<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter September 30, 1999 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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No_____
-----
At November 1, 1999, the Registrant had issued and outstanding an aggregate of
54,654,909 shares of its Common Stock.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. - Financial Statements
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AMOUNTS EXPRESSED IN THOUSANDS, except share amounts
<TABLE>
<CAPTION>
A S S E T S
September 30, December 31,
1999 1998
---- ----
Investments: (Unaudited)
<S> <C> <C>
Fixed maturities available for sale (amortized cost
$1,319,434 in 1999 and $1,245,440 in 1998).............. $1,320,572 $1,324,908
Equity securities available for sale (cost $243,550
in 1999 and $220,449 in 1998)........................... 227,878 219,745
Short-term cash investments, at cost, which approximates
market.................................................. 58,153 45,992
--------- ---------
Total investments................................ 1,606,603 1,590,645
Cash........................................................ 7,857 1,887
Receivables:
Premiums receivable...................................... 116,664 107,950
Premium notes............................................ 13,589 13,739
Accrued investment income................................ 21,564 22,356
Other.................................................... 21,140 24,884
--------- ---------
172,957 168,929
Deferred policy acquisition costs........................... 65,117 61,947
Fixed assets, net........................................... 33,942 31,901
Current income taxes recoverable............................ 6,573 5,895
Deferred income taxes....................................... 12,519 -0-
Other assets................................................ 13,616 15,821
--------- ---------
Total assets.................................... $1,919,184 $1,877,025
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses........................ $ 427,172 $ 405,976
Unearned premiums.......................................... 345,249 327,129
Notes payable.............................................. 78,000 78,000
Loss drafts payable........................................ 41,485 38,433
Accounts payable and accrued expenses...................... 64,530 53,196
Deferred income taxes...................................... -0- 22,639
Other liabilities.......................................... 40,320 34,277
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Total liabilities.............................. 996,756 959,650
--------- ---------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
54,654,909 shares in 1999 and 54,684,438 shares in
1998.................................................. 49,332 48,830
Accumulated other comprehensive income (loss)........... (9,447) 51,196
Unearned ESOP compensation.............................. (3,250) (4,000)
Retained earnings....................................... 885,793 821,349
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Total shareholders' equity..................... 922,428 917,375
--------- ---------
Commitments and contingencies........................... $1,919,184 $1,877,025
========= =========
</TABLE>
2
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30,
Amounts expressed in thousands, except per share data
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Earned premiums $300,070 $282,198
Net investment income 24,834 24,132
Net realized investment gains (losses) (6,795) 1,329
Other 1,224 1,541
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Total revenues 319,333 309,200
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Expenses:
Incurred losses 205,412 175,752
Policy acquisition costs 67,217 64,031
Other operating expenses 12,033 13,607
Interest 1,215 1,214
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Total expenses 285,877 254,604
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Income before income taxes 33,456 54,596
Income taxes 5,760 13,154
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Net income $ 27,696 $ 41,442
======= =======
BASIC EARNINGS PER SHARE (average shares outstanding
54,633,375 in 1999 and 54,979,649 in 1998) $ 0.51 $ 0.75
======= =======
DILUTED EARNINGS PER SHARE (adjusted weighted average
shares 54,818,300 in 1999 and 55,324,399 in 1998) $ 0.51 $ 0.75
======= =======
Dividends declared per share $ 0.21 $ 0.175
======= =======
</TABLE>
3
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended September 30,
Amounts expressed in thousands, except per share data
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Earned premiums $886,522 $835,420
Net investment income 73,942 71,601
Net realized investment gains (losses) (8,189) 4,956
Net realized gain from sale of subsidiary -0- 2,586
Other 3,501 3,877
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Total revenues 955,776 918,440
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Expenses:
Incurred losses 586,523 504,248
Policy acquisition costs 200,598 185,705
Other operating expenses 38,045 32,233
Interest 3,584 3,585
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Total expenses 828,750 725,771
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Income before income taxes 127,026 192,669
Income taxes 26,325 49,558
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Net income $100,701 $143,111
======= =======
BASIC EARNINGS PER SHARE (average shares outstanding
54,615,320 in 1999 and 55,122,895 in 1998) $ 1.84 $ 2.60
======= =======
DILUTED EARNINGS PER SHARE (adjusted weighted average
shares 54,833,838 in 1999 and 55,493,039 in 1998) $ 1.84 $ 2.58
======= =======
Dividends declared per share $ 0.63 $ 0.525
======= =======
</TABLE>
4
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended September 30
Amounts expressed in thousands
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income $ 27,696 $41,442
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (46,364) 14,998
Less: reclassification adjustment for net
losses (gains) included in net income 6,076 (1,183)
------- ------
Other comprehensive income (loss),
before tax (40,288) 13,815
Income tax expense (benefit) related to unrealized
holding gains (losses) arising during period (16,227) 5,249
Income tax expense (benefit) related to reclassi-
fication adjustment for (gains) losses included in
net income 2,126 (414)
------- ------
Comprehensive income, net of tax $ 1,509 $50,422
======= ======
</TABLE>
5
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Nine Months Ended September 30,
Amounts expressed in thousands
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income $100,701 $143,111
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (99,361) 17,457
Less: reclassification adjustment for net
losses (gains) included in net income 6,064 (2,563)
------- -------
Other comprehensive income (loss),
before tax (93,297) 14,894
Income tax expense (benefit) related to unrealized
holding gains (losses) arising during period (34,776) 6,110
Income tax expense (benefit) related to reclassi-
fication adjustment for (gains) losses included in
net income 2,122 (897)
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Comprehensive income, net of tax $ 40,058 $152,792
======= =======
</TABLE>
6
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
Amounts expressed in thousands
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 100,701 $ 143,111
Adjustments to reconcile net income to net cash
provided from operating activities:
Increase (decrease) in unpaid losses and loss
adjustment expenses 21,196 (601)
Increase in unearned premiums 18,120 17,585
Decrease (increase) in premium notes receivable 150 (778)
Increase in premiums receivable (8,714) (6,459)
Increase in deferred policy acquisition costs (3,170) (3,799)
Increase in loss drafts payable 3,052 4,552
Increase in accrued income taxes, excluding
deferred tax on change in unrealized gain (3,181) (2,028)
Increase in accounts payable and accrued expenses 6,903 4,458
Depreciation 4,863 3,963
Net realized investment (gains) losses 8,189 (4,956)
Net realized gain from sale of subsidiary -0- (2,586)
Bond accretion, net (3,795) (2,990)
Other, net 14,240 10,005
-------- --------
Net cash provided from operating activities 158,554 159,477
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (163,182) (262,650)
Sales 48,435 109,458
Calls or maturities 44,644 68,552
Equity securities available for sale:
Purchases (444,280) (600,345)
Sales 412,893 572,614
Proceeds from sale of subsidiary, less cash
transferred -0- 11,018
Increase in payable for securities 4,431 3,485
Increase in short-term cash investments, net (12,161) (11,955)
Purchase of fixed assets (7,534) (3,949)
Sale of fixed assets 778 339
-------- --------
Net cash used in investing activities $(115,976) $(113,433)
</TABLE>
(Continued)
7
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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from financing activities:
Dividends paid to shareholders $(34,407) $(28,891)
Proceeds from stock options exercised,
excluding related tax benefit 649 1,812
Purchase and retirement of common stock (1,850) (21,433)
Net (decrease) increase in ESOP loan (1,000) 3,000
------- -------
Net cash used in financing activities (36,608) (45,512)
------- -------
Net increase in cash 5,970 532
Cash:
Beginning of the year 1,887 3,011
------- -------
End of the year $ 7,857 $ 3,543
======= =======
Supplemental disclosures of cash flow information:
Interest paid during the period $ 3,616 $ 3,219
Income taxes paid during the period $ 29,355 $ 50,947
Common stocks tendered at market value to
exercise stock options -0- (276)
</TABLE>
8
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MERCURY GENERAL CORPORATION & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The financial data included herein have been prepared by the Company,
without audit. In the opinion of management, all adjustments of a normal
recurring nature necessary to present fairly the Company's financial position at
September 30, 1999 and the results of operations, comprehensive income and cash
flows for the periods presented have been made.
Certain reclassifications have been made to the prior year balances to
conform to the current year presentation.
This interim information should be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K.
2. Accounting for the Costs of Computer Software Developed or Obtained for
-----------------------------------------------------------------------
Internal Use
------------
Statement of Position No.98-1 (SOP 98-1) provides guidance on accounting
for the capitalization of certain computer software costs developed or obtained
for internal use. It is effective for financial statements with fiscal years
beginning after December 15, 1998. The Company initially adopted SOP 98-1 in
the quarter ended March 31, 1999.
The effect of the new accounting pronouncement on the financial statements
of the Company was to capitalize a portion of the internal software development
costs that would have otherwise been expensed. The impact of SOP 98-1 on the
net income for the nine months ended September 30, 1999 was less than $0.01 per
share.
3. Accounting by Insurance and Other Enterprises for Insurance-Related
-------------------------------------------------------------------
Assessments
-----------
Statement of Position 97-3 (SOP 97-3) provides guidance on the timing of
recognition and measurement of liabilities for insurance related assessments.
It is effective for financial statements with fiscal years beginning after
December 15, 1998. The Company initially adopted SOP 97-3 in the quarter ended
March 31, 1999.
SOP 97-3 prescribes liability recognition when three conditions are met:
(1) an assessment has been imposed or information available prior to the
issuance of the financial statements indicates that it is probable that an
assessment will be imposed, (2) the event obligating an entity to pay an imposed
or probable assessment has occurred on or before the date of the financial
statements and (3) the amount of the assessment can be reasonably estimated.
The adoption of SOP 97-3 resulted in no impact on the Company's 1999 financial
statements.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
General
- -------
The Company is engaged primarily in writing all risk classifications of
automobile insurance in California, which in 1998 accounted for approximately
90% of the Company's direct premiums written. Since 1990, the Company has also
written small amounts of automobile insurance in Georgia and Illinois. In
December 1996 the Company acquired the American Mercury Insurance Group
(formerly named American Fidelity Insurance Group) which was licensed in 36
states but writes automobile and mechanical breakdown insurance predominantly in
Oklahoma and Texas. During 1998, the Company began writing private passenger
automobile coverage in Florida.
Certain statements in this report on Form 10-Q that are not historical fact
constitute "Forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results of the Company to be materially different from historical
results or from any results expressed or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, but are not
limited to, the risks inherent to the cyclical nature of the property and
casualty insurance industry, the Company's concentration of business largely in
one line (automobile) in one state (California), uncertainties regarding the
growth in future written premiums in relation to recent historical experience,
the effect of an April 1998 rate reduction in California on future loss ratios
of the Company, the impact of the Year 2000 and uncertainties regarding the
success of the Company's operations outside California, including particularly
in the Florida and Texas markets, competition and other industry factors,
including uncertainties inherent in the estimate of loss and loss adjustment
expense (LAE) reserves, insurance regulatory matters and certain structural
matters, including restrictions on intercompany transactions within the
Company's holding company structure.
Results of Operations
- ---------------------
Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998
Premiums earned in the third quarter of 1999 increased 6.3% from the
corresponding period in 1998. Net premiums written in the third quarter of 1999
increased 4.8% from the corresponding period in 1998. Contributing to the
overall third quarter 1999 premiums written growth was the California non-
standard auto program, started in October 1998 and the Florida auto program,
started in January 1998. These two programs accounted for 2.0% and 1.5%,
respectively, of the overall written premium growth in the quarter.
California premiums written, representing 91% of the Company's total
premiums, grew approximately 4.3% in the third quarter of 1999 compared to an
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increase of 5.5% for all of 1998. California private passenger automobile
policies inforce remained relatively constant during the third quarter of 1999,
which compares to a 14.3% rate of growth for all of 1998. The automobile
insurance marketplace remains intensely competitive, particularly in California.
Most of the major direct writers, which represent the Company's chief
competition, have instituted one or more rate cuts over the last twenty-four
months and many have increased their marketing efforts.
The loss ratio in the third quarter (loss and loss adjustment expenses
related to premiums earned) was 68.5%, compared with 62.3% in 1998. The higher
loss ratio in 1999, as compared to 1998, was primarily due to the 7% rate
reduction taken in California in April 1998, and an increase in loss costs due
to higher frequency and severity of California automobile claims.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in 1999 was 26.4% compared to 27.5% in 1998. The decrease is
primarily attributable to a reduction in expenses related to contingent
commissions.
The combined ratio of losses and expenses (GAAP basis) was 94.9% in 1999
compared with 89.8% in 1998, resulting in an underwriting gain for the period of
$15.4 million, compared with $28.8 million in 1998.
Investment income for the third quarter was $24.8 million, compared with
$24.1 million in the third quarter of 1998. The after-tax yield on average
investments of $1,613.7 million (fixed maturities valued at cost; equities at
market) was 5.53% compared with 5.84% on average investments of $1,505.2 million
in 1998. The decrease in realized investment yields reflects the redemption of
bonds acquired in earlier, higher interest rate environments.
Realized investment losses before income taxes were $6.8 million compared
with realized gains of $1.3 million in the third quarter of 1998. Approximately
$6.0 million of the loss was related to a permanent impairment in the value of
one preferred stock investment.
The income tax provision in the third quarter of 1999 of $5.8 million
represented an effective tax rate of 17.2%, compared with an effective rate of
24.1% in 1998. The lower effective rate is principally attributable to the
larger proportion of pre-tax income derived from tax-exempt investment income as
compared to fully taxable underwriting gain.
Net income for the third quarter of $27.7 million, or $.51 per share
(basic), compares with $41.4 million or $.75 per share (basic) in 1998. Diluted
net income per share was $.51 in 1999 and $.75 in 1998.
Other comprehensive income represents the change in the unrealized gains
and losses on the Company's investments occurring during the period. Other
comprehensive losses for the third quarter of $40.3 million compares with other
comprehensive income of $13.8 million in 1998. The losses were primarily the
result of increased market interest rates which reduced the value of the
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Company's investment portfolio.
Nine Months ended September 30, 1999 compared to Nine Months ended September 30,
1998
Premiums earned in the nine months of 1999 increased 6.1% from the
corresponding period in 1998. Net premiums written in the nine months of 1999
increased 6.0% from the corresponding period in 1998. Contributing to the
overall nine months of 1999 premiums written growth was the California non
standard auto program started in October 1998 and the Florida auto program,
started in January 1998. These two programs accounted for 1.7% and 1.9%,
respectively, of the overall written premium growth in the nine months of 1999.
California premiums written, representing 91% of the Company's total
premiums, grew approximately 4.7% in the nine months of 1999 compared to an
increase of 5.5% for all of 1998. California private passenger automobile
policies inforce grew at an annualized rate of 7% during the nine months of
1999, which compares to a 14.3% rate of growth for all of 1998. The automobile
insurance marketplace remains intensely competitive, particularly in California.
Most of the major direct writers, which represent the Company's chief
competition, have instituted one or more rate cuts over the last two years and
many have increased marketing efforts.
The loss ratio in the nine months of 1999 (loss and loss adjustment
expenses related to premiums earned) was 66.2%, compared with 60.4% in 1998.
The higher loss ratio in 1999, as compared to 1998, was primarily due to the 7%
rate reduction taken in California in April 1998 and an increase in loss costs
due to higher frequency and severity of California automobile claims.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in 1999 was 26.9% compared to 26.1% in 1998. The increase in
the expense ratio was largely attributable to expenses related to higher base
and contingent commissions, advertising expenses and start up costs from the
Company's Florida operations.
The combined ratio of losses and expenses (GAAP basis) was 93.1% in 1999
compared with 86.5% in 1998, resulting in an underwriting gain for the period of
$61.4 million, compared with $113.2 million in 1998.
Investment income for the nine months of 1999 was $73.9 million, compared
with $71.6 million in the nine months of 1998. The after-tax yield on average
investments of $1,576.8 million (fixed maturities valued at cost; equities at
market) was 5.63% compared with 5.91% on average investments of $1,462.8 million
in 1998. The decrease in realized investment yields reflects the redemption of
bonds acquired in earlier, higher interest rate environments.
Realized investment losses before income taxes were $8.2 million compared
with realized gains of $7.5 million in the nine months of 1998. Approximately
$6.0 million of the loss in 1999 was related to a permanent impairment in the
value of one preferred stock investment. Included in 1998 realized gains was a
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<PAGE>
gain of $2.6 million on the sale of Cimarron Insurance Company, a wholly owned
subsidiary of the Company.
The income tax provision in the nine months of 1999 of $26.3 million
represented an effective tax rate of 20.7%, compared with an effective rate of
25.7% in 1998. The lower effective rate is principally attributable to a larger
proportion of pre-tax income derived from tax-exempt investment income as
compared to fully taxable underwriting gain.
Net income for the nine months of $100.7 million, or $1.84 per share
(basic), compares with $143.1 million or $2.60 per share (basic) in 1998.
Diluted net income per share was $1.84 in 1999 and $2.58 in 1998.
Other comprehensive income represents the change in the unrealized gains
and losses on the Company's investments occurring during the period. Other
comprehensive losses for the nine months of 1999 of $93.3 million compares with
other comprehensive income of $14.9 million in 1998. The losses were primarily
the result of increased market interest rates which reduced the value of the
Company's investment portfolio.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operating activities during the nine months of 1999
was $158.6 million, while funds derived from the sale, call or maturity of
investments was $506.0 million, of which approximately 82% was represented by
the sale of equities. Fixed-maturity investments, at amortized cost, increased
by $74.0 million during the period. Equity investments, including perpetual
preferred stocks, increased by $23.1 million at cost, and short-term cash
investments increased by $12.2 million. The amortized cost of fixed-maturities
available for sale which were sold or called during the period was $92.0
million.
The market value of all investments (fixed-maturities and equities) held at
market as "Available for Sale" was less than amortized cost of $1,563.0 million
at September 30, 1999 by $14.5 million. That unrealized loss, reflected as
accumulated other comprehensive loss in shareholders' equity net of applicable
tax effects, was $9.4 million at September 30, 1999 compared with an unrealized
gain of $51.2 million at December 31, 1998.
The Company's cash and short term investments totaled $66.0 million at
September 30, 1999. Together with funds generated internally, such liquid
assets are more than adequate to pay claims without the forced sale of
investments.
On August 2, 1999 the Company announced that its Board of Directors
authorized the repurchase over a one year period of up to $200 million of
Mercury General's Common Stock. The purchases may be made from time to time in
the open market at the discretion of management. The program will be funded by
the sale of lower yielding tax-exempt bonds, the proceeds of a bank line and
internal cash generation.
In late October, the Company renewed its $100 million 364 day credit
13
<PAGE>
facility with a consortium of banks led by The Bank of New York. The facility
may be used to fund the Company's stock buy back program as well as for general
corporate purposes.
It has been the Company's policy not to invest in high yield or "junk"
bonds. Approximately 1.3% of total fixed maturities at September 30, 1999 were
rated below investment grade. The average rating of the $1,285.8 million bond
portfolio (at amortized cost) was AA, while the average effective maturity
approximates 11.5 years. The modified duration of the bond portfolio
approximates 8.1 years. Bond holdings are broadly diversified geographically,
and, within the tax-exempt sector, consist largely of revenue issues, including
housing bonds subject to sinking funds and special par calls, and other issues,
many of which have been pre-refunded and escrowed with U.S. Treasuries. General
obligation bonds of the large eastern cities have generally been avoided.
Holdings in the taxable sector consist principally of senior public utility
issues. Fixed-maturity investments of $1,319.4 million (at cost) include $33.6
million of sinking fund preferreds, principally utility issues.
Except for Company-occupied buildings, the Company has no direct
investments in real estate and no holdings of mortgages secured by commercial
real estate.
Equity holdings of $227.9 million at market (cost $243.6 million),
including perpetual preferred issues, are largely confined to the public
utility, financial and banking sectors and represents 26.4% (at cost) of total
shareholders' equity.
As of September 30, 1999, the Company had no material commitments for
capital expenditures.
Industry and regulatory guidelines suggest that the ratio of a property and
casualty insurer's annual net premiums written to statutory policyholders'
surplus should not exceed 3 to 1. Based on the combined surplus of all of the
licensed insurance subsidiaries of $803.1 million at September 30, 1999 and net
written premiums for the twelve months ended on that date of $1,195.0 million,
the ratio of writings to surplus was approximately 1.49 to 1.
Impact of Year 2000
- -------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, or as no date. This could result in a
system failure or miscalculations causing disruptions of operations, 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
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<PAGE>
to both hardware and software. The Company considers policy issuance, premium
billing and collections and its claim systems as its critical systems. The
modifications completed on the above critical systems represent approximately
95% of the Company's total premiums written.
The American Mercury Group which represents approximately 5% of the
Company's total premiums written, completed the modifications to its mission
critical systems during the first quarter of 1999. A small percentage of
insurance policies remain on a non-Year 2000 compliant system. The Company
expects to have all of these policies transferred to the Year 2000 compliant
system by the end 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 end of 1999.
From the inception of Year 2000 remediation efforts in 1997 through
September 30, 1999, the Company expensed approximately $600,000, primarily for
internal labor costs, related to Year 2000 modification. The Company expects to
incur less than $100,000 for the remainder of 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 the Company's 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 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no material changes in the Company's investment strategies,
types of financial instruments held or the risks associated with such
instruments which would materially alter the market risk disclosures made in the
Company's Annual Statement on Form 10-K for the year ended December 31, 1998.
An increase in market interest rates during the nine months of the year
negatively impacted the value of the Company's investments. The impact is
15
<PAGE>
described in the Results of Operations section above.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are included herewith:
27 Financial Data Schedule
(b) Not applicable.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCURY GENERAL CORPORATION
Date: November 10, 1999 By: GEORGE JOSEPH
------------------------------------
George Joseph
Chairman and Chief Executive Officer
Date: November 10, 1999 By: GABRIEL TIRADOR
------------------------------------
Gabriel Tirador
Vice President and Chief Financial
Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERCURY
GENERAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,320,572
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 227,878
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,606,603
<CASH> 7,857
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 65,117
<TOTAL-ASSETS> 1,919,184
<POLICY-LOSSES> 427,172
<UNEARNED-PREMIUMS> 345,249
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 78,000
49,332
0
<COMMON> 0
<OTHER-SE> 873,096
<TOTAL-LIABILITY-AND-EQUITY> 1,919,184
886,522
<INVESTMENT-INCOME> 73,942
<INVESTMENT-GAINS> (8,189)
<OTHER-INCOME> 3,501
<BENEFITS> 586,523
<UNDERWRITING-AMORTIZATION> 200,598
<UNDERWRITING-OTHER> 38,045
<INCOME-PRETAX> 127,026
<INCOME-TAX> 26,325
<INCOME-CONTINUING> 100,701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,701
<EPS-BASIC> 1.84
<EPS-DILUTED> 1.84
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
