22,334
Income tax expense related to unrealized
holding gains arising during period 803 7,807
Income tax benefit related to reclassification
adjustment for losses (gains) included in net income (187) 9
------- -------
Comprehensive income, net of tax $51,397 $50,411
======= =======
</TABLE>
5
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
SIX MONTHS ENDED JUNE 30
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net income $101,669 $66,711
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising
during period 2,459 8,925
Less: reclassification adjustment for net (gains)
included in net income (1,380) (478)
-------- -------
Other comprehensive income, before tax 1,079 8,447
Income tax expense related to unrealized
holding gains arising during period 861 3,123
Income tax benefit related to reclassification
adjustment for (gains) included in net income (483) (168)
-------- -------
Comprehensive income, net of tax $102,370 $72,203
======== =======
</TABLE>
6
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 101,669 $ 66,711
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase (decrease) in unpaid losses and loss
adjustment expenses (6,587) 41,074
Increase in unearned premiums 7,774 30,046
Increase in premium notes receivable (1,047) (1,437)
(Increase) decrease in premiums receivable 588 (14,273)
Increase in deferred policy acquisition costs (1,744) (6,009)
Increase (decrease) in loss drafts payable 775 (1,542)
Increase (decrease) in accrued income taxes,
excluding deferred tax on change in unrealized gain 6,122 (629)
Increase in accounts payable and accrued expenses 23,796 3,215
Depreciation 2,630 2,322
Net realized investment gains (3,627) (833)
Net realized gain from sale of subsidiary (2,586) -0-
Bond accretion, net (1,890) (903)
Other, net 3,817 6,036
-------- ---------
Net cash provided from operating activities 129,690 123,778
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (207,003) (168,514)
Sales 77,564 24,797
Calls or maturities 34,255 33,118
Equity securities available for sale:
Purchases (471,077) (212,884)
Sales 456,737 200,661
Proceeds from sale of subsidiary less cash
transferred 11,018 -0-
Increase (decrease) in short-term cash
investments, net (9,430) 19,130
Purchase of fixed assets (2,246) (3,577)
Sale of fixed assets 237 745
---------- ---------
Net cash used in investing activities $ (109,945) $(106,524)
</TABLE>
(Continued)
7
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to shareholders $(19,331) $(15,934)
Proceeds from stock options exercised, net of
related tax benefit 1,515 846
-------- --------
Net cash used in financing activities (17,816) (15,088)
Net increase in cash 1,929 2,166
Cash:
Beginning of the year 3,011 3,605
-------- --------
End of the year $ 4,940 $ 5,771
======== ========
Supplemental disclosures of cash flow information and
non cash financing activities:
Interest paid during the period $ 2,054 $ 2,521
Income taxes paid during the period $ 29,747 $ 21,532
Common stocks tendered at market value to
exercise stock options (276) -0-
</TABLE>
8
<PAGE>
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
June 30, 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 income was $0.7 million for the period ended June 30,
1998 compared to $5.5 million for the period ended June 30, 1997. Other
comprehensive income primarily relates 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
-------------
GENERAL
- -------
The Company is engaged primarily in writing all risk classifications of
automobile insurance in California, which in 1997 accounted for approximately
88% of the Company'a direct premiums written. The Company also writes small
amounts of automobile insurance in Georgia and Illinois. In December 1996 the
Company acquired the American Mercury Insurance Group (formerly named American
Fidelity Insurance Group) which was licensed in 36 states but writes automobile
and mechanical breakdown insurance predominantly in Oklahoma, Kansas and Texas.
During 1998, the Company began writing private passenger automobile coverage in
Florida, and has recently increased its marketing activities in both Florida and
Texas.
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
9
<PAGE>
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 risks inherent to the cyclical nature of the property and
casualty insurance industry, the Company's concentration of business largely in
one line (automobile) in one state (California), uncertainties regarding the
growth in future written premiums in relation to recent historical experience,
the effect of a recent rate reduction in California on future loss ratios of the
Company, the impact of the Year 2000 and uncertainties regarding the success of
the Company's operations outside California, including particularly in the
Florida and Texas markets, competition and other industry factors, including
uncertainties inherent in the estimate of loss and loss adjustment expense (lae)
reserves, insurance regulatory matters and certain structural matters, including
restrictions on intercompany transactions within the Company's holding company
structure.
Results of Operations
- ---------------------
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Premiums earned in the second quarter of 1998 increased 9.3% from the
corresponding period in 1997. California premiums written, representing 92% of
the Company's total premiums, grew approximately 3.5% in the period versus 30.6%
in 1997. A large portion of the 1997 premium growth was the result of a new
California law made 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 that was unmatched
in 1998. The 1998 California premiums written growth of 3.5% was affected by a
7% rate reduction taken on April 1, 1998. Also, a large portion of the new
business written during 1997 as a result of the new mandatory insurance law did
not qualify for the Company's persistency discount because many of these new
insureds did not have prior insurance coverage. During 1998, as many of these
policies renewed they became eligible for the Company's persistency discount.
Consequently, the average premium per policy declined in 1998 as compared to
1997. The combination of the 7% rate reduction and the effect of the
persistency discount restricted the premiums written for the quarter. In
addition, the Company launched an integrated advertising campaign in late April
that has not yet met Company expectations. The Company revised the radio
portion of the campaign in an effort to improve the response rate. 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 represents the
Company's chief competition, have instituted one or more rate cuts over the last
twelve months and many have increased their marketing efforts.
The loss ratio in the second quarter (loss and loss adjustment expenses
related to premiums earned) was 60.0%, compared with 64.7% in 1997. The lower
loss ratio in 1998 reflects continuing favorable loss experience in the bodily
injury line. The favorable loss experience is largely 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 7%
rate reduction taken on April 1, 1998 affected the Company's loss ratio in the
second quarter of 1998 and will have a larger affect on the Company's loss ratio
in succeeding quarters as a higher percentage of the Company's premiums earned
will reflect the 7% rate reduction. The second quarter loss ratio was adversely
affected by the results of the American Mercury Group (AMI). AMI experienced
storm losses of approximately $2 million during the quarter. AMI's loss ratio
in the second quarter was 86.6% in 1998 compared to 70.2% in 1997.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in 1998 was 25.7% compared to 24.6% in 1997. The increase in
the expense ratio was largely attributable to increased advertising expenses
from the Company's integrated advertising campaign launched in late April.
The combined ratio of losses and expenses (GAAP basis) was 85.7% in 1998
compared with 89.3% in 1997, resulting in an underwriting gain for the period of
$39.9 million, compared with $27.3 million in 1997.
Investment income for the second quarter was $23.6 million, compared with
$20.5 million in the second quarter of 1997. The after-tax yield on average
investments of $1,463.1 million (fixed maturities valued at cost; equities at
market) was 5.84% compared with 6.04% on average investments of $1,218.9 million
in 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 of approximately 5.2%, or approximately 97 basis points lower
than the average yield during 1997.
In June 1998, the Company sold Cimarron Insurance Company ("Cimarron"), a
wholly owned subsidiary acquired December 1996 as part of the American Fidelity
acquisition. The total sales proceeds were approximately $11.1 million with a
pre-tax realized gain of approximately $2.6 million. Realized investment gains
before income taxes, including the sale of Cimarron, were $4.4 million in the
second quarter of 1998, compared with realized gains of $0.3 million in 1997.
The income tax provision in the second quarter of 1998 of $17.7 million
represented an effective tax rate of 26.1%, compared with an effective rate of
25.2% in 1997. 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 for the second quarter of $50.3 million, or $.91 per share
(basic), compares with $35.9 million or $.65 per share (basic) in 1997. Diluted
net income per share was $.90 in 1998 and $.65 in 1997. Net income was
adversely affected by the results of AMI. AMI incurred a loss of $.01 per share
(basic) for the quarter, compared to a $.02 per share (basic) contribution in
1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Premiums earned in the first half of 1998 increased 12.7% from the
corresponding period in 1997. California premiums written, representing 92% of
the Company's total premiums, grew approximately 8.4% in the period versus 32.2%
in the first half of 1997. A large portion of the 1997 premium growth was the
result of the California proof of insurance law that became effective January 1,
1997. This requirement produced a large influx of new business during much of
1997 that was unmatched in 1998. The 1998 California premium growth of 8.4% was
also affected by the 7% rate reduction taken on April 1, 1998 and the effects of
the persistency discount during 1998.
The loss ratio in the first half (loss and loss adjustment expenses-related
to premiums earned) was 59.4%, compared with 65.9% in 1997. The lower loss ratio
in 1998 reflects continuing favorable loss experience in the bodily injury line.
The favorable loss experience is largely 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 7% rate reduction taken on
April 1, 1998 affected the Company's loss ratio in the second quarter of 1998
and will have a larger affect on the Company's loss ratio in succeeding quarters
as a higher percentage of the Company's premiums earned will reflect the 7% rate
reduction.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in 1998 was 25.3% compared to 24.7% in 1997. The increase in
the expense ratio was largely attributable to increased advertising expenses
from the Company's integrated advertising campaign launched in late April.
10
<PAGE>
The combined ratio of losses and expenses (GAAP basis) was 84.7% in 1998
compared with 90.6% in 1997, resulting in an underwriting gain for the period of
$84.4 million, compared with $46.3 million a year ago.
Investment income in the first half was $47.5 million, compared with $40.8
million in the first half of 1997. The after-tax yield on average investments
of $1,443.1 million (fixed maturities at cost, equities at market) was 5.94%
compared with 6.11% on average investments of $1,195.6 million in 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.
Realized investment gains before income taxes, including the sale of the
Cimarron subsidiary, were $6.2 million in the first half of 1998, compared with
realized gains of $0.8 million in the first half of 1997.
The income tax provision in the first half of 1998 of $36.4 million
represented an effective tax rate of 26.4%, compared with an effective rate of
24.1% in 1997. 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 first half of 1998 of $101.7 million, or $1.84 per share
(basic), compares with $66.7 million or $1.21 per share (basic), in 1997.
Diluted net income per share was $1.83 per share in 1998 and $1.21 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from operating activities during the first half of 1998
was $129.7 million, while funds derived from the sale, call or maturity of
investments, excluding the sale of Cimarron, was $568.6 million, of which
approximately 80% was represented by the sale of equities. Fixed-maturity
investments, at amortized cost, increased by $90.3 million during the period.
Equity investments, including perpetual preferred stocks, increased by $18.0
million at cost, and short-term cash investments increased by $7.7 million. The
amortized cost of fixed-maturities available for sale which were sold or called
during the period was $108.1 million.
The market value of all investments (fixed-maturities and equities) held at
market as "Available for Sale" exceeded amortized cost of $1,425.9 million at
June 30, 1998 by $72.0 million. That unrealized gain, reflected as accumulated
other comprehensive income in shareholders' equity net of applicable tax
effects, was $46.8 million at June 30, 1998 compared with an unrealized gain of
$46.1 million at December 31, 1997.
11
<PAGE>
The Company's cash and short term investments totaled $72.4 million at June
30, 1998. Together with funds generated internally, such liquid assets are more
than adequate to pay claims without the forced sale of investments.
On August 10, 1998 the Company announced that its Board of Directors
authorized the repurchase over a one year period of up to $200 million of
Mercury General's Common Stock. The purchases may be made from time to time in
the open market at the discretion of management. The program will be funded by
the sale of lower yielding tax-exempt bonds, the proceeds of an enlarged bank
line and internal cash generation.
It has been the Company's policy not to invest in high yield or "junk"
bonds. Approximately 2.0% of total fixed maturities at June 30, 1998 were rated
below investment grade. The average rating of the $1,183.8 million bond
portfolio (at amortized cost) was AA-, while the average effective maturity
approximates 8.1 years. The modified duration of the bond portfolio approximates
6.4 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 $1,237.9 million (at cost) include $54.1 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 $189.1 million at market (cost $187.9 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represents 21% (at cost) of total shareholders' equity.
As of June 30, 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 to 1. Based on the combined surplus of all of the
licensed insurance subsidiaries of $755.1 million at June 30, 1998 and net
written premiums for the twelve months ended on that date of $1,125.7 million,
the ratio of writings to surplus was approximately 1.49 to 1.
Impact of Year 2000
- -------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, or as no date. This could result in a
system failure or miscalculations causing disruptions of operations,
12
<PAGE>
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business operations.
In March of 1998, the Company completed the modifications necessary to its
computer programs and systems for all of its "critical" systems for business
written in California, Georgia, Illinois and Florida. Modifications were made to
both hardware and software. The Company considers policy issuance, premium
billing and collections and its claims systems as its critical systems. The
modifications completed on the above critical systems represents approximately
94% of the Company's total premiums written.
The American Mercury Group, acquired by the Company in December 1996 and
which represents approximately 6% of the Company's total premiums written, is in
the process of completing the modifications necessary, including the conversion
to new critical systems, to become Year 2000 compliant. The Company expects to
have AMI's critical systems to be Year 2000 compliant by the second quarter of
1999.
Other non-critical systems are already Year 2000 compliant or are
in the process of being modified or converted to become Year 2000 compliant.
The Company expects to have its non-critical systems to be Year 2000 compliant
by the second quarter of 1999.
The Company expensed approximately $125,000 in 1997 and $475,000 in 1998,
primarily for in-house labor costs, related to Year 2000 modifications. The
Company expects to incur an amount less than what has previously been expensed
for the remaining part of 1998 and 1999. It is not possible to quantify the
aggregate cost to the Company with respect to Year 2000 problems, although the
Company does not anticipate it will have a material adverse impact on its
business.
While the Year 2000 considerations are not expected to materially impact
the Company's internal operations, they may have a material effect on some of
the Company's agents, suppliers and financial institutions with whom the Company
conducts business, and thus indirectly affect the Company. The Company has
commenced a program to ascertain the compliance status of those companies with
whom the Company conducts material business.
Item 3. Quantitive and Qualitative Disclosures About Market Risk
--------------------------------------------------------
Not applicable.
13
<PAGE>
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 13, 1998.
(c) The matters voted upon at the meeting and the votes cast with respect
thereto were as follows:
<TABLE>
<CAPTION>
1. Election of Directors
--------------------- Number of shares Number of shares
Nominee voted FOR Withheld
--------------------- ---------------- ----------------
<S> <C> <C>
Nathan Bessin 52,129,014 220,944
Bruce A. Bunner 52,191,951 218,007
Michael D. Curtius 52,100,604 249,354
Richard E. Grayson 52,126,288 223,872
George Joseph 52,105,872 244,088
Gloria Joseph 52,109,362 240,596
Charles McClung 51,632,033 717,926
Donald P. Newell 51,639,024 710,934
Donald R. Spuehler 52,130,449 219,509
</TABLE>
2. Proposal to approve the adoption of the Mercury General Corporation
-------------------------------------------------------------------
Senior Executive Incentive Bonus Plan
-------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
51,978,070 282,680 89,228
3. Proposal to approve KPMG Peat Marwick as auditors for the year 1998
-------------------------------------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
52,305,510 26,788 18,680
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herewith:
27 Financial Data Schedule
(b) Not applicable.
14
<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: August 13, 1998 By: GEORGE JOSEPH
------------------------------------
George Joseph
Chairman and Chief Executive Officer
Date: August 13, 1998 By: GABRIEL TIRADOR
------------------------------------
Gabriel Tirador
Vice President and Chief Financial
Officer
15
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 1,308,845
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 189,068
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,565,395
<CASH> 4,940
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 59,008
<TOTAL-ASSETS> 1,842,194
<POLICY-LOSSES> 402,474
<UNEARNED-PREMIUMS> 317,150
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 75,000
48,927
0
<COMMON> 0
<OTHER-SE> 835,219
<TOTAL-LIABILITY-AND-EQUITY> 1,842,194
553,222
<INVESTMENT-INCOME> 47,469
<INVESTMENT-GAINS> 6,213
<OTHER-INCOME> 2,336
<BENEFITS> 328,496
<UNDERWRITING-AMORTIZATION> 121,674
<UNDERWRITING-OTHER> 18,626
<INCOME-PRETAX> 138,073
<INCOME-TAX> 36,404
<INCOME-CONTINUING> 101,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,669
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.83
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
