The Company owns a 130,000 square foot office building in Rancho Cucamonga, California that opened in September 2003. This space is used to support the Company’s California operations and future expansion. Any space in the building that is not occupied by the Company may be leased to outside parties.
Mercury General Corporation and its subsidiaries (collectively, the “Company”) is headquartered in Los Angeles, California and operates primarily as a personal automobile insurer selling policies through a network of independent agents and brokers in thirteen states. The Company also offers homeowners insurance, mechanical breakdown insurance, commercial and dwelling fire insurance, umbrella insurance, commercial automobile and commercial property insurance. Private passenger automobile lines of insurance accounted for approximately 85% of the $3.0 billion of the Company’s direct premiums written in 2005, with approximately 72% of the private passenger automobile premiums written in California.
This overview discusses some of the relevant factors that management considers in evaluating the Company’s performance, prospects and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety of the management discussion and analysis, the Company’s consolidated financial statements and notes thereto and all other items contained within this Annual Report on Form 10-K.
The Company also generates revenue from its investment portfolio, which was approximately $3.2 billion at the end of 2005. This investment portfolio generated nearly $123 million in pre-tax investment income during 2005. The portfolio is managed by Company personnel with a view towards maximizing after-tax yields and limiting interest rate and credit risk.
The Company’s results and growth have allowed it to consistently generate positive cash flow from operations, which was approximately $490 million in 2005. The Company’s cash flow from operations has exceeded $100 million every year since 1994 and has been positive for over 20 years. Cash flow from operations has been used to pay shareholder dividends and to help support growth.
There are, however, challenges and risks involved in entering each new state, including establishing adequate rates without any operating history in the state, working with a new regulatory regime, hiring and training competent personnel, building adequate systems and finding qualified agents to represent the Company. The Company does not expect to enter into any new states until its NextGen computer system is successfully implemented. See “Technology.”
The Company is currently developing a Next Generation (“NextGen”) computer system to replace its existing underwriting, billings, claims and commissions legacy systems that currently reside on Hewlett Packard 3000 mainframe computers. The NextGen system is designed to be a multi-state, multi-line system that is expected to enable the Company to enter new states more rapidly, as well as respond to legislative and regulatory changes more easily than the Company’s current systems. The NextGen system is initially being deployed for the personal automobile line of business and has been successfully implemented in one state (Virginia). The Company expects to implement NextGen in its other states in 2006 and 2007. The Company has currently spent approximately $30 million on NextGen and expects additional costs to be incurred during the implementation period. NextGen is expected to provide a positive benefit to the Company. As with any large scale technology implementation, risks associated with system implementation can occur that could significantly impact the operations of the Company and increase the expected costs of the project, although management has expended planning and development efforts to mitigate these risks.
The Company operates primarily in the state of California, which was the only state in which it produced business prior to 1990. The Company has since expanded its operations into the following states: Georgia (1990), Illinois (1990), Oklahoma (1996), Texas (1996), Florida (1998), Virginia (2001), New York (2001), New Jersey (2003), Arizona (2004), Pennsylvania (2004), Michigan (2004) and Nevada (2004).
During 2005, approximately 72% of the Company’s total net premiums written were derived from California as compared to 76% in 2004. The decrease was the result of a greater portion of business written outside of California. The Company has established a diversification goal to produce half of its business outside of California by the end of 2008. There are factors, some of which are outside of the Company’s control, that could prevent the Company from achieving this goal.
are determined by the California DOI to have a substantial relationship to the risk of loss and adopted by regulation. The regulations further require that each of the four factors be applied in decreasing order of importance.
In December 2005, the California Insurance Commissioner introduced new regulations designed to reduce the impact on automobile insurance rates based on where people live. Current regulations allow companies to average the weight of all the optional rating factors, and the average weight of the optional rating factors must be less than the third statutory factor. The proposed regulation requires each individual optional factor such as territory to have less weight than the third statutory factor. The California Commissioner expects these regulations to be effective in late 2006 after public hearings and review by the California Office of Administrative Law (“OAL”). Following the announcement of the effective date of this proposed regulation, every insurer will have 90 days to submit a class plan which complies with these regulations.
The insurance industry has argued that territory is a useful predictor of risk because it takes into account aspects such as the number of accidents and theft in a particular area. Many insurers, including the Company, place a higher weight on this optional factor. Certain studies have predicted that reducing the weight of territory in developing automobile insurance rates would likely hurt consumers in the rural and suburban areas where automobile insurance rates would, on average, increase and help consumers in the urban areas where automobile insurance rates would, on average, decrease. Depending upon the results of the public hearing and the OAL review, the insurance industry may challenge the California Commissioner’s proposal in court on the basis that the results of this regulation are unfairly discriminatory.
The outcome of these proposed regulations is not certain at the present time and the Company is unable to determine the impact that these proposed regulations, if enacted, would have on its business.
On June 25, 2003, the California State Board of Equalization (“SBE”) upheld Notices of Proposed Assessments issued against the Company for tax years 1993 through 1996 in which the Franchise Tax Board (“FTB”) disallowed a portion of the Company’s expenses related to management services provided to its insurance company subsidiaries on grounds that such expenses were allocable to the Company’s tax-deductible dividends from such subsidiaries. The SBE decision also resulted in a smaller disallowance of the Company’s interest expense deductions than was proposed by the FTB in those years. The Company filed a petition for rehearing with the SBE
relating to these franchise tax issues and a rehearing was granted and held on July 1, 2005. At the rehearing, additional briefings were requested before the SBE would rule on the matter. These briefings were filed with the SBE and another rehearing is scheduled for March 28, 2006.
The California FTB has audited the 1997 through 2002 tax returns and they accepted the 1997 through 2000 returns to be correct as filed. For the 2001 and 2002 tax returns, the FTB has taken exception to the state apportionment factors used by the Company. Specifically, the FTB has asserted that payroll and property factors from Mercury Insurance Services, LLC, a subsidiary of Mercury Casualty Company that is excluded from the Mercury General California Franchise tax return, should be included in the California apportionment factors. Based on this assertion, the FTB issued notices of proposed tax assessments in January 2006 for the 2001 and 2002 tax years totaling approximately $1 million. The Company strongly disagrees with the position taken by the FTB and plans to formally appeal the assessments before the SBE. An unfavorable ruling against the Company may have a material impact on the Company’s quarterly results of operations. Management believes that the issue will ultimately be resolved in favor of the Company. However, there can be no assurance that the Company will prevail on this matter.
At December 31, 2004, the Company had estimated California automobile insurance bodily injury inflation rates of approximately 1% on the 2003 and 2004 accident years. At December 31, 2005, these assumptions were reduced to deflation amounts of approximately negative 1% for the 2003 accident year and approximately negative 4% for the 2004 accident year. The Company changed its inflation assumptions based on factors that continued to develop throughout 2005. These included a favorable trend in the average amounts paid on closed claims for the 2003 and 2004 accident years and increased certainty in reserve amounts that comes through the passage of time as more claims from an accident period are closed.
Bodily injury inflation for the most recent accident years is one of the most difficult components of the Company’s reserves to estimate because a large portion of the claims have not yet been settled. As time passes and more claims from an accident year are settled, the actual inflation rate becomes more certain. Since there are still a significant amount of open bodily injury claims for the 2005 and 2004 accident years, it is possible that inflation rate assumptions will change as more claims are settled in the future.
The Company had smaller redundancies and deficiencies in its other coverages offered within its California automobile insurance line of business, as well as in other lines of business in California and other states. When aggregated, these account for the remainder of the positive reserve development experienced in 2005. The positive development in total was more than offset by the reserve needs for the current accident year.
For the year ended December 31, 2004, the Company’s loss reserves as estimated at December 31, 2003 produced a redundancy of approximately $58 million which was reflected in the financial statements as a reduction to the 2004 calendar year incurred losses. The Company attributes most of this redundancy to a change in the inflation rate assumptions used to establish reserves on the bodily injury coverage for California private passenger automobile insurance on the 2002 and 2003 accident years.
Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any reinsurance. Net premiums written is a statutory measure used to determine production levels. Net premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that are recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the term of the policies. The following is a reconciliation of total Company net premiums written to net premiums earned (000s) for the years ended December 31, 2005 and 2004, respectively:
The loss ratio (GAAP basis) in 2005 (loss and loss adjustment expenses related to premiums earned) was 65.4% in 2005 compared with 62.6% in 2004. Losses from Florida hurricanes negatively impacted the 2005 and 2004 loss ratios by 1 point and 0.9 points, respectively. Positive development on prior accident years reduced the 2005 loss ratio by 1.6 points compared to a 2.3 point reduction in the 2004 loss ratio.
The income tax provision of $99.4 million in 2005 represented an effective tax rate of 28.2% compared to an effective tax rate of 29.8% in 2004. The lower rate is primarily attributable to a decreased proportion of underwriting income taxed at the full corporate rate of 35% in contrast with investment income which includes tax exempt interest and tax sheltered dividend income.
As described above, net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during a fiscal period less any reinsurance. Net premiums written is a statutory measure used to determine production levels. Net premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that are recognized as income in the financial statements for the period presented and earned on a pro-rata basis over the term of the policies. The following is a reconciliation of total Company net premiums written to net premiums earned (000s) for the years ended December 31, 2004 and 2003, respectively:
The loss ratio (GAAP basis) in 2004 (loss and loss adjustment expenses related to premiums earned) was 62.6% in 2004 compared with 67.7% in 2003. The lower loss ratio is largely attributable to improved loss frequency on automobile claims and California homeowners claims. Automobile loss frequencies can be affected by many factors including seasonal travel, weather and fluctuations in gasoline prices. The Florida hurricanes negatively impacted the 2004 loss ratio by 0.9 points compared to the 0.7 points negative impact that the Southern California firestorms had on the 2003 loss ratio. Furthermore, positive development on prior accident years reduced the 2004 loss ratio by 2.3 points and adverse development on prior accident years increased the 2003 loss ratio by 0.2 points.
The combined ratio of losses and expenses (GAAP basis) is the key measure of underwriting performance traditionally used in the property and casualty insurance industry. A combined ratio under 100% generally reflects profitable underwriting results; a combined ratio over 100% generally reflects unprofitable underwriting results. The combined ratio of losses and expenses (GAAP basis) was 89.2% in 2004 compared with 94.0% in 2003.
Net investment income in 2004 was $109.7 million compared with $104.5 million in 2003. The after-tax yield on average investments of $2,662.2 million (cost basis) was 3.6%, compared with 4.0% on average investments of $2,311.0 million (cost basis) in 2003. The effective tax rate on investment income was 12.6% in 2004, compared to 10.7% in 2003. The higher tax rate in 2004 reflects a shift in the mix of the Company’s portfolio from non-taxable to taxable securities. Proceeds from the sale of bonds which matured or were called in 2004 totaled $363.4 million, compared to $442.5 million in 2003.
Net realized investment gains in 2004 were $25.1 million, compared with net realized gains of $11.2 million in 2003. Included in the net realized investment gains are investment write-downs of $0.9 million in 2004 and $9.1 million in 2003 that the Company considered to be other-than-temporarily impaired.
The income tax provision of $121.6 million in 2004 represented an effective tax rate of 29.8% compared to an effective tax rate of 25.0% in 2003. The higher rate is primarily attributable to an increased proportion of underwriting income taxed at the full corporate rate of 35% in contrast with investment income which includes tax exempt interest and tax sheltered dividend income.
Net income in 2004 was $286.2 million or $5.24 per share (diluted) compared with $184.3 million or $3.38 per share (diluted), in 2003. Diluted per share results are based on a weighted average of 54.6 million shares in 2004 and 54.5 million shares in 2003. Basic per share results were $5.25 in 2004 and $3.39 in 2003. Included in net income are net realized investment gains, net of income tax expense, of $0.30 and $0.13 per share (diluted and basic) in 2004 and 2003, respectively.
Mercury General is largely dependent upon dividends received from its insurance subsidiaries to pay debt service costs and to make distributions to its shareholders. Under current insurance law, the Insurance Companies are entitled to pay, without extraordinary approval, dividends of approximately $248 million in 2006. The actual amount of dividends paid from the Insurance Companies to Mercury General during 2004 was $134 million. As of December 31, 2005, Mercury General also had approximately $31 million in fixed maturity securities, equity securities and cash that could be utilized to satisfy its direct holding company obligations.
Net cash provided from operating activities in 2005 was $489.8 million, an increase of $21.2 million over the same period in 2004. This increase was primarily due to the growth in premiums reflecting increases in both policy sales and rates partially offset by an increase in loss and loss adjustment expenses paid in 2005. The Company has utilized the cash provided from operating activities primarily to increase its investment in fixed maturity securities, the purchase and development of information technology such as the NextGen computer system and the payment of dividends to its shareholders. Excess cash was invested in short-term cash investments. Funds derived from the sale, redemption or maturity of fixed maturity investments of $1,347.0 million, were primarily reinvested by the Company in high grade fixed maturity securities.
The market value of all investments held at market as “Available for Sale” exceeded amortized cost of $3,140.1 million at December 31, 2005 by $102.6 million. That net unrealized gain, reflected in shareholders’ equity, net of applicable tax effects, was $66.5 million at December 31, 2005, compared with $80.5 million at December 31, 2004.
At December 31, 2005, the average rating of the $2,641.0 million bond portfolio at market (amortized cost $2,589.3 million) was AA, the same as the average rating at December 31, 2004. Bond holdings are broadly diversified geographically, within the tax-exempt sector. Holdings in the taxable sector consist principally of investment grade issues. At December 31, 2005, bond holdings rated below investment grade totaled $51.1 million at market (cost $49.8 million) representing 1.6% of total investments. This compares to approximately $50.4 million at market (cost $48.1 million) representing 1.7% of total investments at December 31, 2004.
The following table sets forth the composition of the investment portfolio of the Company as of December 31, 2005:
On August 7, 2001, the Company completed a public debt offering issuing $125 million of senior notes payable under a $300 million shelf registration filed with the Securities and Exchange Commission in July 2001. The notes are unsecured, senior obligations of the Company with a 7.25% annual coupon payable on August 15 and February 15 each year commencing February 15, 2002. These notes mature on August 15, 2011. The Company used the proceeds from the senior notes to retire amounts payable under existing revolving credit facilities, which were terminated. Effective January 2, 2002, the Company entered into an interest rate swap of its fixed rate obligation on the senior notes for a floating rate of LIBOR plus 107 basis points. The swap significantly reduced the interest expense in 2005 and 2004 when the effective interest rate was 5.3% and 3.3%, respectively. However, if the LIBOR interest rate increases in the future as it did during 2004 and 2005, the Company will incur higher interest expense in the future. The swap is designated as a fair value hedge under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). See “
Consolidated Statements of Comprehensive Income for Each of the Years in the Three-Year Period Ended December 31, 2005
Consolidated Statements of Shareholders’ Equity for Each of the Years in the Three-Year Period Ended December 31, 2005
We have audited the accompanying consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2005 and 2004, 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, 2005. 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 have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting as set forth in Item 9a, that Mercury General Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mercury General Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2005 and 2004, 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, 2005, and our report dated March 7, 2006 expressed an unqualified opinion on those consolidated financial statements.
The Company operates as a private passenger automobile insurer selling policies through a network of independent agents and brokers in thirteen states. The Company also offers homeowners insurance, commercial automobile and property insurance, mechanical breakdown insurance, commercial and dwelling fire insurance and umbrella insurance. The private passenger automobile lines of insurance exceeded 85% of the Company’s net premiums written in 2005, 2004 and 2003, with approximately 73%, 76% and 84% of the private passenger automobile premiums written in the state of California during 2005, 2004 and 2003, respectively.
The Company writes covered call options through listed exchanges and over-the-counter. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option.
Insurance premiums are recognized as income ratably over the term of the policies, that is, in proportion to the amount of insurance protection provided. Unearned premiums are computed on a monthly pro rata basis. Unearned premiums are stated gross of reinsurance deductions, with the reinsurance deduction recorded in other assets and other receivables.
One broker produced direct premiums written of approximately 14%, 14% and 16% of the Company’s total direct premiums written during 2005, 2004 and 2003, respectively. No other agent or broker accounted for more than 2% of direct premiums written.
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.
The tax benefit realized on stock options exercised and included in cash provided from operations in 2005, 2004 and 2003 was $503,000, $565,000 and $189,000, respectively.
In 2003, notes payable with a discounted value of $4,315,000 was canceled in accordance with terms of a Purchase and Sale Agreement between the Company and Employers Reinsurance Corporation.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”) that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity instrument issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123R replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance; the principles that the Company currently employs to account and report its employee stock option awards. On April 14, 2005, the Securities and Exchange Commission issued a Final Rule amending Regulation S-X to revise the date for compliance with SFAS No. 123R so that each registrant that is not a small business issuer will be required to prepare financial statements in accordance with SFAS No. 123R beginning with the first interim reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. The Company will adopt the provisions of SFAS No. 123R in January 2006. The Company does not believe that the adoption of SFAS No. 123R will have a material impact on its consolidated financial statements.
At December 31, 2005, the Company had a net unrealized gain on all investments of $102.6 million before income taxes, which is comprised of unrealized gains of $122.7 million offset by unrealized losses of $20.1 million. Unrealized losses represent 0.6% of total investments at amortized cost. The Company’s investment portfolio includes approximately 600 securities in a gross unrealized loss position. Of these unrealized losses, approximately
At December 31, 2005, bond holdings rated below investment grade were 1.6% of total investments. The average Standard and Poor’s rating of the bond portfolio was AA. The amortized cost and estimated market value of fixed maturities available for sale at December 31, 2005 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.
Effective January 2, 2002, the Company entered into an interest rate swap of its fixed rate obligation on the senior notes for a floating rate of LIBOR plus 107 basis points. The swap agreement terminates on August 15, 2011 and includes an early termination option exercisable by either party on the fifth anniversary or each subsequent anniversary by providing sufficient notice, as defined. The swap significantly reduced interest expense in 2003, 2004 and 2005, but does expose the Company to higher interest expense in future periods should LIBOR rates increase. The effective annualized interest rate was 5.3% and 3.3% in 2005 and 2004, respectively. The swap is designated as a fair value hedge and qualifies for the “shortcut method” under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” because the hedge is deemed to have no ineffectiveness. The fair value of the interest rate swap was $7,516,000 and $12,281,000 at December 31, 2005 and 2004, respectively, and has been recorded in other assets in the consolidated balance sheets with a corresponding increase to notes payable. The interest rate swap was determined to be highly effective and no amount of ineffectiveness was recorded in earnings during the periods ending December 31, 2005 and 2004.
The aggregated maturities for notes payable are: 2006-$0; 2007-$0; 2008-$11,250,000; 2009-$0; 2010-$0; thereafter-$125,000,000.
The Company and its subsidiaries file a consolidated Federal income tax return. The provision for income tax expense consists of the following components:
As a result of California Assembly Bill 263 (“AB263”) the Company paid approximately $3.5 million in California franchise taxes for the tax years 1997 through 2003 during 2005. This expense was reflected in the 2004 current state income tax provision. AB263 resolved an issue raised by the Franchise Tax Board (“FTB”) where they
The decrease in the provision for insured events of prior years in 2005 and 2004 relates largely to a decrease in the estimated inflation rates for prior accident years on bodily injury coverage for California automobile insurance. In addition, a decrease in the expenditures to outside legal counsel for defense of personal automobile claims in California during 2005 has led to a reduction in the loss adjustment expense reserve established at December 31, 2004. For 2003, the increase largely relates to an increase in the ultimate liability for bodily injury, physical damage and collision claims over what was originally estimated. The increases in these claims relate to increased severity over what was originally recorded and are the result of inflationary trends in health care costs, auto parts and body shop labor costs.
The increase in prior year loss and loss adjustment expense payments in 2005 and 2004 is related to the recent growth in the Company’s business.
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 primarily those published as statements of Statutory Accounting Principles by 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, 2005, there were no material permitted statutory accounting practices utilized by the Insurance Companies.
During 2005, the Florida DOI conducted a market conduct examination of the Company’s private passenger automobile and homeowners insurance lines of business. In February 2006, in connection with this examination, the Company responded to a Proposed Consent Order (the “Order”) received from the Florida DOI. The Order details preliminary findings from the market conduct examination. As of December 31, 2005, the Company has accrued for those items that it believes will have a financial impact. In addition, the Order proposes a fine for an
unspecified amount of money. The Company has established an accrual for a potential fine; however, it is possible that the actual fine could be greater or less than the amount accrued. The Company believes that the fine, if any, should not have a material effect on the Company’s operations or financial condition.
The Company is, from time to time, named as a defendant in various lawsuits relating to its insurance business. In most of these actions, plaintiffs assert claims for punitive damages, which are not insurable under judicial decisions. The Company has established reserves for lawsuits in cases where the Company is able to estimate its potential exposure and it is probable that the court will rule against the Company. The Company vigorously defends actions against it, unless a reasonable settlement appears appropriate. An unfavorable ruling against the Company in the actions currently pending may have a material impact on the Company’s quarterly results of operations, however it is not expected to be material to the Company’s financial condition.
In Robert Krumme, On Behalf Of The General Public v. Mercury Insurance Company, Mercury Casualty Company, and California Automobile Insurance Company (Superior Court for the City and County of San Francisco), the Court issued a modified injunction on July 11, 2005 requiring the Company to compensate brokers at the same rate based on volume of sales, accept applications for insurance from any California licensed broker, remove subjective underwriting requirements from its broker instruction manual and provide guidelines to be used by its field personnel that specifically identify the standards of broker performance. The Company has implemented changes to its broker relationship to comply with the Court’s modified injunction. The Court also stated that some period of review must take place following any changes before a complete assessment of the brokers’ relationship with the Company can be made, and that any further judicial review should be undertaken only after further discussions between the parties to the lawsuit and appropriate evidence reflecting the nature of such broker relationship is fully assessed. These changes must occur in a one year period of review through November 1, 2006 before the Court will reconsider vacating the modified injunction. The Company believes that it is in compliance with the modified injunction. The Company is not able to estimate the extent to which complying with the modified injunction will impact future trends in earnings or loss ratios.
The Court agreed to postpone the litigation and to seal its ruling on the Company’s Demurrer and Motion to Strike certain portions of the Fourth Amended Complaint until March 14, 2006 to determine whether the case could be resolved without further litigation. If the case is not resolved by that date or if progress towards settlement has not been made, the Company expects the Court will unseal its ruling on the Demurrer and Motion to Strike and discovery will commence. The Company is not able to determine the potential outcome of this matter or potential exposure in the event liability is to be found. The Company intends to vigorously defend this lawsuit.
Noam Hernandez, individually and on behalf of others similarly situated v. Mercury Insurance Company, (Los Angeles Superior Court), originally filed July 12, 2002, as Dan O’Dell v. Mercury Insurance Company, involves a dispute over whether the Company’s use of certain automated database vendors to help determine the value of total loss claims is proper. The Plaintiff (along with plaintiffs in other coordinated cases against other insurers) is seeking class certification and unspecified damages for breach of contract and bad faith, including punitive damages, restitution, an injunction preventing the Company from using valuation software, and unspecified attorneys’ fees and costs. In 2003, the Court granted the Company’s motion to stay the action pending Plaintiff O’Dell’s compliance with a contractual arbitration provision. The arbitration was completed in August 2004 and the award in the Company’s favor was confirmed by the Court in January 2005. In June 2005, based upon the arbitration result and other defenses, the Court granted the Company’s Motion to Strike the first amended complaint. While the individual claims of Plaintiff O’Dell were dismissed with prejudice, Plaintiff’s counsel was given leave to file a second amended complaint, substituting a new Plaintiff, in August of 2005. As with the previous Plaintiff, the Company has filed a motion to compel Plaintiff Hernandez’ compliance with a contractual arbitration provision, and has also filed a Motion to Strike portions of the amended complaint on other grounds. The Court is expected to rule on these motions on March 16, 2006. The Company is not able to evaluate the likelihood of an unfavorable outcome or to estimate a range of potential loss in the event of an unfavorable outcome at the present time. The Company intends to vigorously defend this lawsuit jointly with the other defendants in the coordinated proceedings.
date has been set for May 2006. The Company is not able to evaluate the likelihood of an unfavorable outcome or to estimate a range of potential loss in the event of an unfavorable outcome at the present time. The Company intends to vigorously defend this lawsuit jointly with the other defendants in the coordinated proceedings.
Cynthia Markovich and Patricia Carnegie v. Mercury Insurance Services, LLC, a collective action claim filed April 19, 2005 in the United States District Court for the Middle District of Florida, asserts that the Plaintiffs were denied overtime compensation while working as claims adjusters for the Company in violation of the provisions of the Fair Labor Standards Act. The Plaintiffs are seeking class certification to include all claims adjusters during the three years preceding the filing of this action and recovery of overtime compensation, liquidated damages, attorneys’ fees, costs and other compensation. No specific amount of damages has been claimed. The parties to the claim have agreed to give the putative members of the collective action notice and an opportunity to opt-in to determine the potential liability and then attempt to settle the claim. If a settlement can not be reached, discovery will continue and the case will proceed to trial. The Company is not able to evaluate the likelihood of an unfavorable outcome or to estimate a range of potential loss in the event of a settlement or an unfavorable outcome at the present time. The Company intends to vigorously defend this lawsuit.
The Plan also includes an employee stock ownership plan (“ESOP”) that covers substantially all employees. The Board of Directors authorized the Plan to purchase $1.1 million of the Company’s common stock in the open market for allocation to the Plan participants. The Company recognized $1,100,000, $1,000,000 and $1,000,000 as compensation expense in 2005, 2004 and 2003, respectively.
Dividends paid per-share in 2005, 2004 and 2003 were $1.72, $1.48 and $1.32, respectively and dividends paid in total in 2005, 2004 and 2003 were $93,867,000, $80,632,000 and $71,817,000, respectively.
A summary of the status of the Company’s plans as of December 31, 2005, 2004 and 2003 and changes during the years ending on those dates is presented below: