<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, 1998 Commission File No. 0-3681
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
California 95-221-1612
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4484 Wilshire Boulevard, Los Angeles, California 90010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (323)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 8, 1999, was approximately $888,043,000
(based upon the closing sales price of such date, as reported by the Wall Street
Journal).
At March 8, 1999, the Registrant had issued and outstanding an aggregate of
54,684,438 shares of its Common Stock.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders of Registrant to be held on May 12, 1999 are incorporated herein by
reference into Part III hereof.
<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 a number of states, principally
California. During 1998, private passenger automobile insurance and commercial
automobile insurance accounted for 91.7% and 4.1%, respectively, of the total
Company's direct premiums written. The percentage of direct automobile premiums
written during 1998 by state was 93.9% in California, 2.0% in Oklahoma, 1.3% in
Texas, 1.0% in Georgia, 0.9% in Illinois, 0.8% in Florida and a negligible
amount in Kansas. 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 4.2% of
direct written premiums in 1998, of which approximately 50% was in commercial
lines.
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 $100,000 per person,
$300,000 per accident and $50,000 for property damage or less.
In 1999, A.M. Best & Co. ("A.M. Best") assigned a rating of A+ (Superior)
to all of the Company's insurance subsidiaries except American Mercury Insurance
Company ("AMIC") and American Mercury Lloyds Insurance Company ("AML"). 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). AMIC and AML,
which accounted for less than 6% of the Company's 1998 net written premiums,
were rated A- (Excellent) in 1999 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 in Clearwater, Florida. The non-California
subsidiaries maintain offices in Vernon Hills, Illinois, Atlanta, Georgia,
Oklahoma City, Oklahoma and Cimarron, Kansas. The Company has approximately
2,200 employees.
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
Company
2
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("Mercury Casualty"), Mercury Insurance Company ("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 were 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 and
American Mercury Lloyds Insurance Company, respectively. In June 1998, Cimarron
Insurance Company was sold for cash. Cimarron's results, which are not material
to the Company's operations, are included in the Company's 1998 operating
results up to the sale date.
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 prior approval by the California Department of Insurance ("DOI")
since November 1989. The Company uses its own extensive data base to establish
rates and classifications. The California DOI has in effect rating factor
regulations that influence the weight the Company ascribes to various
classifications of data.
At December 31, 1998, "good drivers" (as defined by the California
Insurance Code) accounted for approximately 74% of all voluntary private
passenger automobile policies in force in California, while the higher risk
categories accounted for approximately 26%. The renewal rate in California (the
rate of acceptance of offers to renew) averages approximately 95%.
In October 1998, the Company began offering a monthly pay policy through
its California Automobile Insurance Company subsidiary targeted at higher risk
drivers who do not fall into existing risk classifications. An insignificant
amount of this business was in-force at December 31, 1998.
The Company's Oklahoma and Texas private passenger automobile business in
force, underwritten through AMI, is primarily standard and preferred risks. AMI
3
<PAGE>
began offering a non-standard policy during 1998 in Texas. The amount of non-
standard policies in force at December 31, 1998 was insignificant.
The Company's Florida private passenger automobile business in force,
underwritten by Mercury Casualty Company, is primarily standard and preferred
risks.
Production and Servicing of Business
The Company sells its policies through more than 1,700 independent agents,
of which approximately 800 are located in California, approximately 300 are
located in Florida and approximately 540 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 19%, 18% and 17% during 1998, 1997 and
1996, respectively, of the Company's total direct premiums written. This agency
was sold during 1998 to a large national broker. The buyer has informed the
Company that they intend to continue producing business for the Company. 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 1998 total commissions and bonuses incurred averaged
16.7% of direct premiums written. The Company is not responsible for any of
its agents' expenses.
In April 1998, the Company began its first major radio and billboard
advertising campaign in California to supplement its existing newspaper and
direct mail advertising campaigns. The newspaper campaign has been in place
since the fourth quarter 1995 and has met the Company's expectations. The cost
of the newspaper program is primarily borne by the Company's agents. The cost
of the radio and billboard campaign is primarily borne by the Company. Although
the radio and billboard campaign have not met Company expectations, the Company
intends to continue the program in the current competitive climate (See
Competitive Conditions).
Claims
Claims operations are conducted by the Company. The claims staff in
California, Georgia, Illinois, Florida 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.
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
4
<PAGE>
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.
5
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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,
------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Net reserves for losses and loss adjustment
expenses, beginning of year........................ $386,270 $311,754 $250,990
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................................ 693,877 641,911 505,726
Increase (decrease) in provision for
Insured events of prior years............... (9,409) 12,818 (3,868)
------ ------ ------
Total incurred losses and loss adjustment
expenses.................................. 684,468 654,729 501,858
------- ------- -------
Payments:
Losses and loss adjustment expenses attribu-
table to insured events of the current
year......................................... 437,612 373,823 298,099
Losses and loss adjustment expenses attribu-
table to insured events of prior years....... 247,310 206,390 167,226
------- ------- -------
Total payments............................... 684,922 580,213 465,325
------- ------- -------
Net reserves for losses and loss adjustment
expenses at the end of the period................... 385,816 386,270 311,754
Reinsurance recoverable.............................. 20,160 22,791 24,931
------- ------- -------
Gross liability at end of year....................... $405,976 $409,061 $336,685
======= ======= =======
</TABLE>
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.
Losses incurred in 1998 include approximately $0.5 million of adverse
development related to acquisition date loss reserves of AMI. As per guidance
provided by Financial Accounting Standards Board (FASB) release EITF D-54, the
Company has recorded the effects of the reserve guarantee separately as a
component of other receivables and other income rather than netting the effects
directly against the loss reserve and loss expense accounts.
6
<PAGE>
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,
---------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Reserves reported on a SAP basis.........$385,816 $386,270 $311,754
Reinsurance recoverable.................. 20,160 22,791 24,931
-------- -------- --------
Reserves reported on a GAAP basis........$405,976 409,061 $336,685
======== ======== ========
</TABLE>
Under SAP reserves are stated net of reinsurance recoverable in contrast to
GAAP where reserves are stated gross of reinsurance recoverable.
The following table represents the development of loss reserves for the
period 1988 through 1998. 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, 1998.
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
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 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for
losses and loss
adjustment expenses. $241,037 $291,408 $301,354 $280,157 $239,203 $214,525 $223,392 $250,990 $311,754 $386,270 $385,816
Paid (cumulative)
as of:
One year later..... 139,874 167,850 181,781 151,866 135,188 143,272 145,664 167,226 206,390 247,310
Two years later.... 195,453 227,503 238,030 197,640 184,119 187,641 198,967 225,158 283,914
Three years later.. 218,335 249,371 254,884 213,824 197,371 204,606 214,403 248,894
Four years later... 226,384 256,659 261,058 218,067 201,365 207,704 219,596
Five years later... 229,168 259,147 263,011 220,057 202,383 209,930
Six years later.... 229,773 259,781 262,741 220,313 203,578
Seven years later.. 229,815 259,769 262,770 221,098
Eight years later.. 229,693 259,769 263,527
Nine years later... 229,793 260,444
Ten years later.... 230,286
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves re-estimated as of:
One year later.....$230,249 $269,934 $285,212 $230,991 $204,479 $204,451 $216,684 $247,122 $324,572 $376,861
Two years later.....233,607 269,652 265,618 218,404 204,999 207,089 222,861 254,920 329,210
Three years later...234,757 259,635 259,624 220,620 203,452 210,838 221,744 257,958
Four years later....228,909 256,694 264,259 221,118 204,603 210,890 222,957
Five years later....228,326 260,365 264,127 221,264 203,705 211,192
Six years later.....230,102 260,402 263,336 220,721 204,161
Seven years later...229,998 260,098 263,045 220,974
Eight years later...229,809 260,031 263,341
Nine years later....229,882 260,233
Ten years later.....230,081
Net Cumulative Redundancy
(deficiency)....... 10,956 31,175 38,013 59,183 35,042 3,333 435 (6,968) (17,456) 9,409
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Gross liability - end of year 240,183 215,301 227,499 253,546 336,685 409,061 405,976
Reinsurance recoverable (980) (776) (4,107) (2,556) (24,931) (22,791) (20,160)
------- ------- ------- ------- ------- ------- -------
Net liability - end of year 239,203 214,525 223,392 250,990 311,754 386,270 385,816
======= ======= ======= ======= ======= ======= =======
Gross re-estimated liability - latest 209,907 218,013 235,230 266,973 356,066 400,981
Re-estimated recoverable - latest (5,746) (6,821) (12,273) (9,015) (26,856) (24,120)
------- ------- ------- ------- ------- -------
Net re-estimated liability - latest 204,161 211,192 222,957 257,958 329,210 376,861
======= ======= ======= ======= ======= =======
Gross cumulative redundancy (deficiency) 30,276 (2,712) (7,731) (13,427) (19,381) 8,080
======= ======= ======= ======= ======= =======
</TABLE>
For the calendar year 1997, the Company's previously estimated loss
reserves produced a redundancy. The Company attributes the favorable loss
development primarily to the effect of Proposition 213, a California initiative
passed in November 1996 that prevents uninsured motorists, drunk drivers and
fleeing felons from collecting awards for "pain and suffering." See Regulations
- -California Financial Responsibility Law. This new law produced an overall
reduction in loss severity for calendar year 1997. In addition, a new law,
effective January 1, 1997 requiring proof of insurance before registration of a
motor vehicle resulted in a much smaller pool of uninsured motorists, thereby
decreasing the frequency of uninsured motorists claims. See Regulations-
California Financial Responsibility Law.
For the calendar years 1995 and 1996, the Company's previously estimated
loss reserves produced deficiencies. These deficiencies relate to increases in
the Company's ultimate estimates for loss adjustment expenses which are based
principally on the Company's actual experience. The adverse development on such
reserves reflects 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
"Royal Globe" doctrine, which, since 1978, had permitted third party plaintiffs
8
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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,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loss Ratio........................... 61.1% 63.5% 66.6% 67.8% 68.4%
Expense Ratio........................ 26.3 24.7 24.0 24.0 24.6
---- ----- ---- ---- ----
Combined Ratio....................... 87.4% 88.2% 90.6% 91.8% 93.0%
==== ===== ==== ==== ====
Industry combined ratio (all
writers) (1)....................... 99.7%(2) 99.5% 101.0% 101.3% 101.3%
Industry combined ratio (excluding
direct writers) (1)................ N.A. 100.1% 102.6% 102.0% 101.3%
- ------------------------------------
</TABLE>
(1) Source: A.M. Best, Aggregates & Averages (1995 through 1998), for all
property and casualty insurance companies (private passenger automobile
line only, after policyholder dividends).
(2) Source: A.M. Best, "Best's Review, January 1999," "Review Preview."
(N.A.) Not available.
9
<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,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C>
Net premiums written..... $1,144,051 $1,086,241 $795,873 $636,590 $550,838
Policyholders' surplus... $ 767,223 $ 679,359 $594,799 $479,114 $411,898
Ratio.................... 1.5 to 1 1.6 to 1 1.3 to 1 1.3 to 1 1.3 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, 1998. Each of the companies exceeded the highest level of minimum required
capital.
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. However, sales of securities are undertaken, with
resulting gains or losses, in order to enhance after-tax yield and keep the
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 79% 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
10
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Company's bond holdings was AA- at December 31, 1998.
The nominal average maturity of the bond portfolio, was 16.6 years at
December 31, 1998, but the call-adjusted average maturity of the portfolio is
shorter, approximately 7.3 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
5.8 years at December 31, 1998. 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. The Company continually evaluates the recoverability of
its investment holdings. 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. 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, 1998.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995 1994
----------- ----------- --------- --------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Averaged invested assets (includes
short-term cash investments).(2)................ $1,474,534 $1,262,925 $975,058 $827,861 $727,866
Net investment income:
Before income taxes....................... 96,169 86,812 70,180 62,964 54,586
After income taxes........................ 87,199 77,917 63,371 57,035 49,787
Average annual return on investments:
Before income taxes....................... 6.5% 6.9% 7.2% 7.6% 7.5%
After income taxes........................ 5.9% 6.2% 6.5% 6.9% 6.8%
Net realized investment gains
(losses) after income taxes..................... (2,552) 3,232 (2,062) 681 (6,485)
Net increase (decrease) in unrealized gains on
all investments after income taxes.............. $ 5,065 $ 27,175 $ (6,271) $ 37,960 $(36,503)
</TABLE>
(1) Includes AMI for the month of December 1996 and the full years 1997 and
1998.
(2) Fixed maturities at cost, equities at market.
11
<PAGE>
The following table sets forth the composition of the investment portfolio
of the Company at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------- --------- -------- -------- -------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxable Bonds............. $ 28,339 $ 29,163 $ 50,096 $ 50,662 $ 76,494 $ 76,113
Tax-Exempt State and
Municipal Bonds.......... 1,174,630 1,251,475 1,021,259 1,085,613 781,586 808,761
Sinking Fund Preferred
Stocks................... 42,471 44,270 76,239 78,711 66,713 69,234
---------- --------- --------- --------- ---------- ----------
Total Fixed Maturity
Investments........... 1,245,440 1,324,908 1,147,594 1,214,986 924,793 954,108
Equity Investments incl.
Perpetual Preferred
Stocks................... 220,449 219,745 169,943 173,522 148,264 148,112
Short-term Cash Invest-
ments.................... 45,992 45,992 59,740 59,740 66,067 66,067
---------- ---------- ---------- ---------- ---------- ----------
Total Investments......... $1,511,881 $1,590,645 $1,377,277 $1,448,248 $1,139,124 $1,168,287
========== ========== ========== ========== ========== ==========
</TABLE>
At December 31, 1998, the Company had a net unrealized gain on all investments
of $78,764,000 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 regularly published statistical
compilations, the Company in 1998 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. Some of the major writers in California have recently instituted
rate cuts and most competitors have instituted one or more rate cuts over the
last twenty-four months. In addition, many competitors have increased their
marketing efforts.
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
12
<PAGE>
lowest-priced insurers doing business in California according to surveys
conducted by the California DOI. In the most recent survey conducted in 1998,
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."
The Company encounters similar competition in each state in which it
operates outside California.
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.
This treaty was replaced with Swiss Re effective January 1, 1999. The new
treaty provides $750,000 coverage in excess of $250,000 for each risk subject to
a maximum of $2,250,000 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.
The Company maintains treaty reinsurance with Swiss Re, effective October
1, 1998, where risks written under personal umbrella policies are ceded to Swiss
Re on a 100% quota share basis. The maximum coverage is $5 million per risk.
Prior to 1998, the Company maintained catastrophe reinsurance for property
and automobile physical damage business. Effective October 1, 1998, the Company
did not renew this catastrophe reinsurance. The reinsurance program was not
renewed because the Company believes it has adequate capitalization to absorb
catastrophe losses in these lines. In addition, the Company expects a
significant reduction in its catastrophe exposure from earthquakes due to the
placement, beginning in the second quarter of 1998, of earthquake risks written
in conjunction with homeowners policies, with the California Earthquake
Authority (CEA). See Regulation - California Earthquake Authority.
13
<PAGE>
ERC reinsures AMI through working layer treaties for property and casualty
losses in excess of $200,000. 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, 1997. 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, Oklahoma and Florida 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,
1997. While the audit was completed during the fall of 1998, the Georgia DOI
has not yet issued the final examination reports. The Company does not
anticipate any audit recommendations that would change the statutory financial
statements as filed. The Illinois DOI conducted an examination of Mercury
Insurance Company of Illinois and Mercury Indemnity Company of Illinois as of
December 31, 1995.
14
<PAGE>
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 1998 and 1997, those contributions amounted to
$1,137,000 and $96,000, respectively. The Company believes in supporting the
political process and intends to continue to make such contributions in amounts
which it determines to be 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 and dividends defined to be of an
"extraordinary" type may not be effected if the California DOI disapproves the
transaction within 30 days after notice. Such transactions include, but are not
limited to, sales, purchases, exchanges, loans and extensions of credit, and
investments, in the net aggregate, involving more than the lesser of 3% of the
Company's admitted assets or 25% of surplus as to policyholders, as of the
preceding December 31. 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' 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
15
<PAGE>
"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 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 0.7% of the direct automobile insurance
premium written by the Company was for assigned risk business. In 1998,
assigned risks represented 0.4% of total automobile direct premiums written and
0.5% 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. The Commissioner has approved a rate decrease of 28.3%
effective February 1, 1999. The Company is prepared for an increase in the
number of assignments based on the rate decrease. However, the magnitude of the
increase in new assignments is difficult to predict because of the overall
competitive climate of the voluntary insurance market.
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,
16
<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 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 enacted 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 renewal experience of this new business has been similar to that of the
Company's existing 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.
17
<PAGE>
California Earthquake Authority
- -------------------------------
The California Earthquake Authority (CEA) is a Quasi-Governmental
organization that was established to provide a market for earthquake coverage to
California homeowners. During the second quarter of 1998, the Company began
placing all new and renewal earthquake coverage offered with its homeowners
policy through the California Earthquake Authority. The Company receives a
small fee for placing business with the CEA.
Upon the occurrence of a major seismic event, the CEA has the ability to
assess participating companies for losses. These assessments are made after CEA
capital has been expended and are based upon each company's participation
percentage multiplied by the amount of the total assessment. Based upon Mercury
Casualty Company's participation percentage, and recently published statistical
information from the CEA, the Company, at December 31, 1998, estimates its
assessment exposure to a "Northridge" - type earthquake to be approximately $3.2
million and its maximum total exposure to CEA assessments to be approximately
$6.5 million.
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 77% of the
facility and leases the remaining office space to others.
The Company leases all of its other office space. 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.
18
<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, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
George Joseph 77 Chairman of the Board and Chief
Executive Officer
Michael D. Curtius 48 President and Chief Operating Officer
Cooper Blanton, Jr. 72 Executive Vice President
Bruce E. Norman 50 Senior Vice President in charge of
Marketing
Joanna Y. Moore 43 Vice President and Chief Claims Officer
Kenneth G. Kitzmiller 52 Vice President in charge of Underwriting
Gabriel Tirador 34 Vice President and Chief Financial Officer
Judy A. Walters 52 Vice President - Corporate Affairs and
Secretary
Richard Glassman 41 Vice President - Information Systems
</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. In January 1999 he was named Chairman of the Board of AMIC.
Mr. Blanton has over 40 years of experience in underwriting and other aspects of
the property and casualty insurance business.
Mr. Norman, Senior Vice President in charge of Marketing, has been employed
by the Company since 1971. Mr. Norman was named to this position in February
1999, and has been a Vice President since October 1985 and a Vice President of
Mercury Casualty since 1983. Mr. Norman has supervised the selection and
19
<PAGE>
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 twelve 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. Ms. Walters was named Vice President - Corporate
Affairs in June 1998.
Mr. Glassman has been employed by Mercury since February 1993. In August
1995 he was appointed Assistant Vice President and assumed the position of
Manager of Information Services, which he had been directing since earlier that
year. In June 1998, Mr. Glassman was appointed Vice President - Information
Systems. He has a vast background in technology, sales and marketing.
PART II
Item 5. Market for the Registrant's Common Equity and Related Security
--------------------------------------------------------------
Holder Matters
--------------
Price Range of Common Stock
The common stock is traded on the New York Stock Exchange (symbol: MCY).
The following table shows the high and low sales prices per share in each
quarter during the past two years as reported in the consolidated transaction
reporting system. The quotations have been adjusted for a two-for-one stock
split that was effective September 16, 1997.
<TABLE>
<CAPTION>
1997 High Low
---- ---
<S> <C> <C>
1st Quarter......................... $32.750 $26.125
2nd Quarter......................... $38.094 $29.250
3rd Quarter......................... $45.875 $36.000
4th Quarter......................... $55.500 $40.750
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
1998 High Low
---- ---
<S> <C> <C>
1st Quarter......................... $63.625 $46.000
2nd Quarter......................... $66.313 $58.250
3rd Quarter......................... $69.438 $36.563
4th Quarter......................... $45.625 $33.250
1999
1st Quarter (January 1 - March 8)... $45.500 $32.938
</TABLE>
Dividends
Following the public offering of its common stock in November 1985, the
Company has paid regular quarterly dividends on its common stock. During 1998
and 1997, the Company paid dividends on its common stock of $0.70 per share and
$0.58 per share, respectively. The 1997 per share amount is adjusted to reflect
a two-for-one stock split in September 1997. On February 5, 1999, the Board of
Directors declared a $.21 quarterly dividend ($.84 annually) payable on March
31, 1999 to stockholders of record on March 17, 1999.
The common stock dividend rate has been increased fifteen 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
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 1999 of up to approximately $98
million. See Note 10 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 8, 1999 was 255. The approximate number of beneficial holders as of
March 8, 1999 was 9,197 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,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Data:
Premiums earned..................................... $1,121,584 $1,031,280 $754,724 $616,326 $529,390
Net investment income............................... 96,169 86,812 70,180 62,964 54,586
Realized investment gains(losses)................... (3,926) 4,973 (3,173) 1,048 (9,853)
Realized gain from sale of
subsidiary 2,586 -- -- -- --
Other............................................... 5,710 4,881 3,233 3,341 3,123
---------- ---------- -------- -------- --------
Total Revenues................................... 1,222,123 1,127,946 824,964 683,679 577,246
---------- ---------- -------- -------- --------
Losses and loss adjustment
expenses.......................................... 684,468 654,729 501,858 416,556 360,557
Policy acquisition costs............................ 252,592 224,883 160,019 128,743 112,682
Other operating expenses............................ 44,941 33,579 24,493 22,017 20,566
Interest............................................ 4,842 4,976 2,004 2,040 1,025
---------- ---------- -------- -------- --------
Total Expenses................................... 986,843 918,167 688,374 569,356 494,830
---------- ---------- -------- -------- --------
Income before income taxes.......................... 235,280 209,779 136,590 114,323 82,416
Income taxes........................................ 57,754 53,473 30,826 24,022 16,121
---------- ---------- -------- -------- --------
Net Income....................................... $ 177,526 $ 156,306 $105,764 $ 90,301 $ 66,295
========== ========== ======== ======== ========
Per Share Data:
Basic earnings per share *.......................... $ 3.23 $ 2.84 $ 1.93 $ 1.65 $ 1.22
========== ========== ======== ======== ========
Diluted earnings per share *........................ 3.21 2.82 1.92 1.65 1.21
========== ========== ======== ======== ========
Dividends paid *.................................... $ .70 $ .58 $ .48 $ .40 $ .35
========== ========== ======== ======== ========
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments................................... $1,590,645 $1,448,248 $1,168,287 $923,194 $751,614
Premiums receivable................................. 107,950 104,216 83,748 58,902 48,741
Total assets........................................ 1,877,025 1,725,532 1,419,927 1,081,656 911,693
Unpaid losses and loss
adjustment expenses................................ 405,976 409,061 336,685 253,546 227,499
Unearned premiums................................... 327,129 309,376 260,878 168,404 148,654
Notes payable....................................... 78,000 75,000 75,000 25,000 25,000
Deferred income tax
liability (asset).................................. 22,639 19,722 6,349 10,158 (10,190)
Shareholders' equity................................ 917,375 799,592 641,222 565,188 457,161
Book value per share*............................... 16.80 14.51 11.69 10.34 8.38
</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 operates primarily in the state of California, which was the
only state it produced business in prior to 1990. The Company expanded its
operations into Georgia and Illinois in 1990. With the acquisition of American
Fidelity Insurance Group (AFI)in December 1996, now American Mercury Insurance
Group (AMI), the Company expanded into the states of Oklahoma and Texas. The
Company further expanded its operations into the state of Florida during 1998.
During 1998, approximately 92% 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, October 1,
1997, April 1, 1998 and November 15, 1998. The rate change made April 1, 1998
reduced rates by approximately 7% and was primarily made to improve Mercury's
competitive position in the marketplace. Except for the April 1, 1998 rate
change, 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 change made
effective May 1, 1994 resulted in a substantial increase in new business being
submitted to the Company. The subsequent rate modifications have allowed the
Company to maintain ongoing growth in policy count. Since March 31, 1994,
Private Passenger Automobile ("PPA") policies in force in California have
increased from approximately 300,000 to 743,000 at December 31, 1998, 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
of driving experience, (3) miles driven per year and (4) whatever optional
factors are determined by the Insurance Commissioner to have a substantial
23
<PAGE>
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 Company submitted a proposed rating plan in response to these
regulations in March 1997. The Company's plan was approved by the California DOI
and became effective October 1, 1997. Although the rate changes produced some
minor dislocations, implementation of the new plan did not have a material
effect on the Company's overall competitive position or its profitability.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
---------------------------------------------------------------------
Premiums earned in 1998 of $1,121.6 million increased 8.8%, reflecting unit
growth which was somewhat offset by reduced average premiums per policy. The
reduction in average premium per policy was primarily the result of the 7% rate
decrease taken for California business in April 1998. In addition, a large
portion of the new California business written during 1997, which grew at a rate
of 28.5% due to a new law requiring proof of insurance to register a car,
qualified for a discount on renewal in 1998. Consequently, the average premium
per policy declined in 1998 as compared to 1997.
Net premiums written in 1998 of $1,144.1 million increased 5.3% over a year
earlier, continuing a growth trend which began in the second quarter of 1994.
The Company increased its marketing efforts in April 1998, launching a fully
integrated radio and billboard advertising program. Although the campaign has
not met expectations, the Company believes continuing the advertising program is
necessary in the current competitive climate. The California automobile
insurance marketplace remains intensely competitive. Most of the major direct
writers, who represent the Company's chief competition, have instituted one or
more rate reductions over the last twenty-four months and many have
significantly increased their marketing efforts.
The loss ratio in 1998 (loss and loss adjustment expenses related to
premiums earned) was 61.0%, compared with 63.5% in 1997. The favorable loss
experience is largely related to the effectiveness of Proposition 213, an
initiative made effective January 1, 1997 which prohibits recovery of non-
economic (pain and suffering) losses by uninsured motorists or drunk drivers
injured in automobile accidents. The 7% rate reduction beginning on April 1,
1998 negatively affected the Company's loss ratio during a large portion of
1998. The full impact of the rate reduction on the Company's loss ratio will be
felt in 1999 and succeeding periods.
The expense ratio (policy acquisition costs and other operating expenses
related to premiums earned) was 26.6% in 1998 and 25.1% in 1997. The increase
in the expense ratio was largely attributable to increased base commissions and
profit-related bonuses to agents, expenses associated with the advertising
program implemented in April 1998, and start up costs from the Company's entry
into the Florida market.
24
<PAGE>
Total losses and expenses in 1998, excluding interest expense of $4.8
million, were $982.0 million, resulting in an underwriting gain for the period
of $139.6 million, compared with an underwriting gain of $118.1 million in 1997.
Investment income in 1998 was $96.2 million, compared with $86.8 million in
1997. The after-tax yield on average investments of $1,474.5 million (fixed
maturities at cost, equities at market) was 5.91%, compared with 6.17% on
average investments of $1,262.9 million in 1997. The effective tax rate on
investment income was 9.3% in 1998, compared to 10.3% in 1997. The lower tax
rate in 1998 reflects the benefits derived from replacing taxable issues held in
the AMI investment portfolio, when purchased in December 1996, to non-taxable
issues throughout the 1997 and 1998 fiscal years. 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 is expected to continue in
1999. Bonds matured and called in 1998 totaled $65.3 million, compared with
$54.0 million in 1997. Approximately $47 million of bonds are expected to
mature or be called in 1999. Average yields being obtained during the first
quarter of 1999 on new investments are 50 to 75 basis points lower than the
average yield realized during 1998.
Realized investment losses in 1998 were $3.9 million, compared with
realized gains of $5.0 million in 1997. The gains and losses in both years were
principally incurred to enhance investment income on both fixed maturities and
equity securities, including perpetual preferred stocks. The losses realized in
1998 were designed to utilize expiring capital gains tax benefits.
Realized gain from sale of subsidiaries of $2.6 million was derived from
the sale for cash of Cimmaron Insurance Company, an inactive company acquired in
the American Mercury Insurance Group purchase made in December 1996.
The income tax provision of $57.8 million in 1998 represented an effective
tax rate of 24.5%, compared with an effective rate of 25.5% in 1997. The 1997
rate is higher primarily because the Company had a large non tax-deductible
charge for ESOP compensation expense in 1997 that did not occur in 1998. ESOP
compensation expense is calculated based on the current market value for the
Company's stock multiplied by shares allocated to employees, however, only the
Company's cost basis is deductible for tax purposes. The increase in the
Company's share price on the shares allocated in 1997, which had been purchased
in 1994, caused the large non-deductible charge that resulted in increasing the
Company's effective tax rate in 1997. This situation did not occur in 1998 as
the shares allocated to employees during 1998 had a similar cost and market
value.
Net income in 1998 was $177.5 million or $3.23 per share, (basic), compared
with $156.3 million, or $2.84 per share, (basic), in 1997. Basic per share
results are based on 55.0 million average shares in 1998 and 55.0 million
average shares in 1997. Diluted per share results were $3.21 in 1998 and $2.82
in 1997.
25
<PAGE>
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 and the
fact that 1996 results only include one month of premiums from AMI. Without the
impact of the AMI results, premiums earned increased 28.9%. 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 (28% excluding the impact of AMI results), continuing a
growth trend which began in the second quarter of 1994. 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 loss cost savings from
the enactment of California Proposition 213 that became effective January 1,
1997. 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 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% in 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,
26
<PAGE>
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.
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 largely 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.
Liquidity and Capital Resources
Net cash provided from operating activities in 1998, was $192.1 million,
while funds derived from the sale, redemption or maturity of investments was
$941.5 million, of which approximately 79% was represented by the sale of equity
securities. The amortized cost of fixed-maturity investments increased by $97.8
million during the year. Equity investments, including perpetual preferred
stocks, increased by $50.5 million at cost, while short-term cash investments
decreased by $13.7 million. The amortized cost of fixed-maturities available
for sale that were sold, called or matured during the year was $195.2 million.
The market value of all investments held at market as "Available for Sale"
exceeded the amortized cost of $1,511.9 million at December 31, 1998 by $78.8
million. That unrealized gain, reflected in shareholders' equity, as
Accumulated Other Comprehensive Income, net of applicable tax effects, was $51.2
million at December 31, 1998 compared with an unrealized gain of $46.1 million
at December 31, 1997. The increase in market values since December 31, 1997
reflects principally the substantial decline in intermediate and long term
interest rates during 1998.
The Company's cash and short term investments totaled $47.9 million at
December 31, 1998. 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
27
<PAGE>
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, 1998 bond holdings rated below investment grade totaled $13.6
million at market (cost $12.7 million), or 1% of total investments. The average
rating of the $1,203 million bond portfolio (at amortized cost) was AA-, while
the average effective maturity, giving effect to anticipated early call,
approximates 7.3 years. The modified duration of the bond portfolio at year-end
was 5.8 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 considered 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.
Holdings in the taxable sector consist largely of senior public utility
issues. Fixed-maturity investments of $1,245.4 million (amortized cost),
include $42.5 million (amortized cost) of sinking fund preferreds, principally
utility issues. The market value of all fixed maturities exceeded cost by $79.5
million at December 31, 1998. 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 $219.7 million at market (cost $220.4 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent about 24.0% of total shareholders' equity.
The Company had outstanding debt at December 31, 1998 of $78 million. Of
this amount, $75 million has been borrowed under a three year 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 February 22, 1999, LIBOR plus
.40, the net interest cost on the loan approximates 5.65%.
The Company also maintains a $100 million line of credit, of which $3
million was drawn on at December 31, 1998 and is due October 31, 1999. The line
28
<PAGE>
of credit may be used to fund the Company's stock repurchase program authorized
by the Board of Directors in August 1998 as well as for general corporate
purposes. The interest rate and loan covenants are the same as the Company's
$75 million loan discussed above. The Company plans to extend the maturity date
of this loan during 1999.
Under the stock repurchase program, the Company may purchase over a one-
year period up to $200 million of Mercury General's common stock. The purchases
may be made from time to time in the open market at the discretion of
management. The program will be funded by the sale of lower yielding tax-exempt
bonds, the proceeds of the $100 million credit facility and internal cash
generation. During 1998, the Company purchased 580,000 shares of the common
stock in the open market at an average price of $41.83. The shares purchased
were retired.
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 was 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. In August 1998, the
Plan purchased 115,000 shares of Mercury General's common stock in the open
market at a price of $43.05 per share. The purchases were funded by a five year
term bank loan of $5 million to the Plan which is guaranteed by the Company.
The shares are being allocated to the employees over a five-year period, with
the initial allocation made 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
effective rate of interest on the loan, which, in 1998 was 6.00%.
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.
The Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 1998. Each of the companies'
policyholders' surplus exceeded the highest level of minimum required capital.
As of December 31, 1998, the Company had no material commitments for
capital expenditures.
The California Earthquake Authority (CEA) is a Quasi-Governmental
organization that was established in 1996 to provide a market for earthquake
29
<PAGE>
coverage to California homeowners. During the second quarter of 1998, the
Company began placing all new and renewal earthquake coverage offered with its
homeowners policy through the California Earthquake Authority. The Company
receives a small fee for placing business with the CEA.
Upon the occurrence of a major seismic event, the CEA has the ability to
assess participating companies for losses. These assessments are made after CEA
capital has been expended and are based upon each company's participation
percentage multiplied by the amount of the total assessment. Based upon Mercury
Casualty Company's participation percentage, and recently published statistical
information from the CEA, the Company, at December 31, 1998, estimates its
assessment exposure to a "Northridge" - type earthquake to be approximately $3.2
million and its maximum total exposure to CEA assessments to be approximately
$6.5 million.
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 $767.2 million at December 31, 1998, and net
written premiums for the twelve months ended on that date of $1,144.1 million,
the ratio of writings to surplus was approximately 1.5 to 1.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. 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 operations.
In March of 1998, the Company completed the modifications necessary to its
computer programs and systems for all of its "critical" systems for business
written in California, Georgia, Illinois and Florida. Modifications were made
to both hardware and software. The Company considers policy issuance, premium
billing and collections and its claims systems as its critical systems. The
modifications completed on the above critical systems represent approximately
94% of the Company's total premiums written.
The American Mercury Group, acquired by the Company in December 1996 and
which represents approximately 6% of the Company's total premiums written, is in
the process of completing the modifications necessary, including the conversion
to new critical systems, to become Year 2000 compliant. The Company expects to
have their critical systems to be Year 2000 compliant by the second quarter of
1999.
Other non-critical systems are already Year 2000 compliant or are in the
process of being modified or converted to become Year 2000 compliant. The
Company expects to have its non-critical systems to be Year 2000 compliant by
the
30
<PAGE>
second quarter of 1999.
The Company expensed approximately $475,000 in 1998 and $125,000 in 1997,
primarily for internal labor costs, related to Year 2000 modifications. The
Company expects to incur an amount less than what has previously been expensed
for 1999. It is not possible to quantify the aggregate cost to the Company with
respect to the Year 2000 problems, although the Company does not anticipate it
will have a material adverse impact on its business.
While the Year 2000 considerations are not expected to materially impact
the Company's internal operations, they may have a material effect on some of
the Company's agents, suppliers and financial institutions with whom the Company
conducts business, and thus indirectly affect the Company. The Company has
commenced a program to ascertain the compliance status of those companies with
whom the Company conducts material business. This program includes sending out
questionnaires to our major business partners regarding their Year 2000
readiness. Based on the responses received to date, the Company does not
anticipate any material impact on its operations or financial condition.
Mercury General is developing business resumption contingency plans
specific to the Year 2000. Business resumption contingency plans address the
actions that would be taken if critical business functions cannot be carried out
in the normal manner upon entering the next century due to system or supplier
failure.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
-----------------------------------------------------------
The Company is subject to various market risk exposures including interest
rate risk and equity price risk. The following disclosure reflects estimates of
future performance and economic conditions. Actual results may differ.
The Company invests its assets primarily in fixed maturity investments,
which at December 31, 1998 comprised 83% of total investments at market value.
Tax-exempt bonds represent 95% of the fixed maturity investments with the
remaining amount consisting of sinking fund preferred stocks and taxable bonds.
Equity securities, consisting primarily of preferred stocks, account for 14% of
total investments at market. The remaining 3% of the investment portfolio
consists of highly liquid short-term investments which are primarily U.S.
Treasury backed overnight repurchase agreements and short-term money market
funds.
The value of the fixed maturity portfolio is subject to interest rate risk.
As market interest rates decrease, the value of the portfolio goes up with the
opposite holding true in rising interest rate environments. A common measure of
the interest sensitivity of fixed maturity assets is modified duration, a
calculation that takes maturity, coupon rate, yield and call terms to calculate
an average age of the expected cash flows. The longer the duration, the more
sensitive the asset is to market interest rate fluctuations.
The Company has historically invested in fixed maturity investments with a
goal towards maximizing after-tax yields and holding assets to the maturity or
31
<PAGE>
call date. Since assets with longer maturity dates tend to produce higher
current yields, the Company's investment philosophy has resulted in a portfolio
with a moderate duration. This has exposed the portfolio to interest rate risk,
which, in periods of falling interest rates, as was generally experienced over
the last decade, resulted in substantial realized and unrealized gains on the
portfolio holdings.
During 1998, lower market interest rates reduced the duration of the
Company's fixed income portfolio. Bond investments made by the Company
typically have call options attached, which reduce the duration of the asset as
rates decline. Consequently, the average modified duration of the portfolio
decreased from 6.1 years at December 31, 1997 to 5.8 years at December 31, 1998.
Given a hypothetical parallel increase of 100 basis points in interest rates,
the fair value of the fixed maturity portfolio would decrease by approximately
$77.1 million.
The value of the equity investments consists of $47.8 million in common
stocks and $171.9 million in non-sinking fund preferred stocks. The common
stock equity assets are typically valued for future economic prospects as
perceived by the market. The non-sinking fund preferred stocks are typically
valued using credit spreads to U. S. Treasury benchmarks. This causes them to
be comparable to fixed income securities in terms of interest rate risk.
The Company's primary strategy for equity investments is to maximize
current income by accelerating the number of dividends collected on the overall
funds employed. The Company times the purchase and sale of equity investments
to coincide with quarterly dividend payment dates and minimum holding periods as
required by the Internal Revenue Service. This timing strategy results in very
short asset holding periods, often less than three months. The Company believes
that this strategy coupled with the defensive nature of the assets involved
reduces the risk, over time, of significant portfolio valuation fluctuations due
to changes in market interest rates.
In general, credit spreads have widened in the non-sinking fund sector
since the credit crisis of this past summer. The Company's non-sinking fund
preferred stock assets were negatively affected by this market change. The
duration of the Company's non-sinking fund preferred stocks is 8.5 years. This
implies that an upward parallel shift in the yield curve by 100 basis points
would reduce the asset value by approximately $14.7 million, everything else
remaining the same.
The remainder of the equity portfolio, representing 3% of total investments
at market value, consists primarily of public utility common stocks. These
assets are defensive in nature and therefore have low volatility to changes in
market price as measured by their Beta. Beta is a measure of a security's
systematic (non-diversifiable) risk, which is the percentage change in an
individual security's return for a 1% change in the return of the market. The
average Beta for the Company's common stock holdings was 0.49. Based on a
hypothetical 20% reduction in the overall value of the stock market, the fair
value of the common stock portfolio would decrease by approximately $4.7
million.
32
<PAGE>
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 intense
competition currently existing in the California automobile insurance markets,
the success of the Company in integrating and profitably operating the business
of AMI, and in expanding generally in Florida and other states outside of
California, the impact of the Year 2000, the impact of the permanent rating
factor regulations 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 general competitive nature of the property
and casualty insurance industry and general uncertainties regarding loss reserve
estimates and legislative and regulatory changes, particularly in California.
Quarterly Data
Summarized quarterly financial data for 1998 and 1997 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>
1998
- ----
Earned premiums..................... $274,454 $278,768 $282,198 $286,164
Income before income taxes ......... $ 70,107 $ 67,966 $ 54,596 $ 42,611
Net income.......................... $ 51,414 $ 50,255 $ 41,442 $ 34,415
Basic earnings per share............ $ .93 $ .91 $ .75 $ .63
Diluted earnings per share.......... $ .93 $ .90 $ .75 $ .63
Dividends declared per share........ $ .175 $ .175 $ .175 $ .175
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
</TABLE>
33
<PAGE>
Item 8. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................ 35
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997...... 36
Consolidated Statements of Income for Each of the Years in the
Three-Year Period Ended December 31, 1998......................... 37
Consolidated Statements of Comprehensive Income for each of the
Years in the Three-Year Period Ended December 31, 1998........... 38
Consolidated Statements of Shareholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1998........... 39
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1998..................... 40
Notes to Consolidated Financial Statements........................ 42
</TABLE>
34
<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, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Los Angeles, California
February 12, 1999
35
<PAGE>
PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
AMOUNTS EXPRESSED IN THOUSANDS, except share amounts
A S S E T S
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized cost
$1,245,440 in 1998 and $1,147,594 in 1997).............. $1,324,908 $1,214,986
Equity securities available for sale (cost $220,449 in
1998 and $169,943 in 1997).............................. 219,745 173,522
Short-term cash investments, at cost, which approxi-
mates market............................................ 45,992 59,740
---------- ----------
Total investments............................. 1,590,645 1,448,248
Cash........................................................ 1,887 3,011
Receivables:
Premiums receivable...................................... 107,950 104,216
Premium notes............................................ 13,739 13,562
Accrued investment income................................ 22,356 21,895
Other.................................................... 24,884 26,476
---------- ----------
168,929 166,149
Deferred policy acquisition costs........................... 61,947 57,264
Fixed assets, net........................................... 31,901 30,493
Current income taxes recoverable............................ 5,895 --
Other assets................................................ 15,821 20,367
---------- ----------
$1,877,025 $1,725,532
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses......................... $ 405,976 $409,061
Unearned premiums........................................... 327,129 309,376
Notes payable............................................... 78,000 75,000
Loss drafts payable......................................... 38,433 32,058
Accounts payable and accrued expenses....................... 53,196 50,742
Current income taxes payable................................ -- 3,317
Deferred income taxes....................................... 22,639 19,722
Other liabilities........................................... 34,277 26,664
---------- ----------
Total liabilities............................. 959,650 925,940
---------- ----------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
54,684,438 shares in 1998 and 55,124,579 in 1997....... 48,830 47,412
Accumulated other comprehensive income................... 51,196 46,131
Unearned ESOP compensation............................... (4,000) --
Retained earnings........................................... 821,349 706,049
---------- ----------
Total shareholders' equity.................... 917,375 799,592
---------- ----------
Commitments and contingencies............................ $1,877,025 $1,725,532
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three years ended December 31, 1998
Amounts expressed in thousands, except per share data
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Earned premiums................................ $1,121,584 $1,031,280 $754,724
Net investment income.......................... 96,169 86,812 70,180
Net realized investment gains (losses)......... (3,926) 4,973 (3,173)
Net realized gain from sale of subsidiary...... 2,586 -- --
Other.......................................... 5,710 4,881 3,233
---------- ---------- --------
Total revenues........................... 1,222,123 1,127,946 824,964
---------- ---------- --------
Expenses:
Losses and loss adjustment expenses............ 684,468 654,729 501,858
Policy acquisition costs....................... 252,592 224,883 160,019
Other operating expenses....................... 44,941 33,579 24,493
Interest....................................... 4,842 4,976 2,004
---------- ---------- --------
Total expenses............................ 986,843 918,167 688,374
---------- ---------- --------
Income before income taxes..................... 235,280 209,779 136,590
Income taxes..................................... 57,754 53,473 30,826
---------- ---------- --------
Net income.................................... $ 177,526 $ 156,306 $105,764
========== ========== ========
Basic earnings per share........................ $ 3.23 $ 2.84 $ 1.93
========== ========== ========
Diluted earnings per share...................... $ 3.21 $ 2.82 $ 1.92
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Years ended December 31, 1998
Amounts expressed in thousands
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income $177,526 $156,306 $105,764
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period 12,397 44,185 (8,593)
Less: reclassification adjustment for net
gains included in net income (4,605) (2,377) (1,055)
-------- -------- --------
Other comprehensive income (loss),
before tax 7,792 41,808 (9,648)
Income tax expense related to unrealized
holding gains(losses) arising during period 4,339 15,465 (3,008)
Income tax benefit related to reclassification
adjustment for gains included in net income (1,612) (832) (369)
-------- -------- --------
Comprehensive income, net of tax $182,591 $183,481 $ 99,493
======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
38
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three years ended December 31, 1998
Amounts expressed in thousands
<TABLE>
<CAPTION>
1998 1997 1996
------- --------- ---------
<S> <C> <C> <C>
Common stock, beginning of year................................................. $ 47,412 $ 42,644 $ 40,895
Proceeds of stock options exercised............................................. 1,216 999 1,104
Tax benefit on sales of incentive stock
options........................................................................ 748 401 220
Release of common stock by the ESOP............................................. (30) 3,368 425
Purchase and retirement of common stock......................................... (516) -- --
-------- -------- --------
Common stock, end of year....................................................... 48,830 47,412 42,644
-------- -------- --------
Accumulated other comprehensive income, beginning
of year........................................................................ 46,131 18,956 25,227
Net increase (decrease) in other comprehensive
income......................................................................... 5,065 27,175 (6,271)
-------- -------- --------
Accumulated other comprehensive income,
end of year.................................................................... 51,196 46,131 18,956
-------- -------- --------
Unearned ESOP compensation relating to common
stock purchases by ESOP........................................................ (5,000) (2,000) (3,084)
Amortization of unearned ESOP compensation...................................... 1,000 2,000 1,084
-------- -------- --------
Unearned ESOP compensation, end of year......................................... (4,000) -- (2,000)
-------- -------- --------
Retained earnings, beginning of year............................................ 706,049 581,622 502,150
Purchase and retirement of common stock......................................... (23,775) -- --
Net income...................................................................... 177,526 156,306 105,764
Dividends paid to shareholders.................................................. (38,451) (31,879) (26,292)
-------- -------- --------
Retained earnings, end of year.................................................. 821,349 706,049 581,622
-------- -------- --------
Total shareholders' equity............................................... $917,375 $799,592 $641,222
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
Amounts expressed in thousands
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 177,526 $ 156,306 $ 105,764
Adjustments to reconcile net income to net cash
provided from operating activities:
(Decrease) increase in unpaid losses and loss
adjustment expenses (3,085) 72,376 35,947
Increase in unearned premiums 17,753 48,498 42,276
Increase in premium notes receivable (177) (1,167) (667)
Increase in premiums receivable (3,734) (20,468) (15,460)
Increase in deferred policy acquisition costs (4,683) (10,481) (7,080)
Increase in loss drafts payable 6,375 3,026 5,179
(Decrease) increase in accrued income taxes,
excluding deferred tax on change in unrealized gain (8,957) 469 1,016
Increase in accounts payable and accrued
expenses 2,454 14,279 8,385
Depreciation 5,444 5,157 4,067
Net realized investment (gains) losses 3,926 (4,973) 3,173
Net realized gain from sale of subsidiary (2,586) -- --
Bond accretion, net (4,146) (2,295) (1,112)
Other, net 6,030 8,479 15,136
--------- --------- ---------
Net cash provided from operating activities 192,140 269,206 196,624
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (295,723) (362,932) (243,779)
Sales 111,779 71,313 41,353
Calls or maturities 84,445 72,515 91,834
Equity securities available for sale:
Purchases (800,620) (608,260) (437,128)
Sales 745,275 590,155 398,306
Proceeds from sale of subsidiary less cash
transferred 11,018 -- --
Purchase of AMI, less cash acquired -- (33,629)
Decrease (increase) in short-term cash investments, net 12,059 6,327 (32,077)
Purchase of fixed assets (7,164) (6,854) (5,971)
Sale of fixed assets 444 1,165 167
--------- --------- ---------
Net cash used in investing activities $(138,487) $(236,571) $(220,924)
</TABLE>
(Continued)
40
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Additions to notes payable $ 3,000 $ -- $ 75,000
Principal payments on notes payable -- -- (25,000)
Payment of American Mercury Insurance Company
indemnification holdback -- (1,750) --
Dividends paid to shareholders (38,451) (31,879) (26,291)
Proceeds from stock options exercised 1,965 1,400 1,324
Purchase and retirement of common stock (24,291) -- --
Net increase (decrease) of ESOP loan 3,000 (1,000) --
-------- -------- --------
Net cash provided by (used in)
financing activities (54,777) (33,229) 25,033
-------- -------- --------
Net increase (decrease) in cash (1,124) (594) 733
Cash:
Beginning of the year 3,011 3,605 2,872
-------- -------- --------
End of the year $ 1,887 $ 3,011 $ 3,605
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(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. In 1998 and 1997 over 90% of
the net written premiums were from California.
The consolidated financial statements include the accounts of Mercury
General Corporation (the Company or MGC) 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 (AMIC), 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. Effective for 1997 and 1998, the financial statements also include the
newly formed company American Mercury MGA, Inc. (AMMGA), a wholly owned
subsidiary of AMIC. The 1998 financial statements include the results of
Cimarron Insurance Company through June 5, 1998, the date it was sold to an
unrelated party. This sale is discussed further in Note 9. Collectively, the
newly-acquired companies, including AML, are referred to as AMI. All of the
subsidiaries as a group, including AML, but excluding AFIMC and AMMGA, 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. The most significant assumptions in the preparation of these
consolidated financial statements relate to loss and loss adjustment expenses.
Actual results could differ from those estimates.
42
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(1) Significant Accounting Policies (Continued)
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.
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 as accumulated
other comprehensive income, 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.
43
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(1) Significant Accounting Policies (Continued)
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 1998, 1997 and 1996 were $1,144,051,000,
$1,086,241,000 and $795,873,000, respectively.
One agent produced direct premiums written of approximately 19%, 18% and
17% of the Company's total direct premiums written during 1998, 1997 and 1996,
respectively. This agency was sold during 1998 to a large national broker. The
buyer has informed the Company that they intend to continue producing business
for the Company. No other agent accounted for more than 2% of direct premiums
written.
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. The Company does not defer advertising
expenses.
44
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(1) Significant Accounting Policies (Continued)
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 regulatory and legal environment,
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 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 15
contains the required disclosures which make up the calculation of basic and
diluted earnings per share.
45
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(1) Significant Accounting Policies (Continued)
Comprehensive Income
Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
"Reporting Comprehensive Income," effective for fiscal years beginning after
December 15, 1997 was adopted by the Company during 1998. The Company is
reporting comprehensive income for the same periods presented on the
Consolidated Statements of Income. The implementation of SFAS No. 130 had no
effect on the financial position or results of operations of the Company.
Segment Reporting
Statement of Financial Accounting Standards No. 131 (SFAS No. 131),
"Disclosures about Segments of an Enterprise and Related Information," became
effective for fiscal years beginning after December 15, 1997. SFAS 131
establishes standards for the way information about operating segments is
reported in financial statements. The Company does not have any operations that
require disclosure as operating segments.
Recently Issued Accounting Standards
Statement of Position 98-1 (SOP 98-1), "Accounting For the Costs of
Computer Software developed or obtained for Internal Use" is effective for
financial statements beginning after December 15, 1998. SOP 98-1 requires that
the cost of internally developed computer software be capitalized. The Company
will implement this standard during the first quarter 1999 and is currently
evaluating the impact that it 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. The Company
accounts for income taxes in accordance with SFAS 109, "Accounting for Income
Taxes".
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.
46
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(1) Significant Accounting Policies (Continued)
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 1998, 1997, and 1996 was $4,494,000, $5,077,000, and
$1,882,000, respectively. Income taxes paid were $65,984,000 in 1998,
$52,611,000 in 1997, and $30,550,000 in 1996.
The subsidiary sold in 1998 consisted primarily of invested assets totaling
$8,408,000 at the sale date.
In 1998, non-cash financing activities included receipt of $276,000 of
common stock tendered at market value to exercise stock options.
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
In 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
14. The adoption of this pronouncement did not have a material effect on the
financial statements of the Company.
Reclassifications
Certain reclassifications have been made to the prior year balances to
conform to the current year presentation.
47
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(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)
-------------------------------
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities................................ $75,602 $67,948 $55,132
Dividends on equity securities............................................ 18,027 16,317 13,385
Interest on short-term cash investments................................... 3,460 3,321 2,126
------- ------- -------
Total investment income................................................. 97,089 87,586 70,643
Investment expense........................................................ 920 774 463
------- ------- -------
Net investment income................................................... $96,169 $86,812 $70,180
======= ======= =======
</TABLE>
A summary of net realized investment gains (losses) is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-------------------------------
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Net realized investment gains (losses):
Fixed maturities........................................................ $ 914 $1,400 $ 963
Equity securities....................................................... (4,840) 3,573 (4,136)
------- ------ -------
$(3,926) $4,973 $(3,173)
======= ====== =======
</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)
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities available for sale:
Gross realized gains.................................................... $ 394 $ 849 $ 515
Gross realized losses................................................... (370) (389) (1,237)
-------- ------- -------
Net.................................................................... $ 24 $ 460 $ (722)
======== ======= =======
Equity securities available for sale:
Gross realized gains.................................................... $ 9,452 $ 7,257 $ 2,925
Gross realized losses................................................... (14,166) (3,565) (7,115)
-------- ------- -------
Net.................................................................... $ (4,714) $ 3,692 $(4,190)
======== ======= =======
</TABLE>
48
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(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)
------------------------------
1998 1997 1996
-------- ------- ---------
<S> <C> <C> <C>
Net increase (decrease) in net unrealized
investment gains and losses:
Fixed maturities available for sale.............................................. $12,076 $38,077 $(8,059)
Income tax expense (benefit)..................................................... 4,227 13,327 (2,821)
------- ------- -------
$ 7,849 $24,750 $(5,238)
======= ======= =======
Equity securities............................................................... $(4,283) $ 3,731 $(1,589)
Income tax expense (benefit).................................................... (1,499) 1,306 (556)
------- ------- -------
$(2,784) $ 2,425 $(1,033)
======= ======= =======
</TABLE>
Accumulated unrealized gains and losses on securities available for sale
follows:
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands)
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Fixed maturities available for sale:
Unrealized gains.................................................................. $ 80,651 $ 68,718
Unrealized losses................................................................. (1,183) (1,326)
Tax effect........................................................................ (27,814) (23,587)
-------- --------
$ 51,654 $ 43,805
-------- --------
Equity securities available for sale:
Unrealized gains.................................................................. $ 5,934 $ 5,006
Unrealized losses................................................................. (6,638) (1,427)
Tax effect........................................................................ 246 (1,253)
-------- --------
$ (458) $ 2,326
-------- --------
Net unrealized investment gains (classified
as accumulated other comprehensive income
on the balance sheet).......................................................... $ 51,196 $ 46,131
======== ========
</TABLE>
49
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(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, 1998 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........... $ 10,206 $ 223 $ 1 $ 10,428
Obligations of states and political
subdivisions........................ 1,179,043 78,003 933 1,256,113
Public utilities...................... 881 55 -- 936
Corporate securities.................. 12,839 336 14 13,161
Redeemable preferred stock............ 42,471 2,034 235 44,270
---------- ------- ------ ----------
Totals........................... $1,245,440 $80,651 $1,183 $1,324,908
========== ======= ====== ==========
</TABLE>
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>
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.
50
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(2) Investments and Investment Income (Continued)
At December 31, 1998 bond holdings rated below investment grade totaled
approximately 1% 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, 1998, 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 ..................... $ 4,671 $ 4,774
Due after one year through five years........ 39,201 40,647
Due after five years through ten years....... 66,971 70,750
Due after ten years.......................... 1,134,597 1,208,737
---------- ----------
$1,245,440 $1,324,908
========== ==========
</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)
-------------------------
1998 1997
-------- ----------
<S> <C> <C>
Land................................ $ 6,084 $ 6,084
Buildings.......................... 22,461 21,802
Furniture and equipment............ 33,120 27,819
Leasehold improvements............. 410 391
-------- --------
62,075 56,096
Less accumulated depreciation...... (30,174) (25,603)
-------- --------
Net fixed assets.................. $ 31,901 $ 30,493
======== ========
</TABLE>
51
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(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)
---------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year................. $ 57,264 $ 46,783 $ 33,809
DAC acquired in purchase of AFI........... -- -- 5,850
Costs deferred during the year............. 257,275 235,364 167,143
Amortization charged to expense............ (252,592) (224,883) (160,019)
--------- --------- ---------
Balance, end of year....................... $ 61,947 $ 57,264 $ 46,783
========= ========= =========
</TABLE>
(5) Notes Payable
Notes payable at December 31, 1998 consist of two revolving credit facilities
with a consortium of banks. A November 21, 1996 credit facility provides for an
aggregate commitment of $75 million, of which $75 million has been drawn and is
outstanding. The $75 million notes are due November 21, 2001. This due date
may be extended annually for additional periods of one year to maintain the
three-year maturity date. The other outstanding debt consists of a 364 day $100
million line of credit dated October 31, 1998. The outstanding draw on this
line of credit is $3 million and is due on October 31, 1999.
The $75 million and $100 million credit facilities are subject to a
commitment fee on the undrawn balances of 0.15% and 0.12%, respectively. In
addition, the $100 million credit facility imposes a utilization fee of 0.05% on
the outstanding debt of both lines of credit if the aggregate principal
outstanding balance of both lines of credit exceeds 66 2/3% of the sum of the
aggregate commitments. For both debts, 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
February 22, 1999, the net interest cost on the loans at December 31, 1998 is
approximately 5.65%.
The terms of the loan agreements include certain affirmative and negative
covenants, all of which are met by the Company at December 31, 1998.
52
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(6) Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return.
The provision for income tax expense (benefit) consists of the following
components:
<TABLE>
<CAPTION>
Year ended December 31,
(Amounts in thousands)
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal
Current.............................................. $ 7,237 $ 54,447 $ 31,880
Deferred............................................. 190 (1,265) (1,139)
-------- -------- --------
$ 57,427 $ 53,182 $ 30,741
======== ======== ========
State
Current.............................................. $ 327 $ 291 $ 85
Deferred............................................. -- -- --
-------- -------- --------
$ 327 $ 291 $ 85
======== ======== ========
Total
Current.............................................. $ 57,564 $ 54,738 $ 31,965
Deferred............................................. 190 (1,265) (1,139)
-------- -------- --------
Total............................................ $ 57,754 $ 53,473 $ 30,826
======== ======== ========
</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)
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed tax expense at 35% ................................ $ 82,348 $ 73,423 $ 47,807
Tax-exempt interest income.................................. (22,547) (19,188) (15,626)
Dividends received deduction................................ (5,437) (5,389) (4,949)
Reduction of losses incurred deduction for 15% of
income on securities purchased after
August 7, 1986............................................. 4,245 3,640 2,974
Other, net.................................................. (855) 987 620
-------- -------- --------
Income tax expense .................................... $ 57,754 $ 53,473 $ 30,826
======== ======== ========
</TABLE>
53
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(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)
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets
Discounting of loss reserves and salvage
and subrogation recoverable for tax
purposes................................................................... $ 6,732 $ 6,930 $ 6,123
Other deferred tax assets................................................... 1,389 1,085 1,358
-------- -------- --------
Total gross deferred tax assets........................................... 8,121 8,015 7,481
Less valuation allowance................................................. -- -- --
-------- -------- --------
Net deferred tax assets.................................................. 8,121 8,015 7,481
-------- -------- --------
Deferred tax liabilities
Tax liability on net unrealized gain on
securities carried at market value......................................... (27,567) (24,840) (10,207)
Tax depreciation in excess of book
depreciation............................................................... (1,545) (1,467) (1,270)
Accretion on bonds.......................................................... (1,467) (1,061) (784)
Other deferred tax liabilities.............................................. (181) (369) (1,569)
-------- -------- --------
Total gross deferred tax liabilities..................................... (30,760) (27,737) (13,830)
-------- -------- --------
Net deferred tax liabilities............................................. $(22,639) $(19,722) $ (6,349)
======== ======== ========
</TABLE>
54
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(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)
------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Gross reserves for losses and loss
adjustment expenses at beginning of year........$409,061 $336,685 $253,546
Less reinsurance recoverable..................... (22,791) (24,931) (2,556)
-------- -------- --------
Net reserves, beginning of year.................. 386,270 311,754 250,990
Reserves acquired in purchase of AMI............. -- -- 24,231
Incurred losses and loss adjustment expenses
related to:
Current year................................. 693,877 641,911 505,726
Prior years.................................. (9,409) 12,818 (3,868)
-------- -------- --------
Total incurred losses and loss adjustment
expenses........................................ 684,468 654,729 501,858
-------- -------- --------
Loss and loss adjustment expense payments
related to:
Current year................................. 437,612 373,823 298,099
Prior years.................................. 247,310 206,390 167,226
-------- -------- --------
Total payments................................... 684,922 580,213 465,325
-------- -------- --------
Net reserves for losses and loss adjustment
expenses at end of year......................... 385,816 386,270 311,754
Reinsurance recoverable.......................... 20,160 22,791 24,931
-------- -------- --------
Gross reserves, end of year...................... $405,976 $409,061 $336,685
======== ======== ========
</TABLE>
Decreases in incurred losses relating to 1998 and 1996 reflects the favorable
loss experience during these years attributable to a number of combined factors
which have produced favorable frequency and severity trends.
Increase in incurred losses in 1997 relating to prior years reflects
increases in the Company's estimates for loss adjustment expenses.
55
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(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, formerly
American Fidelity 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 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 and 1998, with the exception of Cimarron, which is
discussed in Note 9, are included in the consolidated financial statements of
the Company.
The following unaudited proforma consolidated results of operations show 1996
results, as though the acquisition occurred on January 1, 1996 (Amounts in
thousands except per share date):
<TABLE>
<S> <C>
Revenues $891,243
Pretax operating income $136,912
Income before income taxes $133,691
Basic earnings per share $ 1.89
Diluted earnings per share $ 1.88
</TABLE>
(9) Sale of Subsidiary
In June 1998, the Company sold its 100% interest in Cimarron Insurance
Company for $11.1 million in cash. The Company realized a pre-tax gain of
approximately $2.6 million on this transaction.
Cimarron ceased writing new business in 1997 and all renewal business was
underwritten and retained by American Mercury Insurance Company. The
consolidated results for 1998 include $0.2 million of revenue and $0.1 million
of net income from the operations of Cimarron up the sale date of June 5, 1998.
56
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(10) Dividend Restrictions
The Insurance Companies are subject to the financial capacity guidelines
established by the Office of the Commissioner of Insurance of their domiciliary
states. The payment of dividends from statutory unassigned surplus of the
Insurance Companies is restricted, subject to certain statutory limitations. For
the year 1999, the direct insurance subsidiaries of the Company are permitted to
pay approximately $98 million in dividends to the Company without the prior
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.
(11) 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, 1998, there were no material permitted
statutory accounting practices utilized by the Insurance Companies. During 1998,
the NAIC approved the codification of statutory accounting practices.
Codification will become effective in the year 2001 if it is adopted by the
states. If adopted, it will 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 $173,473,000, $147,255,000, and $97,979,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The statutory policyholders'
surplus of the Insurance Companies, as reported to regulatory authorities, as of
December 31, 1998 and 1997 was $767,223,000 and $679,359,000, respectively.
The Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 1998 according to the formula issued
by the NAIC. Each of the companies' policyholders' surplus exceeded the highest
level of minimum required capital.
57
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(12) 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 2008. Total rent expense under these lease agreements, all of
which are operating leases, was $2,074,000, $1,885,000 and $1,583,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
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>
1999.................... $3,059 $ (295)
2000.................... $2,758 $ (100)
2001.................... $2,329 $ --
2002.................... $1,642 $ --
2003............ $ 952 $ --
Thereafter.............. $4,670 $ --
</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.
(13) 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 $1,100,000 for the
plan year ended December 31, 1998 and $1,000,000 for each plan year ended
December 31, 1997 and 1996.
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
58
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(13) Profit Sharing Plan (Continued)
contributions, at a rate set by the Board of Directors, totaled $1,648,000,
$1,349,000, and $955,000 for the plan years ended December 31, 1998, 1997 and
1996.
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
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 $5,000,000,
$2,000,000 and $3,000,000 at December 31, 1998, 1997 and 1996, 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 $970,000, $5,368,000 and $1,509,000 in
1998, 1997 and 1996, respectively. The ESOP shares as of December 31 were as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allocated shares -- 193,200
Shares committed-to-be released 23,000 128,800
Unreleased shares 92,000 --
---------- -------
Total ESOP shares 115,000 322,000
========== =======
Market value of unreleased shares at
December 31, $4,031,000 --
========== =======
</TABLE>
(14) Common Stock
In September 1997, the common stock of the Company was split two-for-one.
All share information has been adjusted accordingly.
59
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(14) Common Stock (Continued)
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, 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 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. At December 31, 1998 no awards other than options have been granted.
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
$454,000, $363,000 and $295,000 in 1998, 1997 and 1996, respectively, and
earnings per share (basic and diluted) would have been reduced by .01 in 1998,
would have remained the same in 1997, and been reduced by .01 (basic and
diluted) in 1996. 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 1998, 1997 and 1996:
dividend yield of 2.0 percent for all years, expected volatility of 32.7 percent
in 1998 and 30 percent for 1997 and 1996 and expected lives of 7 years for all
years. The risk-free interest rates used were 5.4 percent for the options
granted during 1998, 6.4 percent for the options granted during 1997 and 5.5 and
6.4 percent for the options granted during 1996.
60
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998 and 1997
(14) Common Stock (Continued)
A summary of the status of the Company's plans as of December 31, 1998, 1997
and 1996 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
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 629,621 $16.269 717,350 $14.452 724,650 $12.117
Granted during the year 73,000 45.385 45,000 27.406 120,000 23.078
Exercised during the year (144,475) 10.329 (116,729) 8.553 (122,500) 7.713
Canceled or expired (19,000) 51.484 (16,000) 21.750 (4,800) 13.500
-------- -------- --------
Outstanding at end of year 539,146 20.575 629,621 16.269 717,350 14.452
======== ======== ========
Options exercisable at year-end 265,146 277,021 268,150
Weighted-average fair value of
options granted during the year $ 16.37 $ 9.91 $ 8.11
</TABLE>
The following table summarizes information regarding the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
- -------------------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$15.00 to 15.9375 346,846 5.75 $15.451 222,846 $15.399
$21.75 to 27.40063 138,300 7.55 24.577 42,300 23.919
$42.3091 to 44.8209 54,000 9.69 43.239 -- --
------- -------
$15.00 to 44.8209 539,146 6.61 20.575 265,146 16.758
======= =======
</TABLE>
(15) 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>
1998 1997 1996
---------------------------- -------------------------------- --------------------------------
(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 $177,526 55,003 $3.23 $156,306 54,997 $2.84 $105,764 54,794 $1.93
Effect of dilutive
securities
Options -- 351 -- 386 -- 304
Diluted EPS
- -----------
Income available to
common stockholders
after assumed
conversions $177,526 55,354 $3.21 $156,306 55,383 $2.82 $105,764 55,098 $1.92
======== ====== ===== ======== ====== ===== ======== ====== =====
</TABLE>
61
<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 12, 1999, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1998,
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, 1998 are contained herein as listed in the Index to
Consolidated Financial Statements on page 34.
2. Financial Statement Schedules:
Title
-----
Independent 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.
62
<PAGE>
3. Exhibits:
<TABLE>
<S> <C>
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
</TABLE>
63
<PAGE>
<TABLE>
<S> <C>
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.
10.25 Amendment to Revolving Credit Agreement by and among Mercury
General Corporation, the Lender Party thereto and The Bank of
New York, as Agent, dated as of November 21, 1996.
10.26 Revolving Credit Agreement by and among Mercury General
Corporation, the Lender Party thereto and The Bank of New York,
as Agent, dated as of October 30, 1998.
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.
&& This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1997 and is incorporated herein by this
reference.
(b) Reports on Form 8-K:
None
64
<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 GEORGE JOSEPH
-------------------------------------
George Joseph
Chief Executive Officer and
Chairman of the Board
March 8, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chief Executive Officer
and
Chairman of the Board
GEORGE JOSEPH (Principal Executive Officer) March 8, 1999
- -----------------------------
George Joseph
Vice President and
Chief Financial Officer
GABRIEL TIRADOR (Principal Financial Officer) March 8, 1999
- -----------------------------
Gabriel Tirador
NATHAN BESSIN Director March 8, 1999
- --------------------------
Nathan Bessin
BRUCE A. BUNNER Director March 8, 1999
- --------------------------
Bruce A. Bunner
MICHAEL D. CURTIUS Director March 8, 1999
- --------------------------
Michael D. Curtius
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
RICHARD E. GRAYSON Director March 8, 1999
- -------------------------
Richard E. Grayson
GLORIA JOSEPH Director March 8, 1999
- ------------------------
Gloria Joseph
CHARLES MCCLUNG Director March 8, 1999
- ------------------------
Charles McClung
DONALD P. NEWELL Director March 8, 1999
- ------------------------
Donald P. Newell
DONALD R. SPUEHLER Director March 8, 1999
- ------------------------
Donald R. Spuehler
</TABLE>
66
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Mercury General Corporation:
Under date of February 12, 1999, we reported on the consolidated balance
sheets of Mercury General Corporation and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, comprehensive
income, shareholders' equity and cash flows for each of the years in the three-
year period ended December 31, 1998, as contained in the annual report on Form
10-K for the year 1998. 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 LLP
Los Angeles, California
February 12, 1999
S-1
<PAGE>
SCHEDULE I
MERCURY GENERAL CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
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......................... $ 10,206 $ 10,428 $ 10,428
States, Municipalities.................. 1,179,043 1,256,113 1,256,113
Public utilities........................ 881 936 936
All other corporate bonds............... 12,839 13,161 13,161
Redeemable preferred stock................ 42,471 44,270 44,270
---------- ---------- ----------
Total fixed maturities available for
sale.................................. 1,245,440 1,324,908 1,324,908
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities........................ 38,260 40,650 40,650
Banks, trust and insurance companies.... 1,666 1,813 1,813
Industrial, Miscellaneous and
all other.............................. 5,233 5,372 5,372
Nonredeemable preferred stocks............ 175,290 171,910 171,910
---------- ---------- ----------
Total equity securities available for
sale.................................. 220,449 219,745 219,745
---------- ---------- ----------
Short-term investments........................ 45,992 45,992
---------- ----------
Total investments..................... $1,511,881 $1,590,645
========== ==========
</TABLE>
S-2
<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-3
<PAGE>
SCHEDULE II
MERCURY GENERAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 1998 and 1997
Amounts in thousands
ASSETS
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized
cost $1,002 in 1998 and $2,914 in 1997)......... $ 980 $ 2,888
Equity securities, available for sale (cost
$22,885 in 1998 and $28,398 in 1997)............ 22,274 28,555
Short-term cash investments...................... 9,189 6,705
Investment in subsidiaries....................... 979,695 849,608
---------- --------
Total investments.............................. 1,012,138 887,756
Amounts due from affiliates....................... 8,544 5,452
Income taxes...................................... 3,693 3,144
Other assets...................................... 1,963 1,863
---------- --------
$1,026,338 $898,215
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable..................................... $78,000 $ 75,000
Accounts payable and accrued expenses.............. 22,353 18,594
Other liabilities.................................. 8,610 5,029
---------- --------
Total liabilities........................... 108,963 98,623
---------- --------
Shareholders' equity:
Common stock................................... 48,830 47,412
Accumulated other comprehensive income......... 51,196 46,131
Unearned ESOP compensation..................... (4,000) --
Retained earnings.............................. 821,349 706,049
---------- --------
Total shareholders' equity........... 917,375 799,592
---------- --------
$1,026,338 $898,215
========== ========
</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, 1998
Amounts in thousands
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income......................... $ 1,956 $ 2,139 $ 1,489
Management fee income from subsidiaries....... 186,387 162,352 118,657
Other......................................... 94 -- 8
-------- -------- --------
Total revenues............................ 188,437 164,491 120,154
-------- --------
Expenses:
Loss adjustment expenses...................... 115,242 102,889 79,934
Policy acquisition costs...................... 33,550 31,543 20,345
Other operating expenses...................... 38,815 28,454 19,336
Interest...................................... 4,839 4,972 2,004
-------- -------- --------
Total expenses............................ 192,446 167,858 121,619
-------- -------- --------
Loss before income taxes and equity in net
income of subsidiaries....................... (4,009) (3,367) (1,465)
Income tax benefit.............................. (2,010) (528) (536)
-------- -------- --------
Loss before equity in net income
of subsidiaries.............................. (1,999) (2,839) (929)
Equity in net income of subsidiaries............ 179,525 159,145 106,693
-------- -------- --------
Net income................................ $177,526 $156,306 $105,764
======== ======== ========
</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, 1998
Amounts in thousands
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net cash provided from operating activities...... $ 52,908 $ 40,097 $ 32,510
Cash flows from investing activities:
Acquisition of American Mercury Insurance
Company......................................... -- -- (34,991)
Capital contribution to subsidiaries............. -- -- (15,000)
Fixed maturities, at market:
Purchases...................................... (2,700) (3,556) (807)
Sales.......................................... 3,849 2,398 475
Calls or maturities............................ 731 1,234 1,072
Equity securities:
Purchases...................................... (75,180) (71,446) (47,597)
Sales.......................................... 79,852 59,786 42,934
Calls.......................................... 222 358 --
(Increase) decrease in short term cash
investments, net................................. (2,484) 1,385 (3,344)
Other, net....................................... -- -- --
------ -------- --------
Net cash provided by (used) in investing
activities.................................. 4,290 (9,841) (57,258)
Cash flows from financing activities:
Additions to notes payable....................... 3,000 -- 75,000
Principal payments on notes payable.............. -- -- (25,000)
Payment of AMI indemnification holdback.......... (1,750) --
Dividends paid to shareholders................... (38,452) (31,879) (26,291)
Purchase and retirement of common stock.......... (24,291) -- --
Stock options exercised.......................... 1,964 1,400 1,324
------ -------- --------
Net cash provided by (used) in financing
activities................................... (57,779) (32,229) 25,033
Net increase (decrease) in cash.................... (581) (1,973) 285
Cash:
Beginning of the year............................ (3,029) (1,056) (1,340)
------ -------- --------
End of the year ................................. $ (3,610) $ (3,029) $ (1,055)
======= ======== ========
</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, 1998 and 1997
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 $55,000,000, $33,500,000, and $27,700,000 were received by the
Company from its wholly-owned subsidiaries in 1998, 1997 and 1996, respectively,
and are recorded as a reduction to Investment in Subsidiaries.
Cash Overdraft
At December 31, 1998 and 1997, the Company had cash overdrafts of $3,610,000
and $3,029,000, 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, 1998
Amounts in thousands
<TABLE>
<CAPTION>
Ceded to
Gross other Net
amount companies Assumed amount
------ --------- --------- ------
<S> <C> <C> <C> <C>
Property and Liability insurance
1998......................... $1,130,597 $14,352 $5,339 $1,121,584
1997......................... $1,055,114 $24,241 $ 407 $1,031,280
1996......................... $ 757,447 $ 3,138 $ 415 $ 754,724
</TABLE>
S-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
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
</TABLE>
75
<PAGE>
<TABLE>
<S> <C>
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.
10.25 Amendment to Revolving Credit Agreement by and among Mercury
General Corporation, the Lender Party thereto and The Bank of
New York, as Agent, dated as of November 21, 1996.
10.26 Revolving Credit Agreement by and among Mercury General
Corporation, the Lender Party thereto and The Bank of New
York, as Agent, dated as of October 30, 1998.
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.
&& This document was filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended December 31, 1997 and is incorporated herein by this
reference.
(b) Reports on Form 8-K:
None
76
<PAGE>
AMENDMENT AND
-------------
RESTATEMENT
-----------
OF
--
CREDIT AGREEMENT
----------------
AMENDMENT AND RESTATEMENT (this "Amendment"), dated as of December 31,
---------
1998, of the CREDIT AGREEMENT, dated as of November 21, 1996, by and among
MERCURY GENERAL CORPORATION, a California corporation (the "Borrower"), the
lenders party thereto (collectively, together with their respective assigns, the
"Lenders", and each a "Lender") and THE BANK OF NEW YORK, as agent for the
Lenders (in such capacity, the "Agent"), as amended by Amendment No. 1, dated as
of February 20, 1998, Amendment No. 2, dated as of July 14, 1998 and Amendment
No. 3, dated as of October 30, 1998 (the "Agreement").
---------
RECITALS
--------
1. Except as otherwise provided herein, capitalized terms used herein
that are not herein defined shall have the meanings ascribed thereto by the
Agreement.
2. The parties to the Agreement desire to amend and restate the
Agreement to the extent set forth herein upon the terms and conditions herein
contained.
Therefore, in consideration of the RECITALS and the terms and conditions
herein contained, and of other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, it is agreed that the Agreement be
and the same hereby is amended and restated in its entirety so as to read as
presently set forth therein with the exception that the definition of "Maturity
Date" set forth in Section 1.1 thereof shall read as follows:
"Maturity Date": November 21, 2001 (or any date subsequent thereto
resulting from an extension of the Maturity Date pursuant to Section
2.17), or such earlier date on which the Notes shall become due and
payable, whether by acceleration or otherwise.
A. This Amendment shall not be effective until such time (the
"Restatement Effective Date") as each of the following conditions precedent has
- ---------------------------
been fulfilled:
<PAGE>
1. This Amendment.
--------------
The Agent shall have received counterparts of this Amendment
executed by a duly authorized officer of the Borrower and the Agent and
consented to by all of the Lenders.
2. Fees and Expenses of Special Counsel.
------------------------------------
The fees and expenses of Special Counsel in connection with the
preparation, negotiation and closing of this Amendment shall have been paid.
3. Compliance.
----------
After giving effect to this Amendment, (a) the Borrower shall be
in compliance with all of the terms, covenants and conditions of the Loan
Documents as amended hereby, (b) there shall exist no Default or Event of
Default and (c) the representations and warranties contained in the Loan
Documents shall be true and correct with the same effect as though such
representations and warranties had been made on the Restatement Effective Date.
B. The Borrower hereby reaffirms and admits the validity and
enforceability of the Loan Documents and all of its obligations thereunder,
agrees and admits that it has no defenses to or offsets against any of its
obligations under the Loan Documents, and represents and warrants that there
exists no Default or Event of Default and that the representations and
warranties contained in the Loan Documents are true and correct on and as of the
date hereof.
C. In all other respects the Loan Documents shall remain in full force
and effect, and no amendment of any term or condition of the Agreement herein
contained shall be deemed to be an amendment of any other term or condition
contained in the Agreement or any other Loan Document or constitute a waiver of
any Default or Event of Default.
D. This Amendment may be executed in any number of counterparts all of
which, taken together, shall constitute one Amendment. In making proof of this
Amendment, it shall only be necessary to produce the counterpart executed and
delivered by the party to be charged.
E. THIS AMENDMENT IS BEING EXECUTED AND DELIVERED IN, AND IS INTENDED
TO BE PERFORMED IN, THE STATE OF NEW YORK AND SHALL
<PAGE>
BE CONSTRUED AND ENFORCEABLE IN ACCORDANCE WITH, AND BE GOVERNED BY, THE
INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT
OF LAWS.
The Borrower and the Agent have caused this Amendment to be duly executed
as of the date first above written.
<PAGE>
MERCURY GENERAL CORPORATION
By:
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
THE BANK OF NEW YORK, individually
and as Agent
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
CONSENTED TO:
UNION BANK OF CALIFORNIA, N.A.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO
By:
----------------------------
Name:
--------------------------
Title:
------------------------
<PAGE>
REVOLVING CREDIT AGREEMENT
by and among
MERCURY GENERAL CORPORATION,
THE LENDERS PARTY HERETO,
AND
THE BANK OF NEW YORK, AS AGENT
UNION BANK OF CALIFORNIA, AS CO-AGENT
AND
FIRST NATIONAL BANK OF CHICAGO, AS CO-AGENT
WITH
BNY CAPITAL MARKETS, INC.
AS LEAD ARRANGER
________________
$100,000,000
________________
Dated as of October 30, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1 DEFINITIONS AND PRINCIPLES OF CONSTRUCTION .............. 1
Section 1.1 Definitions ............................................. 1
Section 1.2 Principles of Construction .............................. 13
ARTICLE 2 AMOUNT AND TERMS OF LOANS ............................... 14
Section 2.1 Loans ................................................... 14
Section 2.2 Notes ................................................... 14
Section 2.3 Procedure for Borrowing ................................. 15
Section 2.4 Termination or Reduction of Aggregate Commitments ....... 16
Section 2.5 Prepayments of the Loans ................................ 16
Section 2.6 Conversions and Continuations ........................... 17
Section 2.7 Interest Rate and Payment Dates ......................... 18
Section 2.8 Taxes ................................................... 19
Section 2.9 Substituted Interest Rate ............................... 21
Section 2.10 Illegality .............................................. 22
Section 2.11 Increased Costs ......................................... 22
Section 2.12 Capital Adequacy ........................................ 23
Section 2.13 Lending Offices ......................................... 24
Section 2.14 Indemnification for Loss ................................ 24
Section 2.15 Option to Fund .......................................... 25
Section 2.16 Use of Proceeds ......................................... 25
Section 2.17 Extension of Maturity Date .............................. 25
Section 2.18 Agent's Records ......................................... 26
Section 2.19 Mitigation of Taxes and Costs ........................... 26
ARTICLE 3 FEES; PAYMENTS .......................................... 27
Section 3.1 Commitment Fee .......................................... 27
Section 3.2 Pro Rata Treatment and Application of Principal Payments. 27
ARTICLE 4 REPRESENTATIONS AND WARRANTIES .......................... 28
Section 4.1 Subsidiaries ............................................ 28
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Section 4.2 Existence and Power ..................................... 28
Section 4.3 Authority ............................................... 28
Section 4.4 Binding Agreement ....................................... 28
Section 4.5 Litigation .............................................. 28
Section 4.6 Required Consents ....................................... 29
Section 4.7 No Conflicting Agreements ............................... 29
Section 4.8 Compliance with Applicable Laws ......................... 29
Section 4.9 Taxes ................................................... 29
Section 4.10 Governmental Regulations ................................ 30
Section 4.11 Federal Reserve Regulations; Use of Loan Proceeds ....... 30
Section 4.12 Plans ................................................... 30
Section 4.13 Financial Statements .................................... 30
Section 4.14 Property ................................................ 31
Section 4.15 Licenses, Franchises, Etc ............................... 31
Section 4.16 Environmental Matters ................................... 31
Section 4.17 Labor Relations ......................................... 32
Section 4.18 Burdensome Obligations .................................. 32
Section 4.19 No Misrepresentation .................................... 33
Section 4.20 Year 2000 ............................................... 33
ARTICLE 5 CONDITIONS TO FIRST LOANS ............................... 33
Section 5.1 Evidence of Action ...................................... 33
Section 5.2 This Agreement .......................................... 34
Section 5.3 Notes ................................................... 34
Section 5.4 Approvals ............................................... 34
Section 5.5 Opinion of Counsel to the Borrower ...................... 34
Section 5.6 Opinion of Special Counsel .............................. 34
Section 5.7 Payment of Fees ......................................... 34
Section 5.8 Other Documents ......................................... 35
ARTICLE 6 CONDITIONS OF LENDING - ALL LOANS ....................... 35
Section 6.1 Compliance .............................................. 35
Section 6.2 Loan Closings ........................................... 35
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Section 6.3 Borrowing Request ....................................... 35
Section 6.4 Other Documents ......................................... 35
ARTICLE 7 AFFIRMATIVE COVENANTS ................................... 36
Section 7.1 Financial Statements .................................... 36
Section 7.2 Certificates; Other Information ......................... 37
Section 7.3 Legal Existence ......................................... 38
Section 7.4 Taxes ................................................... 38
Section 7.5 Insurance ............................................... 38
Section 7.6 Payment of Indebtedness and Performance of Obligations .. 39
Section 7.7 Condition of Property ................................... 39
Section 7.8 Observance of Legal Requirements ........................ 39
Section 7.9 Inspection of Property; Books and Records; Discussions .. 39
Section 7.10 Authorizations .......................................... 39
Section 7.11 Adjusted Net Worth ...................................... 40
Section 7.12 GAAP Net Worth .......................................... 40
Section 7.13 Leverage Ratio .......................................... 40
Section 7.14 Interest Coverage Ratio ................................. 40
Section 7.15 Year 2000 Covenant ...................................... 40
ARTICLE 8 NEGATIVE COVENANTS ...................................... 40
Section 8.1 Indebtedness of Subsidiaries ............................ 41
Section 8.2 Liens ................................................... 41
Section 8.3 Mergers, Acquisitions and Dispositions .................. 42
Section 8.4 Line of Business ........................................ 42
Section 8.5 Articles of Incorporation and By-laws ................... 42
Section 8.6 Fiscal Year ............................................. 42
Section 8.7 Transactions with Affiliates ............................ 42
Section 8.8 Issuance of Additional Stock by Subsidiaries ............ 43
Section 8.9 Reinsurance Agreements .................................. 43
Section 8.10 Adoption of Pension Plans ............................... 43
ARTICLE 9 DEFAULT ................................................. 43
Section 9.1 Events of Default ....................................... 43
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE 10 THE AGENT ............................................... 46
Section 10.1 Appointment ............................................. 46
Section 10.2 Delegation of Duties .................................... 47
Section 10.3 Exculpatory Provisions .................................. 47
Section 10.4 Reliance by Agent ....................................... 47
Section 10.5 Notice of Default ....................................... 48
Section 10.6 Non-Reliance on Agent and Other Lenders ................. 48
Section 10.7 Indemnification ......................................... 49
Section 10.8 Agent in Its Individual Capacity ........................ 49
Section 10.9 Successor Agent ......................................... 49
ARTICLE 11 OTHER PROVISIONS ........................................ 50
Section 11.1 Amendments and Waivers .................................. 50
Section 11.2 Notices ................................................. 51
Section 11.3 No Waiver; Cumulative Remedies .......................... 52
Section 11.4 Survival of Representations and Warranties .............. 52
Section 11.5 Payment of Expenses and Taxes ........................... 52
Section 11.6 Assignments and Participations .......................... 53
Section 11.7 Counterparts ............................................ 55
Section 11.8 Adjustments; Set-off .................................... 55
Section 11.9 Construction ............................................ 56
Section 11.10 Indemnity ............................................... 56
Section 11.11 Governing Law ........................................... 57
Section 11.12 Headings Descriptive .................................... 57
Section 11.13 Severability ............................................ 57
Section 11.14 Integration ............................................. 57
Section 11.15 Consent to Jurisdiction ................................. 57
Section 11.16 Service of Process ...................................... 58
Section 11.17 No Limitation on Service or Suit ........................ 58
Section 11.18 WAIVER OF TRIAL BY JURY ................................. 58
</TABLE>
<PAGE>
EXHIBITS
- --------
Exhibit A List of Commitments
Exhibit B Form of Note
Exhibit C Form of Borrowing Request
Exhibit D Form of Assignment and Acceptance Agreement
Exhibit E Form of Opinion of Counsel to the Borrower
Exhibit F Form of Opinion of Special Counsel
Exhibit G Form of Notice of Conversion/Continuation
SCHEDULES
- ---------
Schedule 1.1 List of Lending Offices
Schedule 4.1 List of Subsidiaries
Schedule 4.5 List of Litigation
Schedule 8.1 List of Existing Indebtedness
Schedule 8.2 List of Existing Liens
<PAGE>
REVOLVING CREDIT AGREEMENT, dated as of October 30, 1998, by and among
MERCURY GENERAL CORPORATION, a California corporation (the "Borrower"), the
lenders party hereto (collectively, together with their respective assigns, the
"Lenders", and each a "Lender") and THE BANK OF NEW YORK, as agent for the
Lenders (in such capacity, the "Agent").
ARTICLE 1 DEFINITIONS AND PRINCIPLES OF CONSTRUCTION
Section 1.1 Definitions
As used in this Agreement, terms defined in the preamble have the
meanings therein indicated, and the following terms have the following meanings:
"ABR Advances": the Loans (or any portions thereof) at such time as
they (or such portions) are made and/or being maintained at a rate of interest
based upon the Alternate Base Rate.
"Accountants": KPMG Peat Marwick (or any successor thereto), or such
other firm of certified public accountants of recognized national standing
selected by the Borrower and reasonably satisfactory to the Agent.
"Acquisition": with respect to any Person, the purchase or other
acquisition by such Person, by any means whatsoever (including by devise,
bequest, gift, through a dividend or otherwise and whether in a single
transaction or in a series of related transactions), of (i) the Capital Stock
of, or other equity securities of, any other Person if, immediately thereafter,
such other Person would be either a Subsidiary of such Person or otherwise under
the control of such Person, (ii) any business, going concern or division or
segment thereof, or (iii) the Property of any other Person other than in the
ordinary course of business, provided, however, that no acquisition of all or
substantially all of the assets of such other Person shall be deemed to be in
the ordinary course of business.
"Adjusted Net Worth": at any date of determination, the sum of all
amounts which would be included under shareholders' equity on a Consolidated
balance sheet of the Borrower determined in accordance with GAAP (without
adjusting the value of securities held by the Borrower or its Subsidiaries to
market value as contemplated under FASB 115 for securities designated as
"available for sale").
"Advance": an ABR Advance or a Eurodollar Advance, as the case may be.
"Affected Advance": defined in Section 2.9.
"Affected Principal Amount": in the event that (i) the Borrower shall
fail for any reason to borrow, convert or continue after it shall have notified
the Agent of its intent to do so in any instance in which it shall have
requested a Eurodollar Advance, an amount equal to the principal amount of such
Eurodollar Advance; (ii) a Eurodollar Advance shall terminate pursuant to the
provisions hereof prior to the last day of the Interest Period applicable
thereto, an amount equal to the principal amount of such Eurodollar Advance; and
(iii) the Borrower shall prepay or repay all
<PAGE>
or any part of the principal amount of a Eurodollar Advance prior to the last
day of the Interest Period applicable thereto, an amount equal to the principal
amount of such Eurodollar Advance so prepaid or repaid.
"Affiliate": as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. For purposes of this definition, control of a Person shall mean the
power, direct or indirect, (i) to vote 5% or more of the securities or other
interests having ordinary voting power for the election of directors or other
managing Persons thereof or (ii) to direct or cause the direction of the
management and policies of such Person, whether by contract or otherwise.
"Aggregate Commitments": on any date, the sum of all Commitments on
such date.
"Agreement": this Revolving Credit Agreement, as the same may be
amended, supplemented or otherwise modified from time to time.
"Alternate Base Rate": on any date, a rate of interest per annum equal
to the higher of (i) the Federal Funds Rate in effect on such date plus 1/2 of
1% or (ii) the BNY Rate in effect on such date.
"Annual Statements": defined in Section 4.13(b).
"Applicable Insurance Code": with respect to any Insurance Subsidiary,
the insurance code of any jurisdiction where such Insurance Subsidiary is
domiciled or is conducting an insurance business, as in effect from time to time
and including any successor code or statute thereto, together with the
regulations issued thereunder.
"Applicable Insurance Regulatory Authority": with respect to any
Insurance Subsidiary, the insurance department or similar Governmental Authority
located in the jurisdiction in which such Insurance Subsidiary is domiciled and,
to the extent that it has any regulatory authority over such Insurance
Subsidiary, in each other jurisdiction in which such Insurance Subsidiary is
licensed.
"Applicable Lending Office": in respect of any Lender, (i) in the case
of such Lender's ABR Advances, its Domestic Lending Office and (ii) in the case
of such Lender's Eurodollar Advances, its Eurodollar Lending Office.
"Applicable Margin": (i) with respect to the unpaid principal balance
of ABR Advances, the applicable percentage set forth below in the column
entitled "ABR Advances", (ii) with respect to the unpaid principal balance of
Eurodollar Advances, the applicable percentage set forth below in the column
entitled "Eurodollar Advances", and (iii) with respect to the Commitment Fee,
the applicable percentage set forth below in the column entitled "Commitment
Fee"; in each case opposite the applicable Pricing Level:
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<PAGE>
<TABLE>
<CAPTION>
ABR Eurodollar Commitment
Pricing Level Advances Advances Fee
- -------------------- --------- ----------- -----------
<S> <C> <C> <C>
Pricing Level I 0% 0.4000% .1200%
Pricing Level II 0% 0.4500% .1200%
Pricing Level III 0% 0.5750% .1200%
Pricing Level IV 0% 0.6500% .1200%
</TABLE>
"Assignment and Acceptance Agreement": an assignment and acceptance
agreement executed by an assignor and an assignee pursuant to which the assignor
assigns to the assignee all or any portion of such assignor's Notes and
Commitment, substantially in the form of Exhibit D.
"Assignment Fee": defined in Section 11.6(b).
"Authorized Signatory": as to (i) any Person which is a corporation,
the chairman of the board, the president, any vice president, the chief
financial officer or any other duly authorized officer (acceptable to the Agent)
of such Person and (ii) any Person which is not a corporation, the general
partner or other managing Person thereof.
"Benefited Lender": defined in Section 11.8.
"BNY": The Bank of New York.
"BNY Rate": a rate of interest per annum equal to the rate of interest
publicly announced in New York City by BNY from time to time as its prime
commercial lending rate, such rate to be adjusted automatically (without notice)
on the effective date of any change in such publicly announced rate.
"Borrowing Date": any Business Day specified in a Borrowing Request as
a date on which the Borrower requests the Lenders to make Loans.
"Borrowing Request": a request for Loans in the form of Exhibit C.
"Business Day": for all purposes other than as set forth in clause
(ii) below, (i) any day other than a Saturday, Sunday or a day on which
commercial banks located in New York City and Los Angeles are authorized or
required by law or other governmental action to close and (ii) with respect to
all notices and determinations in connection with, and payments of principal and
interest on, Eurodollar Advances, any day which is a Business Day described in
clause (i) above and which is also a day on which dealings in foreign currency
and exchange and Eurodollar funding between banks may be carried on in London,
England.
"Capital Lease Obligations": with respect to any Person, the
obligations of such Person with respect to leases which, in accordance with
GAAP, are required to be capitalized on the financial statements of such Person.
-3-
<PAGE>
"Code": the Internal Revenue Code of 1986, as amended from time to
time, or any successor thereto, and the rules and regulations issued thereunder,
as from time to time in effect.
"Commitment": in respect of any Lender, such Lender's undertaking
during the Commitment Period to make Loans, subject to the terms and conditions
hereof, in an aggregate outstanding principal amount not exceeding the amount
set forth next to the name of such Lender in Exhibit A under the heading
"Commitments", as such amount may be reduced pursuant to Section 2.4.
"Commitment Fee": defined in Section 3.1.
"Commitment Period": the period from the Effective Date until the
Business Day immediately preceding the Maturity Date.
"Commitment Percentage": as to any Lender, the percentage set forth
opposite the name of such Lender in Exhibit A under the heading "Commitment
Percentage".
"Compensatory Interest Payment": defined in Section 2.7(c).
"Consolidated": the Borrower and its Subsidiaries which are
consolidated for financial reporting purposes.
"Consolidated Statutory Capital and Surplus": at any date the
consolidated statutory capital and surplus of the Borrower and its Subsidiaries
determined as of such date in accordance with SAP.
"Consolidating": the Borrower and its Subsidiaries taken separately.
"Contingent Obligation": as to any Person (the "secondary obligor"),
-----------------
any obligation, without duplication, of such secondary obligor (i) guaranteeing
or in effect guaranteeing any return on any investment made by another Person,
or (ii) guaranteeing or in effect guaranteeing any indebtedness, lease, dividend
or other obligation ("primary obligation") of any other Person (the "primary
------------------ -------
obligor") in any manner, whether directly or indirectly, including, without
- -------
limitation, any obligation of such secondary obligor, whether contingent, (A) to
purchase any such primary obligation or any Property constituting direct or
indirect security therefor, (B) to advance or supply funds (x) for the purchase
or payment of any such primary obligation or (y) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (C) to purchase Property, securities or
services primarily for the purpose of assuring the beneficiary of any such
primary obligation of the ability of the primary obligor to make payment of such
primary obligation, (D) otherwise to assure or hold harmless the beneficiary of
such primary obligation against loss in respect thereof, and (E) in respect of
the liabilities of any partnership in which such secondary obligor is a general
partner, except to the extent that such liabilities of such partnership are
nonrecourse to such secondary obligor and its separate Property, provided,
however, that the term "Contingent Obligation" shall not include (1) amounts
potentially
-4-
<PAGE>
owed on or with respect to insurance policies issued or sold in the ordinary
course of business, (2) premiums for any such policies, to the extent
attributable to a period after a particular date upon which Contingent
Obligations are being determined or (3) the indorsement of instruments for
deposit or collection in the ordinary course of business. The amount of any
Contingent Obligation of a Person shall be deemed to be an amount equal to the
stated or determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof as determined by such Person
in good faith.
"Control Person": defined in Section 2.12.
"Conversion/Continuation Date": the date on which (i) a Eurodollar
Advance is converted to an ABR Advance, (ii) the date on which an ABR Advance is
converted to a Eurodollar Advance or (iii) the date on which a Eurodollar
Advance is continued as a new Eurodollar Advance.
"Default": any event or condition which constitutes an Event of
Default or which, with the giving of notice, the lapse of time, or any other
condition, would, unless cured or waived, become an Event of Default.
"Disposition": with respect to any Person, any sale, ceding,
assignment, transfer or other disposition by such Person, by any means, of (a)
any Operating Entity, or (b) any other Property of such Person, provided,
however, that the term "Disposition" shall not include any sale, ceding,
assignment, transfer or other disposition by a Person that is a corporation (i)
to a wholly-owned Subsidiary of that Person or (ii) as a dividend to that
Person's shareholders.
"Dollars" and "$": lawful currency of the United States of America.
"Domestic Lending Office": in respect of any Lender, initially, the
office or offices of such Lender designated as such on Schedule 1.1; thereafter,
such other office of such Lender through which it shall be making or maintaining
ABR Advances, as reported by such Lender to the Agent and the Borrower.
"EBITDA": for any period, net income of the Borrower and its Non-
Insurance Subsidiaries for such period, determined on a Consolidated basis in
accordance with GAAP, plus the sum of, without duplication, (i) Interest
Expense, (ii) provision for income taxes of the Borrower and its Non-Insurance
Subsidiaries and (iii) depreciation, amortization and other non-cash charges of
the Borrower and its Non-Insurance Subsidiaries, each to the extent deducted in
determining such net income for such period.
"Effective Date": October 30, 1998.
"Employee Benefit Plan": an employee benefit plan within the meaning
of Section 3(3) of ERISA maintained, sponsored or contributed to by the
Borrower, any of its Subsidiaries or any ERISA Affiliate.
-5-
<PAGE>
"Environmental Laws": any and all federal, state and local laws
relating to the environment, the use, storage, transporting, manufacturing,
handling, discharge, disposal or recycling of hazardous substances, materials or
pollutants or industrial hygiene, and including, without limitation, (i) the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, 42 USCA (S)9601 et seq.; (ii) the Resource Conservation and Recovery
-- ---
Act of 1976, as amended, 42 USCA (S)6901 et seq.; (iii) the Toxic Substance
-- ---
Control Act, as amended, 15 USCA (S)2601 et. seq.; (iv) the Water Pollution
-- ---
Control Act, as amended, 33 USCA (S)1251 et. seq.; (v) the Clean Air Act, as
-- ---
amended, 42 USCA (S)7401 et seq.; (vi) the Hazardous Material Transportation
Act, as amended, 49 USCA (S)1801 et seq. and (vii) all rules, regulations,
-- ---
judgments, decrees, injunctions and restrictions thereunder and any analogous
state law.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rules and regulations issued thereunder, as
from time to time in effect.
"ERISA Affiliate": when used with respect to an Employee Benefit Plan,
ERISA, the PBGC or a provision of the Code pertaining to employee benefit plans,
any Person that is a member of any group of organizations within the meaning of
Sections 414(b), (c), (m) or (o) of the Code of which the Borrower or any of its
Subsidiaries is a member.
"Eurodollar Advances": collectively, the Loans (or any portions
thereof) at such time as they (or such portions) are made and/or being
maintained at a rate of interest based upon the Eurodollar Rate.
"Eurodollar Lending Office": in respect of any Lender, initially, the
office, branch or affiliate of such Lender designated as such on Schedule 1.1
(or, if no such office branch or affiliate is specified, its Domestic Lending
Office); thereafter, such other office, branch or affiliate of such Lender
through which it shall be making or maintaining Eurodollar Advances, as reported
by such Lender to the Agent and the Borrower.
"Eurodollar Rate": with respect to the Interest Period applicable to
any Eurodollar Advance, a rate of interest per annum, as determined by the
Agent, obtained by dividing (and then rounding to the nearest 1/16 of 1% or, if
there is no nearest 1/16 of 1%, then to the next higher 1/16 of 1%):
(a) the rate, as reported by BNY to the Agent, quoted by BNY to
leading banks in the interbank eurodollar market as the rate at which BNY is
offering Dollar deposits in an amount equal approximately to the Eurodollar
Advance of BNY to which such Interest Period shall apply for a period equal to
such Interest Period, as quoted at approximately 11:00 A.M. two Business Days
prior to the first day of such Interest Period, by
(b) a number equal to 1.00 minus the aggregate of the then stated
maximum rates during such Interest Period of all reserve requirements
(including, without limitation, marginal, emergency, supplemental and special
reserves), expressed as a decimal, established by the Board of Governors of the
Federal Reserve System and any other banking
-6-
<PAGE>
authority to which BNY and other major United States money center banks are
subject, in respect of eurocurrency funding (currently referred to as
"Eurocurrency liabilities" in Regulation D of the Board of Governors of the
Federal Reserve System) or in respect of any other category of liabilities
including deposits by reference to which the interest rate on Eurodollar
Advances is determined or any category of extensions of credit or other assets
which includes loans by non-domestic offices of any Lender to United States
Residents. Such reserve requirements shall include, without limitation, those
imposed under such Regulation D. Eurodollar Advances shall be deemed to
constitute Eurocurrency liabilities and as such shall be deemed to be subject to
such reserve requirements without benefit of credits for proration, exceptions
or offsets which may be available from time to time to any Lender under such
Regulation D. The Eurodollar Rate shall be adjusted automatically on and as of
the effective date of any change in any such reserve requirement.
"Event of Default": any of the events specified in Section 9.1,
provided that any requirement for the giving of notice, the lapse of time, or
any other condition has been satisfied.
"Extension Request": defined in Section 2.17.
"Federal Funds Rate": for any day, a rate per annum (expressed as a
decimal, rounded upwards, if necessary, to the next higher 1/100 of 1%), equal
to the weighted average of the rates on overnight federal funds transactions
with members of the Federal Reserve System arranged by federal funds brokers on
such day, as published by the Federal Reserve Bank of New York on the Business
Day next succeeding such day, provided that (i) if the day for which such rate
is to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
of the quotations for such day on such transactions received by BNY as
determined by BNY and reported to the Agent.
"Financial Statements": defined in Section 4.13(a).
"GAAP": generally accepted accounting principles as from time to time
in effect in the United States.
"GAAP Net Worth": at any date of determination, the sum of all amounts
which would be included under shareholders' equity on a Consolidated balance
sheet of the Borrower determined in accordance with GAAP.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government
and any court or arbitrator (including, without limitation, any Applicable
Insurance Regulatory Authority).
"Hazardous Substance": any hazardous or toxic substance, material or
waste, including, but not limited to, (i) those substances, materials, and
wastes listed in the United States Department of Transportation Hazardous
Materials Table (49 CFR 172.101) or by the
-7-
<PAGE>
Environmental Protection Agency as hazardous substances (40 CFR Part 302) and
amendments thereto and replacements therefor and (ii) any substance, pollutant
or material defined as, or designated in, any Environmental Law as a "hazardous
substance," "toxic substance," "hazardous material," "hazardous waste,"
"restricted hazardous waste," "pollutant," "toxic pollutant" or words of similar
import.
"Highest Lawful Rate": as to any Lender, the maximum rate of interest,
if any, that at any time or from time to time may be contracted for, taken,
charged or received by such Lender on the Notes held thereby or which may be
owing to such Lender pursuant to this Agreement and the other Loan Documents
under the laws applicable to such Lender and this transaction.
"Indebtedness": as to any Person, at a particular time, all items
which constitute, without duplication, (i) indebtedness for borrowed money or
the deferred purchase price of Property (other than trade payables and accrued
expenses incurred in the ordinary course of business), (ii) indebtedness
evidenced by notes, bonds, debentures or similar instruments, (iii) obligations
with respect to any conditional sale or title retention agreement, (iv)
indebtedness arising under acceptance facilities and the amount available to be
drawn under all letters of credit issued for the account of such Person and,
without duplication, all drafts drawn thereunder to the extent such Person shall
not have reimbursed the issuer in respect of the issuer's payment of such
drafts, (v) all liabilities secured by any Lien on any Property owned by such
Person even though such Person has not assumed or otherwise become liable for
the payment thereof (other than carriers', warehousemen's, mechanics',
repairmen's or other like non-consensual statutory Liens arising in the ordinary
course of business), (vi) obligations under Capital Lease Obligations and (vii)
Contingent Obligations; provided that, for purposes of this definition, (a)
"Indebtedness" shall not include obligations in respect of interest rate caps,
collars, swaps or other similar agreements, and (b) Indebtedness under clauses
(iii) or (v) shall be taken at the lesser of the principal amount of such
Indebtedness and the value of the property subject to the Lien referred to
therein.
"Indemnified Person": defined in Section 11.10.
"Insurance Subsidiary": each Subsidiary of the Borrower set forth on
Schedule 4.1 under the heading "Engaged in an Insurance Business."
"Intellectual Property": all copyrights, trademarks, servicemarks,
patents, trade names and service names.
"Interest Coverage Ratio": at any date of determination, the ratio of
(i) the sum of (x) EBITDA of the Borrower and its Non-Insurance Subsidiaries for
the immediately preceding four fiscal quarters of the Borrower plus (y) the
----
greater of (1) 10% of Statutory Surplus of the Insurance Subsidiaries at such
date of determination and (2) Statutory Net Income of the Insurance Subsidiaries
for the immediately preceding four fiscal quarters of the Borrower to (ii)
Interest Expense for the immediately preceding four fiscal quarters of the
Borrower.
"Interest Expense": for any period, the sum of, without duplication,
all interest and commitment fees (adjusted to give effect to all interest rate
swap, cap or other interest rate hedging
-8-
<PAGE>
arrangements and fees and expenses paid in connection with the same, all as
determined in accordance with GAAP), paid or accrued in respect of all
Indebtedness of the Borrower and its Subsidiaries determined on a Consolidated
basis in accordance with GAAP during such period.
"Interest Payment Date": (i) as to any ABR Advance, the last day of
each March, June, September and December commencing on the first of such days to
occur after such ABR Advance is made or any Eurodollar Advance is converted to
an ABR Advance, (ii) as to any Eurodollar Advance in respect of which the
Borrower has selected an Interest Period of one, two or three months, the last
day of such Interest Period, and (iii) as to any Eurodollar Advance in respect
of which the Borrower has selected an Interest Period of six months, the day
which is three months after the first day of such Interest Period and the last
day of such Interest Period.
"Interest Period": with respect to any Eurodollar Advance requested by
the Borrower, the period commencing on, as the case may be, the Borrowing Date
or Conversion/Continuation Date with respect to such Eurodollar Advance and
ending one, two, three or six months thereafter, as selected by the Borrower in
its irrevocable Borrowing Request or its irrevocable Notice of
Conversion/Continuation, provided, however, that (i) if any Interest Period
would otherwise end on a day which is not a Business Day, such Interest Period
shall be extended to the next succeeding Business Day unless the result of such
extension would be to carry such Interest Period into another calendar month, in
which event such Interest Period shall end on the immediately preceding Business
Day, (ii) any Interest Period that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the last
Business Day of a calendar month and (iii) the Borrower shall select Interest
Periods so as not to have more than five different Interest Periods outstanding
at any one time for all Loans.
"Leverage Ratio": as of any date, the ratio of (a) Consolidated
Indebtedness of the Borrower on such date, to (b) the sum of (i) Consolidated
Indebtedness of the Borrower on such date, plus (ii) Adjusted Net Worth on such
date.
"Lien": any mortgage, pledge, hypothecation, assignment, deposit or
preferential arrangement, encumbrance, lien (statutory or other), or other
security agreement or security interest of any kind or nature whatsoever,
including, without limitation, any conditional sale or other title retention
agreement and any capital or financing lease having substantially the same
economic effect as any of the foregoing.
"Loan Documents": collectively, this Agreement and the Notes.
"Loan" and "Loans": defined in Section 2.1.
"Margin Stock": any "margin stock", as defined in Regulation U of the
Board of Governors of the Federal Reserve System, as the same may be amended or
supplemented from time to time.
-9-
<PAGE>
"Material Adverse Change": a material adverse change in (i) the
financial condition, operations, business, prospects or Property of the Borrower
and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to
perform its obligations under the Loan Documents or (iii) the ability of the
Agent and the Lenders to enforce the Loan Documents, including, without
limitation, as a result of a change of law since December 31, 1997.
"Material Adverse Effect": a material adverse effect on (i) the
financial condition, operations, business, prospects or Property of the Borrower
and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to
perform its obligations under the Loan Documents or (iii) the ability of the
Agent and the Lenders to enforce the Loan Documents, including, without
limitation, as a result of a change of law since December 31, 1997.
"Maturity Date": October 29, 1999 (or any date subsequent thereto
resulting from an extension of the Maturity Date pursuant to Section 2.17), or
such earlier date on which the Notes shall become due and payable, whether by
acceleration or otherwise.
"Multiemployer Plan": a Pension Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"NAIC": the National Association of Insurance Commissioners, or any
association or Governmental Authority successor to the functions thereof.
"1996 Revolving Credit": the Revolving Credit Agreement, dated as of
November 21, 1996, by and among the Borrower, the lenders party thereto and BNY
as agent.
"Non-Insurance Subsidiary": each Subsidiary of the Borrower set forth
on Schedule 4.1 under the heading "Not Engaged in an Insurance Business."
"Note" and "Notes": defined in Section 2.2.
"Notice of Conversion/Continuation": a notice substantially in the
form of Exhibit G.
"Operating Entity": (a) any Person, (b) any business or operating unit
of a Person which is, or could be, operated separate and apart from the other
businesses and operations of such Person, or (c) any other line of business or
business segment.
"Pension Plan": at any date of determination, any Employee Benefit
Plan (including a Multiemployer Plan), the funding requirements of which (under
Section 302 of ERISA or Section 412 of the Code) are, or at any time within the
six years immediately preceding such date, were in whole or in part, the
responsibility of the Borrower, any of its Subsidiaries or any ERISA Affiliate.
"Permitted Liens": Liens permitted to exist under Section 8.2.
-10-
<PAGE>
"Person": any individual, firm, partnership, joint venture,
corporation, limited liability company, association, business enterprise, joint
stock company, unincorporated association, trust, Governmental Authority or any
other entity, whether acting in an individual, fiduciary, or other capacity, and
for the purpose of the definition of "ERISA Affiliate", a trade or business.
"Pricing Level I": any time when the Leverage Ratio is less than or
equal to .10:1.00.
"Pricing Level II": any time when the Leverage Ratio is greater than
.10:1.00, but less than or equal to .15:1.00.
"Pricing Level III": any time when the Leverage Ratio is greater than
.15:1.00, but less than or equal to .25:1.00.
"Pricing Level IV": any time when the Leverage Ratio is greater than
.25:1.00
"Property": all types of real, personal, tangible, intangible or mixed
property.
"Real Property": all real property owned or leased by the Borrower or
any of its Subsidiaries.
"Reinsurance Agreement": any agreement, contract, treaty, certificate
or other arrangement under which any Insurance Subsidiary agrees to transfer or
cede to another insurer all or part of the liabilities assumed, or the assets
held, by such Insurance Subsidiary under one or more policies of insurance
(including, without limitation, any agreement, contract, treaty, certificate or
other arrangement that is treated as such by any Applicable Insurance Regulatory
Authority of such Insurance Subsidiary).
"Remaining Interest Period": (i) in the event that the Borrower shall
fail for any reason to borrow a Loan in respect of which it shall have requested
a Eurodollar Advance or convert an Advance to, or continue an Advance as, a
Eurodollar Advance after it shall have notified the Agent of its intent to do
so, a period equal to the Interest Period that the Borrower elected in respect
of such Eurodollar Advance; or (ii) in the event that a Eurodollar Advance shall
terminate pursuant to the provisions hereof prior to the last day of the
Interest Period applicable thereto, a period equal to the remaining portion of
such Interest Period if such Interest Period had not been so terminated; or
(iii) in the event that the Borrower shall prepay or repay all or any part of
the principal amount of a Eurodollar Advance prior to the last day of the
Interest Period applicable thereto, a period equal to the period from and
including the date of such prepayment or repayment to but excluding the last day
of such Interest Period.
"Reporting Insurance Subsidiary": on any date, each Insurance
Subsidiary which, as of the end of the fiscal quarter immediately preceding such
date, (i) had a Statutory Surplus of at least 5% of consolidated Statutory
Surplus of the Insurance Subsidiaries at the end of such fiscal quarter or (ii)
accounted for at least 5% of consolidated net premiums written by the Insurance
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Subsidiaries for the 4 fiscal quarters immediately preceding such date.
"Required Lenders": at any time when no Loans are outstanding, Lenders
having Commitments (or if no Commitments then exist, Lenders having Commitments
on the last day on which Commitments did exist) equal to at least 66 2/3% of the
aggregate Commitments of all the Lenders, and at any time when Loans are
outstanding, Lenders holding Notes having an unpaid principal balance equal to
at least 66 2/3% of the aggregate Loans outstanding.
"Restricted Payment": as to any Person (i) any dividend or other
distribution, direct or indirect, on account of any shares of any class of Stock
or other equity interest in such Person now or hereafter outstanding (other than
a dividend payable solely in shares of such Stock to the holders of such shares)
and (ii) any redemption, retirement, sinking fund or similar payment, purchase
or other acquisition, direct or indirect, of any shares of any class of Stock or
other equity interest in such Person now or hereafter outstanding.
"SAP": with respect to each Insurance Subsidiary, statutory accounting
principles in effect from time to time prescribed or permitted by the Applicable
Insurance Regulatory Authority in the preparation of the financial statements of
such Subsidiary.
"SEC": the Securities and Exchange Commission or any Governmental
Authority succeeding to the functions thereof.
"Special Counsel": Emmet, Marvin & Martin, LLP, special counsel to the
Agent.
"Statutory Net Income": with respect to the Insurance Subsidiaries for
any period, the consolidated statutory net income of the Insurance Subsidiaries
for such period computed in accordance with SAP and consistent with that
reported on line 16, page 4, column 1 of the Summary of Operations Statement in
the Annual Statement.
"Statutory Surplus": with respect to the Insurance Subsidiaries at any
date of determination, the consolidated statutory surplus of the Insurance
Subsidiaries on such date computed in accordance with SAP and consistent with
that reported on line 25, page 3, column 1 of the Liabilities, Surplus and Other
Funds Statement in the Annual Statement.
"Stock": as to any Person, all shares, interests, partnership
interests, limited liability company interests, participations, rights in or
other equivalents (however designated) of such Person's equity (however
designated) and any rights, warrants or options exchangeable for or convertible
into such shares, interests, participations, rights or other equity.
"Subsidiary": as to any Person, any corporation, association,
partnership, limited liability company, joint venture or other business entity
of which such Person or any Subsidiary of such Person, directly or indirectly,
either (i) in respect of a corporation, owns or controls more than 50% of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors or similar managing body, irrespective of whether a class or
classes shall or might have voting power by reason of the happening of any
contingency, or (ii) in respect of an association,
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partnership, limited liability company, joint venture or other business entity,
is entitled to share in more than 50% of the profits and losses, however
determined.
"Tax": any present or future tax, levy, impost, duty, charge, fee,
deduction or withholding of any nature and whatever called, by a Governmental
Authority, on whomsoever and wherever imposed, levied, collected, withheld or
assessed.
"Tax on the Overall Net Income": as to any Person, a Tax imposed by
the jurisdiction in which that Person's principal office (and/or, in the case of
a Lender, its Domestic Lending Office) is located or by any political
subdivision or taxing authority thereof or in which that Person is deemed to be
doing business on all or part of the net income, profits or gains of that Person
(whether worldwide, or only insofar as such income, profits or gains are
considered to arise in or to relate to a particular jurisdiction, or otherwise).
"United States": the United States of America (including the States
thereof and the District of Columbia).
"Unqualified Amount": defined in Section 2.7(c).
"Utilization Fee": defined in Section 3.3.
"Year 2000 Issue": defined in Section 4.20.
Section 1.2 Principles of Construction
(a) All terms defined in a Loan Document shall have the meanings
given such terms therein when used in the other Loan Documents or any
certificate, opinion or other document made or delivered pursuant thereto,
unless otherwise defined therein.
(b) As used in the Loan Documents and in any certificate, opinion
or other document made or delivered pursuant thereto, accounting terms not
defined in Section 1.1, and accounting terms partly defined in Section 1.1, to
the extent not defined, shall have the respective meanings given to them under
GAAP, or, to the extent that such terms apply solely to one or more Insurance
Subsidiaries, given to them under SAP.
(c) The phrase "may not" is prohibitive and not permissive.
(d) Unless the context otherwise requires, words in the singular
number include the plural, and words in the plural include the singular.
(e) Unless specifically provided in a Loan Document to the
contrary, references to a time shall refer to New York City time.
(f) Unless specifically provided in a Loan Document to the
contrary, in the computation of periods of time from a specified date to a later
specified date, the word "from"
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means "from and including" and the words "to" and "until" each means "to but
excluding".
(g) References in any Loan Document to a fiscal period shall refer
to that fiscal period of the Borrower.
ARTICLE 2 AMOUNT AND TERMS OF LOANS
Section 2.1 Loans
Subject to the terms and conditions hereof, each Lender severally
agrees to make revolving credit loans (each a "Loan" and, as the context may
----
require, collectively with all other Loans of such Lender and with the Loans of
all other Lenders, the "Loans") to the Borrower from time to time during the
Commitment Period, provided, however, that immediately after giving effect
thereto (i) the outstanding principal balance of such Lender's Loans would not
exceed such Lender's Commitment, and (b) the aggregate outstanding principal
balance of all Lenders' Loans would not exceed the Aggregate Commitments. During
the Commitment Period, the Borrower may borrow, prepay in whole or in part and
reborrow under the Aggregate Commitments, all in accordance with the terms and
conditions of this Agreement.
Section 2.2 Notes
The Loans made by a Lender shall be evidenced by a promissory note
of the Borrower, substantially in the form of Exhibit B, with appropriate
insertions therein as to date and principal amount (each, as indorsed or
modified from time to time, a "Note" and, collectively with the Notes of all
other Lenders, the "Notes"), payable to the order of such Lender for the account
of its Applicable Lending Office and representing the obligation of the Borrower
to pay the lesser of (a) the original amount of the Commitment of such Lender
and (b) the aggregate unpaid principal balance of all Loans made by such Lender,
with interest thereon as prescribed in Section 2.7. Each Note shall (i) be dated
the first Borrowing Date, (ii) be stated to mature on the Maturity Date and
(iii) bear interest from the date thereof on the unpaid principal balance
thereof at the applicable interest rate or rates per annum determined as
provided in Section 2.7. Interest on each Note shall be payable as specified in
Section 2.7.
Section 2.3 Procedure for Borrowing
(a) The Borrower may borrow under the Aggregate Commitments on any
Business Day during the Commitment Period, provided, however, that the Borrower
shall notify the Agent (by telephone or fax) no later than: 12:00 Noon three
Business Days prior to the requested Borrowing Date, in the case of Eurodollar
Advances, and 12:00 Noon, one Business Day prior to the requested Borrowing
Date, in the case of ABR Advances, specifying in each case (i) the aggregate
principal amount to be borrowed under the Aggregate Commitments, (ii) the
requested Borrowing Date, (iii) whether such borrowing is to consist of one or
more Eurodollar Advances, ABR Advances, or a combination thereof and (iv) if the
borrowing is to consist of one or more Eurodollar Advances, the length of the
Interest Period for each such
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Eurodollar Advance, provided, however, that no Interest Period selected in
respect of any Loan shall end after the Maturity Date. If the Borrower fails to
give timely notice in connection with a request for a Eurodollar Advance, the
Borrower shall be deemed to have elected that such Advance shall be made as an
ABR Advance. Each such notice shall be irrevocable and confirmed immediately by
delivery to the Agent of a Borrowing Request. Each Advance shall be in an
aggregate principal amount equal to $3,000,000 or such amount plus a whole
multiple of $1,000,000 in excess thereof, or, if less, the unused amount of the
Aggregate Commitments.
(b) Upon receipt of each notice of borrowing from the Borrower,
the Agent shall promptly notify each Lender thereof. Subject to its receipt of
the notice referred to in the preceding sentence, (i) each Lender will make the
amount of its Commitment Percentage of each borrowing available to the Agent for
the account of the Borrower at the office of the Agent set forth in Section 11.2
not later than 2:00 PM on the relevant Borrowing Date requested by the Borrower,
in funds immediately available to the Agent at such office. The amounts so made
available to the Agent on such Borrowing Date will then, subject to the
satisfaction of the terms and conditions of this Agreement, as determined by the
Agent, be made available on such date to the Borrower by the Agent at the office
of the Agent specified in Section 11.2 by crediting the account of the Borrower
on the books of such office with the aggregate of said amounts received by the
Agent.
(c) Unless the Agent shall have received prior notice from a
Lender (by telephone or otherwise, such notice to be promptly confirmed by fax
or other writing) that such Lender will not make available to the Agent such
Lender's Commitment Percentage of the Loans requested by the Borrower, the Agent
may assume that such Lender has made such share available to the Agent on the
Borrowing Date in accordance with this Section, provided that such Lender
received notice of the proposed borrowing from the Agent, and the Agent may, in
reliance upon such assumption, make available to the Borrower on the Borrowing
Date a corresponding amount. If and to the extent such Lender shall not have so
made its Commitment Percentage of such Loans available to the Agent, such Lender
and the Borrower severally agree to pay to the Agent forthwith on demand such
corresponding amount (to the extent not previously paid by the other), together
with interest thereon for each day from the date such amount is made available
to the Borrower to the date such amount is paid to the Agent, at a rate per
annum equal to, in the case of the Borrower, the applicable interest rate set
forth in Section 2.7 for ABR Advances, and, in the case of such Lender, the
Federal Funds Rate in effect on each such day (as determined by the Agent). Such
payment by the Borrower, however, shall be without prejudice to its rights
against such Lender. If such Lender shall pay to the Agent such corresponding
amount, such amount so paid shall constitute such Lender's Loan as part of the
Loans for purposes of this Agreement, which Loan shall be deemed to have been
made by such Lender on the Borrowing Date applicable to such Loans.
(d) If a Lender makes a new Loan on a Borrowing Date on which the
Borrower is to repay a Loan from such Lender, such Lender shall apply the
proceeds of such new Loan to make such repayment, and only the excess of the
proceeds of such new Loan over the Loan being repaid need be made available to
the Agent.
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(e) Notices of borrowing given by telephone shall be deemed given
when made by telephone and the Agent and the Lenders may rely thereon whether
such notice is confirmed by the delivery of a Borrowing Request.
Section 2.4 Termination or Reduction of Aggregate Commitments
(a) Voluntary Reductions. The Borrower shall have the right, upon
at least three Business Days' prior written notice to the Agent, at any time to
terminate the Aggregate Commitments or from time to time to permanently reduce
the Aggregate Commitments, provided, however, that any such reduction shall be
in the amount of $3,000,000 (or such lesser available amount of the Facility) or
$3,000,000 plus a whole multiple of $1,000,000 in excess thereof.
(b) In General. Reductions of the Aggregate Commitments shall be
applied pro rata according to the Commitment of each Lender. Simultaneously with
each reduction of the Aggregate Commitments under this Section, the Borrower
shall pay the Commitment Fee accrued on the amount by which the Aggregate
Commitments have been reduced and prepay the Loans as required by Section
2.5(b).
Section 2.5 Prepayments of the Loans
(a) Voluntary Prepayments. The Borrower may, at its option, prepay
the Loans without premium or penalty, in full at any time or in part from time
to time by notifying the Agent in writing at least one Business Day prior to the
proposed prepayment date, in the case of Loans consisting of ABR Advances and at
least three Business Days prior to the proposed prepayment date, in the case of
Loans consisting of Eurodollar Advances, in each case specifying whether the
Loans to be prepaid consist of ABR Advances, Eurodollar Advances, or a
combination thereof, the amount to be prepaid and the date of prepayment. Such
notice shall be irrevocable and the amount specified in such notice shall be due
and payable on the date specified, together with accrued interest to the date of
such payment on the amount prepaid. Upon receipt of such notice, the Agent shall
promptly notify each Lender thereof. Each partial prepayment of the Loans
pursuant to this subsection shall be in an aggregate principal amount of
$3,000,000 (or any smaller outstanding balance of the Loans) or $3,000,000 plus
a whole multiple of $1,000,000 in excess thereof. After giving effect to any
partial prepayment with respect to Eurodollar Advances which were made (whether
as the result of a borrowing or a conversion) on the same date and which had the
same Interest Period, the outstanding principal amount of such Eurodollar
Advances shall exceed (subject to Section 2.6) $3,000,000 or such amount plus a
whole multiple of $1,000,000 in excess thereof.
(b) Mandatory Prepayments of Loans Relating to Reductions of the
Aggregate Commitments. Simultaneously with each reduction of the Aggregate
Commitments under Section 2.4, the Borrower shall prepay the Loans by the
amount, if any, by which the aggregate unpaid principal balance of the Loans
exceeds the amount of the Aggregate Commitments as so reduced.
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(c) In General. If any prepayment is made in respect of any
Eurodollar Advance, in whole or in part, prior to the last day of the applicable
Interest Period, the Borrower agrees to indemnify the Lenders in accordance with
Section 2.14.
Section 2.6 Conversions and Continuations
(a) The Borrower may elect from time to time to convert Eurodollar
Advances to ABR Advances by giving the Agent at least one Business Day's prior
irrevocable notice of such election (confirmed by the delivery of a Notice of
Conversion/Continuation), specifying the amount to be so converted, provided,
that any such conversion of Eurodollar Advances shall only be made on the last
day of the Interest Period applicable thereto. In addition, the Borrower may
elect from time to time to (i) convert ABR Advances to Eurodollar Advances and
(ii) to continue Eurodollar Advances by selecting a new Interest Period
therefor, in each case by giving the Agent at least three Business Days' prior
irrevocable notice of such election (confirmed by the delivery of a Notice of
Conversion/Continuation), in the case of a conversion to, or continuation of,
Eurodollar Advances, specifying the amount to be so converted and the initial
Interest Period relating thereto, provided that any such conversion of ABR
Advances to Eurodollar Advances shall only be made on a Business Day and any
such continuation of Eurodollar Advances shall only be made on the last day of
the Interest Period applicable to the Eurodollar Advances which are to be
continued as such new Eurodollar Advances. The Agent shall promptly provide the
Lenders with a copy of each such Notice of Conversion/Continuation. ABR Advances
and Eurodollar Advances may be converted or continued pursuant to this Section
in whole or in part, provided that conversions of ABR Advances to Eurodollar
Advances, or continuations of Eurodollar Advances shall be in an aggregate
principal amount of $3,000,000 or such amount plus a whole multiple of
$1,000,000 in excess thereof.
(b) Notwithstanding anything in this Section to the contrary, no
ABR Advance may be converted to a Eurodollar Advance and no Eurodollar Advance
may be continued, if the Borrower or the Agent has knowledge that an Event of
Default has occurred and is continuing either (i) at the time the Borrower shall
notify the Agent of its election to convert or continue or (ii) on the requested
Conversion/Continuation Date. In such event, such ABR Advance shall be
automatically continued as an ABR Advance, or such Eurodollar Advance shall be
automatically converted to an ABR Advance on the last day of the Interest Period
applicable to such Eurodollar Advance. If an Event of Default shall have
occurred and be continuing, the Agent shall, at the request of the Required
Lenders, notify the Borrower (by telephone or otherwise) that all, or such
lesser amount as the Required Lenders shall designate, of the outstanding
Eurodollar Advances shall be automatically converted to ABR Advances, in which
event such Eurodollar Advances shall be automatically converted to ABR Advances
on the date such notice is given.
(c) No Interest Period selected in respect of conversion or
continuation of any Eurodollar Advance shall end after the Maturity Date.
(d) Each conversion or continuation of a Eurodollar Advance shall
be effected by each Lender by applying the proceeds of its new Eurodollar
Advance to its Eurodollar Advances (or portion thereof) being converted or
continued (it being understood that such
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conversion or continuation shall not constitute a borrowing for purposes of
Sections 4, 5 or 6).
(e) Notices in respect of a conversion or continuation given by
telephone shall be deemed given when made by telephone and the Agent and the
Lenders may rely thereon whether such notice is confirmed by the delivery of a
Notice of Conversion/Continuation.
Section 2.7 Interest Rate and Payment Dates
(a) Prior to Maturity. Except as otherwise provided in Section
2.7(b), prior to maturity, the Loans shall bear interest on the outstanding
principal balance thereof at the applicable interest rate or rates per annum set
forth below:
LOANS RATE
----- ----
Made as ABR Alternate Base Rate plus the
Advances Applicable Margin.
Made as Eurodollar Eurodollar Rate for the
Advances applicable Interest Period
plus the Applicable Margin.
(b) Event of Default. After the occurrence and during the
continuance of a Default or an Event of Default under Section 9.1(a) or (b), the
outstanding principal balance of the Loans shall bear interest at a rate per
annum equal to 2% plus the rate which would otherwise be applicable under
Section 2.7(a), and any overdue interest or other amount payable under the Loan
Documents shall bear interest at a rate per annum equal to the Alternate Base
Rate plus the Applicable Margin plus 2%. All such interest shall be payable on
demand.
(c) In General. Interest on (i) ABR Advances to the extent based on
the BNY Rate shall be calculated on the basis of a 365 or 366-day year (as the
case may be), and (ii) ABR Advances to the extent based on the Federal Funds
Rate and on Eurodollar Advances shall be calculated on the basis of a 360-day
year, in each case, for the actual number of days elapsed, including the first
day but excluding the last. Except as otherwise provided in Section 2.7(b),
interest shall be payable in arrears on each Interest Payment Date and upon each
payment (including prepayment) of the Loans. Any change in the interest rate on
the Loans resulting from a change in the Alternate Base Rate or reserve
requirements shall become effective as of the opening of business on the day on
which such change shall become effective. The Agent shall, as soon as
practicable, notify the Borrower and the Lenders of the effective date and the
amount of each such change in the BNY Rate, but any failure to so notify shall
not in any manner affect the obligation of the Borrower to pay interest on the
Loans in the amounts and on the dates required. Each determination of the
Alternate Base Rate or a Eurodollar Rate by the Agent pursuant to this Agreement
shall be conclusive and binding on the Borrower absent manifest error. At no
time shall the interest rate payable on the Loans, together with the Commitment
Fee and all other amounts payable under the Loan Documents, to the extent the
same are construed to constitute
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interest, exceed the Highest Lawful Rate. If in respect of a ny period during
the term of this Agreement, any amount paid hereunder, to the extent the same
shall (but for the provisions of this Section) constitute or be deemed to
constitute interest, would exceed the maximum amount of interest permitted by
the Highest Lawful Rate during such period (such amount being hereinafter
referred to as an "Unqualified Amount"), then (i) such Unqualified Amount shall
be applied or shall be deemed to have been applied as a prepayment of the Loans,
and (ii) if in any subsequent period during the term of this Agreement, all
amounts payable hereunder in respect of such period which constitute or shall be
deemed to constitute interest shall be less than the maximum amount of interest
permitted by the Highest Lawful Rate during such period, then the Borrower shall
pay to the Lenders in respect of such period an amount (each a "Compensatory
Interest Payment") equal to the lesser of (x) a sum which, when added to all
such amounts, would equal the maximum amount of interest permitted by the
Highest Lawful Rate during such period, and (y) an amount equal to the
Unqualified Amount less all other Compensatory Interest Payments made in respect
thereof. The Borrower acknowledges that to the extent interest payable on ABR
Advances is based on the BNY Rate, such Rate is only one of the bases for
computing interest on loans made by the Lenders, and by basing interest payable
on ABR Advances on the BNY Rate, the Lenders have not committed to charge, and
the Borrower has not in any way bargained for, interest based on a lower or the
lowest rate at which the Lenders may now or in the future make loans to other
borrowers.
Section 2.8 Taxes
(a) Payments to Be Free and Clear. Provided that all
documentation, if any, then required to be delivered by any Lender or the Agent
pursuant to subsection (c) below has been delivered, all sums payable by the
Borrower under the Loan Documents shall be paid free and clear of and (except to
the extent required by law) without any deduction or withholding on account of
any Tax (other than a Tax on the Overall Net Income of any Lender (for which
payment need not be free and clear but no deduction or withholding shall be made
unless then required by applicable law)) imposed, levied, collected, withheld or
assessed by or within the United States or any political subdivision in or of
the United States or any other jurisdiction from or to which a payment is made
by or on behalf of the Borrower or by any federation or organization of which
the United States or any such jurisdiction is a member at the time of payment.
(b) Grossing-up of Payments. If the Borrower or any other Person
is required by law to make any deduction or withholding on account of any such
Tax from any sum paid or payable by the Borrower to the Agent or any Lender
under any of the Loan Documents:
(i) The Borrower shall notify the Agent and such Lender of
any such requirement or any change in any such requirement as soon as the
Borrower becomes aware of it;
(ii) The Borrower shall pay any such Tax before the date on
which penalties attach thereto, such payment to be made (if the liability to pay
is imposed on the Borrower) for its own account or (if that liability is imposed
on the Agent or such Lender, as the case may be) on behalf of and in the name of
the Agent or such Lender;
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(iii) the sum payable by the Borrower to the Agent or a
Lender in respect of which the relevant deduction, withholding or payment is
required shall be increased to the extent necessary to ensure that, after the
making of that deduction, withholding or payment, the Agent or such Lender, as
the case may be, receives on the due date therefor a net sum equal to what it
would have received had no such deduction, withholding or payment been required
or made; and
(iv) within 30 days after paying any sum from which it is
required by law to make any deduction or withholding, and within 30 days after
the due date of payment of any Tax which it is required by clause (b) above to
pay, the Borrower shall deliver to the Agent and the applicable Lender evidence
satisfactory to the other affected parties of such deduction, withholding or
payment and of the remittance thereof to the relevant Governmental Authority;
provided that no such additional amount shall be required to be paid to any
Lender under clause (iii) above except to the extent that any change after the
date hereof (in the case of each Lender listed on the signature pages hereof) or
after the date of the Assignment and Acceptance Agreement pursuant to which such
Lender became a Lender (in the case of each other Lender) in any such
requirement for a deduction, withholding or payment as is specified therein
shall result in an increase in the rate of such deduction, withholding or
payment from that in effect at the date of this Agreement or at the date of such
Assignment and Acceptance, as the case may be, in respect of payments to such
Lender.
(c) U.S. Tax Certificates. Each Lender that is organized under the
laws of any jurisdiction other than the United States shall deliver to the Agent
for transmission to the Borrower, on or prior to the Effective Date (in the case
of each Lender listed on the signature pages hereof) or on the effective date of
the Assignment and Acceptance Agreement pursuant to which it becomes a Lender
(in the case of each other Lender), and at such other times as may be necessary
in the determination of the Borrower or the Agent (each in the reasonable
exercise of its discretion), such certificates, documents or other evidence,
properly completed and duly executed by such Lender (including, without
limitation, Internal Revenue Service Form 1001 or Form 4224 or any other
certificate or statement of exemption required by Treasury Regulations Section
1.1441-4(a) or Section 1.1441-6(c) or any successor thereto) to establish that
such Lender is not subject to deduction or withholding of United States federal
income tax under Section 1441 or 1442 of the Code or otherwise (or under any
comparable provisions of any successor statute) with respect to any payments to
such Lender of principal, interest, fees or other amounts payable under any of
the Loan Documents. The Borrower shall not be required to pay any additional
amount to any such Lender under subsection (b)(iii) above if such Lender shall
have failed to satisfy the requirements of the immediately preceding sentence;
provided that if such Lender shall have satisfied such requirements on the
Effective Date (in the case of each Lender listed on the signature pages hereof)
or on the effective date of the Assignment and Acceptance Agreement pursuant to
which it became a Lender (in the case of each other Lender), nothing in this
subsection shall relieve the Borrower of its obligation to pay any additional
amounts pursuant to subsection (b)(iii) above in the event that, as a result of
any change in applicable law, such Lender is no longer properly entitled to
deliver certificates, documents or
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other evidence at a subsequent date establishing the fact that such Lender is
not subject to withholding as described in the immediately preceding sentence.
(d) Tax Refund. If any Lender or the Agent, as applicable, receives
a refund (whether by way of direct payment or by offset) of any Tax for which a
payment has been made pursuant to subsection 2.8(b)(ii) which, in the reasonable
good faith judgment of such Lender or Agent, as the case may be, is allocable to
such payment made under subsection 2.8(B)(ii), the amount of such refund
(together with any interest received thereon) shall be paid to the Borrower to
the extent payment has been made in full pursuant to subsection 2.8(b)(ii).
Section 2.9 Substituted Interest Rate
In the event that (i) the Agent shall have determined (which
determination shall be conclusive and binding upon the Borrower) that by reason
of circumstances affecting the interbank eurodollar market either adequate and
reasonable means do not exist for ascertaining the Eurodollar Rate applicable
pursuant to Section 2.7 or (ii) the Required Lenders shall have notified the
Agent that they have determined (which determination shall be conclusive and
binding on the Borrower) that the applicable Eurodollar Rate will not adequately
and fairly reflect the cost to such Lenders of maintaining or funding loans
bearing interest based on such Eurodollar Rate, with respect to any portion of
the Loans that the Borrower has requested be made as Eurodollar Advances or
Eurodollar Advances that will result from the requested conversion or
continuation of any portion of the Advances into or of Eurodollar Advances
(each, an "Affected Advance"), the Agent shall promptly notify the Borrower and
the Lenders (by telephone or otherwise, to be promptly confirmed in writing) of
such determination, on or, to the extent practicable, prior to the requested
Borrowing Date or Conversion/Continuation Date for such Affected Advances. If
the Agent shall give such notice, (a) any Affected Advances shall be made as ABR
Advances, (b) the Advances (or any portion thereof) that were to have been
converted to or continued as Affected Advances shall be converted to or
continued as ABR Advances and (c) any outstanding Affected Advances shall be
converted, on the last day of the then current Interest Period with respect
thereto, to ABR Advances. Until any notice under clauses (i) or (ii), as the
case may be, of this Section has been withdrawn by the Agent (by notice to the
Borrower promptly upon either (x) the Agent having determined that such
circumstances affecting the interbank eurodollar market no longer exist and that
adequate and reasonable means do exist for determining the Eurodollar Rate
pursuant to Section 2.7 or (y) the Agent having been notified by such Required
Lenders that circumstances no longer render the Advances (or any portion
thereof) Affected Advances, no further Eurodollar Advances shall be required to
be made by the Lenders, nor shall the Borrower have the right to convert or
continue all or any portion of the Loans to Eurodollar Advances.
Section 2.10 Illegality
Notwithstanding any other provisions herein, if any law,
regulation, treaty or directive, or any change therein or in the interpretation
or application thereof, shall make it unlawful for any Lender to make or
maintain its Eurodollar Advances as contemplated by this Agreement, (i) the
commitment of such Lender hereunder to make Eurodollar Advances or convert ABR
Advances to Eurodollar Advances shall forthwith be suspended and (ii) such
Lender's Loans
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then outstanding as Eurodollar Advances affected hereby, if any, shall be
converted automatically to ABR Advances on the last day of the then current
Interest Period applicable thereto or within such earlier period as required by
law. If the commitment of any Lender with respect to Eurodollar Advances is
suspended pursuant to this Section and such Lender shall notify the Agent and
the Borrower that it is once again legal for such Lender to make or maintain
Eurodollar Advances, such Lender's commitment to make or maintain Eurodollar
Advances shall be reinstated.
Section 2.11 Increased Costs
In the event that any law, regulation, treaty or directive
hereafter enacted, promulgated, approved or issued or any change in any
presently existing law, regulation, treaty or directive therein or in the
interpretation or application thereof by any Governmental Authority charged with
the administration thereof or compliance by any Lender (or any corporation
directly or indirectly owning or controlling such Lender) with any request or
directive from any central bank or other Governmental Authority:
(a) does or shall subject any Lender to any Taxes of any kind
whatsoever with respect to any Eurodollar Advances or its obligations under this
Agreement to make Eurodollar Advances, or change the basis of taxation of
payments to any Lender of principal, interest or any other amount payable
hereunder in respect of its Eurodollar Advances, including any Taxes required to
be withheld from any amounts payable under the Loan Documents (except for
imposition of, or change in the rate of, Tax on the Overall Net Income of such
Lender or its Applicable Lending Office for any of such Advances by the
jurisdiction in which such Lender is incorporated or has its principal office or
such Applicable Lending Office, including, in the case of Lenders incorporated
in any State of the United States, such tax imposed by the United States); or
(b) does or shall impose, modify or make applicable any reserve,
special deposit, compulsory loan, assessment, increased cost or similar
requirement against assets held by, or deposits of, or advances or loans by, or
other credit extended by, or any other acquisition of funds by, any office of
such Lender in respect of its Eurodollar Advances which is not otherwise
included in the determination of a Eurodollar Rate;
(c) and the result of any of the foregoing is to increase the cost
to such Lender of making, renewing, converting, continuing or maintaining its
Eurodollar Advances or its commitment to make such Eurodollar Advances, or to
reduce any amount receivable hereunder in respect of its Eurodollar Advances,
then, in any such case, the Borrower shall pay such Lender, upon its demand, any
additional amounts necessary to compensate such Lender for such additional cost
or reduction in such amount receivable which such Lender deems to be material as
determined by such Lender; provided, however, that nothing in this Section shall
require the Borrower to indemnify the Lenders with respect to withholding Taxes
for which the Borrower has no obligation under Section 2.8 or any other
increased costs, expenses, Taxes or other matters incurred by a Lender more than
90 days prior to the date that such Lender delivers notice to the Borrower of
such increased cost, expense, tax or matter. A statement setting forth the
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calculations of any additional amounts payable pursuant to the foregoing
sentence submitted by a Lender to the Borrower shall be conclusive absent
manifest error.
Section 2.12 Capital Adequacy
If the amount of capital required or expected to be maintained by
any Lender or any Person directly or indirectly owning or controlling such
Lender (each a "Control Person"), shall be affected by (i) the introduction or
phasing in of any law, rule or regulation after the Effective Date, (ii) any
change after the Effective Date in the interpretation of any existing law, rule
or regulation by any central bank or United States or foreign Governmental
Authority charged with the administration thereof or (iii) compliance by such
Lender or such Control Person with any directive, guideline or request from any
central bank or United States or foreign Governmental Authority (whether or not
having the force of law) promulgated or made after the Effective Date, and such
Lender shall have determined that such introduction, phasing in, change or
compliance shall have had or will thereafter have the effect of reducing (A) the
rate of return on such Lender's or such Control Person's capital, or (B) the
asset value to such Lender or such Control Person of the Loans made or
maintained by such Lender, in either case to a level below that which such
Lender or such Control Person could have achieved or would thereafter be able to
achieve but for such introduction, phasing in, change or compliance (after
taking into account such Lender's or such Control Person's policies regarding
capital adequacy) by an amount deemed by such Lender to be material to such
Lender or Control Person, then, within ten days after demand by such Lender,
accompanied by a statement setting forth the calculations of any additional
amount payable under this Section, which statement shall be conclusive absent
manifest error, the Borrower shall pay to such Lender or such Control Person
such additional amount or amounts as shall be sufficient to compensate such
Lender or such Control Person, as the case may be, for such reduction, provided,
however, that nothing in this Section shall require the Borrower to compensate
any Lender for any such reduction arising more than 90 days prior to the date
that such Lender delivers notice thereof to the Borrower.
Section 2.13 Lending Offices
Each Lender shall have the right at any time and from time to time
to transfer its Loans to a different office, provided that such Lender shall
promptly notify the Agent and the Borrower of any such change of office. Such
office shall thereupon become such Lender's Domestic Lending Office or
Eurodollar Lending Office, as the case may be, provided, however, that no such
Lender shall be entitled to receive any greater amount under Sections 2.9, 2.11
and 2.12 as a result of a transfer of any such Loans to a different office of
such Lender than it would be entitled to immediately prior thereto unless such
claim would have arisen even if such transfer had not occurred.
Section 2.14 Indemnification for Loss
Notwithstanding anything contained herein to the contrary, if the
Borrower shall fail to borrow or convert or continue on a Borrowing Date or
Conversion/Continuation Date after it shall have given notice to do so in which
it shall have requested a Eurodollar Advance, or if a
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Eurodollar Advance shall be terminated or suspended pursuant to the provisions
hereof prior to the last day of the Interest Period applicable thereto, or if,
while a Eurodollar Advance is outstanding, any repayment or prepayment of such
Eurodollar Advance is made for any reason (including, without limitation, as a
result of acceleration, illegality or an assignment pursuant to Section 2.19(b))
on a date which is prior to the last day of the Interest Period applicable
thereto, the Borrower agrees to indemnify each Lender against, and to pay on
demand directly to such Lender, any loss or expense suffered by such Lender as a
result of such failure to borrow, convert or continue, termination, repayment or
prepayment, including, without limitation, an amount, if greater than zero,
equal to:
A x (B-C) x D
---
360
where:
"A" equals such Lender's Commitment Percentage of the Affected Principal Amount;
"B" equals the Eurodollar Rate (expressed as a decimal) applicable to such
Eurodollar Advances;
"C" equals the applicable Eurodollar Rate (expressed as a decimal) in effect on
or about the first day of the applicable Remaining Interest Period, based on the
applicable rates offered or bid, as the case may be, on or about such date, for
deposits in an amount equal approximately to such Lender's Commitment Percentage
of the Affected Principal Amount with an Interest Period equal approximately to
the applicable Remaining Interest Period, as determined by such Lender;
"D" equals the number of days from and including the first day of the applicable
Remaining Interest Period to but excluding the last day of such Remaining
Interest Period;
and any other out-of-pocket loss or expense (including any internal processing
charge customarily charged by such Lender) suffered by such Lender in connection
with such Eurodollar Advance, including, without limitation, in liquidating or
employing deposits acquired to fund or maintain the funding of its Commitment
Percentage of the Affected Principal Amount, or redeploying funds prepaid or
repaid, in amounts which correspond to its Commitment Percentage of the Affected
Principal Amount. Each determination by the Agent or a Lender pursuant to this
Section shall be conclusive and binding on the Borrower absent manifest error.
Section 2.15 Option to Fund
Each Lender has indicated that, if the Borrower elects to borrow or
convert or continue to Eurodollar Advances, such Lender may wish to purchase one
or more deposits in order to fund or maintain its funding of its Eurodollar
Advances during the Interest Period in question; it being understood that the
provisions of this Agreement relating to such funding are included only for the
purpose of determining the rate of interest to be paid on such Eurodollar
Advances and for purposes of determining amounts owning under Sections 2.11,
2.12 and 2.14. Each Lender shall be entitled to fund and maintain its funding of
all or any part of each Eurodollar Advance made by it in
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any manner it sees fit, but all such determinations shall be made as if such
Lender had actually funded and maintained its funding of such Eurodollar Advance
during the applicable Interest Period through the purchase of deposits in an
amount equal to such Eurodollar Advance and having a maturity corresponding to
such Interest Period. The obligations of the Borrower under Sections 2.8, 2.9,
2.10, 2.11 and 2.12 shall survive the termination of the Aggregate Commitments,
the payment of the Notes and all other amounts payable under the Loan Documents.
Section 2.16 Use of Proceeds
The Borrower agrees that the proceeds of the Loans shall be used
solely for its general corporate purposes not inconsistent with the provisions
hereof, including, without limitation, the purchase and retirement of
outstanding common stock of the Borrower (but not the purchase or carrying of
any other Margin Stock) and the provision by Borrower to its Subsidiaries of
funds for use in connection with the business, operations and general corporate
purposes of such Subsidiaries. Notwithstanding anything to the contrary
contained herein, the Borrower further agrees that no part of the proceeds of
any Loan will be used, directly or indirectly, for a purpose which violates any
law, rule or regulation of any Governmental Authority, including the provisions
of Regulations T, U or X of the Board of Governors of the Federal Reserve
System, as amended.
Section 2.17 Extension of Maturity Date
Provided that no Default or Event of Default shall exist, the
Borrower may request that the Maturity Date be extended for additional periods
of 364 days each by giving written notice thereof (each an "Extension Request")
to the Agent at any time during the period which is not more than 60 days nor
less than 30 days prior to any then current Maturity Date and, upon receipt of
each such notice, the Agent shall promptly notify each Lender thereof. The then
current Maturity Date shall not be extended unless and until each Lender, in its
sole and absolute discretion, shall have consented, in writing, to such request,
in which event such then existing Maturity Date shall be extended to the date
occurring 364 days from the date of the last such consent, provided, however,
that if such date is not a Business Day, such extended Maturity Date shall be
the immediately preceding Business Day. In the event that any Lender shall not
have granted its consent to an Extension Request, the then current Maturity Date
shall remain in effect. Each Lender shall endeavor to respond to each Extension
Request by no later than 15 days following the receipt by such Lender from the
Agent of notice of such Extension Request, provided that each Lender which shall
have failed so to respond by such time shall be deemed not to have consented
thereto.
Section 2.18 Agent's Records
The Agent's records regarding the amount of each Loan, each payment
by the Borrower of principal and interest on the Loans and other information
relating to the Loans shall be presumptively correct absent manifest error.
Section 2.19 Mitigation of Taxes and Costs
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(a) Each Lender agrees that, if requested by the Borrower after
the occurrence of an event or the existence of a condition that would require
the Borrower to make payments to such Lender under Section 2.8, 2.11 or 2.12, it
will, to the extent not inconsistent with such Lender's internal policies, use
reasonable efforts (subject to overall policy considerations of such Lender) (i)
to make, fund or maintain the Commitments or Loans of such lender through
another lending office of such Lender, or (ii) take such other reasonable
measures, if as a result the additional amounts that would otherwise be required
to be paid by the Borrower with respect to such Lender pursuant to said Sections
would be materially reduced and if, as determined by such Lender in its sole
discretion, the making, funding or maintaining of such Commitments or Loans
through such other lending office or in accordance with such other measures, as
the case may be, would not otherwise adversely affect such Commitments or Loans
or the interests or such Lender.
(b) If the Borrower becomes obligated to pay additional amounts
described in Section 2.8, 2.11 or 2.12 as a result of any condition described in
such Sections and payment of such amount is demanded by any Lender, then,
provided that no Default or Event of Default shall exist, the Borrower may, on
ten Business Days' prior written notice to the Agent and such Lender, cause such
Lender to (and such Lender shall) assign all of its rights and obligations under
this Agreement to a Lender or other bank selected by the Borrower and acceptable
to the Agent for a purchase price equal to the outstanding principal amount of
such Lender's Loans and all accrued interest and fees thereon, provided that in
no event shall the assigning Lender be required to pay or surrender to such
purchasing Lender or other bank any of the fees received by such assigning
Lender pursuant to this Agreement. The Borrower shall remain obligated to pay to
such assigning Lender all additional amounts required to be paid by the Borrower
pursuant to such Sections had there been no such assignment.
ARTICLE 3 FEES; PAYMENTS
Section 3.1 Commitment Fee
The Borrower agrees to pay to the Agent, for the account of the
Lenders in accordance with each Lender's Commitment Percentage, a fee (the
"Commitment Fee"), during the Commitment Period, equal to the Applicable Margin
times the excess of (a) the Aggregate Commitments (excluding the amount of any
cancelled or reduced portion of the Aggregate Commitments for which the
Commitment Fee was paid upon each such cancellation or reduction under Section
2.4(b)) over (b) the average daily sum of the outstanding principal balance of
the Loans. The Commitment Fee shall be payable quarterly in arrears on the last
day of each March, June, September and December of each year, commencing on the
first such day following the Effective Date, and ending on the date that the
Aggregate Commitments shall expire or otherwise terminate. The Commitment Fee
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed.
Section 3.2 Pro Rata Treatment and Application of Principal Payments
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Each payment, including each prepayment, of principal and interest
on the Loans and of the Commitment Fee shall be made by the Borrower to the
Agent at its office set forth in Section 11.2 in funds immediately available to
the Agent at such office by 2:00 P.M. on the due date for such payment, and,
promptly upon receipt thereof by the Agent, shall be remitted by the Agent in
like funds as received, to the Lenders according to the Commitment Percentage of
each Lender, in the case of the Commitment Fee, and pro rata according to the
aggregate outstanding principal balance of the Loans, in the case of principal
and interest due thereon. The failure of the Borrower to make any such payment
by such time shall not constitute a default hereunder, provided that such
payment is made on such due date, but any such payment made after 2:00 P.M. on
such due date shall be deemed to have been made on the next Business Day for the
purpose of calculating interest on amounts outstanding on the Loans. If any
payment hereunder or under the Notes shall be due and payable on a day which is
not a Business Day, the due date thereof (except as otherwise provided in the
definition of Interest Period) shall be extended to the next Business Day and
(except with respect to payments in respect of the Commitment Fee) interest
shall be payable at the applicable rate specified herein during such extension.
If any payment is made with respect to any Eurodollar Advance prior to the last
day of the applicable Interest Period, the Borrower shall indemnify each Lender
in accordance with Section 2.14.
Section 3.3 Utilization Fee
The Borrower agrees to pay to the Agent, for the account of each
Lender a fee (the "Utilization Fee") equal to 0.05% of the amount of each such
Lender's Loans made when, after giving effect thereto, the aggregate principal
balance of all Loans outstanding hereunder and under the 1996 Revolving Credit
would exceed 66 2/3% of the sum of the Aggregate Commitments, as such term is
defined hereunder and under the 1996 Revolving Credit.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES
In order to induce the Agent and the Lenders to enter into this Agreement
and to make the Loans, the Borrower makes the following representations and
warranties to the Agent and each Lender:
Section 4.1 Subsidiaries
The Borrower has only the Insurance Subsidiaries and Non-Insurance
Subsidiaries set forth on Schedule 4.1.
Section 4.2 Existence and Power
Each of the Borrower and its Subsidiaries is duly organized or
formed and validly existing in good standing under the laws of the jurisdiction
of its incorporation or formation, has all requisite power and authority to own
its Property and to carry on its business as now conducted, and is in good
standing and authorized to do business as a foreign corporation in each
jurisdiction in which the nature of the business conducted therein or the
Property owned therein makes such
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qualification necessary, except where such failure to qualify could not
reasonably be expected to have a Material Adverse Effect.
Section 4.3 Authority
The Borrower has full corporate power and authority to enter into,
execute, deliver and perform the terms of the Loan Documents and to make the
borrowings contemplated thereby all of which have been duly authorized by all
proper and necessary corporate or other applicable action and are in full
compliance with its Articles of Incorporation and By-Laws.
Section 4.4 Binding Agreement
The Loan Documents constitute the valid and legally binding
obligations of the Borrower, enforceable in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors' generally and by
general principles of equity, regardless of whether enforcement is sought in an
action at law or a proceeding in equity, and the discretion of the court before
which any action or proceeding therefor may be brought.
Section 4.5 Litigation
Except as set forth on Schedule 4.5, there are no actions, suits or
proceedings at law or in equity or by or before any Governmental Authority
(whether purportedly on behalf of the Borrower or any its Subsidiaries) pending
or, to the knowledge of the Borrower, threatened against the Borrower or any of
its Subsidiaries or any of their respective Properties or rights, which (i)
could reasonably be expected to have a Material Adverse Effect, (ii) call into
question the validity or enforceability of any of the Loan Documents, or (iii)
could reasonably be expected to result in the rescission, termination or
cancellation of any material license, franchise, right, permit or similar
authorization held by the Borrower or any of its Subsidiaries.
Section 4.6 Required Consents
Except for information filings required to be made in the ordinary
course of business which are not a condition to the Borrower's performance under
the Loan Documents, no consent, authorization or approval of, filing with,
notice to, or exemption by, stockholders, any Governmental Authority or any
other Person is required to authorize, or is required in connection with the
execution, delivery and performance of the Loan Documents or is required as a
condition to the validity or enforceability of the Loan Documents.
Section 4.7 No Conflicting Agreements
Neither the Borrower nor any of its Subsidiaries is in default
under any mortgage, indenture, contract or agreement to which it is a party or
by which it or any of its Property is bound, the effect of which default could
reasonably be expected to have a Material Adverse Effect. The
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execution, delivery or carrying out of the terms of the Loan Documents will not
constitute a default under, or result in the creation or imposition of, or
obligation to create, any Lien upon any Property of the Borrower or any of its
Subsidiaries or result in a breach of or require the mandatory repayment of or
other acceleration of payment under or pursuant to the terms of any such
mortgage, indenture, contract or agreement.
Section 4.8 Compliance with Applicable Laws
Neither the Borrower nor any of its Subsidiaries is in default with
respect to any judgment, order, writ, injunction, decree or decision of any
Governmental Authority which default could reasonably be expected to have a
Material Adverse Effect. Each of the Borrower and its Subsidiaries is complying
in all material respects with all statutes, regulations, rules and orders
applicable to the Borrower or such Subsidiary of all Governmental Authorities,
including, without limitation, all Applicable Insurance Codes and Environmental
Laws, a violation of which could reasonably be expected to have a Material
Adverse Effect.
Section 4.9 Taxes
Each of the Borrower and its Subsidiaries has filed or caused to be
filed all tax returns required to be filed and has paid, or has made adequate
provision for the payment of, all taxes shown to be due and payable on said
returns or in any assessments made against it (other than those being contested
as required under Section 7.4) which would be material to the Borrower or any of
its Subsidiaries, and no tax Liens have been filed with respect thereto. The
charges, accruals and reserves on the books of the Borrower and each of its
Subsidiaries with respect to all federal, state, local and other taxes are, to
the best knowledge of the Borrower, adequate for the payment of all such taxes,
and the Borrower knows of no unpaid assessment which is due and payable against
it or any of its Subsidiaries or any claims being asserted which could
reasonably be expected to have a Material Adverse Effect, except such thereof as
are being contested as required under Section 7.4, and for which adequate
reserves have been set aside in accordance with GAAP.
Section 4.10 Governmental Regulations
Neither the Borrower nor any of its Subsidiaries is subject to
regulation under the Investment Company Act of 1940, as amended, the Public
Utility Holding Company Act of 1935, as amended, or the Federal Power Act, and
neither the Borrower nor any of its Subsidiaries is subject to any statute or
regulation which prohibits or restricts the incurrence of Indebtedness under the
Loan Documents, including, without limitation, statutes or regulations relative
to common or contract carriers or to the sale of electricity, gas, steam, water,
telephone, telegraph or other public utility services.
Section 4.11 Federal Reserve Regulations; Use of Loan Proceeds
Neither the Borrower nor any of its Subsidiaries is engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying any Margin Stock. No part of
the proceeds of the Loans will be used, directly or indirectly,
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for a purpose which violates any law, rule or regulation of any Governmental
Authority, including, without limitation, the provisions of Regulations T, U or
X of the Board of Governors of the Federal Reserve System, as amended. No part
of the proceeds of the Loans will be used, directly or indirectly, to purchase
or carry Margin Stock or to extend credit to others for the purpose of
purchasing or carrying Margin Stock, other than any shares of outstanding stock
of the Borrower that are purchased by the Borrower using the proceeds of the
Loans, which shares shall be returned to the status of authorized and unissued
shares and retired. The Borrower understands that the Lenders, in good faith,
are not relying upon such shares as collateral in extending or maintaining the
Loans.
Section 4.12 Plans
Neither the Borrower nor any Subsidiary has a Pension Plan on the
Effective Date.
Section 4.13 Financial Statements
(a) The Borrower has heretofore delivered to the Agent and the
Lenders copies of its Form 10-K for the fiscal year ending December 31, 1997,
containing the audited Consolidated Balance Sheets of the Borrower and its
Subsidiaries as of December 31, 1997 and December 31, 1996, and the related
Consolidated Statements of Income, Retained Earnings and Cash Flows for the
three year periods ending December 31, 1997, and its Form 10-Q for the fiscal
quarter ended June 30, 1998, containing the unaudited Consolidated Balance Sheet
of the Borrower and its Subsidiaries for such fiscal quarter, together with the
related Consolidated Statements of Income, Retained Earnings and Cash Flows for
the fiscal quarter then ended (with the applicable related notes and schedules,
the "Financial Statements"). The Financial Statements fairly present the
Consolidated financial condition and results of the operations of the Borrower
and its Subsidiaries as of the dates and for the periods indicated therein and
have been prepared in conformity with GAAP. Except as reflected in the Financial
Statements or in the footnotes thereto, neither the Borrower nor any of its
Subsidiaries has any obligation or liability of any kind (whether fixed,
accrued, Contingent, unmatured or otherwise) which, in accordance with GAAP,
should have been shown in the Financial Statements and was not. Since December
31, 1997, the Borrower and each of its Subsidiaries has conducted its business
only in the ordinary course and there has been no Material Adverse Change.
(b) The Borrower has heretofore delivered to the Lenders copies of
the consolidated Annual Statements, as of December 31, 1997, of each of Mercury
Casualty Company and American Mercury Insurance Company (together with the
related notes and schedules thereto, the "Annual Statements"). The Annual
Statements fairly present the financial condition and results of operations of
the Insurance Subsidiaries included therein as of the dates and for the periods
indicated therein and have been prepared in accordance with SAP.
Section 4.14 Property
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Each of the Borrower and its Subsidiaries has good and marketable
title to all of its Property, title to which is material to the Borrower or such
Subsidiary, subject to no Liens except Permitted Liens.
Section 4.15 Licenses, Franchises, Etc.
Each of the Borrower and its Subsidiaries possesses or has the
right to use all licenses, franchises, Intellectual Property, and other rights
as are material and necessary for the conduct of its business, and with respect
to which it is in compliance, with no known conflict with the valid rights of
others which could reasonably be expected to have a Material Adverse Effect. No
event has occurred which permits or, to the best knowledge of the Borrower,
after notice or the lapse of time or both, or any other condition, could
reasonably be expected to permit, the revocation or termination of any such
license, franchise, Intellectual Property, or other right which revocation or
termination could reasonably be expected to have a Material Adverse Effect.
Section 4.16 Environmental Matters
(a) The Borrower and each of its Subsidiaries is in compliance in
all material respects with the requirements of all applicable Environmental
Laws, a violation of which could reasonably be expected to have a Material
Adverse Effect.
(b) No Hazardous Substances have been generated or manufactured
on, transported to or from, treated at, stored at or discharged from any Real
Property in violation of any Environmental Laws which violation could reasonably
be expected to have a Material Adverse Effect; no Hazardous Substances have been
discharged into subsurface waters under any Real Property in violation of any
Environmental Laws which violation could reasonably be expected to have a
Material Adverse Effect; no Hazardous Substances have been discharged from any
Real Property on or into Property or waters (including subsurface waters)
adjacent to any Real Property in violation of any Environmental Laws which
violation could reasonably be expected to have a Material Adverse Effect; and
there are not now, nor ever have been, on any Real Property any underground or
above ground storage tanks containing Hazardous Substances.
(c) Neither the Borrower nor any of its Subsidiaries (i) has
received notice (written or oral) or otherwise learned of any claim, demand,
suit, action, proceeding, event, condition, report, directive, Lien, violation,
non-compliance or investigation indicating or concerning any potential or actual
liability (including, without limitation, potential liability for enforcement,
investigatory costs, cleanup costs, government response costs, removal costs,
remedial costs, natural resources damages, Property damages, personal injuries
or penalties) arising in connection with: (x) any non-compliance with or
violation of the requirements of any applicable Environmental Laws, or (y) the
presence of any Hazardous Substance on any Real Property (or any Real Property
previously owned by the Borrower or any of its Subsidiaries) or the release or
threatened release of any Hazardous Substance into the environment, (ii) to the
knowledge of the Borrower has any threatened or actual liability in connection
with the presence of any Hazardous Substance on any Real Property (or any Real
Property previously owned by the Borrower or any of its Subsidiaries) or the
release or threatened release of any Hazardous
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Substance into the environment, (iii) has received notice of any federal or
state investigation evaluating whether any remedial action is needed to respond
to the presence of any Hazardous Substance on any Real Property (or any Real
Property previously owned by the Borrower or any of its Subsidiaries) or a
release or threatened release of any Hazardous Substance into the environment
for which the Borrower or any of its Subsidiaries is or may be liable, or (iv)
has received notice that the Borrower or any of its Subsidiaries is or may be
liable to any Person under any Environmental Law.
(d) To the knowledge of the Borrower no Real Property is located
in an area identified by the Secretary of Housing and Urban Development as an
area having special flood hazards.
Section 4.17 Labor Relations
There are no material controversies pending between the Borrower or
any of its Subsidiaries and any of their respective employees, which could
reasonably be expected to have a Material Adverse Effect.
Section 4.18 Burdensome Obligations
Neither the Borrower nor any of its Subsidiaries is a party to or
bound by any license, franchise, agreement, deed, lease or other instrument, or
subject to any restriction which, in the opinion of the management of the
Borrower or such Subsidiary is so unusual or burdensome, in the context of its
business, as in the foreseeable future might materially and adversely affect or
impair the revenue or cash flows of the Borrower or such Subsidiary or the
ability of the Borrower to perform its obligations under the Loan Documents. The
Borrower does not presently anticipate that future expenditures by the Borrower
or any of its Subsidiaries needed to meet the provisions of federal or state
statutes, orders, rules or regulations will be so burdensome as to result in a
Material Adverse Effect or Material Adverse Change.
Section 4.19 No Misrepresentation
No representation or warranty contained in any Loan Document and no
certificate or report furnished or to be furnished by the Borrower or any of its
Subsidiaries in connection with the transactions contemplated thereby, contains
or will contain a misstatement of material fact, or, to the best knowledge of
the Borrower, omits or will omit to state a material fact required to be stated
in order to make the statements therein contained not misleading in the light of
the circumstances under which made.
Section 4.20 Year 2000
The Borrower and its Subsidiaries have reviewed the effect of the
Year 2000 Issue on the computer software, hardware and firmware systems and
equipment containing embedded microchips used or relied upon in the conduct of
their businesses (including systems and equipment supplied by others or with
which such computer systems interface). The costs to the
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Borrower and its Subsidiaries of any reprogramming required as a result of the
Year 2000 Issue to permit the proper functioning of such systems and equipment
and the proper processing of data, and the testing of such reprogramming, and of
the reasonably foreseeable consequences of the Year 2000 Issue to the Borrower
and its Subsidiaries (including reprogramming errors and the failure of systems
or equipment supplied by others) are not reasonably expected to result in an
Event of Default or to have a material adverse effect on the business, assets,
operations, prospects or financial condition of the Borrower and its
Subsidiaries. The term "Year 2000 Issue" means the failure of computer software,
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hardware and firmware systems and equipment containing embedded computer chips
to properly receive, transmit, process, manipulate, store, retrieve, retransmit
or in any other way utilize data and information due to the occurrence of the
year 2000 or the inclusion of dates on or after January 1, 2000.
ARTICLE 5 CONDITIONS TO FIRST LOANS
In addition to the conditions precedent set forth in Section 6, the
obligation of each Lender to make its first Loan shall be subject to the
fulfillment of the following conditions precedent:
Section 5.1 Evidence of Action
The Agent shall have received a certificate, dated the first
Borrowing Date, of the Secretary or Assistant Secretary of the Borrower (i)
attaching a true and complete copy of the resolutions of its Board of Directors
and of all documents evidencing other necessary corporate action (in form and
substance satisfactory to the Agent) taken by it to authorize the Loan Documents
and the transactions contemplated thereby, (ii) attaching a true and complete
copy of its Articles of Incorporation and By-Laws, (iii) setting forth the
incumbency of its officer or officers who may sign the Loan Documents, including
therein a signature specimen of such officer or officers and (iv) attaching a
certificate of good standing of the Secretary of State of the State of
California and of each other jurisdiction in which it is qualified to do
business.
Section 5.2 This Agreement
The Agent shall have received counterparts of this Agreement signed
by each of the parties hereto (or receipt by the Agent from a party hereto of a
fax signature page signed by such party which shall have agreed to promptly
provide the Agent with originally executed counterparts hereof).
Section 5.3 Notes
The Agent shall have received the Notes, duly executed by an
Authorized Signatory of the Borrower.
Section 5.4 Approvals
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The Agent shall have received a certificate of an Authorized
Signatory of the Borrower to the effect that all approvals and consents of all
Persons required to be obtained in connection with the consummation of the
transactions contemplated by the Loan Documents have been duly obtained and are
in full force and effect, and that all required notices have been given and all
required waiting periods have expired.
Section 5.5 Opinion of Counsel to the Borrower
The Agent shall have received an opinion of Latham & Watkins,
counsel to the Borrower, addressed to the Agent, the Lenders and Special
Counsel, and dated the first Borrowing Date, substantially in the form of
Exhibit E, and covering such additional matters as the Required Lenders may
reasonably request. It is understood that such opinion is being delivered to the
Agent and the Lenders upon the direction of the Borrower and that the Agent and
the Lenders may and will rely upon such opinion.
Section 5.6 Opinion of Special Counsel
The Agent shall have received an opinion of Special Counsel,
addressed to the Agent and the Lenders and dated the first Borrowing Date
substantially in the form of Exhibit F.
Section 5.7 Payment of Fees
The Borrower shall have paid to the Agent and the Lenders all fees
and expenses which it shall have agreed to pay, to the extent such fees and
expenses shall have become payable on or prior to the Effective Date, and shall
have paid the reasonable fees and disbursements of Special Counsel which the
Borrower is obligated to pay in accordance with Section 11.5 and which shall
have accrued up to the Effective Date.
Section 5.8 Other Documents
The Agent shall have received such other documents (including
financial statements and projections), each in form and substance reasonably
satisfactory to the Agent, as the Agent shall reasonably require in connection
with the making of the first Loans.
ARTICLE 6 CONDITIONS OF LENDING - ALL LOANS
The obligation of each Lender to make any Loan is subject to the
satisfaction of the following conditions precedent as of the date of such Loan:
Section 6.1 Compliance
On each Borrowing Date and after giving effect to the Loans to be
made thereon, (i) the Borrower shall be in compliance with all of the terms,
covenants and conditions thereof, (ii) there shall exist no Default or Event of
Default, (iii) the representations and warranties contained in
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the Loan Documents shall be true and correct with the same effect as though such
representations and warranties had been made on such Borrowing Date (except that
Schedules 4.1 and 4.5 shall have been updated, as appropriate, in order to make
the representations and warranties expressed in Sections 4.1 and 4.5 true and
correct as of such Borrowing Date) and (iv) the aggregate outstanding principal
balance of the Loans will not exceed the Aggregate Commitments. Each borrowing
by the Borrower shall constitute a certification by the Borrower as of such
Borrowing Date that each of the foregoing matters is true and correct in all
respects.
Section 6.2 Loan Closings
All documents required by the provisions of this Agreement to be
executed or delivered to the Agent on or before the applicable Borrowing Date
shall have been executed and shall have been delivered at the office of the
Agent set forth in Section 11.2 on or before such Borrowing Date.
Section 6.3 Borrowing Request
The Agent shall have received a Borrowing Request duly executed by
an Authorized Signatory of the Borrower.
Section 6.4 Concerning Regulation U
If required by Regulation U, the Agent shall have received for each
Lender an appropriately completed Form FR U-1.
Section 6.5 Other Documents
The Agent shall have received such other documents as the Agent or
the Lenders shall reasonably request.
ARTICLE 7 AFFIRMATIVE COVENANTS
The Borrower agrees that, so long as this Agreement is in effect, any Loan
remains outstanding and unpaid, or any other amount is owing under any Loan
Document to any Lender or the Agent, the Borrower shall:
Section 7.1 Financial Statements
Maintain, and cause each Subsidiary to maintain, a standard system
of accounting in accordance with GAAP and, with respect to each Insurance
Subsidiary, SAP, and furnish to the Agent and each Lender:
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(a) As soon as available and, in any event, within 105 days after
the close of each fiscal year, a copy of (x) the Borrower's 10-K in respect of
such fiscal year, and (y) (i) the Borrower's Consolidated Balance Sheet as of
the end of such fiscal year, and (ii) the related Consolidated Statements of
Income and Shareholders' Equity and Cash Flows, as of and through the end of
such fiscal year, setting forth in each case in comparative form the
corresponding figures in respect of the previous fiscal year, all in reasonable
detail, and accompanied by a report of the Borrower's auditors, which report
shall be unqualified as to scope of audit and going concern or similar or other
qualification and shall state that (A) such auditors audited such financial
statements, (B) such audit was made in accordance with generally accepted
auditing standards in effect at the time and provides a reasonable basis for
such opinion, and (C) said financial statements have been prepared in accordance
with GAAP;
(b) After request by the Agent therefor, simultaneously with the
delivery of the certified statements required by clause (a) above, copies of a
statement of the Borrower's auditors (i) confirming the computations by the
Borrower (which computations shall accompany such statement and shall be in
reasonable detail) with respect to the Borrower's compliance with Sections 7.11,
7.12, 7.13, and 7.14, and (ii) stating that, in making the examination necessary
for their audit of the financial statements of the Borrower for such fiscal
year, nothing came to their attention that caused them to believe that any
Default or an Event of Default existed on the date of such statements;
(c) As soon as available, and in any event within 60 days after
the end of each of the first three fiscal quarters of each fiscal year, a copy
of (x) the Borrower's 10-Q in respect of such fiscal quarter, and (y) (i) the
Borrower's Consolidated Balance Sheet as of the end of such quarter, and (ii)
the related Consolidated Statements of Income Shareholders' Equity and Cash
Flows for (A) such quarter, and (B) the period from the beginning of the then
current fiscal year to the end of such quarter, in each case in comparable form
with the prior fiscal year, all in reasonable detail and prepared in accordance
with GAAP (without footnotes and subject to year-end audit adjustments);
(d) Simultaneously with the delivery of the financial statements
required by clauses (a) and (c) above, a certificate of the chief financial
officer of the Borrower certifying that no Default or Event of Default shall
have occurred or be continuing or, if so, specifying in such certificate all
such Defaults and Events of Default, and setting forth computations in
reasonable detail demonstrating compliance with Sections 7.11, 7.12, 7.13, and
7.14;
(e) As soon as practicable after the filing thereof but in any
case no later than 105 days after the close of each fiscal year of the Borrower
and 60 days after the close of each fiscal quarter of the Borrower, copies of
each annual and quarterly statutory statement filed by the Borrower or any
Reporting Insurance Subsidiary with the department of insurance of the state of
domicile of each Reporting Insurance Subsidiary or any other Governmental
Authority;
(f) Promptly upon receipt thereof, copies of any audit reports and
management letters delivered in connection with the statements referred to in
Section 7.1(a); and
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(g) From time to time, such other information regarding the
financial position or business of the Borrower and the Subsidiaries, as either
Agent, at the request of any Lender, may reasonably request.
Section 7.2 Certificates; Other Information
Furnish to the Agent and each Lender:
(a) Prompt written notice if: (i) the Borrower becomes aware that
any Indebtedness of the Borrower or any of its Subsidiaries is declared or shall
become due and payable prior to its stated maturity, or is called and not paid
when due, (ii) the Borrower becomes aware that a default shall have occurred
under any note (other than the Notes), or the holder of any such note, or other
evidence of Indebtedness, certificate or security evidencing any such
Indebtedness or any obligee with respect to any other Indebtedness of the
Borrower or any of its Subsidiaries has the right to declare any such
Indebtedness due and payable prior to its stated maturity, or (iii) the Borrower
becomes aware that there shall occur and be continuing a Default or an Event of
Default or a Material Adverse Change;
(b) Promptly following the Borrower becoming aware of the same,
written notice of: (i) any citation, summons, subpoena, order to show cause or
other document naming the Borrower or any of its Subsidiaries a party to any
proceeding before any Governmental Authority which could reasonably be expected
to have a Material Adverse Effect or which calls into question the validity or
enforceability of any of the Loan Documents, and include with such notice a copy
of such citation, summons, subpoena, order to show cause or other document, (ii)
any lapse or other termination of any material license, Intellectual Property,
permit, franchise or other authorization issued to the Borrower or any of its
Subsidiaries by any Person or Governmental Authority, and (iii) any refusal by
any Person or Governmental Authority to renew or extend any such material
license, Intellectual Property, permit, franchise or other authorization, which
lapse, termination, refusal or dispute could reasonably be expected to have a
Material Adverse Effect;
(c) Promptly upon becoming available, copies of all regular or
periodic reports (including, without limitation, current reports on Form 8-K)
which the Borrower or any Subsidiary may now or hereafter be required to file
with or deliver to the SEC, and copies of all material news releases and proxy
statements sent to stockholders;
(d) Prompt written notice of any order, notice, claim or
proceeding received by, or brought against, the Borrower or any of its
Subsidiaries, or with respect to any of the Real Property, under any
Environmental Law.
(e) Such other information as the Agent or any Lender shall
reasonably request from time to time.
Section 7.3 Legal Existence
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Maintain, and cause each of its Subsidiaries so to maintain, its
corporate existence, in good standing in the jurisdiction of its incorporation
and in each other jurisdiction in which the failure so to do could reasonably be
expected to have a Material Adverse Effect.
Section 7.4 Taxes
Pay and discharge when due, and cause each of its Subsidiaries so
to do, all Taxes, assessments and governmental charges, license fees and levies
upon, or with respect to the Borrower or such Subsidiary and all Taxes upon the
income, profits and Property of the Borrower and its Subsidiaries, which if
unpaid, could reasonably be expected to have a Material Adverse Effect or become
a Lien on the Property of the Borrower or such Subsidiary (other than a Lien
described in Section 8.2(i)), unless and to the extent only that such Taxes,
assessments, charges, license fees and levies shall be contested in good faith
and by appropriate proceedings diligently conducted by the Borrower or such
Subsidiary and, provided, that the Borrower shall give the Agent prompt notice
of such contest and that such reserve or other appropriate provision as shall be
required by the Accountants in accordance with GAAP shall have been made
therefor.
Section 7.5 Insurance
Maintain, and cause each of its Subsidiaries to maintain, with
financially sound and reputable insurance companies insurance on all its
Property in at least such amounts and against at least such risks (but including
in any event public liability, property damage, workers' compensation and
business interruption coverage) as are usually insured against in the same
general area by companies engaged in the same or a similar business; and furnish
to the Agent, upon written request, full information as to the insurance
carried.
Section 7.6 Payment of Indebtedness and Performance of Obligations
Pay and discharge when due, and cause each of its Subsidiaries to
pay and discharge, all lawful Indebtedness, obligations and claims for labor,
materials and supplies or otherwise which, if unpaid, might (i) have a Material
Adverse Effect, or (ii) become a Lien upon Property of the Borrower or any of
its Subsidiaries other than a Permitted Lien, unless and to the extent only that
the validity of such Indebtedness, obligation or claim shall be contested in
good faith and by appropriate proceedings diligently conducted by the Borrower
or such Subsidiary, provided that the Borrower shall give the Agent prompt
notice of any such contest and that such reserve or other appropriate provision
as shall be required by the Accountants in accordance with GAAP shall have been
made therefor.
Section 7.7 Condition of Property
At all times, maintain, protect and keep in good repair, working
order and condition (ordinary wear and tear excepted), and cause each of its
Subsidiaries so to do, all Property necessary to the operation of the Borrower's
or such Subsidiary's business.
Section 7.8 Observance of Legal Requirements
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Observe and comply in all respects, and cause each of its
Subsidiaries so to do, with all laws, ordinances, orders, judgments, rules,
regulations, licenses, certifications, franchises, permits, directions and
requirements of all Governmental Authorities, which now or at any time hereafter
may be applicable to it, a violation of which could reasonably be expected to
have a Material Adverse Effect, except such thereof as shall be contested in
good faith and by appropriate proceedings diligently conducted by the Borrower
or such Subsidiary, provided that the Borrower shall give the Agent prompt
notice of such contest and that such reserve or other appropriate provision as
shall be required by the Accountants in accordance with GAAP shall have been
made therefor.
Section 7.9 Inspection of Property; Books and Records; Discussions
Keep proper books of record and account in which full, true and
correct entries in conformity with GAAP and all requirements of law shall be
made of all dealings and transactions in relation to its business and activities
and permit representatives of the Agent and any Lender to visit its offices, to
inspect any of its Property and examine and make copies or abstracts from any of
its books and records at any reasonable time and as often as may reasonably be
desired, and to discuss the business, operations, prospects, licenses, Property
and financial condition of the Borrower and its Subsidiaries with the officers
thereof and the Accountants.
Section 7.10 Authorizations
Maintain and cause each of its Subsidiaries to maintain, in full
force and effect, all licenses, copyrights, patents, trademarks, trade names,
franchises, permits, applications, reports, and other authorizations and rights,
which, if not so maintained, would individually or in the aggregate have a
Material Adverse Effect.
Section 7.11 Adjusted Net Worth
As of any date of determination, have Adjusted Net Worth of not
less than the sum of (a) $500,000,000, plus (b) 50% of the Consolidated net
income (but not less than zero) for each full fiscal quarter ended during the
period commencing on July 1, 1998 and ending on such date of determination.
Section 7.12 GAAP Net Worth
As of any date of determination, have GAAP Net Worth of not less
than the sum of (a) $475,000,000, plus (b) 50% of the Consolidated net income
(but not less than zero) for each full fiscal quarter ended during the period
commencing on July 1, 1998 and ending on such date of determination.
Section 7.13 Leverage Ratio
Maintain at all times a Leverage Ratio of not more than 0.30:1.00.
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Section 7.14 Interest Coverage Ratio
Maintain at all times an Interest Coverage Ratio greater than
2.50:1.00.
Section 7.15 Year 2000 Covenant
The Borrower shall take, and shall cause each of its Subsidiaries
to take, all necessary action to complete in all material respects by June 30,
1999, the reprogramming of computer software, hardware and firmware systems and
equipment containing embedded microchips owned or operated by or for the
Borrower and its Subsidiaries or used or relied upon in the conduct of their
businesses (including systems and equipment supplied by others or with which
such systems of the Borrower or any of its Subsidiaries interface) required as a
result of the Year 2000 Issue to permit the proper functioning of such computer
systems and other equipment and the testing of such systems and equipment, as so
reprogrammed. At the request of the Agent, the Borrower shall provide, and shall
cause each of its Subsidiaries to provide, to the Agent reasonable assurance of
compliance with the preceding sentence.
ARTICLE 8 NEGATIVE COVENANTS
The Borrower agrees that, so long as this Agreement is in effect, any Loan
remains outstanding and unpaid, or any other amount is owing under any Loan
Document to any Lender or the Agent, the Borrower shall not, directly or
indirectly:
Section 8.1 Indebtedness of Subsidiaries
Permit any Subsidiary of the Borrower to create, incur, assume or
suffer to exist any liability for Indebtedness, except (i) Indebtedness existing
on the date hereof as set forth on Schedule 8.1, but not any increases in the
amount thereof, (ii) Indebtedness secured by Liens on Real Property acquired by
such Subsidiary after the Effective Date and (iii) Indebtedness (not in excess
of $25,000,000 aggregate principal amount at any time outstanding) secured by
Liens permitted under Section 8.2(xi), provided that after giving effect to any
Indebtedness permitted under clauses (ii) and (iii) above, the Borrower is in
compliance with the provisions of Sections 7.13, 7.14 and 8.2(vii).
Section 8.2 Liens
Create, incur, assume or suffer to exist any Lien upon any of its
Property, whether now owned or hereafter acquired, or permit any of its
Subsidiaries so to do, except (i) Liens for Taxes, assessments or similar
charges incurred in the ordinary course of business which are not delinquent or
which are being contested in accordance with Section 7.4, provided that
enforcement of such Liens is stayed pending such contest, (ii) Liens in
connection with workers' compensation, unemployment insurance or other social
security obligations (but not ERISA), (iii) deposits or pledges to secure bids,
tenders, contracts (other than contracts for the payment of money), leases,
statutory obligations, surety and appeal bonds and other obligations of like
nature arising in the
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ordinary course of business, (iv) zoning ordinances, easements, rights of way,
minor defects, irregularities, and other similar restrictions affecting real
Property which do not materially adversely affect the value of such real
Property or the financial condition of the Borrower or such Subsidiary or impair
its use for the operation of the business of the Borrower or such Subsidiary,
(v) Liens arising by operation of law such as mechanics', materialmen's,
carriers', warehousemen's liens incurred in the ordinary course of business
which are not delinquent or which are being contested in accordance with Section
7.6, provided that enforcement of such Liens is stayed pending such contest,
(vi) Liens arising out of judgments or decrees aggregating $5,000,000 or less in
existence less than 30 days after the entry thereof or which are being contested
in accordance with Section 7.6, provided that enforcement of such Liens is
stayed pending such contest or the payment of which is covered by insurance as
to which the carrier has acknowledged liability in writing, (vii) Liens on Real
Property of any Subsidiary of the Borrower acquired after the Effective Date to
secure Indebtedness permitted by Section 8.1(ii), incurred in connection with
the acquisition of such Property, provided that each such Lien is limited to
such Property so acquired, (viii) Liens on Property of the Borrower and its
Subsidiaries existing on the Effective Date as set forth on Schedule 8.2 as
renewed from time to time, but not any increases in the amounts secured thereby,
(ix) purchase money security interests in personal property, provided that each
such Lien is limited to such Property so purchased, (x) banker's liens arising
in the ordinary course of business and (xi) Liens on real property owned by
Subsidiaries of the Borrower securing Indebtedness permitted under Section
8.1(iii), provided that such Liens are limited to the real property so owned.
Section 8.3 Mergers, Acquisitions and Dispositions
Consolidate or merge into or with any Person, or make any
Acquisition or Disposition, or enter into any binding agreement to do any of the
foregoing which is not contingent on obtaining the consent of the Required
Lenders, or permit any Subsidiary of the Borrower to do any of the foregoing,
except that (a) a Subsidiary of the Borrower may consolidate and merge with
another wholly-owned Subsidiary of the Borrower, if (i) immediately before and
after giving effect thereto no Default or Event of Default shall or would exist
and (ii) any such consolidation or merger would not cause any Applicable
Insurance Regulatory Authority to restrict the ability of any Insurance
Subsidiary to pay dividends or otherwise make distributions to the Borrower or
any of its Subsidiaries in any manner, and (b) the Borrower may make
Acquisitions and Dispositions, if (i) the aggregate consolidated amount of any
Capital Stock or Property so acquired in any calendar year (determined on the
basis of the fair market value of any Capital Stock or Property acquired), or
the aggregate Consolidated amount of any assets sold, leased or otherwise
disposed of in any calendar year (determined on the basis of the fair market
value of any assets so sold, leased or disposed of) would not exceed 15% of the
Borrower's Consolidated Statutory Capital and Surplus as of the end of the
immediately preceding calendar year, (ii) an Event of Default would not exist
before or after giving effect thereto and (iii) any such Acquisition or
Disposition would not cause any Applicable Insurance Regulatory Authority to
restrict the ability of any Insurance Subsidiary to pay dividends or otherwise
make distributions to the Borrower or any of its Subsidiaries in any manner,
provided, however, that the foregoing shall not limit Dispositions of investment
securities as part of the management of a securities portfolio of the Borrower
or any of its Subsidiaries.
Section 8.4 Line of Business
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Engage, or permit any Subsidiary of the Borrower to engage, in any
material respect in any business other than a business in which the Borrower or
any Subsidiary is engaged in on the Effective Date and any other business
reasonably related thereto.
Section 8.5 Articles of Incorporation and By-laws
Amend or otherwise modify its Articles of Incorporation or By-Laws
in any way which would adversely affect the interests of the Agent and the
Lenders under any of the Loan Documents, or permit any of its Subsidiaries so to
do.
Section 8.6 Fiscal Year
Change its fiscal year from that in effect on the Effective Date,
or permit any of its Subsidiaries so to do.
Section 8.7 Transactions with Affiliates
Become, or permit any Subsidiary to become, a party to any
transaction with any Affiliate of the Borrower on a basis less favorable to the
Borrower or such Subsidiary in any material respect than if such transaction
were not with an Affiliate of the Borrower other than (A) advances made to
employees of the Borrower or any Subsidiary in the ordinary course of business
in connection with their employment, (B) transactions in which the aggregate
rental value, remuneration or other consideration (including the value of a
loan) together with the aggregate rental value, remuneration or other
consideration (including the value of a loan) of all such other transactions
consummated in the year during which such transaction is proposed to be
consummated, does not exceed $5,000,000, (C) management or similar agreements
entered among the Borrower and any Subsidiaries in the ordinary course of
business, (D) transactions effected pursuant to the agreement, date October 7,
1985, by and among the Borrower, George Joseph and Gloria Joseph with respect to
the ownership by George Joseph and Gloria Joseph of the Borrower's Common Stock,
(E) payments to officers or directors of the Borrower or any Subsidiaries in the
ordinary course of their employment, (F) dividends otherwise permitted by this
Agreement or (G) the provision by the Borrower to its Subsidiaries of funds as
contemplated by Section 2.16.
Section 8.8 Issuance of Additional Stock by Subsidiaries
Permit any of its Subsidiaries to issue, directly or indirectly,
any additional Stock or other equity interests of such Subsidiary, other than to
the Borrower or to a wholly-owned Subsidiary of the Borrower.
Section 8.9 Reinsurance Agreements
Permit any Insurance Subsidiary to enter into a treaty to cede any
of its obligations to any reinsurer that could reasonably be expected to have a
Material Adverse Effect.
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Section 8.10 Adoption of Pension Plans
Adopt a Pension Plan, or permit any Subsidiary so to do, unless
this Agreement is amended, in form and substance satisfactory to the Required
Lenders, to insert the customary provisions with respect thereto.
ARTICLE 9 DEFAULT
Section 9.1 Events of Default
The following shall each constitute an "Event of Default"
hereunder:
(a) The failure of the Borrower to pay any installment of
principal on any Note on the date when due and payable; or
(b) The failure of the Borrower to pay any installment of interest
or any other fees or expenses payable under any Loan Document or otherwise to
the Agent with respect to the loan facilities established hereunder within three
Business Days after the date when due and payable; or
(c) The use of the proceeds of any Loan in a manner inconsistent
with or in violation of Section 2.16; or
(d) The failure of the Borrower to observe or perform any covenant
or agreement contained in Sections 7.11, 7.12, 7.13, 7.14 or Section 8; or
(e) The failure to observe or perform any other term, covenant, or
agreement contained in any Loan Document and such failure shall have continued
unremedied for a period of 30 days after the earlier of the Borrower becoming
aware of such failure and the receipt by the Borrower of notice of such failure
from the Agent; or
(f) Any representation or warranty made in any Loan Document or in
any certificate, report, opinion (other than an opinion of counsel) or other
document delivered or to be delivered pursuant thereto, shall prove to have been
incorrect or misleading (whether because of misstatement or omission) in any
material respect when made; or
(g) Obligations of the Borrower (other than its obligations under
the Notes) or any of its Subsidiaries, whether as principal, guarantor, surety
or other obligor, for the payment of any Indebtedness or operating leases in
excess of $5,000,000 in the aggregate (i) shall become or shall be declared to
be due and payable prior to the expressed maturity thereof, or (ii) shall not be
paid when due or within any grace period for the payment thereof, or (iii) any
holder of any such obligation shall have the right to declare such obligation
due and payable prior to the expressed maturity thereof; or
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(h) The Borrower or any of its Subsidiaries shall (i) suspend or
discontinue its business, (ii) make an assignment for the benefit of creditors,
(iii) generally not be paying its debts as such debts become due, (iv) admit in
writing its inability to pay its debts as they become due, (v) file a voluntary
petition in bankruptcy, (vi) become insolvent (however such insolvency shall be
evidenced), (vii) file any petition or answer seeking for itself any
reorganization, arrangement, composition, readjustment of debt, liquidation or
dissolution or similar relief under any present or future statute, law or
regulation of any jurisdiction, (viii) petition or apply to any tribunal for any
receiver, custodian or any trustee for any substantial part of its Property,
(ix) be the subject of any such proceeding filed against it which remains
undismissed for a period of 45 days, (x) file any answer admitting or not
contesting the material allegations of any such petition filed against it or any
order, judgment or decree approving such petition in any such proceeding, (xi)
seek, approve, consent to, or acquiesce in any such proceeding, or in the
appointment of any trustee, receiver, sequestrator, custodian, liquidator, or
fiscal agent for it, or any substantial part of its Property, or an order is
entered appointing any such trustee, receiver, sequestrator, custodian,
liquidator or fiscal agent and such order remains in effect for 45 days, (xii)
any conservatorship or similar proceeding is commenced in respect of the
Borrower or any Reporting Insurance Subsidiary by or on behalf of the California
Department of Insurance or the department of insurance of any other state of
domicile having jurisdiction or (xiii) take any formal action for the purpose of
effecting any of the foregoing or looking to the liquidation or dissolution of
the Borrower or such Subsidiary; or
(i) An order for relief is entered under the United States
bankruptcy laws or any other decree or order is entered by a court having
jurisdiction (i) adjudging the Borrower or any of its Subsidiaries bankrupt or
insolvent, (ii) approving as properly filed a petition seeking reorganization,
liquidation, arrangement, adjustment or composition of or in respect of the
Borrower or any of its Subsidiaries under the United States bankruptcy laws or
any other applicable Federal or state law, (iii) appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or other similar
official) of the Borrower or any of its Subsidiaries or of any substantial part
of the Property thereof, or (iv) ordering the winding up or liquidation of the
affairs of the Borrower or any of its Subsidiaries, and any such decree or order
continues unstayed and in effect for a period of 45 days; or
(j) Judgments or decrees against the Borrower or any of its
Subsidiaries aggregating in excess of $5,000,000 shall remain unpaid, unstayed,
undischarged, unbonded and undismissed for a period of 30 days unless the
payment thereof is covered in full by insurance as to which the carrier has
acknowledged liability in writing; or
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(k) After the Effective Date (1) Any Person (other than George
Joseph or Gloria Joseph), acting alone or with a group of Persons acting in
concert, (i) shall have or acquire beneficial ownership of securities (or
options therefor) having 20% or more of the ordinary voting power of the
Borrower, or (ii) shall possess, directly or indirectly, the power to direct or
cause the direction of the management and policies of the Borrower, whether
through the ownership of voting securities, by contract or otherwise, or (2)
directors of the Borrower constituting that percentage necessary to approve
corporate action shall not have been directors on the date hereof or directors
designated or approved by directors on the date hereof; or
(l) Any license, franchise, permit, right, approval or agreement
of the Borrower or any Subsidiary to own or operate any Operating Entity owned
or operated by the Borrower or such Subsidiary (i) is not renewed, or is
suspended or revoked and (ii) the non-renewal, suspension or revocation thereof
would have a Material Adverse Effect; or
(m) Any Loan Document shall cease, for any reason, to be in full
force and effect or the Borrower shall so assert in writing or shall disavow any
of its obligations thereunder; or
(n) An event of default shall occur and be continuing under the
1996 Revolving Credit.
Upon the occurrence of an Event of Default or at any time
thereafter during the continuance thereof, (a) if such event is an Event of
Default specified in clause (h) or (i) above, the Aggregate Commitments shall
immediately and automatically terminate and the Loans, all accrued and unpaid
interest thereon and all other amounts owing under the Loan Documents shall
immediately become due and payable and the Agent may, and, upon the direction of
the Required Lenders shall, exercise any and all remedies and other rights
provided in the Loan Documents, and (b) if such event is any other Event of
Default, any or all of the following actions may be taken: (i) with the consent
of the Required Lenders, the Agent may, and upon the direction of the Required
Lenders shall, by notice to the Borrower, declare the Aggregate Commitments to
be terminated forthwith, whereupon the Aggregate Commitments shall immediately
terminate, and (ii) with the consent of the Required Lenders, the Agent may, and
upon the direction of the Required Lenders shall, by notice of default to the
Borrower, declare the Loans, all accrued and unpaid interest thereon, and all
other amounts owing under the Loan Documents to be due and payable forthwith,
whereupon the same shall immediately become due and payable, and the Agent may,
and upon the direction of the Required Lenders shall, exercise any and all
remedies and other rights provided pursuant to the Loan Documents. Except as
otherwise provided in this Section, presentment, demand, protest and all other
notices of any kind are hereby expressly waived. To the fullest extent not
prohibited by applicable law, the Borrower hereby further expressly waives and
covenants not to assert any appraisement, valuation, stay, extension, redemption
or similar laws, now or at any time hereafter in force which might delay,
prevent or otherwise impede the performance or enforcement of any Loan Document.
In the event that the Aggregate Commitments shall have been
terminated or the Notes shall have been declared due and payable pursuant to the
provisions of this Section, any funds received by the Agent and the Lenders from
or on behalf of the Borrower shall be applied by
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the Agent and the Lenders in liquidation of the Loans and the obligations of the
Borrower under the Loan Documents in the following manner and order: (i) first,
to the payment of interest on, and then the principal portion of, any Loans
which the Agent may have advanced on behalf of any Lender for which the Agent
has not then been reimbursed by such Lender or the Borrower; (ii) second, to the
payment of any fees or expenses due the Agent from the Borrower, (iii) third, to
reimburse the Agent and the Lenders for any expenses (to the extent not paid
pursuant to clause (ii) above) due from the Borrower pursuant to the provisions
of Section 11.5; (iv) fourth, to the payment of accrued Commitment Fees and all
other fees, expenses and amounts due under the Loan Documents (other than
principal and interest on the Notes); (v) fifth, to the payment of interest due
on the Notes; (vi) sixth, to the payment of principal outstanding on the Notes;
and (vii) seventh, to the payment of any other amounts owing to the Agent and
the Lenders under any Loan Document.
ARTICLE 10 THE AGENT
Section 10.1 Appointment
Each Lender hereby irrevocably designates and appoints BNY as the
Agent of such Lender under the Loan Documents and each such Lender hereby
irrevocably authorizes BNY, as the Agent for such Lender, to take such action on
its behalf under the provisions of the Loan Documents and to exercise such
powers and perform such duties as are expressly delegated to the Agent by the
terms of the Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
any Loan Document, the Agent shall not have any duties or responsibilities other
than those expressly set forth therein, or any fiduciary relationship with any
Lender, and no implied covenants, functions, responsibilities, duties,
obligations or liabilities shall be read into the Loan Documents or otherwise
exist against the Agent.
Section 10.2 Delegation of Duties
The Agent may execute any of its duties under the Loan Documents by
or through agents or attorneys-in-fact and shall be entitled to rely upon the
advice of counsel concerning all matters pertaining to such duties.
Section 10.3 Exculpatory Provisions
Neither the Agent nor any of its officers, directors, employees,
agents, attorneys-in-fact or affiliates shall be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection with the Loan Documents (except the Agent for its own gross
negligence or willful misconduct), or (ii) responsible in any manner to any of
the Lenders for any recitals, statements, representations or warranties made by
the Borrower or any officer thereof contained in the Loan Documents or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, the Loan Documents or for
the value, validity, effectiveness, genuineness, perfection, enforceability or
sufficiency of any of the Loan Documents or for any failure of the Borrower or
any other Person to perform its
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obligations thereunder. The Agent shall not be under any obligation to any
Lender to ascertain or to inquire as to the observance or performance of any of
the agreements contained in, or conditions of, the Loan Documents, or to inspect
the properties, books or records of the Borrower. The Agent shall not be under
any liability or responsibility whatsoever, as Agent, to the Borrower or any
other Person as a consequence of any failure or delay in performance, or any
breach, by any Lender of any of its obligations under any of the Loan Documents.
Section 10.4 Reliance by Agent
The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any writing, resolution, notice, consent, certificate,
affidavit, opinion, letter, cablegram, telegram, fax, telex or teletype message,
statement, order or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Borrower), independent accountants and other experts
selected by the Agent. The Agent may treat each Lender, or the Person designated
in the last notice filed with it under this Section, as the holder of all of the
interests of such Lender in its Loans and in its Note until written notice of
transfer, signed by such Lender (or the Person designated in the last notice
filed with the Agent) and by the Person designated in such written notice of
transfer, in form and substance satisfactory to the Agent, shall have been filed
with the Agent. The Agent shall not be under any duty to examine or pass upon
the validity, effectiveness, enforceability, perfection or genuineness of the
Loan Documents or any instrument, document or communication furnished pursuant
thereto or in connection therewith, and the Agent shall be entitled to assume
that the same are valid, effective and genuine, have been signed or sent by the
proper parties and are what they purport to be. The Agent shall be fully
justified in failing or refusing to take any action under the Loan Documents
unless it shall first receive such advice or concurrence of the Required Lenders
as it deems appropriate. The Agent shall in all cases be fully protected in
acting, or in refraining from acting, under the Loan Documents in accordance
with a request or direction of the Required Lenders, and such request or
direction and any action taken or failure to act pursuant thereto shall be
binding upon all the Lenders and all future holders of the Notes.
Section 10.5 Notice of Default
The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default unless the Agent has received
written notice thereof from a Lender or the Borrower. In the event that the
Agent receives such a notice, the Agent shall promptly give notice thereof to
the Lenders and the Borrower. The Agent shall take such action with respect to
such Default or Event of Default as shall be directed by the Required Lenders,
provided, however, that unless and until the Agent shall have received such
directions, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem to be in the best interests of the Lenders.
Section 10.6 Non-Reliance on Agent and Other Lenders
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Each Lender expressly acknowledges that neither the Agent nor any
of its respective officers, directors, employees, agents, attorneys-in-fact or
affiliates has made any representations or warranties to it and that no act by
the Agent hereinafter, including any review of the affairs of the Borrower,
shall be deemed to constitute any representation or warranty by the Agent to any
Lender. Each Lender represents to the Agent that it has, independently and
without reliance upon the Agent or any other Lender, and based on such documents
and information as it has deemed appropriate, made its own evaluation of and
investigation into the business, operations, Property, financial and other
condition and creditworthiness of the Borrower and made its own decision to
enter into this Agreement. Each Lender also represents that it will,
independently and without reliance upon the Agent or any other Lender, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, evaluations and decisions in taking or
not taking action under any Loan Document, and to make such investigation as it
deems necessary to inform itself as to the business, operations, Property,
financial and other condition and creditworthiness of the Borrower. Except for
notices, reports and other documents expressly required to be furnished to the
Lenders by the Agent hereunder, the Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, operations, Property, financial and other condition or
creditworthiness of the Borrower which may come into the possession of the Agent
or any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates.
Section 10.7 Indemnification
Each Lender agrees to indemnify and reimburse the Agent in its
capacity as such (to the extent not promptly reimbursed by the Borrower and
without limiting the obligation of the Borrower to do so), pro rata according to
the outstanding principal balance of the Loans (or at any time when no Loans are
outstanding, according to its Commitment Percentage), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind whatsoever including,
without limitation, any amounts paid to the Lenders (through the Agent) by the
Borrower pursuant to the terms of the Loan Documents, that are subsequently
rescinded or avoided, or must otherwise be restored or returned) which may at
any time (including, without limitation, at any time following the payment of
the Notes) be imposed on, incurred by or asserted against the Agent in any way
relating to or arising out of the Loan Documents or any other documents
contemplated by or referred to therein or the transactions contemplated thereby
or any action taken or omitted to be taken by the Agent under or in connection
with any of the foregoing; provided, however, that no Lender shall be liable for
the payment of any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements to the
extent resulting solely from the finally adjudicated gross negligence or willful
misconduct of the Agent. Without limitation of the foregoing, each Lender agrees
to reimburse the Agent promptly upon demand for its pro rata share of any unpaid
fees owing to the Agent, and any costs and expenses (including, without
limitation, reasonable fees and expenses of counsel) payable by the Borrower
under Section 11.5, to the extent that the Agent has not been paid such fees or
has not be reimbursed for such costs and expenses by the Borrower. The failure
of any Lender to reimburse the Agent promptly upon demand for its pro rata share
of any amount required to be by the Lenders to the Agent as provided in this
Section shall not relieve any other Lender of its obligation hereunder to
reimburse the Agent for its pro rata share
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of such amount, but no Lender shall be responsible for the failure of other
Lender to reimburse the Agent for such other Lender's pro rata share of such
amount. The agreements in this Section shall survive the payment of all amounts
payable under the Loan Documents.
Section 10.8 Agent in Its Individual Capacity
BNY and its respective affiliates may make loans to, accept
deposits from, issue letters of credit for the account of, and generally engage
in any kind of business with, the Borrower as though BNY were not Agent
hereunder. With respect to the Commitment made or renewed by BNY and the Notes
issued to BNY, BNY shall have the same rights and powers under the Loan
Documents as any Lender and may exercise the same as though it were not the
Agent, and the terms "Lender" and "Lenders" shall in each case include BNY.
Section 10.9 Successor Agent
If at any time the Agent deems it advisable, in its sole
discretion, it may submit to each of the Lenders a written notice of its
resignation as Agent under the Loan Documents, such resignation to be effective
upon the earlier of (i) the written acceptance of the duties of the Agent under
the Loan Documents by a successor Agent and (ii) on the 30th day after the date
of such notice. Upon any such resignation, the Required Lenders shall have the
right to appoint from among the Lenders a successor Agent. If no successor Agent
shall have been so appointed by the Required Lenders and accepted such
appointment in writing within 30 days after the retiring Agent's giving of
notice of resignation, then the retiring Agent may, on behalf of the Lenders,
appoint a successor Agent, which successor Agent shall be a commercial bank
organized under the laws of the United States of America or any State thereof
and having a combined capital, surplus, and undivided profits of at least
$100,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent's rights, powers, privileges and duties as Agent under
the Loan Documents shall be terminated. The Borrower and the Lenders shall
execute such documents as shall be necessary to effect such appointment. After
any retiring Agent's resignation as Agent, the provisions of the Loan Documents
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent under the Loan Documents. If at any time there shall not be a
duly appointed and acting Agent, the Borrower agrees to make each payment due
under the Loan Documents directly to the Lenders entitled thereto during such
time.
ARTICLE 11 OTHER PROVISIONS
Section 11.1 Amendments and Waivers
With the written consent of the Required Lenders, the Agent and the
Borrower may, from time to time, enter into written amendments, supplements or
modifications of the Loan Documents and, with the consent of the Required
Lenders, the Agent on behalf of the Lenders may execute and deliver to any such
parties a written instrument waiving or a consent to a departure
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from, on such terms and conditions as the Agent may specify in such instrument,
any of the requirements of the Loan Documents or any Default or Event of Default
and its consequences; provided, however, that:
(a) no such amendment, supplement, modification, waiver or consent
shall, without the consent of all of the Lenders, (i) increase the Commitments
of any Lender or the Aggregate Commitments, (ii) extend the Maturity Date; (iii)
decrease the rate, or extend the time of payment, of interest of, or change or
forgive the principal amount of, or change the pro rata allocation of payments
under, any Note or change or forgive the payment of any fees, (iv) change the
provisions of Sections 2.11, 2.12, 2.13, 2.14, 2.15, 5, 6, 11.1 or 11.6(a), or
release any security interest or collateral, except to the extent that such
release is specifically provided for in any Loan Document, or release any
guarantor under any guarantee or (v) change the definition of Required Lenders;
and
(b) without the written consent of the Agent, no such amendment,
supplement, modification or waiver shall amend, modify or waive any provision of
Section 10 or otherwise change any of the rights or obligations of the Agent
hereunder or under the Loan Documents.
Any such amendment, supplement, modification or waiver shall apply
equally to each of the Lenders and shall be binding upon the parties to the
applicable Loan Document, the Lenders, the Agent and all future holders of the
Notes. In the case of any waiver, the parties to the applicable Loan Document,
the Lenders and the Agent shall be restored to their former position and rights
hereunder and under the outstanding Notes and other Loan Documents to the extent
provided for in such waiver, and any Default or Event of Default waived shall
not extend to any subsequent or other Default or Event of Default, or impair any
right consequent thereon. The Loan Documents may not be amended orally or by any
course of conduct.
Section 11.2 Notices
All notices, requests and demands to or upon the respective parties
to Loan Documents to be effective shall be in writing and, unless otherwise
expressly provided therein, shall be deemed to have been duly given or made when
delivered by hand, or when deposited in the mail, first-class postage prepaid,
or, in the case of notice by fax, when sent, addressed as follows in the case of
the Borrower or the Agent, at the Domestic Lending Office, in the case of each
Lender, or to such other addresses as to which the Agent may be hereafter
notified by the respective parties thereto or any future holders of the Notes:
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The Borrower:
Mercury General Corporation
4484 Wilshire Boulevard
Los Angeles, California 90010
Attention: Gabriel Tirador,
Chief Financial Officer
Telephone: (213) 857-7150
Fax: (213) 857-7116
The Agent:
The Bank of New York
One Wall Street
Agency Function Administration
18th Floor
New York, New York 10286
Attention: Patricia A. Hylton
Telephone: (212) 635-4975
Fax: (212) 635-6365 or 6366 or 6367
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with a copy to:
The Bank of New York
One Wall Street
17th Floor
New York, New York 10286
Attention: Lizanne T. Eberle
Vice President
Telephone: (212) 635-6475
Fax: (212) 809-9520,
except that any notice, request or demand by the Borrower to or upon the Agent
or the Lenders pursuant to Sections 2.3 or 2.6 shall not be effective until
received. Any party to a Loan Document may rely on signatures of the parties
thereto which are transmitted by fax or other electronic means as fully as if
originally signed.
Section 11.3 No Waiver; Cumulative Remedies
No failure to exercise and no delay in exercising, on the part of
the Agent or any Lender, any right, remedy, power or privilege under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege under any Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege. The rights, remedies, powers and privileges
under the Loan Documents are cumulative and not exclusive of any rights,
remedies, powers and privileges provided by law.
Section 11.4 Survival of Representations and Warranties
All representations and warranties made under the Loan Documents
and in any document, certificate or statement delivered pursuant thereto or in
connection therewith shall survive the execution and delivery of the Loan
Documents.
Section 11.5 Payment of Expenses and Taxes
The Borrower agrees, promptly upon presentation of a statement or
invoice therefor, and whether any Loan is made (i) to pay or reimburse the Agent
for all its out-of-pocket costs and expenses reasonably incurred in connection
with the development, preparation and execution of, the Loan Documents and the
syndication thereof and any amendment, supplement or modification thereto
(whether or not executed), any documents prepared in connection therewith and
the consummation of the transactions contemplated thereby, including, without
limitation, the reasonable fees and disbursements of Special Counsel, (ii) to
pay or reimburse the Agent and the Lenders for all of their respective costs and
expenses, including, without limitation, reasonable fees and disbursements of
counsel, reasonably incurred in connection with (A) any Default or Event of
Default and any enforcement or collection proceedings resulting therefrom or in
connection with the negotiation of any restructuring or "work-out" (whether
consummated or not) of the obligations of the Borrower under any of the Loan
Documents, (B) the enforcement of this Section and (C) any
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appraisal required in connection with any real Property at any time in the
future taken as collateral security for any obligations under the Loan
Documents, (iii) to pay, indemnify, and hold each Lender and the Agent harmless
from and against, any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other similar taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation of any
of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, the Loan
Documents and any such other documents, and (iv) to pay, indemnify and hold each
Lender and the Agent and each of their respective officers, directors and
employees harmless from and against any and all other liabilities, obligations,
claims, losses, damages, penalties, actions, judgments, suits, costs, expenses
or disbursements of any kind or nature whatsoever (including, without
limitation, reasonable counsel fees and disbursements) with respect to the
enforcement and performance of the Loan Documents, the use of the proceeds of
the Loans and the enforcement and performance of the provisions of any
subordination agreement in favor of the Agent and the Lenders (all the
foregoing, collectively, the "indemnified liabilities") and, if and to the
extent that the foregoing indemnity may be unenforceable for any reason, the
Borrower agrees to make the maximum payment permitted or not prohibited under
applicable law; provided, however, that the Borrower shall have no obligation
hereunder to pay indemnified liabilities to the Agent or any Lender arising from
the finally adjudicated gross negligence or willful misconduct of the Agent or
such Lender or claims between one indemnified party and another indemnified
party. The agreements in this Section shall survive the termination of the
Aggregate Commitments and the payment of all amounts payable under the Loan
Documents.
Section 11.6 Assignments and Participations
(a) The Loan Documents shall be binding upon and inure to the
benefit of the Borrower, the Lenders, the Agent, all future holders of the Notes
and their respective successors and assigns, except that the Borrower may not
assign, delegate or transfer any of its rights or obligations under the Loan
Documents without the prior written consent of the Agent and each Lender.
(b) Each Lender shall have the right at any time, upon written
notice to the Agent of its intent to do so, to sell, assign, transfer or
negotiate all or any part of such Lender's rights and obligations under the Loan
Documents to one or more of its affiliates, to one or more of the other Lenders
(or to affiliates of such other Lenders) or, with the prior written consent of
the Borrower (which consent shall not be unreasonably withheld or delayed and
shall not be required upon the occurrence and during the continuance of an Event
of Default), to sell, assign, transfer or negotiate all or any part of such
Lender's rights and obligations under the Loan Documents to any other bank,
insurance company, pension fund, mutual fund or other financial institution,
provided that (i) each such sale, assignment, transfer or negotiation (other
than sales, assignments, transfers or negotiations (x) to affiliates of such
Lender or (y) of a Lender's entire interest) shall be in a minimum amount of
$5,000,000 and (ii) there shall be paid to the Agent by the assigning Lender (or
the Borrower, in the case of an assignment pursuant to Section 2.19(b)) a fee
(the "Assignment Fee") of $3,500. For each assignment, the parties to such
assignment shall execute and deliver to the Agent for its acceptance and
recording an Assignment and Acceptance
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Agreement. Upon such execution, delivery, acceptance and recording by the Agent,
from and after the effective date specified in such Assignment and Acceptance
Agreement, the assignee thereunder shall be a party hereto and, to the extent
provided in such Assignment and Acceptance Agreement, the assignor Lender
thereunder shall be released from its obligations under the Loan Documents.
Subject to Borrower's right to consent or not to consent to such an assignment
as set forth above, the Borrower agrees upon written request of the Agent and at
the Borrower's expense to execute and deliver (1) to such assignee, Notes, dated
the effective date of such Assignment and Acceptance Agreement, in an aggregate
principal amount equal to the Loans assigned to, and Commitments assumed by,
such assignee and (2) to such assignor Lender, Notes, dated the effective date
of such Assignment and Acceptance Agreement, in an aggregate principal amount
equal to the balance of such assignor Lender's Loans and Commitments, if any,
and each assignor Lender shall cancel and return to the Borrower its existing
Notes. Upon any such sale, assignment or other transfer, the Commitments and the
Commitment Percentages set forth in Exhibit A shall be adjusted accordingly by
the Agent and a new Exhibit A shall be distributed by the Agent to the Borrower
and each Lender.
(c) Each Lender may grant participations in all or any part of its
Loans, its Note and its Commitment to one or more banks, insurance companies,
financial institutions, pension funds or mutual funds, provided that (i) such
Lender's obligations under the Loan Documents shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties to the Loan
Documents for the performance of such obligations and (iii) the Borrower, the
Agent and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under the Loan
Documents, (iv) the voting rights of any holder of any participation shall be
limited to decisions that only do any of the following: (A) subject the
participant to any additional obligation, (B) reduce the principal of, or
interest on the Notes or any fees or other amounts payable hereunder, (C)
postpone any date fixed for the payment of principal of, or interest on the
Notes or any fees or other amounts payable hereunder, (D) release any security
interest or collateral, except to the extent that such release is specifically
provided for in any Loan Document or (E) release any guarantor under any
guarantee. The Borrower acknowledges and agrees that any such participant shall
for purposes of Sections 2.9, 2.11, 2.12 and 2.15 be deemed to be a "Lender";
provided, however, the Borrower shall not, at any time, be obligated to pay any
participant in any interest of any Lender hereunder any sum in excess of the sum
which the Borrower would have been obligated to pay to such Lender in respect of
such interest had such Lender not sold such participation.
(d) If any (i) assignment is made pursuant to subsection (b) above
or (ii) any participation is granted pursuant to subsection (c) above, shall be
made to any Person that is not a U.S. Person, such Person shall furnish such
certificates, documents or other evidence to the Borrower and the Agent, in the
case of clause (i) and to the Borrower and the Lender which sold such
participation in the case of clause (ii), as shall be required by Section
2.9(c).
(e) No Lender shall, as between and among the Borrower, the Agent
and such Lender, be relieved of any of its obligations under the Loan Documents
as a result of any sale, assignment, transfer or negotiation of, or granting of
participations in, all or any part of its Loans, its Commitment or its Note,
except that a Lender shall be relieved of its obligations to the
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<PAGE>
extent of any such sale, assignment, transfer, or negotiation of all or any part
of its Loans, its Commitment or its Note pursuant to subsection (b) above.
(f) Notwithstanding anything to the contrary contained in this
Section, any Lender may at any time or from time to time assign all or any
portion of its rights under the Loan Documents to a Federal Reserve Bank,
provided that any such assignment shall not release such assignor from its
obligations thereunder.
Section 11.7 Counterparts
Each Loan Document (other than the Notes) may be executed by one or
more of the parties thereto on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
document. It shall not be necessary in making proof of any Loan Document to
produce or account for more than one counterpart signed by the party to be
charged. A counterpart of any Loan Document or to any document evidencing, and
of any an amendment, modification, consent or waiver to or of any Loan Document
transmitted by fax shall be deemed to be an originally executed counterpart. A
set of the copies of the Loan Documents signed by all the parties thereto shall
be deposited with each of the Borrower and the Agent. Any party to a Loan
Document may rely upon the signatures of any other party thereto which are
transmitted by fax or other electronic means to the same extent as if originally
signed.
Section 11.8 Adjustments; Set-off
(a) If any Lender (a "Benefited Lender") shall at any time receive
any payment of all or any part of its Loans, or interest thereon, or receive any
collateral in respect thereof (whether voluntarily or involuntarily, by set-off,
pursuant to events or proceedings of the nature referred to in Section 9.1 (h)
or (i), or otherwise) in a greater proportion than any such payment to and
collateral received by any other Lender in respect of such other Lender's Loans,
or interest thereon, such Benefited Lender shall purchase for cash from each of
the other Lenders such portion of each such other Lender's Loans, and shall
provide each of such other Lenders with the benefits of any such collateral, or
the proceeds thereof, as shall be necessary to cause such Benefited Lender to
share the excess payment or benefits of such collateral or proceeds ratably with
each of the Lenders, provided, however, that if all or any portion of such
excess payment or benefits is thereafter recovered from such Benefited Lender,
such purchase shall be rescinded, and the purchase price and benefits returned,
to the extent of such recovery, but without interest. The Borrower agrees that
each Lender so purchasing a portion of another Lender's Loans may exercise all
rights of payment (including, without limitation, rights of set-off, to the
extent not prohibited by law) with respect to such portion as fully as if such
Lender were the direct holder of such portion.
(b) In addition to any rights and remedies of the Lenders provided
by law, upon the occurrence of an Event of Default and the acceleration of the
obligations owing in connection with the Loan Documents, or at any time upon the
occurrence and during the continuance of an Event of Default, under Section
9.1(a) or (b), each Lender shall have the right, without prior notice to the
Borrower, any such notice being expressly waived by the Borrower to the extent
not
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<PAGE>
prohibited by applicable law, to set-off and apply against any indebtedness,
whether matured or unmatured, of the Borrower to such Lender, any amount owing
from such Lender to the Borrower, at, or at any time after, the happening of any
of the above-mentioned events. To the extent not prohibited by applicable law,
the aforesaid right of set-off may be exercised by such Lender against the
Borrower or against any trustee in bankruptcy, custodian, debtor in possession,
assignee for the benefit of creditors, receiver, or execution, judgment or
attachment creditor of the Borrower, or against anyone else claiming through or
against the Borrower or such trustee in bankruptcy, custodian, debtor in
possession, assignee for the benefit of creditors, receiver, or execution,
judgment or attachment creditor, notwithstanding the fact that such right of
set-off shall not have been exercised by such Lender prior to the making,
filing or issuance, or service upon such Lender of, or of notice of, any such
petition, assignment for the benefit of creditors, appointment or application
for the appointment of a receiver, or issuance of execution, subpoena, order or
warrant. Each Lender agrees promptly to notify the Borrower and the Agent after
any such set-off and application made by such Lender, provided that the failure
to give such notice shall not affect the validity of such set-off and
application.
Section 11.9 Construction
The Borrower represents that it has been represented by counsel in
connection with the Loan Documents and the transactions contemplated thereby and
that the principle that agreements are to be construed against the draftsman
shall be inapplicable.
Section 11.10 Indemnity
The Borrower agrees to indemnify and hold harmless the Agent and
each Lender and their respective affiliates, directors, officers, employees,
attorneys and agents (each an "Indemnified Person") from and against any loss,
cost, liability, damage or expense (including the reasonable fees and
disbursements of counsel of such Indemnified Person, including all local counsel
hired by any such counsel) incurred by such Indemnified Person in investigating,
preparing for, defending against, or providing evidence, producing documents or
taking any other action in respect of, any commenced or threatened litigation,
administrative proceeding or investigation under any federal securities law or
any other statute of any jurisdiction, or any regulation, or at common law or
otherwise, which is alleged to arise out of or is based upon (i) any untrue
statement or alleged untrue statement of any material fact by the Borrower in
any document or schedule executed or filed with any Governmental Authority by or
on behalf of the Borrower; (ii) any omission or alleged omission to state any
material fact required to be stated in such document or schedule, or necessary
to make the statements made therein, in light of the circumstances under which
made, not misleading; (iii) any acts, practices or omissions or alleged acts,
practices or omissions of the Borrower or its agents relating to the use of the
proceeds of any or all borrowings made by the Borrower which are alleged to be
in violation of Section 2.14, or in violation of any federal securities law or
of any other statute, regulation or other law of any jurisdiction applicable
thereto; or (iv) any acquisition or proposed acquisition by the Borrower of all
or a portion of the Stock, or all or a portion of the assets, of any Person
whether such Indemnified Person is a party thereto. The indemnity set forth
herein shall be in addition to any other obligations or liabilities of the
Borrower to each Indemnified Person under the Loan Documents or at common law or
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<PAGE>
otherwise, and shall survive any termination of the Loan Documents, the
expiration of the Commitments and the payment of all indebtedness of the
Borrower under the Loan Documents, provided that the Borrower shall have no
obligation under this Section to an Indemnified Person with respect to any of
the foregoing to the extent found in a final judgment of a court having
jurisdiction to have resulted primarily out of the gross negligence or wilful
misconduct of such Indemnified Person or arising solely from claims between one
such Indemnified Person and another such Indemnified Person.
Section 11.11 Governing Law
The Loan Documents and the rights and obligations of the parties
thereunder shall be governed by, and construed and interpreted in accordance
with, the internal laws of the State of New York, without regard to principles
of conflict of laws.
Section 11.12 Headings Descriptive
Section headings have been inserted in the Loan Documents for
convenience only and shall not be construed to be a part thereof.
Section 11.13 Severability
Every provision of the Loan Documents is intended to be severable,
and if any term or provision thereof shall be invalid, illegal or unenforceable
for any reason, the validity, legality and enforceability of the remaining
provisions thereof shall not be affected or impaired thereby, and any
invalidity, illegality or unenforceability in any jurisdiction shall not affect
the validity, legality or enforceability of any such term or provision in any
other jurisdiction.
Section 11.14 Integration
All exhibits to a Loan Document shall be deemed to be a part
thereof. Except for agreements between the Agent and the Borrower with respect
to certain fees, the Loan Documents embody the entire agreement and
understanding among the Borrower, the Agent and the Lenders with respect to the
subject matter thereof and supersede all prior agreements and understandings
among the Borrower, the Agent and the Lenders with respect to the subject
matter thereof.
Section 11.15 Consent to Jurisdiction
The Borrower hereby irrevocably submits to the jurisdiction of any
New York State or Federal court sitting in the City of New York over any suit,
action or proceeding arising out of or relating to the Loan Documents. The
Borrower hereby irrevocably waives, to the fullest extent permitted or not
prohibited by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding brought in such a
court and any claim that any such suit, action or proceeding brought in such a
court has been brought in an inconvenient forum. The Borrower hereby agrees that
a final judgment in any such suit, action or proceeding brought in such a court,
after all appropriate appeals, shall be conclusive and binding upon it.
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<PAGE>
Section 11.16 Service of Process
The Borrower hereby irrevocably consents to the service of process
in any suit, action or proceeding by sending the same by first class mail,
return receipt requested or by overnight courier service, to the address of the
Borrower set forth in Section 11.2. The Borrower hereby agrees that any such
service (i) shall be deemed in every respect effective service of process upon
it in any such suit, action, or proceeding, and (ii) shall to the fullest extent
enforceable by law, be taken and held to be valid personal service upon and
personal delivery to it.
Section 11.17 No Limitation on Service or Suit
Nothing in the Loan Documents or any modification, waiver, consent
or amendment thereto shall affect the right of the Agent or any Lender to serve
process in any manner permitted by law or limit the right of the Agent or any
Lender to bring proceedings against the Borrower in the courts of any
jurisdiction or jurisdictions in which the Borrower may be served.
Section 11.18 WAIVER OF TRIAL BY JURY
THE AGENT, THE LENDERS AND THE BORROWER HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, THE BORROWER HEREBY
CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT, OR THE LENDERS, OR
COUNSEL TO THE AGENT OR THE LENDERS, HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT THE AGENT OR THE LENDERS WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK
TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER
ACKNOWLEDGES THAT THE AGENT AND THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION.
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<PAGE>
TO EVIDENCE THE FOREGOING, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
MERCURY GENERAL CORPORATION
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
THE BANK OF NEW YORK,
Individually and as Agent
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
UNION BANK OF CALIFORNIA, N.A.,
as Co-Agent
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
THE FIRST NATIONAL BANK OF
CHICAGO, as Co-Agent
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
THE CHASE MANHATTAN BANK
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
FLEET NATIONAL BANK
By:______________________________
Name:____________________________
Title:___________________________
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By:______________________________
Name:____________________________
Title:___________________________
By:______________________________
Name:____________________________
Title:___________________________
<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)
American Mercury Lloyds Insurance Company *
AFI Management Company, Inc. (100% owned by American Fidelity Ins. Company) **
American Mercury MGA, Inc.(100% owned by American Mercury Insurance 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>
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 reports dated February
12, 1999, relating to the consolidated balance sheets of Mercury General
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, shareholders' equity,
and cash flows and related schedules for each of the years in the three-year
period ended December 31, 1998, which reports appear in the December 31, 1998
annual report on Form 10-K of Mercury General Corporation.
KPMG LLP
Los Angeles, California
March 19, 1999
Exhibit 23.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERCURY
GENERAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 219,745
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,590,645
<CASH> 1,887
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 61,947
<TOTAL-ASSETS> 1,877,025
<POLICY-LOSSES> 405,976
<UNEARNED-PREMIUMS> 327,129
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 78,000
0
0
<COMMON> 48,830
<OTHER-SE> 868,545
<TOTAL-LIABILITY-AND-EQUITY> 1,877,025
1,121,584
<INVESTMENT-INCOME> 96,169
<INVESTMENT-GAINS> (1,340)
<OTHER-INCOME> 5,710
<BENEFITS> 684,468
<UNDERWRITING-AMORTIZATION> 252,592
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<INCOME-PRETAX> 235,280
<INCOME-TAX> 57,754
<INCOME-CONTINUING> 177,526
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 177,526
<EPS-PRIMARY> 3.23
<EPS-DILUTED> 3.21
<RESERVE-OPEN> 386,270
<PROVISION-CURRENT> 693,877
<PROVISION-PRIOR> (9,409)
<PAYMENTS-CURRENT> 437,612
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