<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act
Title of Class Name of Exchange on Which Registered
-------------- -------------------------------------
Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
NONE
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 ____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant at March 16, 1998, was approximately $1,636,718,299
-------------
(based upon the closing sales price of such date, as reported by the Wall Street
Journal).
At March 16, 1998, the Registrant had issued and outstanding an aggregate of
55,219,513 shares of its Common Stock.
Documents Incorporated by Reference
Proxy statement for the Annual Meeting of Stockholders of Registrant to be held
on May 13, 1998 (only portions of which are incorporated by reference).
<PAGE>
ITEM 1. BUSINESS
--------
GENERAL
Mercury General Corporation ("Mercury General") and its subsidiaries
(collectively, the Company) are engaged primarily in writing all risk
classifications of automobile insurance in California, which in 1997 accounted
for approximately 88% of the Company's direct premiums written. In 1990, the
Company commenced writing small amounts of automobile insurance in Georgia and
Illinois. In December 1996 the Company acquired the American Fidelity Insurance
Group ("AFI"), which is headquartered in Oklahoma City, Oklahoma. In 1997, the
name was changed to American Mercury Insurance Group (AMI). AMI is licensed in
36 states but writes predominantly in Texas, Oklahoma and Kansas. AMI's primary
lines of insurance are private passenger and commercial automobile and
automobile mechanical breakdown. The full year and one month of AMI's operations
are included in the Company's 1997 and 1996 consolidated financial statements,
respectively. During 1997, private passenger automobile insurance and commercial
automobile insurance accounted for 90.5% and 4.3%, respectively, of the
Company's direct premiums written. The Company also writes homeowners insurance,
mechanical breakdown insurance, commercial and dwelling fire insurance and
commercial property insurance. The non-automobile lines of insurance accounted
for 5.2% of direct premiums written in 1997, of which approximately 60% was in
commercial lines. During 1998, the Company began writing private passenger
automobile coverage in Florida.
The Company offers automobile policyholders the following types of
coverage: bodily injury liability, underinsured and uninsured motorist,
property damage liability, comprehensive, collision and other hazards specified
in the policy. The Company's published maximum limits of liability for bodily
injury are $250,000 per person, $500,000 per accident and, for property damage,
$250,000 per accident. Subject to special underwriting approval, the combined
policy limits may be as high as $1,000,000 for vehicles written under the
Company's commercial automobile plan. Under the majority of the Company's
automobile policies, however, the limits of liability are less than $100,000 per
person, $300,000 per accident and $50,000 for property damage.
In 1997, A.M. Best & Co. ("A.M. Best") rated Mercury Casualty Company
("Mercury Casualty") and Mercury Insurance Company ("Mercury Insurance"), the
Company's chief operating subsidiaries, A+ (Superior). This is the second
highest of the fifteen rating categories in the A.M. Best rating system, which
range from A++ (Superior) to F (In Liquidation). AMI was rated A- (Excellent)
in 1997 by A.M. Best.
The principal executive offices of Mercury General are located in Los
Angeles, California. The home office of its California insurance subsidiaries
and the Company's computer and operations center is located in Brea, California.
The Company maintains branch offices in a number of locations in California as
well as a branch office opened in Clearwater, Florida during 1997. The non-
California subsidiaries maintain offices in Vernon Hills, Illinois, Atlanta,
Georgia, Oklahoma City, Oklahoma and Cimarron, Kansas. The Company has
approximately 2,100 employees.
2
<PAGE>
ORGANIZATION
Mercury General, an insurance holding company, is the parent of Mercury
Casualty, a California automobile insurer founded in 1961 by George Joseph, its
Chief Executive Officer. Its insurance operations in California are conducted
through three California insurance company subsidiaries, Mercury Casualty,
Mercury Insurance, and California Automobile Insurance Company. Two
subsidiaries, Mercury Insurance Company of Georgia and Mercury Insurance Company
of Illinois, received authority in late 1989 to write automobile insurance in
those two states. In 1992, Mercury Indemnity Company of Georgia and Mercury
Indemnity Company of Illinois were formed to write preferred risk automobile
insurance in those two states. Through the Company's first acquisition in
December 1996, three additional subsidiaries have been added to the group:
American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron Insurance
Company, domiciled in Kansas; and AFI Management Company, Inc., a Texas
corporation which serves as the attorney-in-fact for American Fidelity Lloyds
Insurance Company, a Texas insurer. Accordingly, their operations are included
in the consolidated financial statements of the Company effective December 1,
1996. During 1997, the names of American Fidelity Insurance Company and American
Fidelity Lloyds Insurance Company were changed to American Mercury Insurance
Company ("AMIC") and American Mercury Lloyds Insurance Company ("AML"),
respectively.
Mercury General furnishes management services to its California, Georgia,
Illinois and Oklahoma subsidiaries. Mercury General, its subsidiaries, and AML
are referred to as the "Company" unless the context indicates otherwise.
Mercury General Corporation individually is referred to as "Mercury General."
The term "California Companies" refers to Mercury Casualty, Mercury Insurance
and California Automobile Insurance Company.
UNDERWRITING
The Company sets its own automobile insurance premium rates, subject to
rating regulations issued by the Insurance Commissioners of the applicable
states. Automobile insurance rates on voluntary business in California have
been subject to approval by the California Department of Insurance ("DOI") since
November 1989. The Company uses its own extensive data base to establish rates
and classifications.
On February 25, 1994, the California DOI approved a revised rating plan and
rates for the California Companies which became effective on May 1, 1994. These
rates were designed to improve the California Companies' competitive position
for new insureds and included a modest overall rate reduction. Further rate
modifications were approved and made effective on October 15, 1995, April 15,
1996 and October 1, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview."
In September 1996 the California DOI issued new rating factor regulations,
replacing expired emergency regulations issued in 1989. See "Regulation -
Automobile Insurance Rating Factor Regulations."
3
<PAGE>
Approximately 80% of the Company's new applications for automobile
insurance in California during 1997 were placed in the lowest risk
classifications, known as "good drivers" (as defined by the California Insurance
Code), while approximately 20% of new applications were accepted in higher
risk classifications at increased rate levels. Policies are reclassified at the
time of renewal and may be changed to a higher or lower risk classification.
At December 31, 1997, "good drivers" accounted for approximately 80% of all
voluntary private passenger automobile policies in force in California, while
the higher risk categories accounted for approximately 20%. The renewal rate
in California (the rate of acceptance of offers to renew) averages approximately
95%.
AMI's private passenger automobile business in force is predominantly
standard and preferred type risks, although they plan to offer more non-standard
programs in the future.
PRODUCTION AND SERVICING OF BUSINESS
The Company sells its policies through more than 1,600 independent agents,
of which approximately 800 are located in California and approximately 650
others represent AMI in Oklahoma, Kansas and Texas. Approximately half of the
agents in California have represented the Company for more than ten years. The
agents, most of whom also represent one or more competing insurance companies,
are independent contractors selected and appointed by the Company.
One agency produced approximately 14%, 17% and 15% during 1997, 1996 and
1995, respectively, of the Company's total direct premiums written. No other
agent accounted for more than 2% of direct premiums written.
The Company believes that its agents' compensation is higher than the
industry average. During 1997 total commissions and bonuses incurred averaged
16.2% of direct premiums written. The Company is not responsible for any of
its agents' expenses.
Traditionally, any advertising has been handled by the individual agents.
During the fourth quarter of 1995, the Company began its first advertising
program in major newspapers in Southern California. While the Company plans,
coordinates and executes the program, the agents are responsible for the cost of
the advertisements. The program has been satisfactory and was expanded to
Northern California in early 1996. The program was temporarily suspended during
the first half of 1997 due to a large influx of new business. See "Regulation-
California Financial Responsibility Law." The program was reinstated during the
third quarter of 1997.
CLAIMS
Claims operations are supervised by the Company. The claims staff in
California, Georgia, Illinois and Oklahoma administers all claims and directs
all legal and adjustment aspects of the claims process. The Company adjusts
most claims without the assistance of outside adjusters.
4
<PAGE>
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The Company maintains reserves for the payment of losses and loss
adjustment expenses for both reported and unreported claims. Loss reserves are
estimated based upon a case-by-case evaluation of the type of claim involved and
the expected development of such claim. The amount of loss reserves and loss
adjustment expense reserves for unreported claims are determined on the basis of
historical information by line of insurance. Inflation is reflected in the
reserving process through analysis of cost trends and reviews of historical
reserving results.
The ultimate liability may be greater or lower than stated loss reserves.
Reserves are closely monitored and are analyzed quarterly by the Company's
actuarial consultants using new information on reported claims and a variety of
statistical techniques. The Company does not discount to a present value that
portion of its loss reserves expected to be paid in future periods. The Tax
Reform Act of 1986 does, however, require the Company to discount loss reserves
for Federal income tax purposes.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses, net of reinsurance deductions,
as shown on the Company's consolidated financial statements for the periods
indicated.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C>
Net reserves for losses and loss adjustment
expenses, beginning of year................................ $311,754 250,990 $223,392
Reserves acquired from purchase of American
Mercury Insurance Company................................... -- 24,231 --
Incurred losses and loss adjustment expenses:
Provision for insured events of the
current year........................................ 641,911 505,726 423,264
Increase (decrease) in provision for
Insured events of prior years....................... 12,818 (3,868) (6,708)
-------- ------- -------
Total incurred losses and loss adjustment
expenses.......................................... 654,729 501,858 416,556
-------- ------- -------
Payments:
Losses and loss adjustment expenses attribu-
table to insured events of the current
year................................................. 373,823 298,099 243,294
Losses and loss adjustment expenses attribu-
table to insured events of prior years............... 206,390 167,226 145,664
-------- ------- -------
Total payments....................................... 580,213 465,325 388,958
-------- ------- -------
Net reserves for losses and loss adjustment
expenses at the end of the period........................... 386,270 311,754 250,990
Reinsurance recoverable...................................... 22,791 24,931 2,556
-------- ------- -------
Gross liability at end of year............................... $409,061 $336,685 $253,546
======== ======== ========
</TABLE>
5
<PAGE>
The AMI purchase agreement includes an indemnification by the seller on the
loss and loss adjustment expense reserves of AMI at the acquisition date,
excluding the mechanical breakdown line, to avoid any impact on the Company's
financial statements from any future adverse development on the acquisition date
loss reserves.
The difference between the reserves reported in the Company's consolidated
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") and those reported in the statements filed with the
Department of Insurance in accordance with statutory accounting principles
("SAP") is shown in the following table:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996 1995
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Reserves reported on a SAP basis......... $386,270 $311,754 $250,990
Reinsurance recoverable.................. 22,791 24,931 2,556
-------- -------- --------
Reserves reported on a GAAP basis........ $409,061 $336,685 $253,546
======== ======== ========
</TABLE>
The following table represents the development of loss reserves for the
period 1988 through 1997. The top line of the table shows the reserves at the
balance sheet date net of reinsurance recoverable for each of the indicated
years. This represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the cumulative amounts paid as of
successive years with respect to that reserve liability. The lower portion of
the table shows the re-estimated amount of the previously recorded reserves
based on experience as of the end of each succeeding year, including cumulative
payments made since the end of the respective year. The estimate changes as more
information becomes known about the frequency and severity of claims for
individual years. A redundancy (deficiency) exists when the original reserve
estimate is greater (less) than the re-estimated reserves at December 31, 1997.
In evaluating the information in the table, it should be noted that each
amount includes the effects of all changes in amounts for prior periods. This
table does not present accident or policy year development data. Conditions and
6
<PAGE>
trends that have affected development of the liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------
1988 1989 1990 1991 1992
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net reserves for
losses and loss
adjustment expenses................ $241,037 $291,408 $301,354 $280,157 $239,203
Paid (cumulative) as of:
One year later.................... 139,874 167,850 181,781 151,866 135,188
Two years later................... 195,453 227,503 238,030 197,640 184,119
Three years later................. 218,335 249,371 254,884 213,824 197,371
Four years later.................. 226,384 256,659 261,058 218,067 201,365
Five years later.................. 229,168 259,147 263,011 220,057 202,383
Six years later................... 229,773 259,781 262,741 220,313
Seven years later................. 229,815 259,769 262,770
Eight years later................. 229,693 259,769
Nine years later.................. 229,793
Net reserves re-estimated as of:
One year later.................... 230,249 269,934 285,212 230,991 204,479
Two years later................... 233,607 269,652 265,618 218,404 204,999
Three years later................. 234,757 259,635 259,624 220,620 203,452
Four years later.................. 228,909 256,694 264,259 221,118 204,603
Five years later.................. 228,326 260,365 264,127 221,264 203,705
Six years later................... 230,102 260,402 263,336 220,721
Seven years later................. 229,998 260,098 263,045
Eight years later................. 229,809 260,031
Nine years later.................. 229,882
Net Cumulative Redundancy
(deficiency)...................... 11,155 31,377 38,309 59,436 35,498
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net reserves for
losses and loss
adjustment expenses................ $214,525 $223,392 $250,990 $311,754 $386,270
Paid (cumulative) as of:
One year later.................... 143,272 145,664 167,226 206,390
Two years later................... 187,641 198,967 225,158
Three years later................. 204,606 214,403
Four years later.................. 207,704
Five years later..................
Six years later...................
Seven years later.................
Eight years later.................
Nine years later..................
Net reserves re-estimated as of:
One year later.................... 204,451 216,684 247,122 324,572
Two years later................... 207,089 222,861 254,920
Three years later................. 210,838 221,744
Four years later.................. 210,890
Five years later..................
Six years later...................
Seven years later.................
Eight years later.................
Nine years later..................
Net Cumulative Redundancy
(deficiency)...................... 3,635 1,648 (3,930) (12,818)
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------
1988 1989 1990 1991 1992
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Gross liability - end of year 240,183
Reinsurance recoverable (980)
-------
Net liability - end of year 239,203
Gross re-estimated liability =======
- latest 209,107
Re-estimated recoverable -
latest (5,402)
Net re-estimated liability - -------
latest 203,705
Gross cumulative redundancy =======
(deficiency) 31,076
=======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Gross liability - end of year 215,301 227,499 253,546 336,685 409,061
Reinsurance recoverable (776) (4,107) (2,556) (24,931) (22,791)
------- ------- ------- ------- -------
Net liability - end of year 214,525 223,392 250,990 311,754 386,270
======= ======= ======= ======= =======
Gross re-estimated liability
- latest 217,333 233,462 263,084 350,435
Re-estimated recoverable -
latest (6,443) (11,718) (8,164) (25,863)
Net re-estimated liability - ------- ------- ------- -------
latest 210,890 221,744 254,920 324,572
Gross cumulative redundancy ======= ======= ======= =======
(deficiency) (2,032) (5,963) (9,538) (13,750)
======= ======= ======= =======
</TABLE>
For the calendar years 1995 and 1996, the Company's previously estimated
loss reserves produced minor deficiencies. These deficiencies relate to
increases in the Company's ultimate estimates for loss adjustment expenses. The
initial estimates were based principally on the Company's actual experience and
did not fully reflect the increases in the legal expenses of defending the
Company's insureds arising from the Company's policy of aggressively defending,
including litigating, exaggerated bodily injury claims arising from minimal
impact automobile accidents.
For the calendar years 1988 through 1994, the Company's previously
estimated loss reserves produced redundancies. The Company attributes this
favorable loss development to several factors. First, the Company had completed
its development of a full complement of claims personnel early in this period.
Second, during 1988, the California Supreme Court reversed what was known as the
7
<PAGE>
"Royal Globe" doctrine, which, since 1978, had permitted third party plaintiffs
to sue insurers for alleged "bad faith" in resolving claims, even when the
plaintiff had voluntarily agreed to a settlement. This doctrine had placed
undue pressures on claims representatives to settle legitimate disputes at
unfairly high settlement amounts. After the reversal of Royal Globe, the
Company believes that it has been able to achieve fairer settlements, because
both parties are in a more equal bargaining position. Third, during the years
1988 through 1990, the volume of business written in the Assigned Risk Program
expanded substantially as rates were suppressed at grossly inadequate levels.
Following the California Insurance Commissioner's approval of an 85% temporary
rate increase in September 1990, the volume of assigned risk business has
declined by nearly 80%. Many of the claims associated with the high volume of
assigned risk business in the 1988-1990 period were later found to be fraudulent
or grossly exaggerated and were settled in subsequent periods for substantially
less than had been initially reserved.
OPERATING RATIOS
Loss and Expense Ratios
-----------------------
Loss and underwriting expense ratios are used to interpret the
underwriting experience of property and casualty insurance companies. Losses
and loss adjustment expenses, on a statutory basis, are stated as a percentage
of premiums earned because losses occur over the life of a policy. Underwriting
expenses on a statutory basis are stated as a percentage of premiums written
rather than premiums earned because most underwriting expenses are incurred when
policies are written and are not spread over the policy period. The statutory
underwriting profit margin is the extent to which the combined loss and
underwriting expense ratios are less than 100%. The Company's loss ratio,
expense ratio and combined ratio, and the private passenger automobile industry
combined ratio, on a statutory basis, are shown in the following table. The
Company's ratios include lines of insurance other than private passenger
automobile written by Mercury Casualty and AMI. Since these other lines
represent only a small percentage of premiums written, the Company believes its
ratios can be compared to the industry ratios included in the table.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loss Ratio........................... 63.5% 66.6% 67.8% 68.4% 61.3%
Expense Ratio........................ 24.7 24.0 24.0 24.6 24.8
---- ----- ----- ----- ----
Combined Ratio....................... 88.2% 90.6% 91.8% 93.0% 86.1%
==== ===== ===== ===== =====
Industry combined ratio (all
writers) (1)....................... 98.0%(2) 101.0% 101.3% 101.3% 101.7%
Industry combined ratio (excluding
direct writers) (1)................ N.A. 102.6% 102.0% 101.3% 103.2%
</TABLE>
- -----------------
(1) Source: A.M. Best, Aggregates & Averages (1997), for all property and
casualty insurance companies (private passenger automobile line only, after
policyholder dividends).
(2) Source: A.M. Best, "Best's Review, January 1998," "Review Preview."
(N.A.) Not available.
8
<PAGE>
Premiums to Surplus Ratio
-------------------------
The following table shows, for the periods indicated, the insurance
companies' statutory ratios of net premiums written to policyholders' surplus.
While there is no statutory requirement applicable to the Company which
establishes a permissible net premium writings to surplus ratio, widely
recognized guidelines established by the National Association of Insurance
Commissioners ("NAIC") indicate that this ratio should be no greater than 3 to
1.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net premiums written......$1,086,241 $795,873 $636,590 $550,838 $484,097
Policyholders' surplus... $ 679,359 $594,799 $479,114 $411,898 $314,136
Ratio..................... 1.6 to 1 1.3 to 1 1.3 to 1 1.3 to 1 1.5 to 1
</TABLE>
Risk-Based Capital Requirements
-------------------------------
In December 1993, the NAIC adopted a risk-based capital formula for
casualty insurance companies which establishes recommended minimum capital
requirements for casualty companies. The formula has been designed to capture
the widely varying elements of risks undertaken by writers of different lines of
insurance having differing risk characteristics, as well as writers of similar
lines where differences in risk may be related to corporate structure,
investment policies, reinsurance arrangements and a number of other factors.
Based on the formula adopted by the NAIC, the Company has estimated the Risk-
Based Capital Requirements of each of its insurance subsidiaries as of December
31, 1997. Each of the companies exceeded the highest level of recommended
capital requirements.
INVESTMENTS AND INVESTMENT RESULTS
The investments of the Company are made by the Company's Chief Investment
Officer under the supervision of the Company's Board of Directors. The Company
follows an investment policy which is regularly reviewed and revised. The
Company's policy emphasizes investment grade, fixed income securities and
maximization of after-tax yields. The Company does not invest with a view to
achieving realized gains, and does not maintain a trading account. However,
sales of securities are undertaken, with resulting gains or losses, in order to
enhance after-tax yield and keep its portfolio in line with current market
conditions. Tax considerations are important in portfolio management, and have
been made more so since 1986 when the alternative minimum tax was imposed on
casualty companies. Changes in loss experience, growth rates and profitability
produce significant changes in the Company's exposure to alternative minimum tax
liability, requiring appropriate shifts in the investment asset mix between
taxable bonds, tax-exempt bonds and equities in order to maximize after-tax
yield. The optimum asset mix is subject to continuous review. At year-end,
approximately 75% of the Company's portfolio, at market values, was invested in
medium to long term, investment grade tax-exempt revenue and municipal bonds.
The average Standard & Poor's rating of the Company's bond holdings was AA- at
December 31, 1997.
9
<PAGE>
The nominal average maturity of the bond portfolio, was 16.5 years at
December 31, 1997, but the call-adjusted average maturity of the portfolio is
shorter, approximately 7.5 years, because holdings are heavily weighted with
high coupon issues which are expected to be called prior to maturity. The
modified duration of the bond portfolio reflecting anticipated early calls was
6.1 years at December 31, 1997. Duration is a measure of how long it takes, on
average, to receive all the cash flows produced by a bond, including
reinvestment of interest. Because of its sensitivity to interest rates, it is a
proxy for a bond's price volatility. The longer the duration, the greater the
price volatility in relation to changes in interest rates.
Holdings of lower than investment grade bonds constitute approximately 1%
of total investments. Equity holdings consist primarily of perpetual preferred
stocks and relatively high yielding electric utility common stocks on which
dividend income is partially tax-sheltered by the 70% corporate dividend
exclusion.
The following table summarizes the investment results of the Company for
the five years ended December 31, 1997.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997(1) 1996(1) 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Averaged invested assets (includes
short-term cash investments).(2)...................... $1,262,925 $975,058 $827,861 $727,866 $683,874
Net investment income:
Before income taxes............................. 86,812 70,180 62,964 54,586 54,121
After income taxes.............................. 77,917 63,371 57,035 49,787 48,223
Average annual return on investments:
Before income taxes............................. 6.9% 7.2% 7.6% 7.5% 7.9%
After income taxes.............................. 6.2% 6.5% 6.9% 6.8% 7.1%
Net realized investment gains
(losses) after income taxes........................... 3,232 (2,062) 681 (6,485) 1,954
Net increase (decrease) in un-
realized gains on all invest-
ments after income taxes.............................. $ 27,175 $ (6,271) $ 37,960 $(36,503) $ 556
</TABLE>
(1) Includes AMI for the month of December 1996 and the full year 1997.
(2) Fixed maturities at cost, equities at market.
10
<PAGE>
The following table sets forth the composition of the investment portfolio
of the Company at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------- -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxable Bonds.................. $ 50,096 $ 50,662 $ 76,494 $ 76,113 $ 21,518 $ 22,539
Tax-Exempt State and
Municipal Bonds............... 1,021,259 1,085,613 781,586 808,761 630,811 663,163
Sinking Fund Preferred
Stocks........................ 76,239 78,711 66,713 69,234 90,080 94,081
---------- ---------- ---------- ---------- -------- --------
Total Fixed Maturity
Investments................ 1,147,594 1,214,986 924,793 954,108 742,409 779,783
Equity Investments incl.
Perpetual Preferred
Stocks........................ 169,943 173,522 148,264 148,112 113,478 114,915
Short-term Cash Invest-
ments......................... 59,740 59,740 66,067 66,067 28,496 28,496
---------- ---------- ---------- ---------- -------- --------
Total Investments.............. $1,377,277 $1,448,248 $1,139,124 $1,168,287 $884,383 $923,194
========== ========== ========== ========== ======== ========
</TABLE>
At December 31, 1997, the Company had a net unrealized gain on all investments
of $70,971,000 before income taxes.
COMPETITIVE CONDITIONS
The property and casualty insurance industry is highly competitive. The
insurance industry consists of a large number of companies, many of which
operate in more than one state, offering automobile, homeowners and commercial
property insurance, as well as insurance coverage in other lines. Many of the
Company's competitors have larger volumes of business and greater financial
resources than the Company. Based on estimates taken from regularly published
statistical compilations and other public filings, the Company in 1997 was the
sixth largest writer of private passenger automobile insurance in California.
All of the insurance companies having greater shares of the California market
sell insurance either directly or through exclusive agents, rather than through
independent agents.
The property and casualty insurance industry is highly cyclical, character-
ized by periods of high premium rates and shortages of underwriting capacity
followed by periods of severe price competition and excess capacity. In the
Company's view, competitive pressures have become more pronounced in the last
several years. The current level of profits makes the market attractive for new
companies, although some of the small companies who entered the California
private passenger automobile market in recent years have already experienced
unsatisfactory results.
11
<PAGE>
Price and reputation for service are the principal means by which the
Company competes with other automobile insurers. The Company believes that it
has a good reputation for service, and it has, historically, been among the
lowest-priced insurers doing business in California according to surveys
conducted by the California DOI. In the most recent survey conducted in 1996,
the Company's rates for most classes of insureds were among the lowest available
in most territories throughout the state. In addition to good service and
competitive pricing, for those insurers dealing through independent agents, as
the Company does, the marketing efforts of agents is a means of competition.
The current and future competitive climate for private passenger automobile
insurance in California remains uncertain. All rates charged by private
passenger automobile insurers are subject to the prior approval of the
California Insurance Commissioner. New rating factor regulations have recently
been issued and the filings required under those regulations have been approved.
See "Regulation - Automobile Insurance Rating Factor Regulations."
AMI encounters similar competition in each state in which it principally
operates.
REINSURANCE
The Company no longer maintains reinsurance for its liability coverage in
California. Effective January 1, 1994, the Company terminated its liability
reinsurance coverage with Employers Reinsurance Corporation ("ERC") because of
rising premiums and under utilization of such coverage. The Company regularly
evaluates the need for liability reinsurance.
The Company maintains property reinsurance under a treaty which was
effective April 1, 1995 with National Reinsurance Corporation, which is rated A+
by A.M. Best. The treaty provides $900,000 coverage in excess of $100,000 for
each risk subject to a maximum of $2,700,000 for any one occurrence. A second
layer of coverage provides an additional $1,000,000 in excess of the first
$1,000,000 per risk subject to a maximum of $2,000,000 for any one occurrence.
Prior to February 1, 1995, ERC provided catastrophe reinsurance for
property and auto physical damage business. Under the treaty, ERC agreed to pay
95% of $9,000,000 in excess of $1,000,000 for any single occurrence and 95% of
$18,000,000 for all occurrences in one calendar year. Effective February 1,
1995, the treaty with ERC was amended to provide coverage for 95% of $7,500,000
in excess of $5,000,000 each occurrence subject to an aggregate limit of 95% of
$15,000,000 for all occurrences. Effective April 1, 1995 this treaty was
replaced with a new catastrophe treaty covering all physical damage and property
lines with several reinsurers arranged through E.W. Blanch Company, a
reinsurance intermediary. The main reinsurers are rated A or better by A.M.
Best. Under the new treaty, the first layer of protection is 95% of $7,500,000
in excess of $10,000,000, for a single occurrence, with a second layer providing
95% of $12,500,000 in excess of $17,500,000. Effective September 1, 1996 the
treaty was replaced to provide coverage under two new layers through the same
principal reinsurers. Under the new treaty coverage is provided for 95% of
$10,000,000 in excess of $15,000,000 per occurrence in the first layer and 95%
of $15,000,000
12
<PAGE>
in excess of $25,000,000 in the second layer. This treaty was renewed October 1,
1997 with the same principal reinsurers and coverage limits.
ERC reinsures AMI through working layer treaties for property and casualty
losses in excess of $150,000. For the years 1990 through 1996 the mechanical
breakdown line of business was reinsured with Constitution Reinsurance
Corporation through a quota-share treaty covering 50%-85% of the business
written depending on the year the policy incepted. For policies effective on or
after January 1, 1997, AMI is retaining the full exposure. AMI has other
reinsurance treaties and facultative arrangements in place for various smaller
lines of business.
If the reinsurers were unable to perform their obligations under the
reinsurance treaty, the Company would be required, as primary insurer, to
discharge all obligations to its insureds in their entirety.
REGULATION
The Company's business in California is subject to regulation and
supervision by the California DOI, which has broad regulatory, supervisory and
administrative powers.
The powers of the California DOI primarily include the prior approval of
insurance rates and rating factors and the establishment of standards of
solvency which must be met and maintained. The regulation and supervision by
the California DOI are designed principally for the benefit of policyholders and
not for insurance company shareholders. The California DOI conducts periodic
examinations of the Company's insurance subsidiaries. The last examination
conducted of the California Companies was as of December 31, 1994. The reports
on the results of that examination recommended no adjustments to the statutory
financial statements as filed by the Company.
The insurance subsidiaries outside California, including AMI, are subject
to the regulatory powers of the insurance departments of those states. Those
powers are similar to the regulatory powers in California enumerated above.
Generally, the regulations relate primarily to standards of solvency and are
designed for the benefit of policyholders and not for insurance company
shareholders.
In California, insurance rates have required prior approval since November
1989. Georgia and Kansas are also prior approval states, while Illinois only
requires that rates be filed with the Department of Insurance prior to their
use. Texas and Oklahoma have a modified version of prior approval laws. In all
states, the insurance code provides that rates must not be "excessive,
inadequate or unfairly discriminatory."
The Georgia DOI recently conducted an examination of Mercury Insurance
Company of Georgia and Mercury Indemnity Company of Georgia as of December 31,
1994. The reports on that audit have recommended no changes to the statutory
financial statements as filed. The Illinois DOI conducted an examination of
Mercury Insurance Company of Illinois and Mercury Indemnity Company of Illinois
13
<PAGE>
as of December 31, 1995. The reports on that audit have recommended no changes
to the statutory financial statements as filed. The states of Oklahoma, Kansas
and Texas will also conduct periodic examinations of AMI.
The operations of the Company are dependent on the laws of the state in
which it does business and changes in those laws can materially affect the
revenue and expenses of the Company. The Company retains its own legislative
advocates in California. The Company also makes financial contributions to
officeholders and candidates. In 1997 and 1996, those contributions amounted to
$96,000 and $548,000, respectively. The Company believes in supporting the
political process and intends to continue to make such contributions in amounts
which it determines are appropriate.
Insurance Guarantee Association
-------------------------------
In 1969, the California Insurance Guarantee Association (the "Association")
was created pursuant to California law to provide for payment of claims for
which insolvent insurers of most casualty lines are liable but which cannot be
paid out of such insurers' assets. The Company is subject to assessment by the
Association for its pro-rata share of such claims based on premiums written in
the particular line in the year preceding the assessment by insurers writing
that line of insurance in California. Such assessments are based upon estimates
of losses to be incurred in liquidating an insolvent insurer. In a particular
year, the Company cannot be assessed an amount greater than 1% of its premiums
written in the preceding year. The only assessment imposed during the past five
years was an immaterial amount in 1994. Assessments are recouped through a
mandated surcharge to policyholders the year after the assessment. Insurance
subsidiaries in the other states are subject to the provisions of similar
insurance guaranty associations. No material assessments were imposed in the
last five years in those states either.
Holding Company Act
-------------------
The California Companies are subject to regulation by the California DOI
pursuant to the provisions of the California Insurance Holding Company System
Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company
Act, the California DOI may examine the affairs of each company at any time.
The Holding Company Act requires disclosure of any material transactions by or
among the companies. Certain transactions defined to be of an "extraordinary"
type may not be effected without the prior approval of the California DOI. Such
transactions include, but are not limited to, sales, purchases, exchanges, loans
and extensions of credit, and investments made within the immediately preceding
12 months involving, in the net aggregate, more than the lesser of 5% of the
company's admitted assets or 25% of surplus as to policyholders, as of the
preceding December 31. Effective January 1, 1997 the threshold for a material
or extraordinary transaction was amended to a single measure of one half of one
percent of admitted assets as of the preceding December 31st. There will no
longer be any aggregation of transactions in the determination of the threshold
except in the case of dividends. An extraordinary dividend is a dividend which,
together with other dividends or distributions made within the preceding 12
months, exceeds the greater of 10% of the insurance company's policyholders'
14
<PAGE>
surplus as of the preceding December 31 or the insurance company's net income
for the preceding calendar year. An insurance company is also required to
notify the California DOI of any dividend after declaration, but prior to
payment.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
that controls a California insurance company, such as Mercury General. A person
seeking to acquire "control," directly or indirectly, of the Company must
generally file with the Insurance Commissioner an application for change of
control containing certain information required by statute and published
regulations and provide a copy of the application to the Company. The Holding
Company Act also effectively restricts the Company from consummating certain
reorganizations or mergers without prior regulatory approval.
The insurance subsidiaries in Georgia, Illinois, Oklahoma, Kansas and Texas
are subject to holding company acts in those states, the provisions of which are
substantially similar to those of the Holding Company Act. Regulatory approval
was obtained from California, Oklahoma, Kansas and Texas before the acquisition
of AMI was completed.
Assigned Risks
--------------
Automobile liability insurers in California are required to sell bodily
injury liability, property damage liability, medical expense and uninsured
motorist coverage to a proportionate number (based on the insurer's share of the
California automobile casualty insurance market) of those drivers applying for
placement as "assigned risks." Drivers seek placement as assigned risks because
their driving records or other relevant characteristics, as defined by
Proposition 103, make them difficult to insure in the voluntary market. During
the last five years, approximately 0.9% of the direct automobile insurance
premium written by the Company was for assigned risk business. In 1997,
assigned risks represented 0.9% of total automobile direct premiums written and
0.8% of total automobile direct premium earned. Premium rates for assigned risk
business are set by the California DOI. In October 1990, more stringent rules
for gaining entry into the plan were approved, resulting in a substantial
reduction in the number of assigned risks insured by the Company since 1991.
Effective January 1, 1994, the California Insurance Code requires that rates
established for the plan be adequate to support the plan's losses and expenses.
The last rate increase approved by the Commissioner approximated 4.8% and became
effective June 1, 1995.
Automobile Insurance Rating Factor Regulations
----------------------------------------------
Commencing November 8, 1989, Proposition 103 required that property and
casualty insurance rates must be approved by the Insurance Commissioner prior to
their use, and that no rate shall be approved which is excessive, inadequate,
15
<PAGE>
unfairly discriminatory or otherwise in violation of the provisions of the
initiative. The proposition specified three statutory factors required to be
applied in "decreasing order of importance" in determining rates for private
passenger automobile insurance: (1) the insured's driving safety record, (2)
the number of miles the insured drives annually, and (3) the number of years of
driving experience of the insured. The new law also gave the Insurance
Commissioner discretion to adopt other factors by regulation that have a
substantial relationship to risk of loss. The new statute further provided that
insurers are required to give at least a 20% discount to "good drivers," as
defined, from rates that would otherwise be charged to such drivers and that no
insurer may refuse to insure a "good driver."
The Company, and most other insurers, historically charged different rates
for residents of different geographical areas within California. The rates for
urban areas, particularly in Los Angeles, have been generally substantially
higher than for suburban and rural areas. The Company's geographical rate
differentials have been derived by actuarial analysis of the claims costs in a
given area.
In September 1996, the California Insurance Commissioner issued new
permanent rating factor regulations which replaced the emergency regulations
which have been in use since their issuance in 1989. They required all
automobile insurers in California to submit new rating plans complying with the
regulations in early 1997. The Company submitted its new proposed rating plan
on March 11, 1997.
The Company's plan, and the new plans of most other California automobile
insurers, were approved by the Department in October 1997. The Company's plan
became effective October 1, 1997. The rate changes resulting from
implementation of the new plan did not have a material effect on the Company's
competitive position or its profitability.
California Financial Responsibility Law
---------------------------------------
Effective January 1, 1997 California has a new law which requires proof of
insurance for the registration (new or renewal) of a motor vehicle. It also
provides for substantial penalties for failure to supply proof of insurance if
one is stopped for a traffic violation. Media attention to the new law
resulted in a surge of new business applications during the first half of 1997.
The persistence of this new business is uncertain, but the new law could produce
additional growth considering the large proportion of uninsured motorists in
California. The Company suspended its advertising program for the first two
quarters of 1997 while it worked to eliminate the backlog of new business.
In November 1996 an initiative sponsored by the California Insurance
Commissioner was overwhelmingly approved by the California voters. It provides
that uninsured drivers who are injured in an automobile accident are able to
recover only actual, out-of-pocket medical expenses and lost wages and are not
entitled to receive awards for general damages, i.e., "pain and suffering."
This restriction also applies to drunk drivers and fleeing felons. The law has
helped in controlling loss costs, but its constitutionality is being challenged
by an
16
<PAGE>
association of attorneys. In the first appellate decision, an intermediate
California appellate court held the law constitutional.
ITEM 2. PROPERTIES
----------
The home office of the California insurance subsidiaries and the Company's
computer facilities are located in Brea, California in an 80,000 square foot
office building owned by the Company.
Since December 1986, Mercury General's executive offices are located in a
36,000 square foot office building in Los Angeles, California, owned by Mercury
Casualty. The Company occupies approximately 95% of the building and leases the
remaining office space to others.
In October 1992 the Company purchased a 158,000 square foot office building
in Brea, California. The Company occupies approximately 59% of the facility and
leases the remaining office space to others.
The Company leases all of its other offices under short-term leases.
Office location is not material to the Company's operations, and the Company
anticipates no difficulty in extending these leases or obtaining comparable
office space.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In most of these actions, plaintiffs
assert claims for punitive damages which are not insurable under California
judicial decisions. The Company vigorously defends these actions, unless a
reasonable settlement appears appropriate. The Company believes that adverse
results, if any, in the actions currently pending should not have a material
effect on the Company's operations or financial position.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders by the Company
during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the executive
officers of the Company as of March 16, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George Joseph 76 Chairman of the Board and Chief Executive Officer
Michael D. Curtius 48 President and Chief Operating Officer
Cooper Blanton, Jr. 71 Executive Vice President
Keith L. Parker 70 Senior Vice President and Chief Investment Officer
Bruce E. Norman 49 Vice President in charge of Marketing
Joanna Y. Moore 42 Vice President and Chief Claims Officer
Kenneth G. Kitzmiller 51 Vice President in charge of Underwriting
Gabriel Tirador 33 Vice President and Chief Financial Officer
Judy A. Walters 51 Secretary
</TABLE>
Mr. Joseph, Chief Executive Officer of the Company and Chairman of its
Board of Directors, has served in those capacities since 1961. Mr. Joseph has
more than 45 years experience in the property and casualty insurance business.
Mr. Curtius, President and Chief Operating Officer, has been employed by
the Company since 1977. In October 1987, Mr. Curtius was named Vice President
and Chief Claims Officer, and in August 1991 he was appointed Executive Vice
President. He was elected President and Chief Operating Officer of Mercury
General and the California Companies in May 1995 and elected to the Board of
Directors of Mercury General and the California Companies in 1996. In December
of 1996 he was appointed Vice Chairman of AMIC. Mr. Curtius has over 20 years
of experience in the insurance industry.
Mr. Blanton, Executive Vice President, joined the Company in 1966 and
supervised its underwriting activities from 1967 until September 1995. He was
appointed Executive Vice President of Mercury Casualty and Mercury Insurance in
1983 and was named Executive Vice President of Mercury General in 1985. In May
1995 he was named President of the Georgia and Illinois insurance company
subsidiaries and in February 1996 he was elected to the Board of Directors of
those companies. Mr. Blanton has over 40 years of experience in underwriting
and other aspects of the property and casualty insurance business.
Mr. Parker, Senior Vice President and Chief Investment Officer, has been
employed by the Company or its subsidiaries since 1970 and has held his present
position since October 1985. Mr. Parker has over 40 years of investment
management experience and has been primarily responsible for management of the
Company's investment portfolio since 1972.
18
<PAGE>
Mr. Norman, Vice President in charge of Marketing, has been employed by the
Company since 1971. Mr. Norman was named to this position in October 1985, and
has been a Vice President of Mercury Casualty since 1983. Mr. Norman has
supervised the selection and training of agents and managed relations between
agents and the Company since 1977. In February 1996 he was elected to the Board
of Directors of the California Companies.
Ms. Moore, Vice President & Chief Claims Officer, joined the Company in the
claims department in March 1981. She was named Vice President of Claims of
Mercury General in August 1991 and has held her present position since July
1995.
Mr. Kitzmiller, Vice President in charge of Underwriting, has been employed
by the Company in the underwriting department since 1972. In August 1991 he
was appointed Vice President of Underwriting of Mercury General and has
supervised the underwriting activities of the Company since early 1996.
Mr. Tirador, Vice President and Chief Financial Officer, served as the
Company's assistant controller from March 1994 to December 1996. During January
1997 to February 1998 he served as the Vice President and Controller of the
Automobile Club of Southern California. He rejoined the Company in February
1998 in his current capacity. Mr. Tirador has over eleven years experience in
the property and casualty insurance industry and is a Certified Public
Accountant.
Ms. Walters has been employed by the Company since 1967, and has served as
its Secretary since 1982.
19
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
---------------------------------------------------------------------
MATTERS
-------
PRICE RANGE OF COMMON STOCK
The following table shows the price range per share in each quarter as
reported on the Nasdaq National Market until October 9, 1996 and on the New York
Stock Exchange since that date. These quotations do not include adjustments for
retail mark-ups, mark-downs or commissions. The quotations have been adjusted
for a two-for-one stock split that was effective September 16, 1997.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1996
1st Quarter.......................... $ 26.000 $ 20.750
2nd Quarter.......................... $ 23.875 $ 20.375
3rd Quarter.......................... $ 23.875 $ 19.875
4th Quarter.......................... $ 29.125 $ 23.500
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997
1st Quarter.......................... $ 32.750 $ 26.125
2nd Quarter.......................... $ 38.094 $ 29.250
3rd Quarter.......................... $ 45.875 $ 36.000
4th Quarter.......................... $ 55.500 $ 40.750
1998
1st Quarter (January 1 - March 16)... $ 60.750 $ 45.688
</TABLE>
DIVIDENDS
Following the public offering of its common stock in November 1985, the
Company has paid regular quarterly dividends on its common stock. On February
6, 1998, the Board of Directors declared a $.175 quarterly dividend ($.70
annually) payable on March 31, 1998 to stockholders of record on March 16, 1998.
The dividend rate has been increased fourteen times since dividends were
initiated in January, 1986, at an annual rate of $0.05, adjusted for the two-
for-one stock splits in September 1992 and September 1997. For financial
statement purposes, the Company records dividends on the declaration date. The
Company expects to continue the payment of quarterly dividends. The continued
payment and amount of cash dividends will depend upon, among other factors, the
Company's operating results, overall financial condition, capital requirements
and general business conditions.
As a holding company, Mercury General is largely dependent upon dividends
from its subsidiaries to pay dividends to its shareholders. These subsidiaries
are subject to state laws that restrict their ability to distribute dividends.
The state laws permit a casualty insurance company to pay dividends and advances
within any 12-month period, without any prior regulatory approval, in an amount
up to the greater of 10% of statutory earned surplus at the preceding December
20
<PAGE>
31, or net income for the calendar year preceding the date the dividend is paid.
Under this test, the direct insurance subsidiaries of the Company are entitled
to pay dividends to Mercury General during 1998 of up to approximately $67
million. See Note 9 of Notes to Consolidated Financial Statements and "Business
- -- Regulation -- Holding Company Act."
SHAREHOLDERS OF RECORD
The approximate number of holders of record of the Company's common stock
as of March 16, 1998 was 255. The approximate number of beneficial holders as
of March 16, 1998 was 7,746 according to the Bank of New York, the Company's
transfer agent.
21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- --------- --------- --------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME DATA:
Premiums earned..................................... $1,031,280 $754,724 $616,326 $529,390 $474,093
Net investment income............................... 86,812 70,180 62,964 54,586 54,121
Realized investment gains(losses) 4,973 (3,173) 1,048 (9,853) 3,006
Other............................................... 4,881 3,233 3,341 3,123 2,544
---------- -------- -------- -------- --------
Total Revenues.................................. 1,127,946 824,964 683,679 577,246 533,764
---------- -------- -------- -------- --------
Losses and loss adjustment
expenses.......................................... 654,729 501,858 416,556 360,557 289,208
Policy acquisition costs............................ 224,883 160,019 128,743 112,682 99,738
Other operating expenses............................ 33,579 24,493 22,017 20,566 18,564
Interest............................................ 4,976 2,004 2,040 1,025 793
---------- -------- -------- -------- --------
Total Expenses................................... 918,167 688,374 569,356 494,830 408,303
---------- -------- -------- -------- --------
Income before income taxes.......................... 209,779 136,590 114,323 82,416 125,461
Income taxes........................................ 53,473 30,826 24,022 16,121 29,252
---------- -------- -------- -------- --------
Net Income....................................... $ 156,306 $105,764 $ 90,301 $ 66,295 $ 96,209
========== ======== ======== ======== ========
PER SHARE DATA:
Basic earnings per share *.......................... $2.84 $1.93 $ 1.65 $ 1.22 $ 1.76
========== ======== ======== ======== ========
Diluted earnings per share *........................ 2.82 1.92 1.65 1.21 1.75
========== ======== ======== ======== ========
Dividends paid *.................................... $.58 $.48 $ .40 $ .35 $ .30
========== ======== ======== ======== ========
<CAPTION>
December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments................................... $1,448,248 $1,168,287 $923,194 $751,614 $740,480
Premiums receivable................................. 104,216 83,748 58,902 48,741 38,227
Total assets........................................ 1,725,532 1,419,927 1,081,656 911,693 863,962
Unpaid losses and loss adjust-
ment expenses...................................... 409,061 336,685 253,546 227,499 215,301
Unearned premiums................................... 309,376 260,878 168,404 148,654 128,828
Notes payable....................................... 75,000 75,000 25,000 25,000 15,000
Deferred income tax liability
(asset)........................................... 19,722 6,349 10,158 (10,190) 8,758
Shareholders' equity................................ 799,592 641,222 565,188 457,161 450,275
Book value per share *.............................. 14.51 11.69 10.34 8.38 8.22
</TABLE>
*Adjusted for a two-for-one stock split effective September 1997.
__________________
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
- --------
The operating results of property and casualty insurance companies are
subject to significant fluctuations from quarter-to-quarter and from year-to-
year due to the effect of competition on pricing, the frequency and severity of
losses, including the effect of natural disasters on losses, general economic
conditions, the general regulatory environment in those states in which an
insurer operates, state regulation of premium rates and other factors such as
changes in tax laws. The property and casualty industry has been highly
cyclical, with periods of high premium rates and shortages of underwriting
capacity followed by periods of severe price competition and excess capacity.
The Company did business only in the state of California until 1990, when
it began operations in Georgia and Illinois. In December 1996, the American
Fidelity Insurance Group (AFI), now American Mercury Insurance Group (AMI), was
acquired for cash. The 1996 results of operations of AMI for the month of
December only are included in the Company's 1996 consolidated statement of
income. The full year results of AMI for 1997 are included in the Company's 1997
consolidated statement of income. AMI writes automobile (approximately 57% of
AMI's direct premiums) and other casualty lines of insurance principally in
Oklahoma, Texas and Kansas, and is headquartered in Oklahoma City, Oklahoma.
Total direct premiums written by AMI in 1997 were $87.3 million. Total direct
premiums written by AMI in 1996 were $90.4 million; of that amount $5.5 million
of premiums were written in December and included in the results of operations
of the Company in 1996. AMI is licensed in 36 states. In early 1998, the Company
also commenced operations in Florida.
During 1997, approximately 90% of the Company's direct premiums written,
including AMI, were derived from California.
In California, as in various other states, all property and casualty rates
must be approved by the Insurance Commissioner before they can be used.
In February 1994, the California Insurance Commissioner approved new rates
which were designed to improve the Company's competitive position for new
insureds. These rate changes, which became effective on May 1, 1994, provided
for decreases in premium rates for new insureds. Further rate modifications
were approved and made effective on October 15, 1995, April 15, 1996 and October
1, 1997. The rate changes made over the last several years have been
substantially revenue-neutral overall, with physical damage rates being
increased and bodily injury liability rates decreased. The rate changes have
resulted in a substantial increase in new business being submitted to the
Company. Since March 31, 1994, Private Passenger Automobile ("PPA") policies in
force in California have increased by approximately 350,000 to 650,000 at
December 31, 1997, an annual rate of increase of over 20%.
In September 1996, the California Insurance Commissioner issued new
permanent rating factor regulations designed to implement the requirements that
automobile insurance rates be determined by (1) driving safety record, (2) years
23
<PAGE>
of driving experience, (3) miles driven per year and (4) whatever optional
factors are determined by the Insurance Commissioner to have a substantial
relationship to the risk of loss and adopted by regulation. The law further
requires that each of the four factors be applied in decreasing order of
importance.
The new permanent regulations replaced emergency regulations which had been
in use since their issuance in 1989. The new regulations required all
automobile insurers in California to submit new rating plans complying with the
regulations in early 1997. The Company submitted its new proposed rating plan
on March 11, 1997.
The Company's plan, and the new plans of most other California automobile
insurers, were approved by the California DOI in October 1997. The Company's
plan became effective November 1, 1997. Although the rate changes produced some
minor dislocations, implementation of the new plan has not thus far had a
material effect on the Company's overall competitive position or its
profitability.
In February 1998, the Company filed new reduced rates with the California
DOI. The overall rate reduction of approximately 7% will become effective on
April 1, 1998.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
---------------------------------------------------------------------
Premiums earned in 1997 of $1,031.3 million (including $65.1 million
contributed by AMI) increased 36.6%, primarily reflecting unit growth. Average
premium per policy for the year declined slightly. Net premiums written in 1997
of $1,086.2 million (including $72.8 million contributed by AMI) increased 36.5%
over a year earlier, continuing a growth trend which began in the second quarter
of 1993. Growth in written premiums in California of 28.5% for all of 1997 was
aided by a new California law that became effective January 1, 1997 which
requires proof of insurance for the registration (new or renewal) of a motor
vehicle. The greater part of the new business generated by the new law occurred
in the first half of 1997, and provided for only the minimum liability coverage
required by law. The average premium on this business was substantially less
than that produced by full coverage policies, which constitute a majority of
the Company's total premium volume.
The loss ratio in 1997 (loss and loss adjustment expenses related to
premiums earned) was 63.5%, compared with 66.5% in 1996. The improvement in
loss experience in 1997 is in large part related to the effectiveness of
Proposition 213, an initiative passed by a large majority of California voters
in November 1996 which prohibits recovery of non-economic losses by uninsured
motorists or drunk drivers injured in automobile accidents. The 1997 loss ratio
reflects deficiencies from unfavorable development on allocated loss adjustment
expenses from prior periods. The initial estimates were based principally on
the Company's actual experience and did not fully reflect the increases in the
legal expenses of defending the Company's insureds arising from the Company's
policy
24
<PAGE>
of aggressively defending, including litigating, exaggerated bodily
injury claims arising from minimal impact automobile accidents.
The expense ratio (policy acquisition costs and other operating expenses
related to premiums earned) was 25.1% in 1997 and 24.5% 1996. The increase in
the expense ratio in 1997 reflects increased provisions for profit-related
bonuses to both agents and employees and the inclusion of the operating results
of AMI for a full year.
Total losses and expenses in 1997, excluding interest expense of $5.0
million, were $913.2 million, resulting in an underwriting gain for the period
of $118.1 million, compared with an underwriting gain of $68.4 million in 1996.
Investment income in 1997, including a contribution from AMI of $6.3
million, was $86.8 million, compared with $70.2 million in 1996. The after-tax
yield on average investments of $1,262.9 million, including AMI, (fixed
maturities at cost, equities at market) was 6.17%, compared with 6.50% on
average investments of $975.1 million in 1996. The effective tax rate on
investment income was 10.3% in 1997, compared with 9.7% in 1996. The effective
tax rate was increased, and the effective after-tax yield was reduced slightly,
by the inclusion of AMI for the full year 1997. The slightly higher tax rate on
investment income in 1997 reflects an increase in the proportion of investment
income derived from taxable bonds held by AMI and dividends on equities,
principally perpetual preferred stocks. The redemption of bonds acquired during
higher interest periods has been a negative influence on realized yields in each
of the last several years and will continue in 1998. Bonds matured and called in
1997 totaled $54.0 million, compared with $72.9 million in 1996. Approximately
$65.3 million of bonds are expected to mature or be called in 1998. Average
yields being obtained during the first quarter of 1998 on new investments are 50
to 75 basis points lower than the average yield realized in 1997.
Realized investment gains in 1997 were $5.0 million, compared with realized
losses of $3.2 million in 1996. The gains and losses in both years reflect
principally income-enhancing swaps of both fixed maturities and equity
securities, including perpetual preferred stocks. The losses realized in 1996
were designed to utilize expiring capital gains tax benefits.
The income tax provision of $53.5 million in 1997 represented an effective
tax rate of 25.5%, compared with an effective rate of 22.6% in 1996. The
increase in the rate is attributable to the increased proportion of realized
gains and the increase in underwriting gains, both of which are taxed at the
full corporate rate of 35%, in contrast to investment income which consists
primarily of tax-exempt interest and tax sheltered dividend income.
Net income in 1997 was $156.3 million, or $2.84 per share, (basic),
compared with $105.8 million, or $1.93 per share, (basic), in 1996. Basic share
results are based on 55.0 million average shares in 1997 and 54.8 million
average shares in 1996, adjusted for a two-for-one stock split effective
September 16, 1997. Diluted per share results, calculated in accordance with
new accounting standards, were $2.82 in 1997 and $1.92 in 1996.
25
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
---------------------------------------------------------------------
Premiums earned in 1996 of $754.7 million (including $5.2 million
contributed by AMI in December 1996) increased 22.5% over premiums earned in
1995, primarily reflecting unit growth. Average premium per policy for the year
was substantially unchanged. Net premiums written in 1996 of $795.9 million
(including $4.5 million contributed by AMI) increased 25.0% over a year earlier,
continuing a growth trend which began in the second quarter of 1993.
The loss ratio in 1996 was 66.5%, compared with 67.6% in 1995. The 1996
and 1995 loss ratios reflect small contributions from favorable loss reserve
development from prior periods.
The expense ratio was 24.4% in 1996 and 1995. The consolidation of one
month of operating results of AMI in 1996 had no material effect on either the
loss or expense ratios.
Total losses and expenses in 1996, excluding interest expense of $2.0
million, were $686.4 million, resulting in an underwriting gain for the period
of $68.4 million, compared with an underwriting gain of $49.0 million in 1995.
Investment income in 1996, including a contribution from AMI of $400,000
for the final month of the year, was $70.2 million, compared with $63.0 million
in 1995. The after-tax yield on average investments of $975.1 million, including
AMI, was 6.50%, compared with 6.89% on average investments of $827.9 million in
1995. The effective tax rate on investment income was 9.7% in 1996, compared
with 9.4% in 1995. The effective tax rate was increased and the effective after-
tax yield was reduced slightly by the inclusion of AMI for the month of December
1996. The effective tax rate on investment income in 1996, excluding AMI, was
9.6%, and the after-tax yield was 6.56%. The slightly higher tax rate on
investment income in 1996 reflects an increase in the proportion of investment
income derived from dividends on equities, principally perpetual preferred
stocks. Bonds matured and called in 1996 totaled $72.9 million, compared with
$71.0 million in 1995. Average yields obtained during 1997 on new investments
were approximately some 50 basis points lower than the average yield realized in
1996.
Realized investment losses in 1996 were $3.2 million, compared with
realized gains of $1.0 million in 1995. The 1996 losses reflect principally
yield-enhancing swaps of both fixed maturities and equity securities, including
perpetual preferred stocks, designed to utilize expiring capital gains tax
benefits. The 1995 gains arose in part from the early redemption of fixed-
maturity investments.
The income tax provision of $30.8 million in 1996 represented an effective
tax rate of 22.6%, compared with an effective rate of 21.0%, in 1995. The
increase in the rate is attributable principally to the greater contribution
from underwriting gains, which are fully taxable and increased by $19.4 million
during 1996, whereas the predominantly tax-free investment income increased $7.2
million.
26
<PAGE>
Net income in 1996 was $105.8 million, or $1.93 per share (Basic), compared
with $90.3 million, or $1.65 per share (Basic), in 1995. Basic per share
results are based on 54.8 million average shares in 1996 and 54.6 million
average shares in 1995 adjusted for a two-for-one stock split effective
September 16, 1997. Diluted per share results, calculated in accordance with
new accounting standards, were $1.92 in 1996 and $1.65 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities in 1997, was $268.2 million,
while funds derived from the sale, redemption or maturity of investments was
$734.0 million, of which approximately 80% was represented by the sale of equity
securities. The amortized cost of fixed-maturity investments increased by
$222.8 million during the year. Equity investments, including perpetual
preferred stocks, increased by $21.7 million at cost, while short-term cash
investments decreased by $6.3 million. The amortized cost of fixed-maturities
available for sale that were sold, called or matured during the year was $142.4
million.
The market value of all investments held at market as "Available for Sale"
exceeded the amortized cost of $1,377.3 million at December 31, 1997 by $71.0
million. That unrealized gain, reflected in shareholders' equity net of
applicable tax effects, was $46.1 million at December 31, 1997 compared with an
unrealized gain of $19.0 million at December 31, 1996. The increase in market
values since December 31, 1996 reflects principally the substantial decline in
intermediate and long term interest rates during 1997.
The Company's cash and short term investments totaled $62.8 million at
December 31, 1997. Together with funds generated internally, such liquid assets
are more than adequate to pay claims without the sale of long term investments.
Traditionally, it has been the Company's policy not to invest in high yield
or "junk" bonds. In 1995, the Company 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 by Moody's or BB by Standard & Poor's.
At December 31, 1997 bond holdings rated below investment grade totaled $15.0
million at market (cost $14.0 million), or 1% of total investments. The average
rating of the $1,071.4 million bond portfolio (at amortized cost) was AA-, while
the average effective maturity, giving effect to anticipated early call,
approximates 7.5 years. The modified duration of the bond portfolio at year-end
was 6.1 years, reflecting the heavy weighting of high coupon issues, including
housing issues subject to sinking funds, and other issues which are pre-refunded
or are expected to be called prior to their maturity. Duration measures the
length of time it takes to receive all the cash flows produced by a bond,
including reinvestment of interest. Because it measures four factors (maturity,
coupon rate, yield and call terms) which determine sensitivity to changes in
interest rates, modified duration is a much better indicator of price volatility
than simple maturity alone. 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.
27
<PAGE>
Holdings in the taxable sector consist largely of senior public utility
issues. Fixed-maturity investments of $1,147.6 million (amortized cost),
include $76.2 million (amortized cost) of sinking fund preferreds, principally
utility issues. The market value of all fixed maturities exceeded cost by $67.4
million at December 31, 1997. The only securities held which may be considered
derivatives are a small amount of adjustable rate preferred stocks.
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 $173.5 million at market (cost $169.9 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 21.7% of total shareholders' equity.
The only significant debt of the Company at December 31, 1997 was a three
year, $75,000,000 revolving credit bank loan. The loan agreement requires the
Company to meet numerous affirmative and negative covenants. The proceeds of
the loan were used to repay a prior loan and to acquire AMI, with the balance
contributed to the Company's new insurance subsidiaries. The loan agreement may
be extended annually for additional periods of one year each to maintain the
three year maturity date. The interest rate is variable and is optionally
related to the Federal Funds Rate, Bank of New York Rate (prime rate) or the
Eurodollar London Interbank Rate (LIBOR). Based on the rates effective through
November 23, 1998, LIBOR plus .50, the net interest cost on the loan
approximates 6.125%.
In March 1994, the Company's Employee Stock Ownership Plan (the "Plan")
purchased 322,000 shares of Mercury General's common stock in the open market at
a price of $14.875 per share, adjusted for the two-for-one stock split effective
September 16, 1997. The purchases were funded by a five year term bank loan of
$5.0 million to the Plan which is guaranteed by the Company. The shares have
been allocated to employees over the amortization period of the loan, with the
initial allocation made in December 1994. The remaining balance of the loan of
$2.0 million is being retired in March 1998 with the proceeds of contributions
to the Plan by the Company for the year 1997, and the remaining unallocated
shares were credited to employees' ESOP balances at December 31, 1997. A new
$5.0 million ESOP loan is currently being arranged with an amortization period
of not more than five years. The proceeds of that loan will be used to purchase
the Company's shares in the open market, with the shares to be allocated to
employees over the amortization period beginning in December 1998. Since
dividends on unallocated shares held by the Plan are tax deductible if they are
used for debt service, as are Company contributions to the Plan, the net, after-
tax interest cost to the Company for the borrowed funds used for the Plan stock
purchase is less than the nominal fixed rate of interest on the loan, which, in
1997, was 6.98%.
In December 1993, the NAIC adopted a risk-based capital formula for
casualty insurance companies which establishes recommended minimum capital
requirements for casualty companies. The formula has been designed to capture
the widely varying elements of risks undertaken by writers of different lines of
28
<PAGE>
insurance having differing risk characteristics, as well as writers of similar
lines where differences in risk may be related to corporate structure,
investment policies, reinsurance arrangements and a number of other factors.
The Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 1997. Each of the companies'
policyholders' surplus exceeded the highest level of recommended capital
requirements.
As of December 31, 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 $679.4 million at December 31, 1997, and net
written premiums for the twelve months ended on that date of $1,086.2 million,
the ratio of writings to surplus was approximately 1.6 to 1.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four 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, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company is nearing completion of the modifications to its computer
programs and systems to resolve the problems created by the impending year 2000.
The conversion of the most critical systems should be completed within the first
quarter of 1998. The cost of this conversion has been charged to current
operations and will not have a material effect on the financial condition of the
Company.
While the Year 2000 considerations are not expected to materially impact
the Company's internal operations, they may have an effect on some of the
Company's agents, suppliers and financial institutions with whom the Company
conducts business, and thus indirectly affect the Company. It is not possible
to quantify the aggregate cost to the Company with respect to external Year 2000
problems, although the Company does not anticipate it will have a material
adverse impact on its business.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from the historical information contained herein and from those that
may be expressed or implied by such forward-looking statements. Factors that
could cause or contribute to such differences include, among others, the success
of the Company in integrating and profitably operating the business of AMI, and
29
<PAGE>
in expanding generally in states outside of California, the impact of the
permanent rating factor regulations recently adopted by the California Insurance
Commissioner for private passenger automobile policies issued in California and
the level of investment yields obtainable in the Company's investment portfolio
in comparison to recent yields, as well as the cyclical and competitive nature
of the property and casualty insurance industry and general uncertainties
regarding loss reserve estimates and legislative and regulatory changes. Such
risks and uncertainties and other factors are discussed above and in periodic
filings with the Securities and Exchange Commission.
SUPPLEMENTARY DATA
Summarized quarterly financial data for 1997 and 1996 is as follows (in
thousands except per share data):
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
----------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
- ----
Earned premiums..................... $235,579 $255,119 $267,212 $273,370
Income before income taxes.......... $ 39,870 $ 47,967 $ 55,198 $ 66,744
Net income.......................... $ 30,818 $ 35,893 $ 40,754 $ 48,841
Basic earnings per share............ $ .56 $ .65 $ .74 $ .89
Diluted earnings per share.......... $ .56 $ .65 $ .74 $ .88
Dividends declared per share........ $ .145 $ .145 $ .145 $ .145
1996
- ----
Earned premiums..................... $169,563 $181,254 $193,298 $210,609
Income before income taxes ......... $ 27,421 $ 34,185 $ 38,078 $ 36,906
Net income.......................... $ 21,911 $ 26,583 $ 28,993 $ 28,277
Basic earnings per share.......... $ .40 $ .49 $ .53 $ .52
Diluted earnings per share.......... $ .40 $ .48 $ .53 $ .51
Dividends declared per share........ $ .12 $ .12 $ .12 $ .12
</TABLE>
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................ 32
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996...... 33
Consolidated Statements of Income for Each of the Years in the
Three-Year Period Ended December 31, 1997......................... 34
Consolidated Statements of Shareholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1997........... 35
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1997..................... 36
Notes to Consolidated Financial Statements........................ 38
</TABLE>
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mercury General Corporation:
We have audited the accompanying consolidated balance sheets of Mercury
General Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercury
General Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 13, 1998
32
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS
A S S E T S
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized cost
$1,147,594 in 1997 and $924,793 in 1996)................ $1,214,986 $ 954,108
Equity securities available for sale (cost $169,943 in
1997 and $148,264 in 1996).............................. 173,522 148,112
Short-term cash investments, at cost, which approxi-
mates market............................................ 59,740 66,067
---------- ----------
Total investments............................. 1,448,248 1,168,287
Cash........................................................ 3,011 3,605
Receivables:
Premiums receivable...................................... 104,216 83,748
Premium notes............................................ 13,562 12,395
Accrued investment income................................ 21,895 18,410
Other.................................................... 26,476 29,655
---------- ----------
166,149 144,208
Deferred policy acquisition costs........................... 57,264 46,783
Fixed assets, net........................................... 30,493 30,060
Other assets................................................ 20,367 26,984
---------- ----------
$1,725,532 $1,419,927
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses........................ $ 409,061 $ 336,685
Unearned premiums.......................................... 309,376 260,878
Notes payable.............................................. 75,000 75,000
Loss drafts payable........................................ 32,058 29,032
Accounts payable and accrued expenses...................... 50,742 36,463
Current income taxes....................................... 3,317 1,590
Deferred income taxes...................................... 19,722 6,349
Other liabilities.......................................... 26,664 32,708
---------- ----------
Total liabilities............................ 925,940 778,705
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
55,124,579 shares in 1997 and 55,007,850 in 1996...... 47,412 42,644
Net unrealized investment gains......................... 46,131 18,956
Unearned ESOP compensation.............................. -- (2,000)
Retained earnings....................................... 706,049 581,622
---------- ----------
Total shareholders' equity................... 799,592 641,222
---------- ----------
Commitments and contingencies........................... $1,725,532 $1,419,927
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1997
AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Revenues:
Earned premiums.............................. $1,031,280 $754,724 $616,326
Net investment income........................ 86,812 70,180 62,964
Net realized investment gains (losses)....... 4,973 (3,173) 1,048
Other........................................ 4,881 3,233 3,341
---------- -------- --------
Total revenues........................... 1,127,946 824,964 683,679
---------- -------- --------
Expenses:
Losses and loss adjustment expenses.......... 654,729 501,858 416,556
Policy acquisition costs..................... 224,883 160,019 128,743
Other operating expenses..................... 33,579 24,493 22,017
Interest..................................... 4,976 2,004 2,040
---------- -------- --------
Total expenses.......................... 918,167 688,374 569,356
---------- -------- --------
Income before income taxes................... 209,779 136,590 114,323
Income taxes................................... 53,473 30,826 24,022
---------- -------- --------
Net income.................................... $ 156,306 $105,764 $ 90,301
========== ======== ========
Basic earnings per share....................... $ 2.84 $ 1.93 $ 1.65
========== ======== ========
Diluted earnings per share..................... $ 2.82 $ 1.92 $ 1.65
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Common stock, beginning of year................................................. $ 42,644 $ 40,895 $ 40,250
Proceeds of stock options exercised............................................. 999 1,104 384
Tax benefit on sales of incentive stock
options........................................................................ 401 220 74
Release of common stock by the ESOP............................................. 3,368 425 187
-------- -------- --------
Common stock, end of year....................................................... 47,412 42,644 40,895
-------- -------- --------
Net unrealized investment gains (losses) on
securities, beginning of year.................................................. 18,956 25,227 (12,733)
Net increase (decrease) in unrealized invest-
ment gains (losses) on securities.............................................. 27,175 (6,271) 37,960
-------- -------- --------
Net unrealized investment gains on
securities, end of year........................................................ 46,131 18,956 25,227
-------- -------- --------
Unearned ESOP compensation relating to common
stock purchases by ESOP........................................................ (2,000) (3,084) (4,042)
Amortization of unearned ESOP compensation...................................... 2,000 1,084 958
-------- -------- --------
Unearned ESOP compensation, end of year......................................... -- (2,000) (3,084)
-------- -------- --------
Retained earnings, beginning of year............................................ 581,622 502,150 433,686
Net income...................................................................... 156,306 105,764 90,301
Dividends paid to shareholders.................................................. (31,879) (26,292) (21,837)
-------- -------- --------
Retained earnings, end of year.................................................. 706,049 581,622 502,150
-------- -------- --------
Total shareholders' equity............................................... $799,592 $641,222 $565,188
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
AMOUNTS EXPRESSED IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 156,306 $ 105,764 $ 90,301
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase in unpaid losses and loss adjustment
expenses 72,376 35,947 26,047
Increase in unearned premiums 48,498 42,276 19,750
Increase in premium notes receivable (1,167) (667) (166)
Increase in premiums receivable (20,468) (15,460) (10,161)
Increase in deferred policy acquisition costs (10,481) (7,080) (3,741)
Increase in loss drafts payable 3,026 5,179 2,292
Increase in accrued income taxes,
excluding deferred tax on change in unrealized
gain 469 1,016 4,995
Increase in accounts payable and accrued
expenses 14,279 8,385 3,487
Depreciation 5,157 4,067 3,736
Net realized investment (gains) losses (4,973) 3,173 (1,048)
Bond amortization, net (2,295) (1,112) (103)
Other, net 7,479 15,136 1,169
------- ------- -------
Net cash provided from operating activities 268,206 196,624 136,558
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (362,932) (243,779) (204,360)
Sales 71,313 41,353 47,824
Calls or maturities 72,515 91,834 70,954
Equity securities available for sale:
Purchases (608,260) (437,128) (386,343)
Sales 590,155 398,306 365,696
Purchase of AFI, less cash acquired -- (33,629) --
Decrease (increase) in short-term cash investments,
net 6,327 (32,077) (5,801)
Purchase of fixed assets (6,854) (5,971) (4,115)
Sale of fixed assets 1,165 167 494
--------- --------- ---------
Net cash used in investing activities $(236,571) $(220,924) $(115,651)
</TABLE>
(Continued)
36
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Additions to notes payable $ -- $ 75,000 $ --
Principal payments on notes payable -- (25,000) --
Payment of American Mercury Insurance Company
indemnification holdback (1,750) -- --
Dividends paid to shareholders (31,879) (26,291) (21,837)
Proceeds from stock options exercised 1,400 1,324 458
-------- -------- --------
Net cash provided by (used in)
financing activities (32,229) 25,033 (21,379)
-------- -------- --------
Net increase (decrease) in cash (594) 733 (472)
Cash:
Beginning of the year 3,605 2,872 3,344
-------- -------- --------
End of the year $ 3,011 $ 3,605 $ 2,872
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
The Company is primarily engaged in the underwriting of private passenger
automobile insurance in the state of California.
The consolidated financial statements include the accounts of Mercury
General Corporation (the Company) and its wholly-owned subsidiaries, Mercury
Casualty Company, Mercury Insurance Company, California Automobile Insurance
Company, California General Underwriters Insurance Company, Inc., Mercury
Insurance Company of Georgia, Mercury Insurance Company of Illinois, Mercury
Indemnity Company of Georgia and Mercury Indemnity Company of Illinois.
Effective December 1, 1996 the financial statements also include newly acquired
companies American Mercury Insurance Company, Cimarron Insurance Company, Inc.,
AFI Management Company, Inc. (AFIMC), and American Mercury Lloyds Insurance
Company (AML). AML is not owned by MGC, but is controlled by MGC through its
attorney-in-fact, AFIMC. The acquisition is discussed further in Note 8.
Collectively, the newly-acquired companies, including AML, are referred to as
AMI. All of the subsidiaries as a group, including AML, but excluding AFIMC,
are referred to as the Insurance Companies. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles (GAAP) which differ in some respects from those filed in reports to
insurance regulatory authorities. All significant intercompany balances and
transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Investments
Fixed maturities available for sale include those securities that
management intends to hold for indefinite periods, but which may be sold in
response to changes in interest rates, tax planning considerations or other
aspects of asset/liability management. Fixed maturities available for sale,
which include bonds and sinking fund preferred stocks, are carried at market.
Short-term investments are carried at cost, which approximates market.
Investments in equity securities, which include common stocks and non-redeemable
preferred stocks, are carried at market.
38
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In most cases, the market valuations were drawn from standard trade data
sources. In no case were any valuations made by the Company's management.
Equity holdings, including non sinking fund preferred stocks, are, with minor
exceptions, actively traded on national exchanges, and were valued at the last
transaction price.
Temporary unrealized investment gains and losses on securities available
for sale are credited or charged directly to shareholders' equity, net of
applicable tax effects. When a decline in value of fixed maturities or equity
securities is considered other than temporary, a loss is recognized in the
consolidated statement of income. Realized gains and losses are included in the
consolidated statements of income based upon the specific identification method.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", and Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments", require disclosure of estimated fair value
information about financial instruments, for which it is practicable to estimate
that value. Under SFAS No. 115, the Company categorizes all of its investments
in debt and equity securities as available for sale. Accordingly, all
investments, including cash and short-term cash investments, are carried on the
balance sheet at their fair value. The carrying amounts and fair values for
investment securities are disclosed in Note 2 and were drawn from standard trade
data sources such as market and broker quotes. The carrying value of
receivables, accounts payable and other liabilities is equivalent to the
estimated fair value of those items. The estimated fair value of notes payable
equals their carrying value, which was based on borrowing rates currently
available to the Company for bank loans with similar terms and maturities. The
terms of the notes are discussed in Note 5.
Premium Income Recognition
Insurance premiums are recognized as income ratably over the term of the
policies. Unearned premiums are computed on the monthly pro rata basis.
Unearned premiums are stated gross of reinsurance deductions, with the
reinsurance deduction recorded in other assets.
Net premiums written during 1997, 1996 and 1995 were $1,086,241,000,
$795,873,000 and $636,590,000, respectively.
39
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
One agent produced direct premiums written of approximately 14%, 17% and
15% of the Company's total direct premiums written during 1997, 1996 and 1995,
respectively.
Premium Notes
Premium notes receivable represent the balance due to the Company from
policyholders who elect to finance their premiums over the policy term. The
Company requires both a downpayment and monthly payments as part of its
financing program. Premium finance fees are charged to policyholders who elect
to finance premiums. The fees are charged at rates that vary with the amount
of premium financed. Premium finance fees are recognized over the term of the
premium note based upon the effective yield.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, which consist of
commissions, premium taxes and certain other underwriting costs, which vary
directly with and are directly related to, the production of business, are
deferred and amortized to income ratably over the terms of the policies.
Deferred acquisition costs are limited to the amount which will remain after
deducting from unearned premiums and anticipated investment income, the
estimated losses and loss adjustment expenses and the servicing costs that will
be incurred as the premiums are earned.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period, plus estimates, based upon past experience, of
ultimate developed costs which may differ from case estimates and of unreported
claims. The liability is stated net of anticipated salvage and subrogation
recoveries. The amount of reinsurance recoverable is included in other
receivables.
Estimating loss reserves is a difficult process as there are many factors
that can ultimately affect the final settlement of a claim and, therefore, the
reserve that is needed. Changes in the law, results of litigation, medical
costs, the cost of repair materials and labor rates can all impact ultimate
claim costs. In addition, time can be a critical part of reserving
determinations since the longer the span between the incidence of a loss and the
payment or
40
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
settlement of the claim, the more variable the ultimate settlement amount can
be. Accordingly, short-tail claims, such as property damage claims, tend to be
more reasonably predictable than long-tail liability claims. Management
believes that the liability for losses and loss adjustment expenses is adequate
to cover the ultimate net cost of losses and loss adjustment expenses incurred
to date. Since the provisions are necessarily based upon estimates, the
ultimate liability may be more or less than such provisions.
Depreciation
Buildings and furniture and equipment are depreciated over 30-year and 5-
year to 10-year periods, respectively, on a combination of straight-line and
accelerated methods. Automobiles are depreciated over 5 years, using an
accelerated method.
Earnings per Share
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which requires
presentation of basic and diluted earnings per share for all publicly traded
companies effective for fiscal years ending after December 15, 1997. Note 14
contains the required disclosures which make up the calculation of basic and
diluted earnings per share.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise
and Related Information," were issued in June 1997 and are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income, which includes net income and
changes in equity except those resulting from investments by, or distributions
to stockholders. SFAS No. 131 establishes standards for disclosures related to
business operating segments. The Company is currently evaluating the impact
that these statements will have on the consolidated financial statements.
Income Taxes
Deferred income taxes result from temporary differences in the recognition
of income and expense for tax and financial reporting purposes.
41
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reinsurance
In accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts," the liabilities for unearned
premiums and unpaid losses are stated in the accompanying consolidated financial
statements before deductions for ceded reinsurance. The ceded amounts are
immaterial and are carried in other assets and other receivables. Earned
premiums are stated net of deductions for ceded reinsurance.
The Insurance Companies, as primary insurers, would be required to pay
losses in their entirety in the event that the reinsurers were unable to
discharge their obligations under the reinsurance agreements.
Statements of Cash Flows
Interest paid during 1997, 1996, and 1995 was $5,077,000, $1,882,000, and
$1,970,000, respectively. Income taxes paid were $52,611,000 in 1997,
$30,550,000 in 1996, and $18,954,000 in 1995.
The balance sheet of AMI at the acquisition date included the following
assets: investments of $75,310,000, cash of $1,362,000, receivables of
$44,418,000 and other assets of $31,124,000. Liabilities assumed in the
acquisition included unearned premiums of $50,199,000, loss and loss adjustment
expense reserves of $47,039,000 and other liabilities of $19,985,000.
On December 30, 1997, the Company paid $1,750,000 of principal plus $87,500
of interest to the seller of AMI. This amount represented repayment of a one
year note which secured the seller's guaranty of the collectibility of certain
assets of AMI.
Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning
after December 15, 1995. The Company accounts for stock-based compensation
under the accounting methods prescribed by Accounting Principles Board (APB)
Opinion No. 25, as allowed by SFAS No. 123. Disclosure of stock-based
compensation determined in accordance with SFAS No. 123 is presented in Footnote
13. Accordingly, adoption of this pronouncement did not have a material effect
on the financial statements of the Company.
42
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain reclassifications have been made to the prior year balances to
conform to the current year presentation.
(2) INVESTMENTS AND INVESTMENT INCOME
A summary of net investment income is shown in the following table:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-----------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities................................ $67,948 $55,132 $50,099
Dividends on equity securities............................................ 16,317 13,385 11,855
Interest on short-term cash investments................................... 3,321 2,126 1,456
------- ------- -------
Total investment income.............................................. 87,586 70,643 63,410
Investment expense........................................................ 774 463 446
------- ------- -------
Net investment income................................................ $86,812 $70,180 $62,964
======= ======= =======
</TABLE>
A summary of net realized investment gains (losses) is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-----------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Net realized investment gains (losses):
Fixed maturities..................................................... $1,400 $ 963 $ (57)
Equity securities.................................................... 3,573 (4,136) 1,105
------ ------- -------
$4,973 $(3,173) $ 1,048
====== ======= =======
</TABLE>
Gross gains and losses realized on the sales of investments (excluding
calls) are shown below:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-----------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Fixed maturities available for sale:
Gross realized gains................................................. $ 849 $ 515 $ 346
Gross realized losses................................................ (389) (1,237) (822)
------- ------- -------
Net............................................................. $ 460 $ (722) $ (476)
======= ======= =======
Equity securities available for sale:
Gross realized gains................................................. $ 7,257 $ 2,925 $ 5,154
Gross realized losses................................................ (3,565) (7,115) (4,049)
------- ------- -------
Net............................................................. $ 3,692 $(4,190) $ 1,105
======= ======= =======
</TABLE>
43
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(2) INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
A summary of the net increase (decrease) in unrealized investment gains
and losses less applicable income tax expense (benefit), is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net increase (decrease) in net unrealized
investment gains and losses:
Fixed maturities available for sale......................... $38,077 $ (8,059) $ 49,859
Income tax expense (benefit)................................ 13,327 (2,821) 17,451
------- -------- --------
$24,750 $ (5,238) $ 32,408
======= ======== ========
Equity securities........................................... $ 3,731 $ (1,589) $ 8,541
Income tax expense (benefit)................................ 1,306 (556) 2,989
------- -------- --------
$ 2,425 $ (1,033) $ 5,552
======= ======== ========
</TABLE>
Accumulated unrealized gains and losses on securities available for sale
follows:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands)
----------------------
1997 1996
---- ----
<S> <C> <C>
Fixed maturities available for sale:
Unrealized gains................................................ $ 68,718 $ 34,555
Unrealized losses............................................... (1,326) (5,240)
Tax effect...................................................... (23,587) (10,260)
-------- --------
$ 43,805 $ 19,055
-------- --------
Equity securities available for sale:
Unrealized gains................................................ $ 5,006 $ 2,347
Unrealized losses............................................... (1,427) (2,499)
Tax effect...................................................... (1,253) 53
-------- --------
$ 2,326 $ (99)
-------- --------
Net unrealized investment gains............................... $ 46,131 $ 18,956
======== ========
</TABLE>
44
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(2) INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
The amortized costs and estimated market values of investments in fixed
maturities available for sale as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies........... $ 19,700 $ 123 $ 16 $ 19,807
Obligations of states and political
subdivisions........................ 1,021,259 64,908 554 1,085,613
Public utilities...................... 11,383 151 5 11,529
Corporate securities.................. 19,013 324 11 19,326
Redeemable preferred stock............ 76,239 3,212 740 78,711
---------- ------- ------ ----------
Totals........................... $1,147,594 $68,718 $1,326 $1,214,986
========== ======= ====== ==========
</TABLE>
The amortized costs and estimated market values of investments in fixed
maturities available for sale as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... $ 34,218 $ 33 $ 366 $ 33,885
Obligations of states and political
subdivisions...................... 781,586 30,817 3,642 808,761
Public utilities................................ 12,908 229 87 13,050
Corporate securities............................ 29,368 114 304 29,178
Redeemable preferred stock...................... 66,713 3,362 841 69,234
-------- ------- -------- --------
Totals..................................... $924,793 $34,555 $ 5,240 $954,108
======== ======= ======== ========
</TABLE>
Traditionally, it has been the Company's policy not to invest in high yield or
non-investment grade bonds. In 1995, the Company adopted a policy allowing a
small percentage of its investments to be placed in bonds rated lower than
investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's.
45
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(2) INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
At December 31, 1997 bond holdings rated below investment grade totaled
approximately 1.0% of total investments. The average Standard and Poor's
rating of the bond portfolio is AA-.
The amortized cost and estimated market value of fixed maturities available for
sale at December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
------------ ----------
(Amounts in thousands)
-------------------------
<S> <C> <C>
Fixed maturities available for sale:
Due in one year or less .................... $ 12,117 $ 12,230
Due after one year through five years....... 78,682 79,795
Due after five years through ten years...... 65,455 68,505
Due after ten years......................... 991,340 1,054,456
---------- ----------
$1,147,594 $1,214,986
========== ==========
</TABLE>
The Company utilizes repurchase agreements for investing funds overnight. All
repurchase agreements utilized require U.S. Treasury securities or obligations
of U.S. government corporations or agencies as collateral.
(3) FIXED ASSETS
A summary of fixed assets follows:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands)
-------------------------
1997 1996
---- ----
<S> <C> <C>
Land............................. $ 6,084 $ 6,128
Buildings........................ 21,802 21,430
Furniture and equipment.......... 27,819 23,287
Leasehold improvements........... 391 1,238
------ -------
56,096 52,083
Less accumulated depreciation.... (25,603) (22,023)
Net fixed assets........... ------- -------
$ 30,493 $ 30,060
====== =======
</TABLE>
46
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(4) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs incurred and amortized to income are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
(Amounts in thousands)
---------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year......... $ 46,783 $ 33,809 $ 30,068
DAC acquired in purchase of AFI.... -- 5,850 --
Costs deferred during the year..... 235,364 167,143 132,484
Amortization charged to expense.... (224,883) (160,019) (128,743)
--------- --------- ---------
Balance, end of year............... $ 57,264 $ 46,783 $ 33,809
========= ========= =========
</TABLE>
(5) NOTES PAYABLE
Notes payable at December 31, 1997 consists of three unsecured notes
payable under a credit agreement dated November 21, 1996. The combined principal
amount on the notes of $75,000,000 is payable on November 21, 2000. The loan
agreement may be extended annually for additional periods of one year each to
maintain the three year maturity date. The interest rate is variable and is
optionally related to the Federal Funds rate, Bank of New York prime rate or the
Eurodollar London Interbank rate (LIBOR). Based on the rates effective through
November 23, 1998, the net interest cost on the loan at December 31, 1997 is
approximately 6.125%.
The terms of the loan agreement include certain affirmative and negative
covenants, all of which are met by the Company at December 31, 1997.
(6) INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return.
47
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) INCOME TAXES (CONTINUED)
The provision for income tax expense (benefit) consists of the following
components:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal
Current....................... $54,447 $31,880 $24,016
Deferred...................... (1,265) (1,139) (92)
------- ------- -------
$53,182 $30,741 $23,924
======= ======= =======
State
Current....................... $ 291 $ 85 $ 98
Deferred...................... -- -- --
------- ------- -------
$ 291 $ 85 $ 98
======= ======= =======
Total
Current....................... $54,738 $31,965 $24,114
Deferred...................... (1,265) (1,139) (92)
------- ------- -------
Total..................... $53,473 $30,826 $24,022
======= ======= =======
</TABLE>
The income tax provision reflected in the consolidated statements of income
is less than the expected federal income tax on income before income taxes as
shown in the table below:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed tax expense at 35% ........................................ $ 73,423 $ 47,807 $ 40,013
Tax-exempt interest income.......................................... (19,188) (15,626) (13,718)
Dividends received deduction........................................ (5,389) (4,949) (4,936)
Reduction of losses incurred deduction for 15% of
income on securities purchased after August 7, 1986 3,640 2,974 2,546
Other, net.......................................................... 987 620 117
-------- -------- --------
Income tax expense ............................................ $ 53,473 $ 30,826 $ 24,022
======== ======== ========
</TABLE>
48
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) INCOME TAXES (CONTINUED)
The "temporary differences" that give rise to a significant portion of the
deferred tax asset (liability) relate to the following:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands)
-------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Deferred tax assets
Discounting of loss reserves and salvage
and subrogation recoverable for tax
purposes.................................... $ 6,930 $ 6,123 $ 5,030
Other deferred tax assets.................... 1,085 1,358 638
-------- -------- --------
Total gross deferred tax assets............ 8,015 7,481 5,668
Less valuation allowance.................. -- -- --
-------- -------- --------
Net deferred tax assets................... 8,015 7,481 5,668
-------- -------- --------
Deferred tax liabilities
Tax liability on net unrealized gain on
securities carried at market value.......... (24,840) (10,207) (13,584)
Tax depreciation in excess of book
depreciation................................ (1,467) (1,270) (1,184)
Accretion on bonds........................... (1,061) (784) (742)
Other deferred tax liabilities............... (369) (1,569) (316)
-------- -------- --------
Total gross deferred tax liabilities...... (27,737) (13,830) (15,826)
-------- -------- --------
Net deferred tax liabilities............... $(19,722) $ (6,349) $(10,158)
======== ======== ========
</TABLE>
49
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(7) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserves for losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross reserves for losses and loss
adjustment expenses at beginning of year..... $336,685 $253,546 $227,499
Less reinsurance recoverable................ (24,931) (2,556) (4,107)
-------- -------- --------
Net reserves, beginning of year............... 311,754 250,990 223,392
Reserves acquired in purchase of AMI.......... -- 24,231 --
Incurred losses and loss adjustment expenses
related to:
Current year.............................. 641,911 505,726 423,264
Prior years............................... 12,818 (3,868) (6,708)
-------- -------- --------
Total incurred losses and loss adjustment
expenses................................... 654,729 501,858 416,556
-------- -------- --------
Loss and loss adjustment expense payments
related to:
Current year.............................. 373,823 298,099 243,294
Prior years............................... 206,390 167,226 145,664
-------- -------- --------
Total payments................................ 580,213 465,325 388,958
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at end of year...................... 386,270 311,754 250,990
Reinsurance recoverable....................... 22,791 24,931 2,556
-------- -------- --------
Gross reserves, end of year................... 409,061 $336,685 $253,546
======== ======== ========
</TABLE>
Increases in incurred losses in 1997 relating to prior years reflects increases
in the Company's estimates for loss adjustment expenses.
Decreases in incurred losses relating to 1996 and 1995 reflects the favorable
loss experience during these years attributable to a number of combined factors
which have produced favorable frequency and severity trends.
50
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) ACQUISITION OF AMERICAN FIDELITY INSURANCE COMPANY
Effective November 30, 1996 the Company acquired all of the issued and
outstanding common stock of American Mercury Insurance Company, including its
subsidiaries as described in Note 1, for $35.0 million. The acquisition was
paid for in cash with funds raised by increasing the Company's notes payable
under the bank credit agreement discussed in Note 5. On December 30, 1996 the
Company contributed an additional $15.0 million to AMI. The acquisition was
accounted for using the purchase method and resulted in a minimal amount of
goodwill. The purchase agreement includes an indemnification by the seller on
the loss and loss adjustment expense reserves of AMI at the acquisition date,
excluding the mechanical breakdown line, to avoid any impact on the Company's
financial statements from any future adverse development on the acquisition date
loss reserves.
AMI writes property and casualty insurance, primarily in Oklahoma, Kansas and
Texas, where the companies are domiciled. Its primary lines are automobile and
mechanical breakdown insurance. The results of operations for the month of
December 1996 and all of 1997 are included in the consolidated financial
statements of the Company.
The following unaudited proforma consolidated results of operations for 1996
give effect to the acquisition as though it had occurred at the beginning of
each year presented:
<TABLE>
<CAPTION>
Pro Forma Results for the year ended
December 31,
(Amounts in thousands,
except per share data)
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues $891,243 $756,728
Pretax operating income $136,912 $117,092
Income before income taxes $133,691 $118,293
Basic earnings per share $ 1.89 $ 1.70
Diluted earnings per share $ 1.88 $ 1.69
</TABLE>
(9) DIVIDEND RESTRICTIONS
The Insurance Companies are subject to the financial capacity guidelines
established by the Office of the Commissioner of Insurance of their domicile
states. The payment of dividends from statutory unassigned surplus of the
Insurance Companies is restricted, subject to certain statutory limitations.
For the year 1998, the direct insurance subsidiaries of the Company are
permitted to pay approximately $67.0 million in dividends to the Company without
the prior
51
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(9) Dividend Restrictions (Continued)
approval of the Commissioner of Insurance of the state of domicile. The above
statutory regulations may have the effect of indirectly limiting the ability of
the Company to pay dividends.
(10) STATUTORY BALANCES AND ACCOUNTING PRACTICES
The Insurance Companies prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the various
state insurance departments. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. As of December 31, 1997, there were no material permitted
statutory accounting practices utilized by the Insurance Companies. The NAIC is
working on a project to codify statutory accounting practices, the result of
which is expected to constitute the only source of "prescribed" statutory
accounting practices. When complete, that project will most likely change the
definition of prescribed versus permitted statutory accounting practices and may
result in changes to the accounting policies that insurance enterprises use to
prepare their statutory financial statements.
The Insurance Companies' statutory net income, as reported to regulatory
authorities, was $147,255,000, $97,979,000, and $86,210,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The statutory policyholders'
surplus of the Insurance Companies, as reported to regulatory authorities, as of
December 31, 1997 and 1996 was $679,359,000 and $594,799,000, respectively.
The Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 1997 according to the formula issued
by the NAIC. Each of the companies' policyholders' surplus exceeded the highest
level of recommended capital requirements.
(11) COMMITMENTS AND CONTINGENCIES
The Company is obligated under various noncancellable lease agreements
providing for office space and equipment rental that expire at various dates
through the year 2002. Total rent expense under these lease agreements, all of
which are operating leases, was $1,885,000, $1,583,000 and $1,461,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
52
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Mercury Casualty Company will receive minimum future rentals on various
noncancellable operating leases on a building in Brea, California. The annual
rental commitments, expressed in thousands, are shown as follows:
<TABLE>
<CAPTION>
Rent Rent
YEAR Expense Income
---- ------- ------
<S> <C> <C>
1998.................... $1,947 $ (330)
1999.................... $2,025 $ (263)
2000.................... $1,350 $ (91)
2001.................... $ 856 $ --
2002.................... $ 267 $ --
Thereafter.............. $ -- $ --
</TABLE>
The Company and its subsidiaries are defendants in various lawsuits generally
incidental to their business. In most of these actions, plaintiffs assert
claims for exemplary and punitive damages which are not insurable under
California judicial decisions. The Company vigorously defends these actions,
unless a reasonable settlement appears appropriate. Management does not expect
the ultimate disposition of these lawsuits to have a material effect on the
Company's consolidated operations or financial position.
(12) PROFIT SHARING PLAN
The Company, at the option of the Board of Directors, may make annual con-
tributions to an employee profit sharing plan. The contributions are not to
exceed the greater of the Company's net income for the plan year or its retained
earnings at that date. In addition, the annual contributions may not exceed an
amount equal to 15% of the compensation paid or accrued during the year to all
participants under the plan. The annual contribution was $1,000,000 for each of
the plan years ended December 31, 1997, 1996 and 1995.
The Profit Sharing Plan also includes an option for employees to make salary
deferrals under Section 401(k) of the Internal Revenue Code. Company matching
contributions, at a rate set by the Board of Directors, totaled $1,349,000,
$955,000, and $773,000 for the plan years ended December 31, 1997, 1996 and
1995.
Effective March 11, 1994 the Profit Sharing Plan also includes a leveraged
employee stock ownership plan (ESOP) that covers substantially all employees.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
53
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(12) PROFIT SHARING PLAN (CONTINUED)
service less dividends received by the ESOP. Dividends received by the ESOP on
unallocated shares are used to pay debt service and the ESOP shares serve as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to employees, based on the proportion of debt service
paid in the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the debt of the ESOP, which was
$2,000,000, $3,000,000 and $4,000,000 at December 31, 1997, 1996 and 1995,
respectively, is recorded in the balance sheet as other liabilities. The shares
pledged as collateral are reported as unearned ESOP compensation in the
shareholders' equity section of the balance sheet. As shares are committed to
be released from collateral, the Company reports compensation expense equal to
the current market price of the shares, and reduces unearned ESOP compensation
by the original cost of the shares. The difference between the market price and
cost of the shares is charged to common stock. As shares are committed to be
released from collateral, the shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as a
reduction of accrued interest. ESOP compensation expense was $5,368,000,
$1,509,000 and $1,145,000 in 1997, 1996 and 1995, respectively. The ESOP shares
as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Allocated shares 193,200 128,800
Shares committed-to-be released 128,800 64,400
Unreleased shares -- 128,800
-------- ----------
Total ESOP shares 322,000 322,000
======== ==========
Market value of unreleased shares at
December 31, $ -- $3,381,000
======== ==========
</TABLE>
(13) COMMON STOCK
In September 1997, the common stock of the Company was split two-for-one.
All share information has been adjusted accordingly.
The Company adopted a stock option plan in October 1985 (the "1985 Plan")
under which 5,400,000 shares were reserved for issuance. Options granted during
1985 were exercisable immediately. Subsequent options granted become
exercisable 20% per year beginning one year from the date granted. All options
were granted at the market price on the date of the grant and expire in 10
years.
In May 1995 the Company adopted The 1995 Equity Participation Plan (the "1995
Plan") which succeeds the Company's 1985 Plan. Under the 1995 Plan,
54
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(13) COMMON STOCK (CONTINUED)
5,400,000 shares of Common Stock are authorized for issuance upon exercise of
options, stock appreciation rights and other awards, or upon vesting of
restricted or deferred stock awards. During 1995, the Company granted incentive
stock options under both the 1995 Plan and the 1985 Plan. The options granted
during 1997, 1996 and 1995 become exercisable 20% per year beginning one year
from the date granted and were granted at the market price on the date of the
grant. The options expire in 10 years.
As explained in Note 1, the Company applies APB Opinion No. 25 in accounting
for its stock option plan. Accordingly, no compensation cost has been
recognized in the Statements of Income. Had compensation cost for the Company's
Plans been determined based on the fair value at the grant dates consistent with
the method of SFAS No. 123, the Company's net income would have been reduced by
$363,000, $295,000 and $116,000 in 1997, 1996 and 1995, respectively, and
earnings per share (basic and diluted) would have remained the same in 1997,
been reduced by .01 (basic and diluted) in 1996 and diluted would have been
reduced by .01 in 1995 and basic would have remained the same in 1995.
Calculations of the fair value under the method prescribed by SFAS No. 123 were
made using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1997, 1996 and 1995: dividend yield of
2.0 percent for all years, expected volatility of 30 percent for all years and
expected lives of 7 years for all years. The risk-free interest rates used were
6.4 percent for the options granted during 1997, 5.5 and 6.4 percent for the
options granted during 1996, and 7.4 and 6.4 percent for the options granted
during 1995.
A summary of the status of the Company's plans as of December 31, 1997, 1996
and 1995 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 723,350 $14.452 730,650 $12.117 475,850 $ 9.301
Granted during the year 45,000 27.406 120,000 23.078 310,000 15.545
Exercised during the year (116,729) 8.553 (122,500) 7.713 (55,200) 7.089
Canceled or expired (16,000) 21.750 (4,800) 13.500 -- --
-------- -------
Outstanding at end of year 635,621 16.269 723,350 14.452 730,650 12.115
======== ======== =======
Options exercisable at year-end 281,021 268,150 283,450
Weighted-average fair value of
options granted during the year $ 9.91 $ 8.11 $5.75
</TABLE>
55
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(13) COMMON STOCK (CONTINUED)
The following table summarizes information regarding the stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
- ------------------ ----------- ---------------- ------------- ----------- -------------
$3.906 to 3.906 70,600 1.33 years $ 3.906 70,600 $ 3.906
$15.00 to 15.9375 416,021 6.64 15.409 186,421 15.354
$21.75 to 27.4006 149,000 8.32 24.528 24,000 23.078
------- -------
$3.906 to 27.406 635,621 6.44 16.269 281,021 13.138
======= =======
</TABLE>
(14) EARNINGS PER SHARE
A reconciliation of the numerator and denominator, adjusted for a two-for-one
stock split effective September 1997, used in the basic and diluted earnings per
share calculation is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ---------------------------- -----------------------
(000's) (000's) (000's) (000's) (000's) (000's)
Weighted Weighted Weighted
Income Shares Income Shares Income Shares
(Numera- (Denomi- Per-Share (Numera- (Denomi- Per-Share (Numera- (Denomi- Per-Share
tor) nator) Amount tor) nator) Amount tor) nator) Amount
-------- -------- --------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
- ---------
Income available to
common stockholders $156,306 54,997 $2.84 $105,764 54,794 $1.93 $90,301 54,623 $1.65
Effect of dilutive
securities
Options -- 386 -- 304 -- 252
Diluted EPS
- -----------
Income available to
common stockholders
after assumed
conversions $156,306 55,383 $2.82 $105,764 55,098 $1.92 $90,301 54,875 $1.65
======== ====== ===== ======== ====== ===== ======= ====== =====
</TABLE>
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
----------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding executive officers of the Company is included in Part
I. For this and other information called for by Items 10, 11, 12 and 13,
reference is made to the Company's definitive proxy statement for its Annual
Meeting of Shareholders, to be held on May 13, 1998, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1997,
and which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Financial Statements: The Consolidated Financial Statements for the year
ended December 31, 1997 are contained herein as listed in the Index to
Consolidated Financial Statements on page 31.
2. Financial Statement Schedules:
TITLE
-----
Auditors' Report on Financial Statement Schedules
Schedule I -- Summary of Investments -- Other than Investments in
Related Parties
Schedule II -- Condensed Financial Information of Registrant
Schedule IV -- Reinsurance
All other schedules are omitted as the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
Notes thereto.
57
<PAGE>
<TABLE>
<CAPTION>
3. Exhibits:
<C> <S>
3.1 Articles of Incorporation of the Company, as amended to date.
3.2@@ By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among the
Company, George Joseph and Gloria Joseph.
10.1 Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992, among
the Company, Mercury Casualty Company, Mercury Insurance Company and
California Automobile Insurance Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11, 1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells Fargo
Bank, N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank, N.A.,
as Trustee, of the Mercury General Corporation ESOP Feature Trust dated as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by
Mercury General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit Sharing Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit Sharing Plan.
10.9& Amendment 1996-I to the Mercury General Corporation Profit Sharing Plan.
10.10& Amendment 1997-I to the Mercury General Corporation Profit Sharing Plan.
10.11 Amendment 1998-I to the Mercury General Corporation Profit Sharing Plan.
10.12& Revolving Credit Agreement by and among Mercury General
Corporation, the Lenders Party Thereto and The Bank of New York, as Agent
dated as of November 21, 1996.
10.13** Property Per Risk Excess of Loss Reinsurance Agreement between
National Reinsurance Corporation and Mercury Casualty Company, effective April 1, 1995.
10.14** Endorsement No. 1 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.15@@ Endorsement No. 2 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.16@@ Endorsement No. 3 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.17 Property Excess Catastrophe Reinsurance Agreement effective
September 1, 1996.
10.18@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Illinois.
10.19@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Illinois.
10.20@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Georgia.
10.21@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Georgia.
10.22@ The 1995 Equity Participation Plan.
</TABLE>
58
<PAGE>
<TABLE>
<C> <S>
10.23& Stock Purchase Agreement between Mercury General Corporation as
Purchaser and AFC as Seller dated November 15, 1996.
10.24 Management Agreement effective January 1, 1997 between the Company
and American Mercury Insurance Company, AFI Management Co., Inc. and
Cimarron Insurance Company.
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule
</TABLE>
* This document was filed as an exhibit to Registrant's Registration Statement
on Form S-1, File No. 33-899, and is incorporated herein by this reference.
# This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1992, and is incorporated herein by this
reference.
## This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1993, and is incorporated herein by this
reference.
** This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1994, and is incorporated herein by this
reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed on
March 8, 1996 and is incorporated herein by this reference.
@@ This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1995, and is incorporated herein by this
reference.
& This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1996 and is incorporated herein by this
reference.
(b) Reports on Form 8-K:
None
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCURY GENERAL CORPORATION
By /s/ GEORGE JOSEPH
-------------------------------------
George Joseph
Chief Executive Officer and
Chairman of the Board
March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Chief Executive Officer
and
Chairman of the Board
/s/ GEORGE JOSEPH (Principal Executive Officer) March 18, 1998
- --------------------------
George Joseph
Senior Vice President
/s/ KEITH L. PARKER Chief Investment Officer March 18, 1998
- --------------------------
Keith L. Parker
Vice President and
Chief Financial Officer
/s/ GABRIEL TIRADOR (Principal Financial Officer) March 18, 1998
- --------------------------
Gabriel Tirador
/s/ NATHAN BESSIN Director March 18, 1998
- --------------------------
Nathan Bessin
/s/ BRUCE A. BUNNER Director March 18, 1998
- --------------------------
Bruce A. Bunner
/s/ MICHAEL D. CURTIUS Director March 18, 1998
- --------------------------
Michael D. Curtius
60
<PAGE>
Signature Title Date
--------- ----- ----
/s/ RICHARD E. GRAYSON Director March 18, 1998
- -------------------------
Richard E. Grayson
/s/ GLORIA JOSEPH Director March 18, 1998
- ------------------------
Gloria Joseph
/s/ CHARLES MCCLUNG Director March 18, 1998
- ------------------------
Charles McClung
/s/ DONALD P. NEWELL Director March 18, 1998
- ------------------------
Donald P. Newell
/s/ DONALD R. SPUEHLER Director March 18, 1998
- -------------------------
Donald R. Spuehler
61
<PAGE>
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Mercury General Corporation:
Under date of February 13, 1998, we reported on the consolidated balance
sheets of Mercury General Corporation and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, as contained in the annual report on Form 10-K for the year
1997. In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedules as
listed under Item 14(a)2. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 13, 1998
S-1
<PAGE>
SCHEDULE I
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- ---------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Fixed maturities available for sale
Bonds:
U.S. Government......................... $ 19,700 $ 19,807 $ 19,807
States, Municipalities.................. 1,021,259 1,085,614 1,085,614
Public utilities........................ 11,383 11,529 11,529
All other corporate bonds............... 19,013 19,326 19,326
Redeemable preferred stock................ 76,239 78,710 78,710
---------- ---------- ----------
Total fixed maturities available for
sale.................................. 1,147,594 1,214,986 1,214,986
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities........................ 25,020 29,144 29,144
Banks, trust and insurance companies.... 567 552 552
Industrial, Miscellaneous and
all other.............................. 1,962 1,980 1,980
Nonredeemable preferred stocks............ 142,394 141,846 141,846
---------- ---------- ----------
Total equity securities available for
sale.................................. 169,943 173,522 173,522
---------- ---------- ----------
Short-term investments........................ 59,740 59,740
---------- ----------
Total investments........................ $1,377,277 $1,448,248
========== ==========
</TABLE>
S-2
<PAGE>
SCHEDULE I, CONTINUED
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Amount at
which shown
in the
Type of Investment Cost Value balance sheet
- ------------------ ---- ----- -------------
<S> <C> <C> <C>
Fixed maturities available for sale
Bonds:
U.S. Government......................... $ 34,218 $ 33,885 $ 33,885
States, Municipalities.................. 781,586 808,761 808,761
Public utilities........................ 12,908 13,050 13,050
All other corporate bonds............... 29,368 29,178 29,178
Redeemable preferred stock................ 66,713 69,234 69,234
---------- -------- ----------
Total fixed maturities available for
sale................................... 924,793 954,108 954,108
---------- -------- ----------
Equity securities:
Common stocks:
Public utilities........................ 20,726 21,360 21,360
Banks, trust and insurance companies.... 544 493 493
Industrial, Miscellaneous and
all other.............................. 1,535 2,209 2,209
Nonredeemable preferred stocks............ 125,459 124,050 124,050
---------- -------- ----------
Total equity securities available for
sale................................... 148,264 148,112 148,112
---------- -------- ----------
Short-term investments......................... 66,067 66,067
---------- ----------
Total investments........................ $1,139,124 $1,168,287
========== ==========
</TABLE>
S-3
<PAGE>
SCHEDULE II
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
AMOUNTS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized
cost $2,914 in 1997 and $3,003 in 1996).......... $ 2,888 $ 3,012
Equity securities, available for sale (cost
$28,398 in 1997 and $17,169 in 1996)............. 28,555 16,877
Short-term cash investments........................ 6,705 8,090
Investment in subsidiaries......................... 849,608 697,059
-------- --------
Total investments.......................... 887,756 725,038
Amounts due from affiliates.............................. 5,452 5,014
Income taxes............................................. 3,144 1,988
Other assets............................................. 1,863 2,303
-------- --------
$898,215 $734,343
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable............................................ $ 75,000 $ 75,000
Accounts payable and accrued expenses.................... 18,594 12,311
Other liabilities........................................ 5,029 5,807
-------- --------
Total liabilities................................. 98,623 93,118
-------- --------
Shareholders' equity:
Common stock...................................... 47,412 42,644
Net unrealized investment gains .................. 46,131 18,959
Unearned ESOP compensation........................ -- (2,000)
Retained earnings................................. 706,049 581,622
-------- --------
Total shareholders' equity................. 799,592 641,225
-------- --------
$898,215 $734,343
======== ========
</TABLE>
See notes to condensed financial information
S-4
<PAGE>
SCHEDULE II, CONTINUED
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1997
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Net investment income........................................................ $ 2,139 $ 1,489 $ 1,824
Management fee income from subsidiaries...................................... 162,352 118,657 101,823
Other........................................................................ -- 8 27
-------- ------- -------
Total revenues........................................................... 164,491 120,154 103,674
Expenses:
Loss adjustment expenses..................................................... 102,889 79,934 68,048
Policy acquisition costs..................................................... 31,543 20,345 17,087
Other operating expenses..................................................... 28,454 19,336 16,627
Interest..................................................................... 4,972 2,004 2,040
-------- ------- -------
Total expenses........................................................... 167,858 121,619 103,802
Loss before income taxes and equity in net
income of subsidiaries...................................................... (3,367) (1,465) (128)
Income tax benefit............................................................. (528) (536) (386)
-------- ------- -------
Income (loss) before equity in net income
of subsidiaries............................................................. (2,839) (929) 258
Equity in net income of subsidiaries........................................... 159,145 106,693 90,043
-------- ------- -------
Net income................................................................ $156,306 $105,764 $ 90,301
======== ======== ========
</TABLE>
See notes to condensed financial information.
S-5
<PAGE>
SCHEDULE II, CONTINUED
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net cash provided from operating activities..................... $ 40,097 $ 32,510 $ 25,526
Cash flows from investing activities:
Acquisition of American Mercury Insurance
Company........................................................ -- (34,991) --
Capital contribution to subsidiaries............................ -- (15,000) (500)
Fixed maturities, at market:
Purchases..................................................... (3,556) (807) (1,051)
Sales......................................................... 2,398 475 335
Calls or maturities........................................... 1,234 1,072 349
Equity securities:
Purchases..................................................... (71,446) (47,597) (49,390)
Sales......................................................... 59,786 42,934 48,675
Calls......................................................... 358 --- --
Increase in short term cash investments, net.................... 1,385 (3,344) (2,708)
Other, net...................................................... -- -- --
------- -------- --------
Net cash used in investing activities....................... (9,841) (57,258) (4,290)
Cash flows from financing activities:
Additions to notes payable...................................... -- 75,000 --
Principal payments on notes payable............................. -- (25,000) --
Payment of AMI indemnification holdback......................... (1,750) -- --
Dividends paid to shareholders.................................. (31,879) (26,291) (21,837)
Stock options exercised......................................... 1,400 1,324 458
------- -------- --------
Net cash used in financing activities........................ (32,229) 25,033 (21,379)
Net increase (decrease) in cash................................... (1,973) 285 (143)
Cash:
Beginning of the year........................................... (1,056) (1,340) (1,197)
-------- -------- --------
End of the year ................................................ $ (3,029) $ (1,055) $ (1,340)
========= ======== ========
</TABLE>
See notes to condensed financial information.
S-6
<PAGE>
SCHEDULE II, CONTINUED
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1997 AND 1996
The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes included in
this statement.
MANAGEMENT FEE INCOME
Under a management agreement, the Company performs management services which
include all underwriting and claims servicing functions for its subsidiaries.
The Company is compensated by monthly reimbursement of expenses incurred.
DIVIDENDS RECEIVED FROM SUBSIDIARIES
Dividends of $33,500,000, $27,700,000, and $24,500,000 were received by the
Company from its wholly-owned subsidiaries in 1997, 1996 and 1995, respectively,
and are recorded as a reduction to Investment in Subsidiaries.
CASH OVERDRAFT
At December 31, 1997 and 1996, the Company had cash overdrafts of $3,029,000
and $1,055,000, respectively which are classified in "other liabilities" in the
accompanying condensed balance sheet.
S-7
<PAGE>
SCHEDULE IV
MERCURY GENERAL CORPORATION
REINSURANCE
THREE YEARS ENDED DECEMBER 31, 1997
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Ceded to
Gross other Net
amount companies Assumed amount
--------- --------- ------- ----------
<S> <C> <C> <C> <C>
Property and Liability insurance
1997............................ $1,055,114 $24,241 $407 $1,031,280
1996............................ $ 757,447 $ 3,138 $415 $ 754,724
1995............................ $ 619,404 $ 3,444 $366 $ 616,326
</TABLE>
S-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Articles of Incorporation of the Company, as amended to date.
3.2@@ By-laws of the Company, as amended to date.
4.1* Shareholders' Agreement dated as of October 7, 1985 among the
Company, George Joseph and Gloria Joseph.
10.1 Form of Agency Contract.
10.2# Management Agreement, as amended, effective July 1, 1992, among
the Company, Mercury Casualty Company, Mercury Insurance Company and
California Automobile Insurance Company.
10.3## Profit Sharing Plan, as Amended and Restated as of March 11, 1994.
10.4## ESOP Feature Trust Agreement between the Company and Wells
Fargo Bank, N.A., as Trustee, effective March 1, 1994.
10.5## ESOP Loan Agreement between Union Bank and Wells Fargo Bank,
N.A., as Trustee, of the Mercury General Corporation ESOP
Feature Trust dated as of March 11, 1994.
10.6## Continuing Guaranty, dated as of March 11, 1994, executed by
Mercury General Corporation in favor of Union Bank.
10.7** Amendment 1994-I to the Mercury General Corporation Profit
Sharing Plan.
10.8** Amendment 1994-II to the Mercury General Corporation Profit
Sharing Plan.
10.9& Amendment 1996-I to the Mercury General Corporation Profit
Sharing Plan.
10.10& Amendment 1997-I to the Mercury General Corporation Profit
Sharing Plan.
10.11 Amendment 1998-I to the Mercury General Corporation Profit
Sharing Plan.
10.12& Revolving Credit Agreement by and among Mercury General
Corporation, the Lenders Party Thereto and The Bank of New
York, as Agent dated as of November 21, 1996.
10.13** Property Per Risk Excess of Loss Reinsurance Agreement between
National Reinsurance Corporation and Mercury Casualty Company,
effective April 1, 1995.
10.14** Endorsement No. 1 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.15@@ Endorsement No. 2 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.16@@ Endorsement No. 3 to the Property Per Risk Excess of Loss
Agreement effective April 1, 1995.
10.17 Property Excess Catastrophe Reinsurance Agreement effective
September 1, 1996.
10.18@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Illinois.
10.19@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Illinois.
10.20@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Insurance Company of Georgia.
</TABLE>
70
<PAGE>
<TABLE>
<C> <S>
10.21@@ Management Agreement effective January 1, 1995 between the
Company and Mercury Indemnity Company of Georgia.
10.22@ The 1995 Equity Participation Plan.
10.23& Stock Purchase Agreement between Mercury General Corporation as
Purchaser and AFC as Seller dated November 15, 1996.
10.24 Management Agreement effective January 1, 1997 between the Company
and American Mercury Insurance Company, AFI Management Co., Inc. and
Cimarron Insurance Company.
21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule.
</TABLE>
* This document was filed as an exhibit to Registrant's Registration Statement
on Form S-1, File No. 33-899, and is incorporated herein by this reference.
# This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1992, and is incorporated herein by this
reference.
## This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1993, and is incorporated herein by this
reference.
** This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1994, and is incorporated herein by this
reference.
@ This document was filed as an exhibit to Registrant's Form S-8 filed on
March 8, 1996 and is incorporated herein by this reference.
@@ This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1995, and is incorporated herein by this
reference.
& This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1996 and is incorporated herein by this
reference.
(b) Reports on Form 8-K:
None
71
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
-------------------------
OF
--
CALIFORNIA GENERAL UNDERWRITERS
-------------------------------
We, the undersigned, residents of the State of California, have this
day voluntarily associated ourselves together for the purpose of forming a
corporation under the laws of the State of California, and we do hereby certify:
ONE: The name of this corporation is
---
CALIFORNIA GENERAL UNDERWRITERS.
TWO: The specific business in which the corporation is primarily
---
to engage is the management of the underwriting department of a casualty
insurance company, the issuing of insurance policies, and acting as consultants
and advisers of insurance companies, both casualty and others.
THREE: The purposes for which this corporation is formed are:
-----
(a) The primary business in which the corporation initially intends to
engage is the consulting with and advising insurance companies, both casualty
and others.
(b) To buy, sell, own, hold, exchange, mortgage, and otherwise deal in
and with any and all kinds of real, personal or mixed property; to incur any
indebtedness, and to execute any and all evidences of such indebtedness; to sign
and deliver any and all kinds of notes, stocks, bonds, trust indentures,
contracts and documents; to lend or borrow money, with or without security; to
act as real estate broker; to act as agent for the making or procuring of loans,
and to act as broker in connection with the purchase, sale or exchange of any
and all kinds of real and personal property; to buy, purchase or otherwise
acquire any patent or patents, process of processes, or trade-marks or copy-
rights, to sell, lease or encumber or otherwise deal in any patent or patents,
or any interest or interests in any patent or patents, process or processes, of
trade-marks or copyrights; to merge or consolidate with any corporation in such
manner as may be permitted by law.
1
<PAGE>
(c) To manufacture, import, export, buy and sell and deal generally in
any and all kinds of goods, wares and merchandise of any and all kinds and
descriptions, and to carry on all other businesses incidental thereto; and to do
anything which any person may do, establish and carry on that may be lawful
under the laws of the State of California; to exercise all of the powers
conferred by the laws of the State of California upon corporations formed under
the laws pursuant to and under which this corporation is formed, as such laws
are now in effect or may at any time hereafter be amended; and to enter into
partnerships and joint ventures with natural persons or other corporations.
(d) To erect, construct, maintain, improve, rebuild, enlarge, alter,
manage and control, directly or through ownership of stock in any corporation,
any and all kinds of buildings, houses, stores, offices, shops, warehouses,
factories, mills, machinery and plants, and any and all other structures and
erections which may, in the judgment of the Board of Directors, at any time be
necessary, useful or advantageous for the purposes of the corporation, and which
can lawfully be done under the laws of the State of California.
(e) To carry on the business of warehousing in all of its branches; to
receive on consignment or otherwise, to store, sell and distribute goods on
commission or other basis; to export, import, and otherwise deal in goods, wares
and merchandise of all classes and descriptions; to issue warehouse receipts,
certificates and circulars, negotiable or otherwise, to persons warehousing
goods, wares or merchandise with said corporation; to make advances on loans by
way of mortgage, pledge or deposit on warehouse receipts, upon the security of
goods, wares or merchandise stored with said corporation, or otherwise.
(f) To acquire, by purchase or otherwise, the good will, business,
property rights, franchises and assets of every kind, with or without
undertaking, either wholly or in part, the liabilities of any person, firm
association or corporation; and to acquire any business as a going concern, or
otherwise, (1) by purchase of the assets thereof, wholly or in party; (2) by
acquisition of the shares, or any part thereof; or (3) in any other manner; and
to pay for the same in cash or in the shares or bonds or other evidence of
indebtedness of this corporation, or otherwise; to hold, maintain and operate,
or in any other manner dispose of, the whole or any part of the good will,
business rights and property so acquired, and to conduct in any lawful manner
2
<PAGE>
the whole or any part of any business so acquired; and to exercise all of the
powers necessary or convenient in and about the management of such business.
(g) To establish branch stores, offices, wholesale houses and
factories for the conduct of the business of said corporation.
The foregoing statement of purposes, objects and powers shall be
construed as a statement of both powers and purposes; and the purposes, objects
and powers stated in each clause shall, except where otherwise expressed, be in
nowise limited or restricted by reference to or inference from the terms or
provisions of any other paragraph or clause but shall be regarded as independent
powers, objects and powers.
The foregoing shall be construed as objects and powers, and the
enumeration thereof shall not be held to limit or restrict in any manner the
general powers now or thereafter conferred on this corporation by the laws of
the State of California.
FOUR: That the principal office for the transaction of the
----
business of the corporation will be in the County of Los Angeles, State of
California.
FIVE: That the term of existence of this corporation shall be the
----
maximum term allowed by the laws of the State of California.
SIX: That the number of directors of this corporation shall be
---
three (3); and the names and addresses of the persons so appointed to act as the
first directors are:
GEORGE JOSEPH
1227 South LaBrea Avenue
Los Angeles 19, California
GEORGE McKAY
705 Plymouth Road
San Marino, California
RICHARD H. OSHMAN
3540 Wilshire Boulevard
Los Angeles 5, California
SEVEN: That the total number of shares which the corporation shall
-----
have the authority to issue is two thousand (2,000) shares of the par value of
One Hundred ($100.00) Dollars each, and of the aggregate par value of Two
Hundred Thousand ($200,000) Dollars.
3
<PAGE>
EIGHT: The stock of this corporation shall be non-assessable.
-----
NINTH: After the initial application for a permit to issue stock
-----
has been made and approved by the California Corporation Commissioner and the
said stock is sold and/or issued pursuant thereto, no additional applications
may be made for the issuance of new common stock unless and until the Secretary
of the corporation has obtained in writing the consent of the holders of at
least 75% of the common stock outstanding at that time.
IN WITNESS WHEREOF, we have hereunto set our hands this 27th day of
December, 1960.
/s/ George Joseph
----------------------
George Joseph
/s/ George McKay
----------------------
George McKay
/s/ Richard H. Oshman
----------------------
Richard H. Oshman
4
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On this 27th day of December, 1960, before me, a Notary Public in and
for said County and State, personally appeared GEORGE JOSEPH, known to me to be
the person whose name is subscribed to the within instrument, and acknowledged
that he executed the same.
WITNESS my hand and official seal.
/s/ J.M. Barker
-----------------------------
Notary Public in and for said
County and State
J. M. Barker
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On this 27th day of December, 1960, before me, a Notary Public in and
for said County and State, personally appeared GEORGE McKAY, known to me to be
the person whose name is subscribed to the within instrument, and acknowledged
that he executed the same.
WITNESS my hand and official seal.
/s/ J.M. Barker
-----------------------------
Notary Public in and for said
County and State
J. M. Barker
5
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On this 27th day of December, 1960, before me, a Notary Public in and
for said County and State, personally appeared RICHARD A. OSHMAN, known to me to
be the person whose name is subscribed to the within instrument, and
acknowledged that he executed the same.
WITNESS my hand and official seal.
/s/ Manuel Seligman
-----------------------------
Notary Public in and for said
County and State
Manuel Seligman
6
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CALIFORNIA GENERAL UNDERWRITERS
GEORGE JOSEPH and RICHARD H. OSHMAN certify:
1. That they are the President and Secretary, respectively, of CALIFORNIA
GENERAL UNDERWRITERS, a California Corporation.
2. That at a meeting of the Board of Directors of said Corporation, duly
held at Los Angeles, California, on the 18th of November, 1968, the following
Resolution was adopted:
"RESOLVED, that Article ONE of the Articles of Incorporation of this
corporation be amended to read as follows:
'ONE: The name of this corporation is
CALIFORNIA MANAGEMENT, INC.'"
----------------------------
3. That the Shareholder has adopted said amendment by written consent.
That the wording of the amended Article, as set forth in the Shareholder's
written consent, is the same as that set forth in the Directors' Resolution in
Paragraph 2 above.
4. That the number of shares represented by written consent is fifty.
That the total number of shares entitled to vote on or consent to the amendment
is fifty.
/s/ George Joseph
----------------------------
George Joseph, President
/s/ Richard H. Oshman
----------------------------
Richard H. Oshman, Secretary
1
<PAGE>
Each of the undersigned declares under penalty of perjury that the matters
set forth in the foregoing Certificate are true and correct.
Executed at Los Angeles, California, on November 21, 1968.
/s/ George Joseph
----------------------------
George Joseph
/s/ Richard H. Oshman
----------------------------
Richard H. Oshman
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CALIFORNIA MANAGEMENT, INC.
---------------------------
GEORGE JOSEPH and RICHARD H. OSHMAN certify:
1. That they are the President and Secretary, respectively, of
CALIFORNIA MANAGEMENT, INC., a California Corporation.
2. That at a meeting of the Board of Directors of said Corporation,
duly held at Los Angeles, California, on June 2, 1969, the following Resolution
was adopted:
"RESOLVED, that Article ONE of the Articles of Incorporation of
this corporation be amended to read as follows:
'ONE: The name of this corporation is
CALIFORNIA GENERAL MANAGEMENT, INC.'"
------------------------------------
3. That the Shareholder has adopted said amendment by written
consent. That the wording of the amended Article, as set forth in the
Shareholder's written consent, is the same as that set forth in the Directors'
Resolution in Paragraph 2 above.
4. That the number of shares represented by written consent is fifty.
That the total number of shares entitled to vote on or consent to the amendment
is fifty.
/s/ George Joseph
----------------------------
George Joseph, President
/s/ Richard H. Oshman
----------------------------
Richard H. Oshman, Secretary
Each of the undersigned declares under penalty of perjury that the matters
set forth in the foregoing Certificate are true and correct.
1
<PAGE>
Executed at Los Angeles, California, on June 2, 1969.
/s/ George Joseph
----------------------------
George Joseph
/s/ Richard H. Oshman
----------------------------
Richard H. Oshman
2
<PAGE>
AGREEMENT OF MERGER
BETWEEN
CALIFORNIA GENERAL MANAGEMENT, INC.
AND
GJA MERGER CORP.
This Agreement of Merger is entered into between CALIFORNIA GENERAL
MANAGEMENT, INC., a California corporation (herein "Surviving Corporation") and
GJA MERGER CORP., a California corporation (herein "Merging Corporation").
1. Merging Corporation shall be merged into Surviving Corporation.
2. Each outstanding share of Merging Corporation shall be converted
to one share of Surviving Corporation.
3. The outstanding shares of Surviving Corporation shall remain
outstanding and are not affected by the merger.
4. Merging Corporation shall from time to time, as and when
requested by Surviving Corporation, execute and deliver all such
documents and instruments and take all such action necessary or
desirable to evidence or carry out this merger.
5. The effect of the merger and the effective date of the merger are
as prescribed by law.
IN WITNESS WHEREOF the parties have executed this Agreement.
CALIFORNIA GENERAL MANAGEMENT, INC.
By /s/ George Joseph
----------------------------
President
By /s/ Stepan Stepanian
----------------------------
Secretary
1
<PAGE>
GJA MERGER CORP.
By /s/ George Joseph
--------------------------
President
By /s/ Stepan Stepanian
---------------------------
Secretary
2
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
GEORGE JOSEPH AND STEPAN STEPANIAN certify that:
1. They are the president and the secretary, respectively, of
CALIFORNIA GENERAL MANAGEMENT, INC., a California corporation.
2. The Agreement of Merger in the form attached was duly approved by
the board of directors and shareholders of the corporation.
3. The shareholder approval was by the holders of 100% of the
outstanding shares of the corporation.
4. There is only one class of shares and the number of shares
outstanding is 50.
/s/ George Joseph
-----------------------------
GEORGE JOSEPH, President
/s/ Stepan Stepanian
-----------------------------
STEPAN STEPANIAN, Secretary
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing certificate are true of their own knowledge. Executed at Los
Angeles, California on October 30, 1978.
/s/ George Joseph
-----------------------------
GEORGE JOSEPH
/s/ Stepan Stepanian
-----------------------------
STEPAN STEPANIAN
1
<PAGE>
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
GEORGE JOSEPH AND STEPAN STEPANIAN certify that:
1. They are the president and the secretary respectively, of GJA
MERGER CORP., a California corporation.
2. The Agreement of Merger in the form attached was duly approved by
the board of directors and shareholders of the corporation.
3. The shareholder approval was by the holders of 100% of the
outstanding shares of the corporation.
4. There is only one class of shares and the number of shares
outstanding is 9.
/s/ George Joseph
-----------------------------
GEORGE JOSEPH, President
/s/ Stepan Stepanian
-----------------------------
STEPAN STEPANIAN, Secretary
The undersigned declare under penalty of perjury that the matters set forth
in the foregoing certificate are true of their own knowledge. Executed at Los
Angeles, California on October 30, 1978.
/s/ George Joseph
-----------------------------
GEORGE JOSEPH
/s/ Stepan Stepanian
-----------------------------
STEPAN STEPANIAN
1
<PAGE>
CERTIFICATE OF OWNERSHIP
GEORGE JOSEPH AND STEPAN STEPANIAN certify that:
1. They are the President and Secretary, respectively, of CALIFORNIA
GENERAL MANAGEMENT, INC., a California corporation.
2. This corporation owns all the outstanding shares of MERCURY
GENERAL CORPORATION, a California corporation.
3. The Board of Directors of this corporation duly adopted the
following resolutions:
RESOLVED, that Mercury General Corporation, be merged into this
corporation, and that all of the estate, property rights, privileges,
powers and franchises of Mercury General Corporation be vested in and
held and enjoyed by this corporation as fully and entirely and without
change or diminution as the same were before held and enjoyed by
Mercury General Corporation in its name.
RESOLVED, that this corporation assume all of the obligations of
Mercury General Corporation pursuant to Section 1110 of the California
Corporation Code.
RESOLVED, that this corporation shall cause to be executed and
filed and/or recorded the documents prescribed by the laws of the
State of California and by the laws of any other appropriate
jurisdiction and will cause to be performed all necessary acts within
the State of California and within any other appropriate jurisdiction.
RESOLVED, that this corporation's name shall continue to be
California General Management, Inc.
RESOLVED, that the effective date of the Certificate of Ownership
setting forth a copy of these resolutions, and the date upon which the
merger therein provided for shall become effective, shall be the
Filing Date.
/s/ George Joseph
-----------------------------
George Joseph, President
/s/ Stepan Stepanian
-----------------------------
Stepan Stepanian, Secretary
1
<PAGE>
The undersigned declare under penalty of perjury that the matters set
forth in the foregoing certificate are true of their own knowledge. Executed at
Los Angeles, California on December 18, 1980.
/s/ George Joseph
-----------------------------
George Joseph
/s/ Stepan Stepanian
-----------------------------
Stepan Stepanian
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
-------------------------
George Joseph and Judy Walters certify that:
1. They are the President and Secretary, respectively, of California
----------
General Management, Inc., a California corporation;
- ------------------------
2. Article ONE of the Articles of Incorporation of this corporation
is amended to read as follows:
"ONE: The name of this corporation is Mercury General
Corporation."
3. Article SEVEN of the Articles of Incorporation of this corporation
is amended to read as follows:
"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 authority to issue is Fifteen
Million (15,000,000) shares; and, the shares shall be without par
value. Upon the amendment of this Article to read as hereinabove set
forth, each outstanding share of a par value of $100 is split up and
converted into 219,047,619 shares of Common Stock, without par value."
4. Article NINTH of the Article of Incorporation of this corporation
is amended to read as follows:
"NINTH: Any of the following actions shall require the prior
-----
approval (by vote or written consent) of the shareholders entitled to
exercise not less than 66-2/3% of the voting power of the corporation,
notwithstanding that applicable law would otherwise permit such
actions with the approval of a lesser percentage: (a) any amendment of
these Articles of Incorporation; or (b) merger or consolidation of the
corporation with any other corporation, except the merger of wholly-
owned subsidiary of this corporation; or (c) sale, lease, conveyance,
exchange, transfer or other disposition of all or substantially all of
the assets of this corporation."
1
<PAGE>
5. The foregoing amendments of Articles of Incorporation have been
duly approved by the board of directors.
6. The foregoing amendments of Articles of Incorporation have been
duly approved by the required vote of shareholders in accordance with Section
902 of the Corporations Code. The total number of outstanding shares of the
corporation is 52.5. The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The percentage vote required was more
than 50%.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: October 27, 1985
/s/ George Joseph
------------------------------
George Joseph, President
/s/ Judy Walters
------------------------------
Judy Walters, Secretary
2
<PAGE>
CERTIFICATE OF CORRECTION
-------------------------
OF
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION
George Joseph and Judy Walters certify that:
1. They are the President and Secretary, respectively, of Mercury
-------
General Corporation.
- -------------------
2. The name of the corporation is Mercury General Corporation, and it
is a California corporation.
3. The instrument being corrected is entitled "CERTIFICATE OF
AMENDMENT OF ARTICLES OF INCORPORATION", and said instrument was filed with the
Secretary of State of the State of California on October 15, 1985.
4. Paragraph "3" of said Certificate of Amendment, as corrected,
should read as follows:
Article SEVEN of the Articles of Incorporation of this corporation is
amended to read as follows:
"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 authority to issue is Fifteen
Million (15,000,000) shares; and, the shares shall be without par
value. Upon the amendment of this Article to read as hereinabove set
forth, each outstanding share of a par value of $100 is split up and
converted into 219,047,619 shares of Common Stock, without par value."
5. Said paragraph "3", as corrected, conforms the wording of the
amended article to that adopted by the board of directors and shareholders.
1
<PAGE>
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Date: October 26, 1985
/s/ George Joseph
------------------------------
George Joseph, President
/s/ Judy Walters
------------------------------
Judy Walters, Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION
George Joseph and Judy A. Walters certify that:
1. They are the President and the Secretary, respectively, of MERCURY
GENERAL CORPORATION, a California corporation.
2. Articles TEN and ELEVEN of the Articles of Incorporation of this
corporation are added to read in their entirety as follows:
"TEN: The liability of the directors of the corporation for
---
monetary damages shall be eliminated to the fullest extent permissible
under California law.
"ELEVEN: The corporation is authorized to provide indemnification
------
of agents (as defined in Section 317 of the Corporations Code) for
breach of duty to the corporation and its stockholders through bylaw
provisions or through agreements with the agents, or both, in excess
of the indemnification otherwise permitted by Section 317 of the
Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the Corporations Code."
3. The foregoing amendment of Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902 of
the Corporations Code. The total number of outstanding shares of the
corporation is 13,505,000. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote required
was more than 66 2/3%.
1
<PAGE>
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: June 1, 1988
/s/ George Joseph
------------------------------
George Joseph, President
/s/ Judy A. Walters
------------------------------
Judy A. Walters, Secretary
2
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
Keith L. Parker and Judy A. Walters certify that:
1. They are the vice president and the secretary, respectively, of Mercury
General Corporation, a California corporation.
2. Article SEVEN of the articles of incorporation of this corporation is
amended to read as follows:
"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 authority to issue is Thirty Million (30,000,000)
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 foregoing amendment of articles of incorporation 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.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of my own knowledge.
Date: August 25, 1992
/s/ Keith L. Parker
---------------------------
Keith L. Parker
Vice President
/s/ Judy A. Walters
---------------------------
Judy A. Walters
Secretary
1
<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 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
1
<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 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
1
<PAGE>
EXHIBIT 10.1
MERCURY INSURANCE GROUP
PRODUCERS CONTRACT
The undersigned producer and company(s), hereinafter called Producer and
Company, agree that these provisions apply to the signatory company(s), and the
producer:
1. Producer as designated in this agreement shall mean broker.
2. The territory within which the Producer may act shall be the State of
California.
3. This contract shall become effective on the day it is signed by an officer
the Company.
4. The Producer has authority to solicit applications for insurance for such
classes of risks as the Company may authorize to collect, receive, and
receipt for premiums on insurance tendered by the Producer to and accepted
by the Company; and to receive commission on paid premiums as full
compensation on business placed with the Company as stated in the attached
commission schedules.
5. The Producer shall promptly forward applications and required premiums to
the Company and may bind insurance in accordance with the Producer's
Manual.
6. The Producer shall refund ratably to the Company, on business, heretofore
or hereafter written, commissions on canceled insurance and on reduction in
premiums at the same rate at which such commissions were originally paid.
7. If premiums are to be billed by the Producer, the Company will bill the
Producer monthly. The balance therein shown to be due to the Company shall
be paid within 15 days after the billing date, otherwise such policies
shall be subject to cancellation 10 days thereafter. The Producer shall be
responsible for and agrees to pay to the Company all premiums on policies
written with the Company whether collected by the Producer or not.
Premiums billed by the Company, direct to the Insured, shall be the
responsibility of the Company. The producer is authorized to deposit in a
Federally Insured savings account, term deposit account or time certificate
of deposit (of any combination thereof) any part or all of the premium
funds collected by the agent an behalf of the Company, and is entitled to
retain any Interest which accrues on sold premium funds.
8. Commissions Statements for direct bill policies shall be rendered monthly,
and any balance due the Company shall be paid within 15 days after the
statement is mailed. Any balance due the Producer may be offset by any
other amounts due the Company by the Producer.
9. The Producer has no authority to make, alter, vary, or discharge any policy
contract to extend the time for payment of premiums except as authorized in
writing by the Company to waive or extend any policy obligation or
condition; to incur any liability in
<PAGE>
behalf of the Company, or to engage in advertisement respecting the Company
without the prior written consent of the Company.
10. The Company shall not be responsible for any producer expenses.
11. Any Company supplies furnished to the Producer by the Company shall remain
the property of the Company and shall be returned to the Company or its
representative promptly upon demand.
12. In the event of termination of this contract, provided the Producer shall
pay amounts due the Company within thirty days of the billing date, the
Producer's records, use and control of expirations shall remain his
property and be left in his absolute possession. If the Producer does not
pay the statements as provided above, title to the records and expirations
shall transfer to the Company for its exclusive use and control. If
premiums due the Company are disputed, the Producer shall nominate a
national accounting firm to render an Independent accounting. The
nomination must be made in writing within ten days after receipt of the
monthly statement. If demand for an accounting is not made within ten
days, future agreement to Independent accounting will be at the option of
the Company. Premiums found due shall be paid within ten days of the date
the accounting firm renders its opinion. Expenses of the Independent
accounting will be shared equally by both parties.
13. This contract supersedes all previous contracts or agreements whether oral
or written between the Company and the Producer and shall remain in effect
until terminated by either party at any time upon written notice to the
other.
14. The Producer shall not appoint sub agents to represent the Company without
the written consent of the Company. The Producer is not to accept business
for the Company from any other agent or broker.
15. The Producer will not transfer ownership of the policies written the
Company, or allow another producer or broker to renew or service the
policies without the prior written approval of the Company unless this
contract has been terminated and all amounts due the Company have been
paid.
16. If the Producer is a corporation, it is agreed that ownership of any stock
may not be sold, transferred or additional stock issued without consent of
the Company. This provision shall not apply if the Producer is a publicly
held corporation under the Security Exchange Act of 1934.
17. It is agreed that the Producer shall not submit broker of record letters on
existing Mercury polices or rewrite Mercury policies written through other
producers of the company without the prior consent of the Company until the
producer has written at least $500,000 in premiums with the Company.
<PAGE>
18. The Company will allow the Producer an additional contingent commission on
the Net Result of business produced by the Producer for the Company on the
basis hereinafter set forth for each calendar year. The rate of said
contingent commission to be as follows:
<TABLE>
<CAPTION>
RATE NET EARNED PREMIUM
OF AT LEAST:
<S> <C>
15% $ 50,000
20% 100,000
25% 150,000
30% 200,000
</TABLE>
The net result shall be computed as follows:
INCOME
Net premium earned shall be gross premiums earned net of reinsurance cost
to the Company, assessments for guarantee funds and loading for assigned
risk plans, reinsurance facilities and joint underwriting authorities.
OUTGO
A flat deduction of 30% of net earned premiums.
A deduction equal to the average commission rate paid the producer on
premiums earned during the calendar year.
Net Losses incurred shall be gross losses incurred less reinsurance
recovered or recoverable.
Deficit, if any, from previous year's contingent account. (Deficit of any
individual year to be carried forward one year only.)
The difference between the Income and Outgo shall constitute the Net
Result, and contingent commission thereon at the rate as set out above will
be paid to the Producer, but not before August 31st following the end of
the contingent year.
The net results referred to above shall include premiums and losses
resulting from all forms of Insurance written by the Producer for the
Company.
It is a condition of this agreement remittances for all items and balances
shall reach the Company within a period of time in accordance with the
conditions and provisions in the Producer Contract. Otherwise, no
contingent commission shall be payable.
<PAGE>
If the Producer Contract is terminated by either the Company or the
Producer, no contingent Commission shall be payable on business produced
in the year in which termination occurs. This applies even if the business
is transferred to another Producer of the Company.
19. The Producer agrees to reimburse the Company for any expense, attorney's
fees, loss or damage sustained by the Company by reason of the Producer's
violation of, or failure to conform to any of the provisions of this
agreement.
IN WITNESS WHEREOF, the Company has caused this contract to be signed at the
Home Office and the Producer has subscribed his name hereto this __________ day
of _______________________.
By____________________________________ Title_____________________________
MERCURY CASUALTY COMPANY
MERCURY INSURANCE COMPANY
CALIFORNIA AUTOMOBILE INSURANCE
COMPANY
Producer______________________________ Title_____________________________
<PAGE>
COMMISSION SCHEDULE
The Producer is authorized to represent the Companies below for the classes of
risks indicated and receive commissions at the rate shown, except for commission
rates on certain classes of risks designated in the producers manual.
PERSONAL LINES
Automobile: Mercury Casualty Company .......................................
Mercury Insurance Company & California Automobile Insurance
Company.........................................................
Personal Protection Package (Automobile, Homeowners and Umbrella)............
Personal Umbrella Policy.....................................................
Homeowners...................................................................
Dwelling Fire................................................................
COMMERCIAL LINES
Automobile...................................................................
Commission rates for Mercury Insurance Company, Mercury Casualty Company,
California Automobile Insurance Company, Personal Lines Automobile and Personal
Protection Package policies are subject to the following adjustments:
1. The rate of commission shown in the commission schedule shall be the base
commission rate. The maximum rate of commission payable shall be 20%.
2. The commission rate from the effective date of this agreement to the second
June 30th following the first accounting period will be the base commission
rate. The commission rate will be subject to modification for policies
effective each twelve month period thereafter. The commission rate in
effect during the previous twelve months may be increased or decreased by
1% of the premium.
3. The first accounting period for Mercury Insurance Company, California
Automobile Insurance Company and Mercury Casualty Company private passenger
auto policies, shall be the three year period ending December 31, in the
year the producer has had a contract in effect with the company either as
an agent and or broker for three or more years. Otherwise, the first
accounting period begins with the effective date of this agreement and ends
December 31st in the year this agreement has been in effect for three
years.
<PAGE>
4. The first Accounting Period for Personal Protection Package policies shall
be the period beginning with the effective date of this agreement and
ending December 3lst of the year in which it has been in effect for one
year. The second Accounting Period shall be the period beginning with the
effective date of this agreement and ending December 31st of the year in
which it has been in effect for two years.
5. Subsequent accounting periods shall be successive three year periods ending
twelve months following the previous accounting period,
6. Loss ratio means net losses incurred during the accounting period
(developed for fifteen months following the accounting period) divided by
net premiums earned during the accounting period. For Mercury Insurance
Company and California Automobile Insurance Company the net earned premium
and net incurred losses shall be combined and the commission rate adjusted
together. The loss ratio for Mercury Casualty Company and the Personal
Protection Package shall be calculated separately and the commission rates
adjusted separately.
7. For private, passenger automobile net earned premiums and net incurred
losses for Bodily Injury, Property Damage, Uninsured Motorist and Medical
Payments Coverages shall be calculated by the Company based upon a net
retention of $25,000 per occurrence. For Personal Protection Package the
net earned premiums and net incurred losses for all coverages shall be
calculated by the Company based upon a net retention of $25,000 per
occurrence for all coverages. All earned premiums and incurred losses
shall be net of reinsurance costs and recoveries, assessments for guarantee
funds and loading for assigned risk plans reinsurance facilities and joint
underwriting authorities.
8. The commission rate for Personal Protection Package and Mercury Casualty
Company private passenger auto policies will be increased when the loss
ratio for the latest accounting period is 55% or less, and decreased when
the loss ratio is 60% or more.
9. The commission rate for Mercury Insurance Company and California Automobile
Insurance Company will be increased when the loss ratio for the latest
accounting period is 60% or less, and decreased when the loss ratio for the
latest accounting period is 65% or more.
<PAGE>
10. Any other change in commission rates are by mutual agreement between the
Producer and Company.
Executed this day of At Los Angeles, California
--------- ------------- -----------------------
By____________________________________ Title_________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
Producer______________________________ Title_________________________
<PAGE>
AMENDMENT 1998-1
MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN
WHEREAS, Mercury General Corporation (the "Company") maintains the Mercury
General Corporation Profit Sharing Plan (the "Plan"); and
WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the right to
amend the Plan; and
WHEREAS, the Company deems it advisable to clarify the eligibility provisions
of the Plan, effective January 1, 1998; and
WHEREAS, the Company desires to make it clear that any participant in the Plan
who was formerly employed by American Fidelity Insurance Company ("AFI") will be
credited with vesting service under the Plan for his or her service with AFI
prior to the acquisition of AFI by the Company; and
WHEREAS, the Company deems it advisable to require that a Participant be
credited with 1,000 Hours of Service (and be a Participant on the Anniversary
Date) in order to receive an allocation of the Company Contribution or ESOP
Contribution; and
1
<PAGE>
WHEREAS,the Company wishes to amend the provisions of Section 3.10 of the Plan
to provide greater flexibility to the Committee in selecting Investment Funds;
NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January
1, 1998, except as otherwise provided hereunder:
1. The definition of "Eligible Employee" in Section 1.2 of the Plan shall be
amended to read as follows:
"`Eligible Employee' shall mean any Employee of the Company, except that there
shall be excluded all leased employees described in Section 414(n) of the Code,
all Employees who are compensated on an hourly basis (provided that, effective
January 1, 1997 and thereafter, the exclusion of employees compensated on an
hourly basis shall not apply to any Employee who was formerly employed by
American Fidelity Insurance Company ("AFI")) and, effective January 1, 1998 and
thereafter, the exclusion of employees compensated on an hourly basis shall not
apply to any Employee classified by the Company as a permanent Employee), all
Employees working on a piecework basis and those Employees covered by a
collective bargaining agreement between the Company and any collective
bargaining representative if retirement benefits were the subject of good faith
bargaining between such representative and the Company, unless the Employee is a
member of a group of employees to whom this Plan has been extended by
2
<PAGE>
such a collective bargaining agreement, and Employees who are nonresident aliens
and receive no United States source income."
2. The definition of "ESOP Allocation Period" in Section 1.2 of the Plan is
amended, effective January 1, 1998, to read as follows:
"`ESOP Allocation Period' shall, effective January 1, 1998, mean each Plan
Year beginning with the Plan Year commencing January 1, 1998. The ESOP
Allocation Period may be changed at the direction of the Committee."
3. The definition of "Year of Vesting Service" under Section 1.2 shall be
amended by adding the following at the end thereof:
"Additionally, any Participant in the Plan who was employed by American
Fidelity Insurance Company ("AFI") on the date on which AFI was acquired by
Mercury General Corporation (the "Acquisition"), shall be credited with a Year
of Vesting Service for each pre-Acquisition year of vesting service credited to
him or her under the American Fidelity Companies Employees Savings Plan."
4. The first sentence of Section 3.1(c) of the Plan shall be amended to read
as follows:
3
<PAGE>
"As of each Anniversary Date, there shall be allocated from the Company
contribution under Section 3.1(a) for the Plan Year and any amount credited to a
former Employee's Company Contribution Account as of the preceding Anniversary
Date which has been forfeited (as set forth in Section 6.2), to the Company
Contribution Account of each Participant who completed at least 1000 Hours of
Service during the Plan Year and who is a Participant on the Anniversary Date,
an amount equal to that portion of the total allocable amount that the
Participant's Compensation bears to the total Compensation of all such
Participants."
5. Section 3.10 is amended in its entirety to read as follows:
"3.10 - Investment Funds.
----------------
(a) Separate Investment Funds shall be established and maintained by the
Committee under this Plan. The Committee may, in its discretion, terminate any
Investment Fund. The Committee shall determine the number of Investment Funds
and the Administrator, the Trustee or the Investment Manager shall determine the
investments to be made under the Investment funds.
(b) Pursuant to rules established by the Committee and subject to the
provisions of this Section, each Participant shall have the right and obligation
to designate in which of the Investment Funds his Accounts will be invested, and
to change such designation. The designation shall be on such forms as are
4
<PAGE>
established by the Committee or pursuant to such other methods approved by the
Committee (including telephonic transfers if authorized by the Committee). The
Committee shall describe to the Participants the investments to be made under
each Investment Fund in such detail as the Committee deems appropriate in its
sole discretion. If a Participant does not make an election with respect to the
investment of his Accounts, they will be invested in the fund selected by the
Committee as announced to Participants. The Committee may establish other rules,
regulations, and procedures regarding the Investment Funds as it deems
appropriate in its sole discretion."
6. The first sentence of Subsection 4.3(f) shall be amended to read as
follows, effective with respect to ESOP Allocation Periods beginning January 1,
1998 and thereafter:
"(f) As soon as practicable following each ESOP Allocation Period, all
Leveraged Shares that have been released from the Loan Suspense Account as a
result of loan amortization payments made during such ESOP Allocation period
that have not and will not be allocated pursuant to Subsection (e) shall be
allocated together with any amount credited to a former Employee's ESOP Account
which has been forfeited (as set forth in Section 6.2) to the ESOP Account of
each person who is credited with at least 1000 Hours of Service during the Plan
Year and who is a Participant on the last day of the applicable ESOP Allocation
Period, an amount equal to that portion of the total
5
<PAGE>
allocable amount that the Participant's Compensation during the ESOP Allocation
Period bears to the total Compensation of all such Participants during the ESOP
Allocation Period."
IN WITNESS WHEREOF, this Amendment 1998-1 is hereby adopted this 6th day of
February, 1998.
MERCURY GENERAL CORPORATION
By /s/ George Joseph
------------------------
Its C.E.O.
6
<PAGE>
EXHIBIT 10.17
MERCURY CASUALTY COMPANY
LOS ANGELES, CALIFORNIA
THIRD AND FOURTH PROPERTY EXCESS
CATASTROPHE REINSURANCE CONTRACT
Originally Effective: September 1, 1996
<PAGE>
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
<PAGE>
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
Third Excess Catastrophe Reinsurance
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Allmerica Re, A Division of The Hanover Insurance Company 1.25%
AXA Reinsurance Company 7.50
Cat Limited 10.00
Continental Casualty Company 2.00
Everest Reinsurance Company 13.00
First Excess and Reinsurance Corporation 9.00
Nationwide Mutual Insurance Company 3.00
Patriot Re Corporation (for Various Lloyd's Underwriters) 2.00
Renaissance Reinsurance Ltd. 4.00
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 1.75
Security Insurance Company of Hartford .40
Signet Star Reinsurance Company 2.00
Sydney Reinsurance Corporation 4.25
United Fire & Casualty Company 1.00
USF RE Insurance Company 2.00
Vesta Fire Insurance Corporation 25.00
Winterthur Reinsurance Corporation of America 3.25
THROUGH SWIRE BLANCH EUROPE
Europa Re .75
Sirius International Insurance Corporation 1.25
</TABLE>
<PAGE>
Third Excess Catastrophe Reinsurance (Continued)
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Societe Parisienne de Souscription
(for La Reunion Francaise) 1.50%
THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters
Per Signing Schedule 5.10
TOTAL 100.00%
</TABLE>
Fourth Excess Catastrophe Reinsurance
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Allmerica Re, A Division of The Hanover Insurance Company 1.50%
Cat Limited 10.00
Continental Casualty Company 1.50
First Excess and Reinsurance Corporation 10.00
Hartford Re Company
(for Hartford Fire Insurance Company) 3.00
Nationwide Mutual Insurance Company 4.00
Renaissance Reinsurance Ltd. 4.00
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 2.00
San Francisco Reinsurance Company 5.25
Security Insurance Company of Hartford .44
Signet Star Reinsurance Company 2.00
Sydney Reinsurance Corporation 3.50
USF RE Insurance Company 3.00
Vesta Fire Insurance Corporation 25.00
Winterthur Reinsurance Corporation of America 2.50
THROUGH SWIRE BLANCH EUROPE
Europa Re 2.00
Mapfre Re Compania de Reaseguros, S.A. 2.50
Sirius International Insurance Corporation 1.25
Societe Parisienne de Souscription
(for La Reunion Francaise) 1.50
</TABLE>
<PAGE>
Fourth Excess Catastrophe Reinsurance (Continued)
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Through Miller Reinsurance Brokers North America Ltd.
Lloyd's Underwriters and Companies
Per Signing Schedule(s) 15.06%
TOTAL 100.00%
</TABLE>
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article PAGE
<S> <C>
I Classes of Business Reinsured 1
II Term 1
III Territory 2
IV Exclusions 2
V Retention and Limit 3
VI Reinstatement 3
VII Loss Occurrence (BRMA 27A) 4
VIII Definitions 6
IX Loss Notices and Settlements 7
X Salvage and Subrogation 7
XI Reinsurance Premium 7
XII Offset 8
XIII Inspection of Records 9
XIV Net Retained Lines (BRMA 32B) 9
XV Errors and Omissions (BRMA 14F) 9
XVI Currency (BRMA 12A) 9
XVII Taxes (BRMA 50B) 10
XVIII Federal Excise Tax (BRMA 17A) 10
XIX Unauthorized Reinsurers 10
XX Insolvency 11
XXI Arbitration (BRMA 6J) 12
XXII Service of Suit (BRMA 49C) 13
XXIII Assignments and Changes of Interest 14
XXIV Agency Agreement 14
XXV Intermediary (BRMA 23A) 14
Schedule A
</TABLE>
<PAGE>
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
ARTICLE I - CLASSES OF BUSINESS REINSURED
By this Contract the Reinsurer agrees to reinsure the excess liability which may
accrue to the Company under its policies, contracts and binders of insurance or
reinsurance (hereinafter called "policies") in force at the effective date
hereof or issued or renewed on or after that date, and classified by the Company
as Homeowners (Section I), Fire, Allied Lines, Commercial Multiple Peril
(Section I), Automobile Physical Damage (Comprehensive only), Earthquake and
Inland Marine, subject to the terms, conditions and limitations set forth herein
and in Schedule A attached to and forming part of this Contract.
ARTICLE II - TERM
A. This Contract shall become effective on September 1, 1996, with respect to
losses arising out of loss occurrences commencing on or after that date, and
shall remain in force until August 31, 1997, both days inclusive. However,
if the Reinsurer sustains no loss hereunder from loss occurrences commencing
on or prior to June 30, 1997, this Contract shall, upon notice from the
Company on June 30, 1997, expire on June 30, 1997.
B. Notwithstanding the provisions of paragraph A above, either party may
terminate this Contract at any time, provided the Reinsurer has sustained no
loss hereunder, by giving the other party not less than 90 days prior notice
by certified mail.
C. If this Contract expires while a loss occurrence covered hereunder is in
progress, the Reinsurer's liability hereunder shall, subject to the other
terms and conditions of this
<PAGE>
Contract, be determined as if the entire loss occurrence had occurred prior
to the expiration of this Contract, provided that no part of such loss
occurrence is claimed against any renewal or replacement of this Contract.
ARTICLE III - TERRITORY
This Contract shall apply to the territorial limits set forth in the Company's
policies reinsured hereunder.
ARTICLE IV - EXCLUSIONS
This Contract does not apply to and specifically excludes the following:
1. All lines of business not included in Article I.
2. All excess of loss reinsurance assumed by the Company.
3. Reinsurance assumed by the Company under obligatory reinsurance
agreements, except agency reinsurance where the policies involved are to
be reunderwritten in accordance with the underwriting standards of the
Company and reissued as Company policies at the next anniversary or
expiration date.
4. Financial guarantee and insolvency.
5. All Accident and Health, Fidelity and Surety, Boiler and Machinery,
Ocean Marine, Workers' Compensation and Credit business when written as
such.
6. Flood when written as such.
7. Mortgage Impairment insurances and similar kinds of insurances, however
styled.
8. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause -
Physical Damage - Reinsurance" attached to and forming part of this
Contract.
9. Risks excluded under the provisions of the "Total Insured Value
Exclusion Clause" attached to and forming part of this Contract.
10. Loss or damage caused by or resulting from war, invasion, hostilities,
acts of foreign enemies, civil war, rebellion, insurrection, military or
usurped power, or martial law or confiscation by order of any government
or public authority, but this exclusion shall not
<PAGE>
apply to loss or damage covered under a standard policy with a standard
War Exclusion Clause.
11. All liability of the Company arising by contract, operation of law, or
otherwise, from its participation or membership, whether voluntary or
involuntary, in any insolvency fund. "Insolvency fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, however denominated, established or governed, which
provides for any assessment of or payment or assumption by the Company
of part or all of any claim, debt, charge, fee or other obligation of an
insurer, or its successors or assigns, which has been declared by any
competent authority to be insolvent, or which is otherwise deemed unable
to meet any claim, debt, charge, fee or other obligation in whole or in
part.
12. Loss or liability excluded under the provisions of the "Pools,
Associations and Syndicates Exclusion Clause" attached to and forming
part of this Contract.
13. Pollution and seepage coverages excluded under the provisions of the
"Pollution and Seepage Exclusion Clause (BRMA 39A)" attached to and
forming part of this Contract.
ARTICLE V - RETENTION AND LIMIT
A. As respects each excess layer of reinsurance coverage provided by this
Contract, the Company shall retain and be liable for the first amount of
ultimate net loss, shown as "Company's Retention" for that excess layer in
Schedule A attached hereto, arising out of each loss occurrence. The
Reinsurer shall then be liable, as respects each excess layer, for 95.0% of
the amount by which such ultimate net loss exceeds the Company's applicable
retention, but the liability of the Reinsurer under each excess layer shall
not exceed 95.0% of the amount, shown as "Reinsurer's Per Occurrence Limit"
for that excess layer in Schedule A attached hereto, as respects any one loss
occurrence.
B. The Company shall retain, in addition to its initial retention on each loss
occurrence, 5.0% of the excess ultimate net loss to which the excess layer
applies.
C. The Company shall be permitted to carry excess per risk reinsurance,
recoveries under which shall inure to the benefit of this Contract.
ARTICLE VI - REINSTATEMENT
A. In the event all or any portion of the reinsurance coverage provided by this
Contract is exhausted by loss, the amount so exhausted shall be reinstated
immediately from the time
<PAGE>
the loss occurrence commences hereon. For each amount so reinstated the
Company agrees to pay additional premium equal to the product of the
following:
1. The percentage of the occurrence limit for the excess layer reinstated
(based on the loss paid by the Reinsurer under that excess layer); times
2. The earned reinsurance premium for the excess layer reinstated for the
term of this Contract (exclusive of reinstatement premium).
B. Whenever the Company requests payment by the Reinsurer of any loss under any
excess layer hereunder, the Company shall submit a statement to the Reinsurer
of reinstatement premium due the Reinsurer for that excess layer. If the
earned reinsurance premium for any excess layer for the term of this Contract
has not been finally determined as of the date of any such statement, the
calculation of reinstatement premium due for that excess layer shall be based
on the annual deposit premium for that excess layer and shall be readjusted
when the earned reinsurance premium for that excess layer for the term of
this Contract has been finally determined. Any reinstatement premium shown
to be due the Reinsurer for any excess layer as reflected by any such
statement (less prior payments, if any, for that excess layer) shall be
payable by the Company concurrently with payment by the Reinsurer of the
requested loss for that excess layer. Any return reinstatement premium shown
to be due the Company shall be remitted by the Reinsurer within 60 days after
receipt and verification of the Company's statement.
C. Notwithstanding anything stated herein, the liability of the Reinsurer
provided by this Contract shall not exceed either of the following:
1. 95.0% of the amount, shown as "Reinsurer's Per Occurrence Limit" for that
excess layer in Schedule A attached hereto, as respects loss or losses
arising out of any one loss occurrence; or
2. 95.0% of the amount, shown as "Reinsurer's Term Limit" for that excess
layer in Schedule A attached hereto, in all during the term of this
Contract.
ARTICLE VII - LOSS OCCURRENCE (BRMA 27A)
A. The term "loss occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs within
the area of one state of the United States or province of Canada and states
or provinces contiguous thereto and to one another. However, the duration and
extent of any one "loss occurrence" shall be limited to all individual losses
sustained by the Company occurring during any period of 168 consecutive hours
arising out
<PAGE>
of and directly occasioned by the same event, except that the term "loss
occurrence" shall be further defined as follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained by the
Company occurring during any period of 72 consecutive hours arising out
of and directly occasioned by the same event. However, the event need not
be limited to one state or province or states or provinces contiguous
thereto.
2. As regards riot, riot attending a strike, civil commotion, vandalism and
malicious mischief, all individual losses sustained by the Company
occurring during any period of 72 consecutive hours within the area of
one municipality or county and the municipalities or counties contiguous
thereto arising out of and directly occasioned by the same event. The
maximum duration of 72 consecutive hours may be extended in respect of
individual losses which occur beyond such 72 consecutive hours during the
continued occupation of an assured's premises by strikers, provided such
occupation commenced during the aforesaid period.
3. As regards earthquake (the epicentre of which need not necessarily be
within the territorial confines referred to in paragraph A of this
Article) and fire following directly occasioned by the earthquake, only
those individual fire losses which commence during the period of 168
consecutive hours may be included in the Company's "loss occurrence."
4. As regards "freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting frozen
pipes and tanks) may be included in the Company's "loss occurrence."
B. Except for those "loss occurrences" referred to in subparagraphs 1 and 2 of
paragraph A above, the Company may choose the date and time when any such
period of consecutive hours commences, provided that it is not earlier than
the date and time of the occurrence of the first recorded individual loss
sustained by the Company arising out of that disaster, accident or loss, and
provided that only one such period of 168 consecutive hours shall apply with
respect to one event.
C. However, as respects those "loss occurrences" referred to in subparagraphs 1
and 2 of paragraph A above, if the disaster, accident or loss occasioned by
the event is of greater duration than 72 consecutive hours, then the Company
may divide that disaster, accident or loss into two or more "loss
occurrences," provided that no two periods overlap and no individual loss is
included in more than one such period, and provided that no period commences
earlier than the date and time of the occurrence of the first recorded
individual loss sustained by the Company arising out of that disaster,
accident or loss.
<PAGE>
D. No individual losses occasioned by an event that would be covered by 72 hours
clauses may be included in any "loss occurrence" claimed under the 168 hours
provision.
ARTICLE VIII - DEFINITIONS
A. "Ultimate net loss" as used herein is defined as the sum or sums (including
interest on judgments, extra contractual obligations, loss resulting from the
reformation or liberalization of policies, litigation expenses and all other
loss adjustment expense, except office expenses and salaries of the Company's
regular employees) paid or payable by the Company in settlement of claims and
in satisfaction of judgments rendered on account of such claims, after
deduction of all salvage, all recoveries and all claims on inuring insurance
or reinsurance, whether collectible or not. Nothing herein shall be
construed to mean that losses under this Contract are not recoverable until
the Company's ultimate net loss has been ascertained.
B. "Extra contractual obligations" as used herein shall mean 90.0% of any
punitive, exemplary, compensatory or consequential damages paid or payable by
the Company as a result of an action against it by its insured or its
insured's assignee, which action alleges negligence or bad faith on the part
of the Company in handling a claim under a policy subject to this Contract.
An extra contractual obligation shall be deemed to have occurred on the same
date as the loss covered or alleged to be covered under the policy.
Notwithstanding anything stated herein, this Contract shall not apply to any
extra contractual obligation incurred by the Company as a result of any
fraudulent and/or criminal act by any officer or director of the Company
acting individually or collectively or in collusion with any individual or
corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
C. As respects amounts paid by the Company subject to this Contract for debris
removal, including cleanup of pollutants, as respects business classified as
commercial property, "loss" shall mean an amount not to exceed 30.0% of the
direct physical loss or damage paid by the Company, for any one loss, any one
location, any one insured. "Loss" is further restricted to include only such
claims for debris removal, including cleanup of pollutants, reported to the
Company not more than 180 days immediately following the direct physical loss
or damage.
D. "Pollutant" as used herein shall mean any solid liquid, gaseous, or thermal
irritant or contaminant, including, but not limited to smoke, vapor, soot,
fumes, acids, alkalis, chemicals and waste. Waste includes materials to be
recycled, reconditioned or reclaimed.
<PAGE>
ARTICLE IX - LOSS NOTICES AND SETTLEMENTS
A. Whenever a loss sustained by the Company appears likely to result in a claim
hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall
have the right to participate in the adjustment of the loss at its own
expense.
B. All loss settlements made by the Company, provided they are within the terms
of this Contract, and either under the strict conditions of the Company's
policies or by way of compromise, shall be unconditionally binding upon the
Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be
liable upon receipt of reasonable evidence of the amount paid (or scheduled
to be paid) by the Company.
C. All salvage and recoveries received subsequent to a loss settlement under
this Contract shall be applied as if received prior to said loss settlement,
and all necessary adjustment shall be made between the Company and the
Reinsurer immediately following receipt by the Company of such salvage or
recoveries.
ARTICLE X - SALVAGE AND SUBROGATION
The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or
recovery made by the Company, less the actual cost, excluding salaries of
officials and employees of the Company and sums paid to attorneys as retainer,
of obtaining such reimbursement or making such recovery) on account of claims
and settlements involving reinsurance hereunder. Salvage thereon shall always
be used to reimburse the excess carriers in the reverse order of their priority
according to their participation before being used in any way to reimburse the
Company for its primary loss. The Company hereby agrees to enforce its rights
to salvage or subrogation relating to any loss, a part of which loss was
sustained by the Reinsurer, and to prosecute all claims arising out of such
rights.
ARTICLE XI - REINSURANCE PREMIUM
A. As premium for each excess layer of reinsurance coverage provided by this
Contract, the Company shall pay the Reinsurer the greater of the following:
1. The amount, shown as "Annual Minimum Premium" for that excess layer in
Schedule A attached hereto; or, in the event the early expiration
provision outlined in paragraph A of Article II is exercised by the
Company, the amount shown as "Early Expiration Minimum Premium" for that
excess layer in Schedule A attached hereto. In the event that this
Contract is terminated in accordance with the provisions of paragraph B of
Article II, the annual minimum premium for each excess layer shall be a
<PAGE>
pro rata portion of the "Annual Minimum Premium" for that excess layer in
Schedule A attached hereto.
2. The percentage, shown as "Premium Rate" for that excess layer in Schedule
A attached hereto, of the Company's net earned premium for the term of
this Contract.
B. The Company shall pay the Reinsurer an annual deposit premium for each excess
layer of an amount, shown as "Annual Deposit Premium" for that excess layer
in Schedule A attached hereto, in four equal installments of an amount, shown
as "Quarterly Deposit Premium" for that excess layer in Schedule A attached
hereto, on September 1 and December 1, 1996, and March 1 and June 1, 1997.
However, in the event that this Contract expires on June 30, 1997 in
accordance with the provisions of paragraph A of Article II, the Reinsurer
shall return to the Company a pro rata portion of the deposit premium for
each excess layer payable on June 1, 1997. In the event that this Contract
is terminated at any time, in accordance with the provisions of paragraph B
of Article II, the Company shall pay a pro rata portion of the amount, shown
as "Annual Deposit Premium," for that excess layer in Schedule A attached
hereto.
C. Within 60 days after the expiration or termination of this Contract, the
Company shall provide a report to the Reinsurer setting forth the premium due
hereunder for each excess layer, computed in accordance with paragraph A, and
any additional premium due the Reinsurer or return premium due the Company
for each such excess layer shall be remitted promptly.
D. "Net earned premium" as used herein is defined as gross earned premium of the
Company for the classes of business reinsured hereunder, less the earned
portion of premiums ceded by the Company for reinsurance which inures to the
benefit of this Contract. For purposes of calculating net earned premium,
for multiple peril policies with indivisible premiums, if any, 80.0% of the
total Homeowners basic policy premium and 70.0% of the total basic Commercial
Multiple Peril policy premium shall be considered subject premium.
ARTICLE XII - OFFSET
The Company or the Reinsurer may offset any balance, whether on account of
premiums, commissions, loss or claim expenses due from one party to the other
under this Contract or under any other reinsurance contract heretofore or
hereafter entered into between the Company and the Reinsurer, whether acting as
assuming reinsurer or ceding company.
<PAGE>
ARTICLE XIII - INSPECTION OF RECORDS
The Reinsurer may inspect the records of the Company pertaining to the risks
reinsured hereunder.
ARTICLE XIV - NET RETAINED LINES (BRMA 32B)
A. This Contract applies only to that portion of any policy which the Company
retains net for its own account, and in calculating the amount of any loss
hereunder and also in computing the amount or amounts in excess of which this
Contract attaches, only loss or losses in respect of that portion of any
policy which the Company retains net for its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss or
losses shall not be increased by reason of the inability of the Company to
collect from any other reinsurer(s), whether specific or general, any amounts
which may have become due from such reinsurer(s), whether such inability
arises from the insolvency of such other reinsurer(s) or otherwise.
ARTICLE XV - ERRORS AND OMISSIONS (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
ARTICLE XVI - CURRENCY (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they
shall be construed to mean United States Dollars and all transactions under
this Contract shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date such
transaction is entered on the books of the Company.
<PAGE>
ARTICLE XVII - TAXES (BRMA 50B)
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
ARTICLE XVIII - FEDERAL EXCISE TAX (BRMA 17A)
(Applicable to those reinsurers, excepting Underwriters at Lloyd's London and
other reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow for the purpose of paying the Federal
Excise Tax the applicable percentage of the premium payable hereon as imposed
under Section 4371 of the Internal Revenue Code to the extent such premium is
subject to the Federal Excise Tax.
B. In the event of any return premium becoming due hereunder the Reinsurer will
deduct the applicable percentage from the return premium payable hereon and
the Company or its agent should take steps to recover the tax from the United
States Government.
ARTICLE XIX - UNAUTHORIZED REINSURERS
A. If the Reinsurer is unauthorized in any state of the United States of America
or the District of Columbia, the Reinsurer agrees to fund its share of the
Company's ceded outstanding loss and loss adjustment expense reserves
(including incurred but not reported loss reserves) by:
1. Clean, irrevocable and unconditional letters of credit issued and
confirmed, if confirmation is required by the insurance regulatory
authorities involved, by a bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters of credit and
acceptable to said insurance regulatory authorities; and/or
2. Escrow accounts for the benefit of the Company; and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the Company on any
financial statement it is required to file with the insurance regulatory
authorities involved. The Reinsurer, at its sole option, may fund in other
than cash if its method and form of funding are acceptable to the insurance
regulatory authorities involved.
B. With regard to funding in whole or in part by letters of credit, it is
agreed that each letter of credit will be in a form acceptable to insurance
regulatory authorities involved, will be
<PAGE>
issued for a term of at least one year and will include an "evergreen
clause," which automatically extends the term for at least one additional
year at each expiration date unless written notice of non-renewal is given
to the Company not less than 30 days prior to said expiration date. The
Company and the Reinsurer further agree, notwithstanding anything to the
contrary in this Contract, that said letters of credit may be drawn upon by
the Company or its successors in interest at any time, without diminution
because of the insolvency of the Company or the Reinsurer, but only for one
or more of the following purposes:
1. To reimburse itself for the Reinsurer's share of losses and/or loss
adjustment expense paid under the terms of policies reinsured hereunder,
unless paid in cash by the Reinsurer;
2. To reimburse itself for the Reinsurer's share of any other amounts
claimed to be due hereunder, unless paid in cash by the Reinsurer;
3. To fund a cash account in an amount equal to the Reinsurer's share of any
ceded outstanding loss and loss adjustment expense reserves (including
incurred but not reported loss reserves) funded by means of a letter of
credit which is under non-renewal notice, if said letter of credit has
not been renewed or replaced by the Reinsurer 10 days prior to its
expiration date;
4. To refund to the Reinsurer any sum in excess of the actual amount
required to fund the Reinsurer's share of the Company's ceded outstanding
loss and loss adjustment expense reserves (including incurred but not
reported loss reserves), if so requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of credit is in
excess of the actual amount required for B(1) or B(3), or in the case of
B(2), the actual amount determined to be due, the Company shall promptly
return to the Reinsurer the excess amount so drawn.
ARTICLE XX - INSOLVENCY
A. In the event of the insolvency of one or more of the reinsured companies,
this reinsurance shall be payable directly to the company or to its
liquidator, receiver, conservator or statutory successor immediately upon
demand, with reasonable provision for verification, on the basis of the
liability of the company without diminution because of the insolvency of the
company or because the liquidator, receiver, conservator or statutory
successor of the company has failed to pay all or a portion of any claim. It
is agreed, however, that the liquidator, receiver, conservator or statutory
successor of the company shall give written notice to the Reinsurer of the
pendency of a claim against the company indicating the policy or bond
reinsured which claim would involve a possible liability on the part of the
Reinsurer within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in
<PAGE>
the receivership, and that during the pendency of such claim, the Reinsurer
may investigate such claim and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or defenses
that it may deem available to the company or its liquidator, receiver,
conservator or statutory successor. The expense thus incurred by the
Reinsurer shall be chargeable, subject to the approval of the Court, against
the company as part of the expense of conservation or liquidation to the
extent of a pro rata share of the benefit which may accrue to the company
solely as a result of the defense undertaken by the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority in
interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Contract as though such
expense had been incurred by the company.
C. It is further understood and agreed that, in the event of the insolvency of
one or more of the reinsured companies, the reinsurance under this Contract
shall be payable directly by the Reinsurer to the company or to its
liquidator, receiver or statutory successor, except as provided by Section
4118(a) of the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the event of the
insolvency of the company or (2) where the Reinsurer with the consent of the
direct insured or insureds has assumed such policy obligations of the company
as direct obligations of the Reinsurer to the payees under such policies and
in substitution for the obligations of the company to such payees.
ARTICLE XXI - ARBITRATION (BRMA 6J)
A. As a condition precedent to any right of action hereunder, in the event of
any dispute or difference of opinion hereafter arising with respect to this
Contract, it is hereby mutually agreed that such dispute or difference of
opinion shall be submitted to arbitration. One Arbiter shall be chosen by
the Company, the other by the Reinsurer, and an Umpire shall be chosen by the
two Arbiters before they enter upon arbitration, all of whom shall be active
or retired disinterested executive officers of insurance or reinsurance
companies or Lloyd's London Underwriters. In the event that either party
should fail to choose an Arbiter within 30 days following a written request
by the other party to do so, the requesting party may choose two Arbiters who
shall in turn choose an Umpire before entering upon arbitration. If the two
Arbiters fail to agree upon the selection of an Umpire within 30 days
following their appointment, each Arbiter shall nominate three candidates
within 10 days thereafter, two of whom the other shall decline, and the
decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within 30 days following
the date of appointment of the Umpire. The Arbiters shall consider this
Contract as an honorable engagement rather than merely as a legal obligation
and they are relieved of all judicial formalities and may abstain from
following the strict rules of law. The decision of the
<PAGE>
Arbiters shall be final and binding on both parties; but failing to agree,
they shall call in the Umpire and the decision of the majority shall be final
and binding upon both parties. Judgment upon the final decision of the
Arbiters may be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this Article
and communications shall be made by the Company to each of the reinsurers
constituting one party, provided, however, that nothing herein shall impair
the rights of such reinsurers to assert several, rather than joint, defenses
or claims, nor be construed as changing the liability of the reinsurers
participating under the terms of this Contract from several to joint.
D. Each party shall bear the expense of its own Arbiter, and shall jointly and
equally bear with the other the expense of the Umpire and of the arbitration.
In the event that the two Arbiters are chosen by one party, as above
provided, the expense of the Arbiters, the Umpire and the arbitration shall
be equally divided between the two parties.
E. Any arbitration proceedings shall take place at a location mutually agreed
upon by the parties to this Contract, but notwithstanding the location of the
arbitration, all proceedings pursuant hereto shall be governed by the law of
the state in which the Company has its principal office.
ARTICLE XXII - SERVICE OF SUIT (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United States of America,
and/or is not authorized in any State, Territory or District of the United
States where authorization is required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any amount claimed
to be due hereunder, the Reinsurer, at the request of the Company, will
submit to the jurisdiction of any court of competent jurisdiction within the
United States. Nothing in this Article constitutes or should be understood
to constitute a waiver of the Reinsurer's rights to commence an action in any
court of competent jurisdiction in the United States, to remove an action to
a United States District Court, or to seek a transfer of a case to another
court as permitted by the laws of the United States or of any state in the
United States.
B. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefor, the Reinsurer hereby designates
the party named in its Interests and Liabilities Agreement, or if no party is
named therein, the Superintendent, Commissioner or Director of Insurance or
other officer specified for that purpose in the statute, or his successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on
behalf of the Company or any beneficiary hereunder arising out of this
Contract.
<PAGE>
ARTICLE XXIII - ASSIGNMENTS AND CHANGES OF INTEREST
No assignment or change of the Company's interest hereunder, whether voluntary
or involuntary and whether by merger or reinsurance of its entire business with
another company or otherwise, shall be binding upon the Reinsurer.
ARTICLE XXIV - AGENCY AGREEMENT
If more than one reinsured company is named as a party to this Contract, the
first named company shall be deemed the agent of the other reinsured companies
for purposes of sending or receiving notices required by the terms and
conditions of this Contract, and for purposes of remitting or receiving any
monies due any party.
ARTICLE XXV - INTERMEDIARY (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this
Contract for all business hereunder. All communications (including but not
limited to notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements) relating thereto
shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co.,
Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431.
Payments by the Company to the Intermediary shall be deemed to constitute
payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall
be deemed to constitute payment to the Company only to the extent that such
payments are actually received by the Company.
IN WITNESS WHEREOF, the Company by its duly authorized representative has
executed this Contract as of the date undermentioned at:
Los Angeles, California, this _______ day of _________________________199__.
_____________________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
<PAGE>
SCHEDULE A
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
all of Los Angeles, California
<TABLE>
<CAPTION>
THIRD FOURTH
EXCESS EXCESS
<S> <C> <C>
Company's Retention $15,000,000 $25,000,000
Reinsurer's Per Occurrence Limit (95.0% of) $10,000,000 $15,000,000
Reinsurer's Term Limit (95.0% of) $20,000,000 $30,000,000
Annual Minimum Premium $ 520,000 $ 436,000
Early Expiration Minimum Premium $ 432,900 $ 362,970
Premium Rate
Class of Business other than Auto Physical Damage 2.8457% 2.5046%
Auto Physical Damage 0.3003% 0.2343%
Annual Deposit Premium $ 650,000 $ 545,000
Quarterly Deposit Premium $ 162,500 $ 136,250
</TABLE>
<PAGE>
U.S.A.
- ------
NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE
1. This Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or
Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of this
Clause, this Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary property on the
site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for processing
substantial quantities of "special nuclear material," and for
reprocessing, salvaging, chemically separating, storing or disposing
of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2) III above using
substantial quantities of radioactive isotopes or other products of
nuclear fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, from any insurance on property which is on the same site
as a nuclear reactor power plant or other nuclear installation and which
normally would be insured therewith except that this paragraph (3) shall not
operate
(a) where Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provisions excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused. However on and after 1st January
1960 this sub-paragraph (b) shall only apply provided the said
radioactive contamination exclusion provision has been approved by
the Governmental Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2) and
(3) hereof, this Reinsurance does not cover any loss or liability by radioactive
contamination accruing to the Reassured, directly or indirectly, and whether as
Insurer or Reinsurer, when such radioactive contamination is a named hazard
specifically insured against.
5. It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note.-Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that
(a) all policies issued by the Reassured on or before 31st December
1957 shall be free from the application of the other provisions of
this Clause until expiry date or 31st December 1960 whichever first
occurs whereupon all the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the
Reassured on or before 31st December 1958 shall be free from the
application of the other provisions of this Clause until expiry
date or 31st December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
<PAGE>
TOTAL INSURED VALUE EXCLUSION CLAUSE
It is the mutual intention of the parties to exclude risks, other than Offices,
Hotels, Apartments, Hospitals, Educational Establishments and Public Utilities
(except Railroad Schedules), and Builders Risks on the above classes, where at
the time of cession, the Total Insured Value over all interests exceeds
$250,000,000. However, the Company shall be protected hereunder, subject to the
other terms and conditions of this Contract, if subsequent to cession being
made, the Company becomes acquainted with the true facts of the case and
discovers that the mutual intention has been inadvertently breached; on
condition that the Company shall at the first opportunity, and certainly by next
anniversary of the original policy, exclude the risk in question.
It is agreed that this mutual intention does not apply to Contingent Business
Interruption or to interests traditionally underwritten as Inland Marine or to
Stock and/or Contents written on a blanket basis except where the Company is
aware that the Total Insured Value of $250,000,000 is already exceeded for
buildings, machinery, equipment and direct use and occupancy at the key
location.
It is understood and agreed that this Clause shall not apply hereunder where the
Company writes 100% of the risk.
<PAGE>
POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE
SECTION A:
Excluding:
(a) All business derived directly or indirectly from any Pool, Association
or Syndicate which maintains its own reinsurance facilities.
(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March
1, 1968 for the purpose of insuring property whether on a country-wide
basis or in respect of designated areas. This exclusion shall not apply
to so-called Automobile Insurance Plans or other Pools formed to provide
coverage for Automobile Physical Damage.
SECTION B:
It is agreed that business written by the Company for the same perils, which
is known at the time to be insured by, or in excess of underlying amounts placed
in the following Pools, Associations or Syndicates, whether by way of insurance
or reinsurance, is excluded hereunder:
Industrial Risk Insurers,
Associated Factory Mutuals,
Improved Risk Mutuals,
Any Pool, Association or Syndicate formed for the purpose of writing
Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs,
United States Aircraft Insurance Group,
Canadian Aircraft Insurance Group,
Associated Aviation Underwriters,
American Aviation Underwriters.
Section B does not apply:
(a) Where The Total Insured Value over all interests of the risk in question
is less than $250,000,000.
(b) To interests traditionally underwritten as Inland Marine or stock and/or
contents written on a blanket basis.
(c) To Contingent Business Interruption, except when the Company is aware
that the key location is known at the time to be insured in any Pool,
Association or Syndicate named above, other than as provided for under
Section B(a).
(d) To risks as follows:
Offices, Hotels, Apartments, Hospitals, Educational Establishments,
Public Utilities (other than railroad schedules) and builder's risks on
the classes of risks specified in this subsection (d) only.
<PAGE>
Where this clause attaches to Catastrophe Excesses, the following Section C
is added:
SECTION C:
Nevertheless the Reinsurer specifically agrees that liability accruing to
the Company from its participation in residual market mechanisms including but
not limited to:
(1) The following so-called "Coastal Pools":
Alabama Insurance Underwriting Association
Florida Windstorm Underwriting Association ("FWUA")
Louisiana Insurance Underwriting Association
Mississippi Windstorm Underwriting Association
North Carolina Insurance Underwriting Association
South Carolina Windstorm and Hail Underwriting Association
Texas Catastrophe Property Insurance Association
AND
(2) All "Fair Plan" and "Rural Risk Plan" business
AND
(3) The Florida Property and Casualty Joint Underwriting Association
("FPCJUA"), the Florida Residential Property and Casualty Joint
Underwriting Association ("RPCJUA") and the California Earthquake
Authority (CEA)
for all perils otherwise protected hereunder shall not be excluded, except,
however, that this reinsurance does not include any increase in such liability
resulting from:
(i) The inability of any other participant in such "Coastal Pool" and/or
"Fair Plan" and/or "Rural Risk Plan" and/or Residual Market Mechanisms
to meet its liability.
(ii) Any claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural
Risk Plan" and/or Residual Market Mechanisms, or any participant
therein, including the Company, whether by way of subrogation or
otherwise, brought by or on behalf of any insolvency fund (as defined
in the Insolvency Fund Exclusion Clause incorporated in this Contract).
SECTION D:
(1) Notwithstanding Section C above, in respect of the CEA, where an
assessment is made against the Company by the CEA, the Company may
include in its Ultimate Net Loss only that assessment directly
attributable to each separate loss occurrence covered hereunder. The
Company's initial capital contribution to the CEA shall not be included
in the Ultimate Net Loss.
<PAGE>
(2) Notwithstanding Section C above, in respect of the FWUA, FPCJUA and
RPCJUA, where an assessment is made against the Company by the FWUA, the
FPCJUA, the RPCJUA, or any combination thereof, the maximum loss that
the Company may include in the Ultimate Net Loss in respect of any loss
occurrence hereunder shall not exceed the lesser of:
(a) The Company's assessment from the relevant entity (FWUA, FPCJUA
and/or RPCJUA) for the accounting year in which the loss occurrence
commenced, or
(b) The product of the following:
(i) The Company's percentage participation in the relevant entity
for the accounting year in which the loss occurrence
commenced; and
(ii) The relevant entity's total losses in such loss occurrence.
Any assessments for accounting years subsequent to that in which the
loss occurrence commenced may not be included in the Ultimate Net Loss
hereunder. Moreover, notwithstanding Section C above, in respect of the
FWUA, the FPCJUA and/or the RPCJUA, the Ultimate Net Loss hereunder
shall not include any monies expended to purchase or retire bonds as a
consequence of being a member of the FWUA, the FPCJUA and/or the RPCJUA.
For the purposes of this Contract, the Company may not include in the
Ultimate Net Loss any assessment or any percentage assessment levied by
the FWUA, the FPCJUA and/or the RPCJUA to meet the obligations of an
insolvent insurer member or other party, or to meet any obligations
arising from the deferment by the FWUA, the FPCJUA and/or the RPCJUA of
the collection of monies.
- --------------------------------------------------------------------------------
NOTES: Wherever used herein the terms:
"Company" shall be understood to mean "Company", "Reinsured",
"Reassured" or whatever other term is used in the attached
reinsurance document to designate the reinsured company or
companies.
"Agreement" shall be understood to mean "Agreement", "Contract",
"Policy", or whatever other term is used to designate the
attached reinsurance document.
"Reinsurers" shall be understood to mean "Reinsurers", "Underwriters" or
whatever other term is used in the attached reinsurance
document to designate the reinsurer or reinsurers.
<PAGE>
POLLUTION AND SEEPAGE EXCLUSION CLAUSE
This Contract excludes loss and/or damage and/or costs and/or expenses arising
from seepage and/or pollution and/or contamination, other than contamination
from smoke. Nevertheless, this exclusion does not preclude payment of the cost
of removing debris of property damaged by a loss otherwise covered hereunder,
subject always to a limit of 25% of the Company's property loss under the
applicable original policy.
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Allmerica Re
A Division of
The Hanover Insurance Company
Bedford, New Hampshire
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
1.25% of the Third Excess Catastrophe Reinsurance
1.50% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Florham Park, New Jersey, this _______ day of_________________________199___.
_________________________________________________________
Allmerica Re, A Division of The Hanover Insurance Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
AXA Reinsurance Company
Wilmington, Delaware
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
7.50% of the Third Excess Catastrophe Reinsurance
0% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
New York, New York, this _______ day of _______________________________199___.
_____________________________________________________
AXA Reinsurance Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Cat Limited
Hamilton, Bermuda
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
10.00% of the Third Excess Catastrophe Reinsurance
10.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Hamilton, Bermuda, this _______ day of_________________________________199___.
_____________________________________________________
Cat Limited
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Continental Casualty Company
Chicago, Illinois
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
2.00% of the Third Excess Catastrophe Reinsurance
1.50% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Chicago, Illinois, this _______ day of_________________________________199___.
_____________________________________________________
Continental Casualty Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Everest Reinsurance Company
Dover, Delaware
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
13.00% of the Third Excess Catastrophe Reinsurance
0% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Newark, New Jersey, this _______ day of _______________________________199___.
_____________________________________________________
Everest Reinsurance Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
First Excess and Reinsurance Corporation
Overland Park, Kansas
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
9.00% of the Third Excess Catastrophe Reinsurance
10.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Kansas City, Missouri, this _______ day of____________________________199___.
_____________________________________________________
First Excess and Reinsurance Corporation
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Hartford Fire Insurance Company
Hartford, Connecticut
by
Hartford Re Company
Hartford, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
0% of the Third Excess Catastrophe Reinsurance
3.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Security Insurance Company of Hartford
Farmington, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
0.40% of the Third Excess Catastrophe Reinsurance
0.44% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Farmington, Connecticut, this _______ day of ___________________________199___.
_____________________________________________________
Security Insurance Company of Hartford
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Signet Star Reinsurance Company
Wilmington, Delaware
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
2.00% of the Third Excess Catastrophe Reinsurance
2.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Florham Park, New Jersey, this _______ day of _________________________199___.
_____________________________________________________
Signet Star Reinsurance Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Sydney Reinsurance Corporation
Philadelphia, Pennsylvania
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
4.25% of the Third Excess Catastrophe Reinsurance
3.50% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
New York, New York, this _______ day of _______________________________199___.
_____________________________________________________
Sydney Reinsurance Corporation
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
United Fire & Casualty Company
Cedar Rapids, Iowa
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
1.00% of the Third Excess Catastrophe Reinsurance
0% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Cedar Rapids, Iowa, this _______ day of________________________________199___.
_____________________________________________________
United Fire & Casualty Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
USF RE Insurance Company
Boston, Massachusetts
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
2.00% of the Third Excess Catastrophe Reinsurance
3.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Costa Mesa, California, this _______ day of_____________________________199___.
_____________________________________________________
USF RE Insurance Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Vesta Fire Insurance Corporation
Birmingham, Alabama
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
25.00% of the Third Excess Catastrophe Reinsurance
25.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Birmingham, Alabama, this _______ day of_______________________________199___.
_____________________________________________________
Vesta Fire Insurance Corporation
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Winterthur Reinsurance Corporation of America
New York, New York
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
3.25% of the Third Excess Catastrophe Reinsurance
2.50% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
New York, New York, this _______ day of _______________________________199___.
_____________________________________________________
Winterthur Reinsurance Corporation of America
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Europa Re
Cologne, Germany
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
0.75% of the Third Excess Catastrophe Reinsurance
2.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Cologne, Germany, this _______ day of ________________________________199___.
_____________________________________________________
Europa Re
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Mapfre Re Compania de Reaseguros, S.A
Madrid, Spain
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
0% of the Third Excess Catastrophe Reinsurance
2.50% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Madrid, Spain, this _______ day of ____________________________________199___.
_____________________________________________________
Mapfre Re Compania de Reaseguros, S.A.
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Sirius International Insurance Corporation
Stockholm, Sweden
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
1.25% of the Third Excess Catastrophe Reinsurance
1.25% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Stockholm, Sweden, this _______ day of________________________________199___.
_____________________________________________________
Sirius International Insurance Corporation
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
La Reunion Francaise
Paris, France
by
Societe Parisienne de Souscription
Paris, France
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
1.50% of the Third Excess Catastrophe Reinsurance
1.50% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Paris, France, this _______ day of ____________________________________199___.
_____________________________________________________
Societe Parisienne de Souscription
(for and on behalf of La Reunion Francaise)
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Certain Underwriting Members of Lloyd's
shown in the Signing Schedule attached hereto
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
5.10% of the Third Excess Catastrophe Reinsurance
4.92% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
In any action, suit or proceeding to enforce the Subscribing Reinsurer's
obligations under the attached Contract, service of process may be made upon
Mendes & Mount, 750 Seventh Avenue, New York, New York 10019.
Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule
attached hereto.
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Certain Insurance Companies
shown in the Signing Schedule(s) attached hereto
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
0% of the Third Excess Catastrophe Reinsurance
10.14% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
In any action, suit or proceeding to enforce the Subscribing Reinsurer's
obligations under the attached Contract, service of process may be made upon
Mendes & Mount, 750 Seventh Avenue, New York, New York 10019.
The following Article shall apply to the Subscribing Reinsurer's share in the
attached Contract, in lieu of the provisions of Article XIX - Unauthorized
Reinsurers - of the Contract:
"Article XIX - Loss Reserves
(Applicable only if the Reinsurer cannot qualify for credit by any state or
any other governmental authority having jurisdiction over the Company's loss
reserves.)
A. As regards policies or bonds issued by the Company coming within the
scope of this Contract, the Company agrees that, when it shall file with
the Insurance Department or set up on its books reserves for losses
covered hereunder which it shall be required by law to set up, it will
forward to the Reinsurer a statement showing the proportion of such loss
reserves which is applicable to the Reinsurer. The Reinsurer hereby
agrees that it will apply for and secure delivery to the Company of a
clean, irrevocable and unconditional Letter of Credit issued and
confirmed, if confirmation is required by the regulatory authority(ies)
having jurisdiction over the Company's loss reserves, by a bank or banks
meeting the NAIC Securities Valuation Office credit standards for issuers
of Letters of Credit and which is (are) acceptable to said regulatory
authority(ies), in an amount equal to the Reinsurer's proportion of
reserves in respect of known outstanding losses that have been reported
to the Reinsurer and allocated loss expenses relating thereto as shown in
the statement prepared by the Company. Under no circumstances shall any
amount relating to reserves in respect of Incurred But Not Reported
losses be included in the amount of the Letter of Credit.
B. The Letter of Credit shall be in a form acceptable to insurance
regulatory authority(ies) having jurisdiction over the Company's loss
reserves, shall be issued for a period of not less than one year, and
shall be automatically extended for one year from its date of expiration
or any future expiration date unless thirty (30) days prior to any
expiration date the issuing bank shall notify the Company by registered
mail that the issuing bank elects not to consider the Letter of Credit
extended for any additional period. An issuing bank, not a member of the
federal reserve system or not chartered in New York State, shall provide
sixty (60) days notice to the Company prior to any expiration in the
event of non-extension.
C. Notwithstanding any other provision of this Contract, the Company or its
successors in interest may draw upon such credit at any time, without
diminution because of the
<PAGE>
insolvency of the Company or of the Reinsurer, for one or more of the
following purposes only:
1. To pay the Reinsurer's share or to reimburse the Company for the
Reinsurer's share of any loss reinsured by this Contract, the payment
of which has been agreed by the Reinsurer and which has not been
otherwise paid;
2. To make refund of any sum which is in excess of the actual amount
required to pay the Reinsurer's share of any liability reinsured by
this Contract;
3. In the event of expiration of the Letter of Credit as provided for
above, to establish deposit of the Reinsurer's share of known and
reported outstanding losses and allocated expenses relating thereto
under this Contract. Such cash deposit shall be held in an interest
bearing account separate from the Company's other assets, and interest
thereon shall accrue to the benefit of the Reinsurer.
The issuing bank shall have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition
of funds withdrawn, except to ensure that withdrawals are made only upon
the order of properly authorized representatives of the Company.
D. At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company shall prepare a specific
statement, for the sole purpose of amending the Letter of Credit, of the
Reinsurer's share of known and reported outstanding losses and allocated
expenses relating thereto. If the statement shows that the Reinsurer's
share of such losses and allocated loss expenses exceeds the balance of
credit as of the statement date, the Reinsurer shall, within thirty (30)
days after receipt of notice of such excess, secure delivery to the
Company of an amendment of the Letter of Credit increasing the amount of
credit by the amount of such difference. If, however, the statement shows
that the Reinsurer's share of known and reported outstanding losses plus
allocated loss expenses relating thereto is less than the balance of
credit as of the statement date, the Company shall, within thirty (30)
days after receipt of written request from the Reinsurer, release such
excess credit by agreeing to secure an amendment to the Letter of Credit
reducing the amount of credit available by the amount of such excess
credit."
Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s)
attached hereto.
<PAGE>
(Revised: July 1, 1997)
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
EFFECTIVE: SEPTEMBER 1, 1966
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
Third Excess Catastrophe Reinsurance
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Allmerica Re, A Division of The Hanover Insurance Company 1.25%
AXA Reinsurance Company 7.50
Cat Limited 10.00
Continental Casualty Company 2.00
Everest Reinsurance Company 13.00
First Excess and Reinsurance Corporation 9.00
Nationwide Mutual Insurance Company 3.00
Patriot Re Corporation (for Various Lloyd's Underwriters) 2.00
Renaissance Reinsurance Ltd. 4.00
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 1.75
Signet Star Reinsurance Company 2.00
Sydney Reinsurance Corporation 4.25
United Fire & Casualty Company 1.00
USF RE Insurance Company 2.00
Vesta Fire Insurance Corporation 25.00
Winterthur Reinsurance Corporation of America 3.25
THROUGH SWIRE BLANCH EUROPE
Europa Re .75
Sirius International Insurance Corporation 1.25
</TABLE>
Page 1 of 3
<PAGE>
Third Excess Catastrophe Reinsurance (Continued)
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
SPS Reasurrance 1.50%
THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters
Per Signing Schedule 5.10
TOTAL 99.60% part of
100% share in the
interests and liabilities
of the "Reinsurer"
</TABLE>
Fourth Excess Catastrophe Reinsurance
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Allmerica Re, A Division of The Hanover Insurance Company 1.50%
Cat Limited 10.00
Continental Casualty Company 1.50
First Excess and Reinsurance Corporation 10.00
Hartford Re Company
(for Hartford Fire Insurance Company) 3.00
Nationwide Mutual Insurance Company 4.00
Renaissance Reinsurance Ltd. 4.00
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 2.00
Signet Star Reinsurance Company 2.00
Sydney Reinsurance Corporation 3.50
USF RE Insurance Company 3.00
Vesta Fire Insurance Corporation 25.00
Winterthur Reinsurance Corporation of America 2.50
THROUGH SWIRE BLANCH EUROPE
Europa Re 2.00
Mapfre Re Compania de Reaseguros, S.A. 2.50
Sirius International Insurance Corporation 1.25
SPS Reasurrance 1.50
</TABLE>
Page 2 of 3
<PAGE>
Fourth Excess Catastrophe Reinsurance (Continued)
REINSURERS PARTICIPATIONS
THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters and Companies
Per Signing Schedule(s) 15.06%
TOTAL 99.56% part of
100% share in the
interests and
liabilities
of the
"Reinsurer"
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Page 3 of 3
<PAGE>
(Revised: September 1, 1997)
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
EFFECTIVE: SEPTEMBER 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
Third Excess Catastrophe Reinsurance
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Allmerica Re, A Division of The Hanover Insurance Company 1.25%
AXA Reinsurance Company 7.50
Cat Limited 10.00
Continental Casualty Company 2.00
Everest Reinsurance Company 13.00
First Excess and Reinsurance Corporation 9.00
Nationwide Mutual Insurance Company 3.00
Patriot Re Corporation (for Various Lloyd's Underwriters) 2.00
Renaissance Reinsurance Ltd. 4.00
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 1.75
Signet Star Reinsurance Company 2.00
Sydney Reinsurance Corporation 4.25
United Fire & Casualty Company 1.00
USF RE Insurance Company 2.00
Vesta Fire Insurance Corporation 25.00
Winterthur Reinsurance Corporation of America 3.25
THROUGH SWIRE BLANCH EUROPE
Europa Re .75
Sirius International Insurance Corporation 1.25
</TABLE>
Page 1 of 3
<PAGE>
Third Excess Catastrophe Reinsurance (Continued)
REINSURERS PARTICIPATIONS
SPS Reasurrance 1.50%
THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters
Per Signing Schedule 5.10
TOTAL 99.60% part
of 100%
share in the
interests and
liabilities
of the
"Reinsurer"
Fourth Excess Catastrophe Reinsurance
<TABLE>
<CAPTION>
REINSURERS PARTICIPATIONS
<S> <C>
Allmerica Re, A Division of The Hanover Insurance Company 1.50%
Cat Limited 10.00
Continental Casualty Company 1.50
First Excess and Reinsurance Corporation 10.00
Hartford Re Company
(for Hartford Fire Insurance Company) 8.25
Nationwide Mutual Insurance Company 4.00
Renaissance Reinsurance Ltd. 4.00
St. Paul Reinsurance Management Corporation
(for St. Paul Fire and Marine Insurance Company) 2.00
Signet Star Reinsurance Company 2.00
Sydney Reinsurance Corporation 3.50
USF RE Insurance Company 3.00
Vesta Fire Insurance Corporation 25.00
Winterthur Reinsurance Corporation of America 2.50
THROUGH SWIRE BLANCH EUROPE
Europa Re 2.00
Mapfre Re Compania de Reaseguros, S.A. 2.50
Sirius International Insurance Corporation 1.25
SPS Reasurrance 1.50
</TABLE>
Page 2 of 3
<PAGE>
Fourth Excess Catastrophe Reinsurance (Continued)
REINSURERS PARTICIPATIONS
THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters and Companies
Per Signing Schedule(s) 15.06%
TOTAL 99.56% part of
100% share in the
interests and liabilities
of the "Reinsurer"
E. W. Blanch Co.
Reinsurance Services
3500 West 80th Street
Minneapolis, Minnesota 55431
Page 3 of 3
<PAGE>
ADDENDUM NO. 1
to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
all of Los Angeles, California
IT IS HEREBY AGREED, effective August 31, 1997, that paragraph A of Article II -
Term - shall be deleted and the following substituted therefor:
"A. This Contract shall become effective on September 1, 1996, with respect
to losses arising out of loss occurrences commencing on or after that
date, and shall remain in force until September 30, 1997, both days
inclusive.
The provisions of this Contract shall remain otherwise unchanged.
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Allmerica Re
A Division of
The Hanover Insurance Company
Bedford, New Hampshire
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Florham Park, New Jersey, this _______ day of ______________________199___.
_____________________________________________________
Allmerica Re, A Division of The Hanover Insurance Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
AXA Reinsurance Company
Wilmington, Delaware
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ____________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
New York, New York, this _______ day of _________________________ 199___.
_____________________________________________________
AXA Reinsurance Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Cat Limited
Hamilton, Bermuda
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Hamilton, Bermuda, this _______ day of _______________________199___.
_____________________________________________________
Cat Limited
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Continental Casualty Company
Chicago, Illinois
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _______________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Chicago, Illinois, this _______ day of _________________________199___.
_____________________________________________________
Continental Casualty Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Everest Reinsurance Company
A Delaware Corporation
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ____________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Warren, New Jersey, this _______ day of ________________________ 199___.
_____________________________________________________
Everest Reinsurance Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
First Excess and Reinsurance Corporation
Overland Park, Kansas
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ______________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Kansas City, Missouri, this _______ day of _________________________199___.
_____________________________________________________
First Excess and Reinsurance Corporation
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Hartford Fire Insurance Company
Hartford, Connecticut
by
Hartford Re Company
Hartford, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IT IS ALSO AGREED, effective September 1, 1997, with respect to losses arising
out of loss occurrences commencing on or after that date, that the Subscribing
Reinsurer's percentage
<PAGE>
shares in the interests and liabilities of the "Reinsurer" as set forth in the
attached Contract captioned above shall be increased as follows:
From 0.0% to 0.0% of the Third Excess Catastrophe Reinsurance
From 3.00% to 8.25% of the Fourth Excess Catastrophe Reinsurance
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _______________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
San Francisco, California, this _______ day of ________________________ 199___.
_____________________________________________________
Hartford Re Company
(for and on behalf of Hartford Fire Insurance Company)
<PAGE>
Addendum No. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Nationwide Mutual Insurance Company
Columbus, Ohio
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ______________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Columbus, Ohio, this _______ day of _____________________________199___.
_____________________________________________________
Nationwide Mutual Insurance Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Certain Underwriting Members of Lloyd's
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _________________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Skillman, New Jersey, this _______ day of ________________________199___.
_____________________________________________________
Patriot Re Corporation
(for and on behalf of Underwriters at Lloyd's
per Contract # __________)
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Renaissance Reinsurance Ltd.
Hamilton, Bermuda
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _____________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Hamilton, Bermuda, this _______ day of ___________________________199___.
_____________________________________________________
Renaissance Reinsurance Ltd.
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
St. Paul Fire and Marine Insurance Company
St. Paul, Minnesota
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ________________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
New York, New York, this _______ day of _______________________ 199___.
_____________________________________________________
St. Paul Fire and Marine Insurance Company
by St. Paul Re, Inc.
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Signet Star Reinsurance Company
Wilmington, Delaware
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _________________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Florham Park, New Jersey, this _______ day of _____________________ 199___.
_____________________________________________________
Signet Star Reinsurance Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Sydney Reinsurance Corporation
Philadelphia, Pennsylvania
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _____________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
New York, New York, this _______ day of _________________________ 199___.
_____________________________________________________
Sydney Reinsurance Corporation
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
United Fire & Casualty Company
Cedar Rapids, Iowa
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ______________________ 199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Cedar Rapids, Iowa, this _______ day of ___________________________ 199___.
_____________________________________________________
United Fire & Casualty Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
USF RE Insurance Company
Boston, Massachusetts
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _______________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Costa Mesa, California, this _______ day of _______________________199___.
_____________________________________________________
USF RE Insurance Company
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Vesta Fire Insurance Corporation
Birmingham, Alabama
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ______________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Birmingham, Alabama, this _______ day of __________________________199___.
_____________________________________________________
Vesta Fire Insurance Corporation
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Winterthur Reinsurance Corporation of America
New York, New York
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of __________________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
New York, New York, this _______ day of _________________________ 199___.
_____________________________________________________
Winterthur Reinsurance Corporation of America
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Europa Re
Cologne, Germany
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ____________________ 199___
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Cologne, Germany, this _______ day of __________________________ 199___.
_____________________________________________________
Europa Re
Europa Ruckversicherung
Aktiengesellschaft
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Mapfre Re Compania de Reaseguros, S.A
Madrid, Spain
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _______________________199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Madrid, Spain, this _______ day of ____________________________ 199___.
_____________________________________________________
Mapfre Re Compania de Reaseguros, S.A.
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Sirius International Insurance Corporation
Stockholm, Sweden
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ______________________ 199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Stockholm, Sweden, this _______ day of ___________________________ 199___.
_____________________________________________________
Sirius International Insurance Corporation
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
La Reunion Francaise
Paris, France
by
Societe Parisienne de Souscription
Paris, France
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED, effective July 1, 1997, that all rights, interests,
liabilities and obligations of the "Subscribing Reinsurer" under this Agreement
shall be transferred from La Reunion Francaise, Paris, France, by Societe
Parisienne de Souscription, Paris, France (hereinafter referred to as the
"Assignor") to SPS Reassurance, Paris, France (hereinafter referred to as the
"Assignee"). In accordance therewith, the Assignor shall assign, and the
Assignee shall assume, all of the rights, interests, liabilities and obligations
of the "Subscribing Reinsurer" under this Agreement. The Assignee shall then be
subject to all of the terms and conditions hereof, and the term "Subscribing
Reinsurer," wherever it is used herein, shall refer to SPS Reassurance, Paris,
France.
IT IS UNDERSTOOD AND AGREED that the Company consents to the foregoing transfer
of rights, interests, liabilities and obligations from the Assignor to the
Assignee, and further releases the
<PAGE>
Assignor from all unfulfilled liabilities and obligations which have arisen
under this Agreement and all liabilities and obligations which may arise in the
future under this Agreement.
IT IS ALSO AGREED that the "Novation Addendum," a copy of which is attached to
and forms part of this Addendum, shall be recognized as part of this Agreement,
effective July 1, 1997.
IT IS ALSO AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS ALSO AGREED that, in lieu of the provisions of the second paragraph of the
original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ________________________ 199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Paris, France, this _______ day of ___________________________________ 199___.
_____________________________________________________
La Reunion Francaise
Paris, France, this _______ day of ________________________________ 199___.
_____________________________________________________
SPS Reassurance
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Certain Underwriting Members of Lloyd's
shown in the Signing Schedule attached hereto
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the Company by its duly authorized representative has
executed this Addendum as of the date undermentioned at:
Los Angeles, California, this _______ day of __________________ 199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule
attached hereto.
<PAGE>
ADDENDUM NO. 1
to the
INTERESTS AND LIABILITIES AGREEMENT
of
Certain Insurance Companies
shown in the Signing Schedule(s) attached hereto
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the
Contract, effective August 31, 1997.
IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of
the original Interests and Liabilities Agreement, this Agreement shall expire on
September 30, 1997.
IN WITNESS WHEREOF, the Company by its duly authorized representative has
executed this Addendum as of the date undermentioned at:
Los Angeles, California, this _______ day of _______________________ 199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s)
attached hereto.
<PAGE>
TERMINATION ADDENDUM
to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
all of Los Angeles, California
and to the
INTERESTS AND LIABILITIES AGREEMENT
of
San Francisco Reinsurance Company
Novato, California
(hereinafter referred to as the "Subscribing Reinsurer")
attached thereto
IT IS HEREBY AGREED that this Contract, the Interests and Liabilities Agreement
and the Subscribing Reinsurer's share(s), as listed below, in the interests and
liabilities of the "Reinsurer" under the respective excess layers of reinsurance
provided in this Contract shall be terminated on August 31, 1997, with respect
to losses arising out of loss occurrences commencing after that date:
0.0% of the Third Excess Catastrophe Reinsurance
5.25% of the Fourth Excess Catastrophe Reinsurance
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of _______________________ 199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Novato, California, this _______ day of __________________________ 199___.
_____________________________________________________
San Francisco Reinsurance Company
<PAGE>
TERMINATION ADDENDUM
to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
all of Los Angeles, California
and to the
INTERESTS AND LIABILITIES AGREEMENT
of
Security Insurance Company of Hartford
Farmington, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")
attached thereto
IT IS HEREBY AGREED that this Contract, the Interests and Liabilities Agreement
and the Subscribing Reinsurer's share(s), as listed below, in the interests and
liabilities of the "Reinsurer" under the respective excess layers of reinsurance
provided in this Contract shall be terminated on August 31, 1997, with respect
to losses arising out of loss occurrences commencing after that date:
0.40% of the Third Excess Catastrophe Reinsurance
0.44% of the Fourth Excess Catastrophe Reinsurance
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Addendum as of the dates undermentioned at:
Los Angeles, California, this _______ day of ________________________ 199___.
_____________________________________________________
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Farmington, Connecticut, this _______ day of ______________________ 199___.
_____________________________________________________
Security Insurance Company of Hartford
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Hartford, Connecticut, this _______ day of _____________________________199___.
_____________________________________________________
Hartford Re Company
(for and on behalf of Hartford Fire Insurance Company)
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Nationwide Mutual Insurance Company
Columbus, Ohio
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
3.00% of the Third Excess Catastrophe Reinsurance
4.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Columbus, Ohio, this _______ day of ____________________________________199___.
_____________________________________________________
Nationwide Mutual Insurance Company
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Certain Underwriting
Members of Lloyd's
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
2.00% of the Third Excess Catastrophe Reinsurance
0% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Skillman, New Jersey, this _______ day of______________________________199___.
_____________________________________________________
Patriot Re Corporation
(for and on behalf of Underwriters at Lloyd's
per Contract # ____________)
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
Renaissance Reinsurance Ltd.
Hamilton, Bermuda
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
4.00% of the Third Excess Catastrophe Reinsurance
4.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Hamilton, Bermuda, this _______ day of________________________199___.
_____________________________________________________
Renaissance Reinsurance Ltd.
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
St. Paul Fire and Marine Insurance Company
St. Paul, Minnesota
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
1.75% of the Third Excess Catastrophe Reinsurance
2.00% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
New York, New York, this _______ day of ___________________________________
199___.
_____________________________________________________
St. Paul Fire and Marine Insurance Company
St. Paul Reinsurance Management Corporation,
Reinsurance Managers
<PAGE>
INTERESTS AND LIABILITIES AGREEMENT
of
San Francisco Reinsurance Company
Novato, California
(hereinafter referred to as the "Subscribing Reinsurer")
with respect to the
THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996
issued to and duly executed by
Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and
California General Underwriters Insurance Company, Inc.
All of Los Angeles, California
(hereinafter collectively referred to as the "Company")
The Subscribing Reinsurer hereby accepts the following percentage shares in the
interests and liabilities of the "Reinsurer" as set forth in the attached
Contract captioned above:
0% of the Third Excess Catastrophe Reinsurance
5.25% of the Fourth Excess Catastrophe Reinsurance
This Agreement shall become effective on September 1, 1996, and shall continue
in force until August 31, 1997, both days inclusive. However, if the
"Reinsurer" under the attached Contract sustains no loss from loss occurrences
commencing on or prior to May 31, 1997, this Agreement shall, upon notice from
the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may
also be terminated by the Company in accordance with paragraph B of Article II
of the Contract.
<PAGE>
The Subscribing Reinsurer's share in the attached Contract shall be separate and
apart from the shares of the other reinsurers, and shall not be joint with the
shares of the other reinsurers, it being understood that the Subscribing
Reinsurer shall in no event participate in the interests and liabilities of the
other reinsurers.
IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized
representative has executed this Agreement as of the date undermentioned at:
Novato, California, this _______ day of ________________________________199___.
_____________________________________________________
San Francisco Reinsurance Company
<PAGE>
EXHIBIT 10.24
MANAGEMENT AGREEMENT
--------------------
This Agreement is entered into on March 31, 1997, effective as of the 1st
day of January 1997, between Cimarron Insurance Company, Inc. hereinafter
referred to as Insurer, and Mercury General Corporation, hereinafter referred to
as Manager.
In consideration of the promises, conditions and covenants herein
contained, the parties agreed as follows:
1. The Manager promises to manage the Insurer, and to conduct on
their behalf any and all duties of management as shall be necessary for the
complete operation of the Insurer.
2. That Insurer promises and hereby delegates to the Manager all of
the duties of management which they are allowed to so delegate by the laws of
the State of Kansas, including but not limited to the following duties: to
issue and underwrite insurance policies, which the Insurer may be so authorized
to do by law, in accordance with the rules and regulations as delineated in the
underwriting manuals of the Insurer, settle and adjust any and all losses and
claims, defend lawsuits, establish premium rates, establish and choose sales
agents and brokers, determine agents' and brokers' commissions, prepare the
records necessary for the conduct of the insurance business, furnish all forms,
supplies and agents' manuals necessary for the conduct of the insurance business
and such other duties as mutually agreed upon by the parties.
3. That Manager promises to perform all of the operating functions on
behalf of the Insurer including but not be limited to the following:
A. To acquire, license and appoint sales agents and brokers for
the production of the insurance business of and for the Insurer, provided
1
<PAGE>
that the Insurer shall retain the right to refuse the appointment of any agent
or broker and the right to terminate any agent or broker.
B. To issue and underwrite policies on behalf of the Insurer and
to choose and obtain the necessary application and policy forms.
C. To furnish for Insurer all of the operating forms, printing
supplies, agents' manuals and any other related items which may become necessary
for the operation of the insurance business.
D. To pay on behalf of the Insurer all of their operating
expenses, including but not limited to rent, supplies, salaries of all
personnel, telephone, advertising costs, costs of settling and adjusting all
insurance claims, legal defense costs, court costs, costs of loss analysis,
accounting costs (other than auditing), premium collection costs; provided,
however, the Insurer shall pay, and be responsible for, the costs of management
fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid
loss adjustment expense, audit fees, assigned risk or similar assessments,
bureau fees, Fair Plan or similar assessments, directors' fees, agents'
commissions, reinsurance premiums, investment counsel fees, assessments by the
various state guarantee associations in the states in which Insurer is licensed,
membership fees in the National Association of Independent Insurers, any
assessments by that Association, political contributions, premiums paid for
insurance policies in which the Insurer is the beneficiary and owner, such as
fidelity bonds, taxes of all types and costs which may be levied on insurance
companies by the governmental authorities having jurisdiction over the same and
agents' bonuses (contingency commissions).
E. Such other operating functions as mutually agreed upon by the
parties.
2
<PAGE>
4. Manager shall be reimbursed monthly for all expenses incurred on
behalf of the Insurer. The parties may mutually agree to an alternate
reimbursement schedule, subject to the approval of the Kansas Insurance
Department. Manager shall provide an annual report showing all expenses
incurred and reimbursed during the prior years to enable Insurer to include such
information on any necessary regulatory filings.
5. The ownership and legal title to the insurance policies, insurance
policy records, data processing tapes, disks, programs and documentation, and
account records of the Insurer, compiled on behalf of Insurer by Manager, shall
remain in and with Insurer, however, Manager shall have access to such records
at all times and shall permit Manager to examine and copy any data in Insurer's
possession.
6. The term of this Agreement shall commence on January 1, 1997 and
shall continue until terminated as provided herein. Either party may terminate
this Agreement upon ninety (90) days prior written notice to the other party,
and any necessary notice to any applicable state insurance department. Upon
termination, Manager shall provide a final reimbursement invoice for the
services provided prior to termination, and Insurer shall pay such invoice
within thirty (30) days of receipt thereof.
This Agreement shall be governed by the laws of the State of Kansas.
This Agreement contains the entire agreement between the parties hereto and
no other agreement or understanding, verbal or otherwise, exists between the
parties except as expressly set forth herein.
The obligations of the Manager hereunder are not subject to assignment or
delegation except with the prior consent of Insurer, and prior notification to
the Kansas Commissioner of Insurance.
3
<PAGE>
For the purposes of this Agreement, Manager shall be considered an
independent contractor and not an agent or an employee of the Insurer.
IN WITNESS WHEREOF, we have set our hands and seals this 1st day of April
1997.
CIMARRON INSURANCE COMPANY, INC. MERCURY GENERAL CORPORATION
/s/ Stanley A. Dickey /s/ Michael D. Curtius
_____________________________ ___________________________
By: Stanley A. Dickey By: Michael D. Curtius
President President
/s/ Patricia Mullendore /s/ Judy Walters
_____________________________ ___________________________
By: Patricia Mullendore By: Judy Walters
Secretary Secretary
4
<PAGE>
MANAGEMENT AGREEMENT
--------------------
This Agreement is entered into on March 31, 1997, effective as of the 1st
day of January 1997, between American Fidelity Insurance Company hereinafter
referred to as Insurer, and Mercury General Corporation, hereinafter referred to
as Manager.
In consideration of the promises, conditions and covenants herein
contained, the parties agreed as follows:
1. The Manager promises to manage the Insurer, and to conduct on
their behalf any and all duties of management as shall be necessary for the
complete operation of the Insurer.
2. That Insurer promises and hereby delegates to the Manager all of
the duties of management which they are allowed to so delegate by the laws of
the State of Oklahoma, including but not limited to the following duties: to
issue and underwrite insurance policies, which the Insurer may be so authorized
to do by law, in accordance with the rules and regulations as delineated in the
underwriting manuals of the Insurer, settle and adjust any and all losses and
claims, defend lawsuits, establish premium rates, establish and choose sales
agents and brokers, determine agents' and brokers' commissions, prepare the
records necessary for the conduct of the insurance business, furnish all forms,
supplies and agents' manuals necessary for the conduct of the insurance business
and such other duties as mutually agreed upon by the parties.
3. That Manager promises to perform all of the operating functions on
behalf of the Insurer including but not be limited to the following:
A. To acquire, license and appoint sales agents and brokers for
the production of the insurance business of and for the Insurer, provided
1
<PAGE>
that the Insurer shall retain the right to refuse the appointment of any agent
or broker and the right to terminate any agent or broker.
B. To issue and underwrite policies on behalf of the Insurer and
to choose and obtain the necessary application and policy forms.
C. To furnish for Insurer all of the operating forms, printing
supplies, agents' manuals and any other related items which may become necessary
for the operation of the insurance business.
D. To pay on behalf of the Insurer all of their operating
expenses, including but not limited to rent, supplies, salaries of all
personnel, telephone, advertising costs, costs of settling and adjusting all
insurance claims, legal defense costs, court costs, costs of loss analysis,
accounting costs (other than auditing), premium collection costs; provided,
however, the Insurer shall pay, and be responsible for, the costs of management
fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid
loss adjustment expense, audit fees, assigned risk or similar assessments,
bureau fees, Fair Plan or similar assessments, directors' fees, agents'
commissions, reinsurance premiums, investment counsel fees, assessments by the
various state guarantee associations in the states in which Insurer is licensed,
membership fees in the National Association of Independent Insurers, any
assessments by that Association, political contributions, premiums paid for
insurance policies in which the Insurer is the beneficiary and owner, such as
fidelity bonds, taxes of all types and costs which may be levied on insurance
companies by the governmental authorities having jurisdiction over the same and
agents' bonuses (contingency commissions).
E. Such other operating functions as mutually agreed upon by the
parties.
2
<PAGE>
4. Manager shall be reimbursed monthly for all expenses incurred on
behalf of the Insurer. The parties may mutually agree to an alternate
reimbursement schedule. Manager shall provide an annual report showing all
expenses incurred and reimbursed during the prior years to enable Insurer to
include such information on any necessary regulatory filings.
5. The ownership and legal title to the insurance policies, insurance
policy records, data processing tapes, disks, programs and documentation, and
account records of the Insurer, compiled on behalf of Insurer by Manager, shall
remain in and with Insurer, however, Manager shall have access to such records
at all times and shall permit Manager to examine and copy any data in Insurer's
possession.
6. The term of this Agreement shall commence on January 1, 1997 and
shall continue until terminated as provided herein. Either party may terminate
this Agreement upon ninety (90) days prior written notice to the other party,
and any necessary notice to any applicable state insurance department. Upon
termination, Manager shall provide a final reimbursement invoice for the
services provided prior to termination, and Insurer shall pay such invoice
within thirty (30) days of receipt thereof.
This Agreement shall be governed by the laws of the State of Oklahoma.
This Agreement contains the entire agreement between the parties hereto and
no other agreement or understanding, verbal or otherwise, exists between the
parties except as expressly set forth herein.
The obligations of the Manager hereunder are not subject to assignment or
delegation except with the prior consent of Insurer.
For the purposes of this Agreement, Manager shall be considered an
independent contractor and not an agent or an employee of the Insurer.
3
<PAGE>
IN WITNESS WHEREOF, we have set our hands and seals this 1st day of April
1997.
AMERICAN FIDELITY
INSURANCE COMPANY MERCURY GENERAL CORPORATION
/s/ Stanley A. Dickey /s/ Michael D. Curtius
_____________________________ ___________________________
By: Stanley A. Dickey By: Michael D. Curtius
President President
/s/ Patricia Mullendore /s/ Judy Walters
_____________________________ ___________________________
By: Patricia Mullendore By: Judy Walters
Secretary Secretary
4
<PAGE>
MANAGEMENT AGREEMENT
--------------------
This Agreement is entered into on March 31, 1997, effective as of the 1st
day of January 1997, between AFI Management Company, Inc. hereinafter referred
to as Company, and Mercury General Corporation, hereinafter referred to as
Manager.
In consideration of the promises, conditions and covenants herein
contained, the parties agreed as follows:
1. The Manager promises to manage the Company, and to conduct on
their behalf any and all duties of management as shall be necessary for the
complete operation of the Company.
2. That Company promises and hereby delegates to the Manager all of
the duties of management which they are allowed to so delegate by the laws of
the State of Texas, including, but not limited to, defend lawsuits, establish
and choose agents and brokers, determine agent commissions, prepare the records
necessary for the conduct of its business, furnish all forms, supplies and other
material necessary for the conduct of its business.
3. That Manager promises to perform all of the operating functions on
behalf of the Company, including but not limited to the payment on behalf of the
Company all of its operating expenses, including but not limited to rent,
supplies, salaries of all personnel, telephone, advertising costs, legal defense
costs, court costs, accounting costs (other than auditing), provided, however,
the Company shall pay and be responsible for the costs of management fees,
reserves for losses, audit fees, assessments due as the result of licensing of
the Company, sales taxes, agent commissions, investment counsel fees, membership
fees, political contributions, premiums paid for insurance policies in which the
1
<PAGE>
Company is the beneficiary and owner, taxes of all types and costs.
4. Manager shall be reimbursed monthly for all expenses incurred on
behalf of the Company. The parties may mutually agree to an alternate
reimbursement schedule. Manager shall provide an annual report showing all
expenses incurred and reimbursed during the prior years to enable Company to
include such information on any necessary regulatory filings.
5. The ownership and legal title to the insurance policies, insurance
policy records, data processing tapes, disks, programs and documentation, and
account records of the Company, compiled on behalf of Company by Manager, shall
remain in and with Company, however, Manager shall have access to such records
at all times and shall permit Manager to examine and copy any data in Company's
possession.
6. The term of this Agreement shall commence on January 1, 1997 and
shall continue until terminated as provided herein. Either party may terminate
this Agreement upon ninety (90) days prior written notice to the other party,
and any necessary notice to any applicable state insurance department. Upon
termination, Manager shall provide a final reimbursement invoice for the
services provided prior to termination, and Company shall pay such invoice
within thirty (30) days of receipt thereof.
This Agreement shall be governed by the laws of the State of Texas.
This Agreement contains the entire agreement between the parties hereto and
no other agreement or understanding, verbal or otherwise, exists between the
parties except as expressly set forth herein.
The obligations of the Manager hereunder are not subject to assignment or
2
<PAGE>
delegation except with the prior consent of Company.
For the purposes of this Agreement, Manager shall be considered an
independent contractor and not an agent or an employee of the Manager.
IN WITNESS WHEREOF, we have set our hands and seals this 1st day of April
1997.
AFI MANAGEMENT COMPANY MERCURY GENERAL CORPORATION
/s/ Stanley A. Dickey /s/ Michael D. Curtius
_____________________________ ___________________________
By: Stanley A. Dickey By: Michael D. Curtius
President President
/s/ Patricia Mullendore /s/ Judy Walters
_____________________________ ___________________________
By: Patricia Mullendore By: Judy Walters
Secretary Secretary
3
<PAGE>
Exhibit 21.1
SUBSIDIARIES - MERCURY GENERAL CORPORATION
Mercury Casualty Company (100% owned)
Mercury Insurance Company (100% owned by Mercury Casualty Company)
California General Underwriters Insurance Company, Inc. (100% owned by Mercury
Casualty Company)
California Automobile Insurance Company (100% owned)
Mercury Insurance Company of Georgia (100% owned by California Automobile
Insurance Company)
Mercury Indemnity Company of Georgia (100% owned)
Mercury Insurance Company of Illinois (100% owned)
Mercury Indemnity Company of Illinois (100% owned by Mercury Insurance Company
of Illinois)
American Mercury Insurance Company (100% owned)
Cimarron Insurance Company (100% owned by American Mercury Ins. Company)
American Mercury Lloyds Insurance Company *
AFI Management Company, Inc. (100% owned by American Fidelity Ins. Company) **
* Controlled by Mercury General Corporation through its attorney-in-fact, AFI
Management Company, Inc.
** Attorney-in-fact for American Fidelity Lloyds Insurance Co., whose results
are consolidated with Mercury General Corporation.
<PAGE>
EXHIBIT 23.1
The Board of Directors
Mercury General Corporation
We consent to incorporation by reference in the registration statement No.
333-01583 on Form S-8 of Mercury General Corporation of our report dated
February 13, 1998, relating to the consolidated balance sheets of Mercury
General Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
and related schedules for each of the years in the three-year period ended
December 31, 1997, which reports appear in the December 31, 1997 annual report
on Form 10-K of Mercury General Corporation
KPMG PEAT MARWICK LLP
Los Angeles, California
MARCH 5, 1998
<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 REFERENE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 1,214,986
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 173,522
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,448,248
<CASH> 3,011
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 57,264
<TOTAL-ASSETS> 1,725,532
<POLICY-LOSSES> 409,061
<UNEARNED-PREMIUMS> 309,376
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 75,000
0
0
<COMMON> 47,412
<OTHER-SE> 752,180
<TOTAL-LIABILITY-AND-EQUITY> 1,725,532
1,031,280
<INVESTMENT-INCOME> 86,812
<INVESTMENT-GAINS> 4,973
<OTHER-INCOME> 4,881
<BENEFITS> 654,729
<UNDERWRITING-AMORTIZATION> 224,883
<UNDERWRITING-OTHER> 33,579
<INCOME-PRETAX> 209,779
<INCOME-TAX> 53,473
<INCOME-CONTINUING> 156,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,306
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.82
<RESERVE-OPEN> 311,754
<PROVISION-CURRENT> 641,911
<PROVISION-PRIOR> 12,818
<PAYMENTS-CURRENT> 373,823
<PAYMENTS-PRIOR> 206,390
<RESERVE-CLOSE> 386,270
<CUMULATIVE-DEFICIENCY> (12,818)
</TABLE>
