<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 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 May 7, 1999, the Registrant had issued and outstanding an aggregate of
54,701,009 shares of its Common Stock.
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AMOUNTS EXPRESSED IN THOUSANDS, except share amounts
A S S E T S
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Investments:
Fixed maturities available for sale (amortized cost
$1,258,531 in 1999 and $1,245,440 in 1998)............ $1,331,389 $1,324,908
Equity securities available for sale (cost $241,154
in 1999 and $220,449 in 1998)......................... 232,472 219,745
Short-term cash investments, at cost, which approxi-
mates market.......................................... 57,046 45,992
---------- ----------
Total investments........................... 1,620,907 1,590,645
Cash...................................................... 4,203 1,887
Receivables:
Premiums receivable.................................... 114,150 107,950
Premium notes.......................................... 13,903 13,739
Accrued investment income.............................. 21,047 22,356
Other.................................................. 22,927 24,884
---------- ----------
172,027 168,929
Deferred policy acquisition costs......................... 63,828 61,947
Fixed assets, net......................................... 33,429 31,901
Current income taxes recoverable.......................... -0- 5,895
Other assets.............................................. 15,091 15,821
---------- ----------
Total assets................................ $1,909,485 $1,877,025
========== ==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Losses and loss adjustment expenses........................ $403,481 $405,976
Unearned premiums.......................................... 337,566 327,129
Notes payable.............................................. 78,000 78,000
Loss drafts payable........................................ 39,977 38,433
Accounts payable and accrued expenses...................... 51,176 53,196
Current income taxes....................................... 6,700 -0-
Deferred income taxes...................................... 17,391 22,639
Other liabilities.......................................... 38,475 34,277
-------- --------
Total liabilities.............................. 972,766 959,650
-------- --------
Shareholders' equity:
Common stock without par value or stated value.
Authorized 70,000,000 shares; issued and outstanding
54,686,438 shares in 1999 and 54,684,438 shares in
1998.................................................. 48,826 48,830
Accumulated other comprehensive income.................. 41,715 51,196
Unearned ESOP compensation.............................. (3,750) (4,000)
Retained earnings....................................... 849,928 821,349
---------- -----------
Total shareholders' equity..................... 936,719 917,375
---------- -----------
Commitments and contingencies...........................
$1,909,485 $1,877,025
========== ==========
</TABLE>
2
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, 1999
Amounts expressed in thousands, except per share data
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Earned premiums $290,518 $274,454
Net investment income 23,988 23,867
Net realized investment gains 59 1,824
Other 1,168 1,087
-------- --------
Total revenues 315,733 301,232
-------- --------
Expenses:
Incurred losses 182,845 161,351
Policy acquisition costs 66,114 59,630
Other operating expenses 13,098 8,941
Interest 1,192 1,203
-------- --------
Total expenses 263,249 231,125
-------- --------
Income before income taxes 52,484 70,107
Income taxes 12,440 18,693
-------- --------
Net income $ 40,044 $ 51,414
======== ========
BASIC EARNINGS PER SHARE (average shares outstanding
54,595,382 in 1999 and 55,156,013 in 1998) $ 0.73 $ 0.93
======== ========
DILUTED EARNINGS PER SHARE (adjusted weighted
average shares 54,838,156 in 1999 and 55,557,730 in
1998) $ 0.73 $ 0.93
======== ========
Dividends declared per share $ 0.210 $ 0.175
======== ========
</TABLE>
3
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31, 1999
Amounts expressed in thousands
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net income $ 40,044 $51,414
Other comprehensive loss, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period (13,673) 166
Less: reclassification adjustment for net gains
included in net income (913) (845)
-------- -------
Other comprehensive loss, before tax (14,586) (679)
Income tax expense (benefit) related to unrealized
holding gains (losses) arising during period (4,786) 58
Income tax benefit related to reclassification
adjustment for net gains included in net income (319) (296)
-------- -------
Comprehensive income, net of tax $ 30,563 $50,973
======== =======
</TABLE>
4
<PAGE>
MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31
Amounts expressed in thousands
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 40,044 $ 51,414
Adjustments to reconcile net income to net cash
provided from operating activities:
Decrease in unpaid losses and loss adjustment
expenses (2,495) (4,672)
Increase in unearned premiums 10,437 13,066
Increase in premium notes receivable (164) (293)
Increase in premiums receivable (6,200) (7,785)
Increase in deferred policy acquisition costs (1,881) (2,845)
Increase in loss drafts payable 1,544 3,493
Increase in accrued income taxes, excluding deferred
tax on change in unrealized gain 12,453 15,008
Decrease in accounts payable and accrued expenses (2,020) (7,700)
Depreciation 1,426 1,335
Net realized investment gains (59) (1,824)
Bond accretion, net (1,048) (829)
Other, net 9,377 9,735
-------- --------
Net cash provided from operating activities 61,414 68,103
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases (37,201) (103,610)
Sales 12,378 51,097
Calls or maturities 12,827 18,096
Equity securities available for sale:
Purchases (195,609) (248,852)
Sales 174,916 238,396
Increase in short-term cash investments, net (11,054) (9,493)
Purchase of fixed assets (3,055) (1,152)
Sale of fixed assets 134 88
-------- --------
Net cash used in investing activities $(46,664) $(55,430)
</TABLE>
(Continued)
5
<PAGE>
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 $(11,464) $(9,663)
Proceeds from stock options exercised 30 857
Net decrease in ESOP loan (1,000) --
-------- -------
Net cash used in financing activities (12,434) (8,806)
-------- -------
Net increase in cash 2,316 3,867
Cash:
Beginning of the year 1,887 3,011
-------- -------
End of the period $ 4,203 $ 6,878
======== =======
Supplemental disclosures of cash flow information
and non-cash financing activities:
Interest paid during the period $ 1,243 $ 874
Income taxes (received) paid during the period $ (16) $ 3,348
Common stocks tendered at market value to exercise
stock options $ -- $ 276
</TABLE>
6
<PAGE>
MERCURY GENERAL CORPORATION & SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The financial data included herein have been prepared by the Company,
without audit. In the opinion of management, all adjustments of a normal
recurring nature necessary to present fairly the Company's financial position at
March 31, 1999 and the results of operations, comprehensive income and cash
flows for the periods presented have been made.
This interim information should be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K.
2. 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
first quarter 1999 net income 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 first quarter
1999 financial statements.
7
<PAGE>
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 March 31, 1999 compared to Three Months Ended March 31, 1998
Premiums earned in the first quarter of 1999 increased 5.9% from the
corresponding period in 1998. Premiums written in the first quarter of 1999
increased 4.5% from the corresponding period in 1998. Contributing favorably to
the overall first 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 1.1% and 2.1%,
respectively, of the overall written premium growth in the quarter.
California premiums written, representing 91% of the Company's total
premiums, grew approximately 2.6% in the first quarter of 1999 compared to an
increase of 5.5% for all of 1998. California policy count grew at an annualized
rate of 13.4% during the first quarter of 1999, which compares to a 14.3% rate
8
<PAGE>
of growth for all of 1998. The disparity between premium growth and policy
count growth is largely due to a 7% rate reduction that became effective April
1, 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 first quarter (loss and loss adjustment expenses
related to premiums earned) was 62.9% in 1999 and 58.8% in 1998. The higher
loss ratio in 1999 as compared to 1998 was largely due to the 7% rate reduction
taken in California in April of 1998. The Company's frequency and severity
trends remain favorable.
The expense ratio (policy acquisition costs and other expenses related to
premiums earned) in the first quarter of 1999 was 27.3% compared to 25.0% in
1998. The increase in the expense ratio was largely attributable to expenses
related to the Company's expanded advertising campaign, start-up costs from the
Florida operations and higher base commissions.
The combined ratio of losses and expenses (GAAP basis) was 90.2% in the
first quarter of 1999 compared with 83.8% in 1998, resulting in an underwriting
gain for the period of $28.5 million, compared with $44.5 million in 1998.
Investment income for the first quarter of 1999 was $24.0 million, compared
with $23.9 million in the first quarter of 1998. The after-tax yield on average
investments of $1,541.0 million (fixed maturities valued at cost; equities at
market) was 5.63% compared with 6.05% on average investments of $1,421.7 million
in 1998. The reduction in the after-tax yield was primarily due to a decrease
in the dividend yield obtained from the equity portfolio. 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. Equity market
conditions during the first quarter reduced the effectiveness of this strategy
and resulted in a decline in the number of dividends captured.
The income tax provision in the first quarter of 1999 of $12.4 million
represented an effective tax rate of 23.7%, compared with an effective rate of
26.7% in 1998. The lower effective tax rate in 1999 is principally attributable
to the higher proportion of tax-exempt investment income in 1999.
Net income for the first quarter of $40.0 million, or $.73 per share
(basic), compares with $51.4 million or $.93 per share (basic) in 1998. Diluted
net income per share was $.73 in 1999 and $.93 in 1998.
Liquidity and Capital Resources
- -------------------------------
Net cash provided from operating activities during the first three months
of 1999 was $61.4 million, while funds derived from the sale, redemption or
maturity of investments was $200.1 million, of which approximately 87% was
represented by the sale of equity securities. Fixed-maturity investments, at
amortized cost, increased by $13.1 million during the period. Equity
investments, including perpetual preferred stocks, increased by $20.7 million at
9
<PAGE>
cost, and short-term cash investments increased by $11.1 million. The amortized
cost of fixed-maturities available for sale which were sold or called during the
period was $25.2 million.
The market value of all investments (fixed-maturities and equities) held at
market as "Available for Sale" exceeded amortized cost of $1,499.7 million at
March 31, 1999 by $64.2 million. That unrealized gain, reflected as accumulated
other comprehensive income in shareholders' equity net of applicable tax
effects, was $41.7 million at March 31, 1999 compared with an unrealized gain of
$51.2 million at December 31, 1998.
The Company's cash and short term investments totaled $61.2 million at
March 31, 1999 . Together with funds generated internally, such liquid assets
are more than adequate to pay claims without the forced sale of investments.
It has been the Company's policy not to invest in high yield or "junk"
bonds. Approximately 1.0% of total fixed maturities at March 31, 1999 were
rated below investment grade. The average rating of the $1,223.0 million bond
portfolio (at amortized cost) was A+. 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 $1,258.5 million (at cost)
include $35.5 million of sinking fund preferreds, principally utility issues.
Except for Company-occupied buildings, the Company has no direct
investments in real estate and no holdings of mortgages secured by commercial
real estate.
Equity holdings of $232.5 million at market (cost $241.2 million),
including perpetual preferred issues, are largely confined to the public utility
and banking sectors and represent 25.7% (at cost) of total shareholders' equity.
As of March 31, 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 $777.8 million at March 31, 1999 and net
written premiums for the twelve months ended on that date of $1,157.0 million,
the ratio of writings to surplus was approximately 1.49 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
10
<PAGE>
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 which represents approximately 6% 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 second quarter of 1999.
From the inception of Year 2000 remediation efforts in 1997 through March
31, 1999, the Company expensed approximately $600,000, 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 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.
11
<PAGE>
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
12
<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: May 10, 1999 By:GEORGE JOSEPH
------------------------------------
George Joseph
Chairman and Chief Executive Officer
Date: May 10, 1999 By:GABRIEL TIRADOR
------------------------------------
Gabriel Tirador
Chief Financial Officer
13
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 1,331,389
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 232,472
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,620,907
<CASH> 4,203
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 63,828
<TOTAL-ASSETS> 1,909,485
<POLICY-LOSSES> 403,481
<UNEARNED-PREMIUMS> 337,566
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 78,000
0
0
<COMMON> 48,826
<OTHER-SE> 887,893
<TOTAL-LIABILITY-AND-EQUITY> 1,909,485
290,518
<INVESTMENT-INCOME> 23,988
<INVESTMENT-GAINS> 59
<OTHER-INCOME> 1,168
<BENEFITS> 182,845
<UNDERWRITING-AMORTIZATION> 66,114
<UNDERWRITING-OTHER> 13,098
<INCOME-PRETAX> 52,484
<INCOME-TAX> 12,440
<INCOME-CONTINUING> 40,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,044
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
