In October 1992, the Company purchased a 158,000 square foot office building in Brea, California. The Company occupies approximately 37% of the
The loss ratio in 1995 (loss and loss adjustment expenses related to premiums earned) was 67.6%, compared with 68.1% in 1994. In contrast to the previous several years, the 1995 and 1994 loss ratios reflect smaller contributions from favorable loss reserve development from prior periods.
The loss ratio in 1994 was 68.1%, compared with 61.0% in 1993. The higher loss ratio in 1994 reflects a much smaller contribution from favorable loss reserve development from prior periods and a reduction in the estimate of salvage and subrogation recoverable for prior accident years. The major earthquake which struck Southern California on January 17, 1994 resulted in net loss claims, after reinsurance recoveries, of approximately $1.2 million, which added less than 0.25% to the 1994 loss ratio. Earthquake losses were immaterial as the Company writes only a small amount of homeowners' insurance. Approximately one half of the net earthquake losses incurred were related to the Company's principal line, automobile insurance, while the other half was related to the homeowners' line.
The expense ratio (policy acquisition costs and other expenses related to premiums earned) was 25.2%, compared with 25.0% in 1993.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992 ---------------------------------------------------------------------
Premiums earned in 1993 increased 4.1%. The year-to-year increase in the final quarter was 8.4%, following sequential quarterly increases (decreases) of (0.4%), 2.7% and 5.7%. Premiums written in 1993 increased 6.2%, with the quarterly pattern increasing sequentially throughout the year. This improvement largely reflects new business submitted by newly appointed agents who had previously represented other insurers which had withdrawn from the California
Total losses and expenses, excluding interest expense of $793,000, were $407.5 million, resulting in an underwriting gain for the year of $66.6 million, or 14.0% of premiums earned, compared with an underwriting gain of $68.1 million in 1992, or 14.9% of premiums earned in 1992. The latter result excludes a provision of $18.6 million for rate refunds relating to the Proposition 103 rate rollback mandate. The rollback issue was resolved in May 1992 by a negotiated settlement reached with the California Department of Insurance (DOI). Refunds were completed in August 1992, fully extinguishing the Company's Proposition 103 rollback liability.
in 1992, the effective tax rate in 1992 was 24.5%. The effective tax rate is lower than the statutory corporate rate, 35% in 1993 and 34% in 1992, because a substantial part of net investment income is derived from tax-exempt bonds and dividends entitled to the corporate dividend exclusion. Except for the increase in the corporate statutory tax rate to 35% from 34%, effective as of January 1, 1993, the impact of the Omnibus Tax Reconciliation Act of 1993 was insignificant.
Net income in 1993 was $96.2 million, or $3.52 per share, compared with $83.3 million, or $3.06 per share, in 1992. Per share results are based on 27.4 million average shares in 1993 and 27.2 million shares in 1992. The provision for final settlement of rate refunds in the 1992 period reduced net income by $12.3 million, or $.45 per share.
Holdings in the taxable sector consist principally of senior public utility issues. Fixed-maturity investments of $742.4 million (at amortized cost) include $90.1 million of sinking fund preferreds, principally utility issues. Included in the sinking fund preferred holdings are two investment grade utility issues which are held in trust and structured as "inverse floaters," dividends on which vary inversely to short term interest rates. The aggregate market value and cost of those holdings was $4.4 million and $4.2 million, respectively, at December 31, 1995. The year-end yield at market on those holdings approximated 8.8%. The only other securities which may be considered derivatives are a small amount of adjustable rate preferred stocks.
Except for Company-occupied buildings, the Company has no direct investments in real estate and no holdings of mortgages secured by commercial real estate.
Equity holdings of $114.9 million at market (cost $113.5 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 20.3% of total shareholders' equity.
The only significant debt of the Company at December 31, 1995, was a three year revolving credit agreement covering two bank loans totalling $25,000,000 dated December 20, 1994. The proceeds of the loans were used to repay a prior $15,000,000 loan, and to contribute $10,000,000 to the Company's insurance subsidiaries. The agreement renews annually, at which time it may be extended for an additional year to maintain the three year maturity date. The interest cost of the loans is variable and related to LIBOR (London Interbank Rate). Based on the rate effective March 19 through September 16, 1996, the net interest cost of the loans approximates 6.09%. The Company expects that the revolving loans will be renewed and extended to 1998 with no difficulty. The loans may be repaid in whole or in part with no penalty. The source of any repayments are expected to be derived from dividends from the Company's insurance subsidiaries or other external financing.
Summarized quarterly financial data for 1995 and 1994 is as follows (in thousands except per share data):
We have audited the accompanying consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury General Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Temporary unrealized investment gains and losses on securities available for sale are credited or charged directly to shareholders' equity, net of applicable tax effects. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is recognized in the consolidated statement of income. Realized gains and losses are included in the consolidated statements of income based upon the specific identification method.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", and Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments", require disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value. Under SFAS No. 115, the Company categorizes all of its investments in debt and equity securities as available for sale. Accordingly, all investments, including cash and short term cash investments, are carried on the balance sheet at their fair value. The carrying amounts and fair values for investment securities are disclosed in Note 2 and were drawn from standard trade data sources such as market and broker quotes. The estimated fair value of notes payable equals their carrying value, which was based on borrowing rates currently available to the Company for bank loans with similar terms and maturities. The terms of the notes are discussed in Note 5.
Net premiums written during 1995, 1994 and 1993 were $636,590,000, $550,838,000 and $484,097,000, respectively.
One agent produced direct premiums written of approximately 15%, 13% and 12% of the Company's total direct premiums written during 1995, 1994 and 1993, respectively.
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. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date. Since the provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.
Buildings and furniture and equipment are depreciated over 30-year and 5-year to 10-year periods, respectively, on a combination of straight-line and accelerated methods. Automobiles are depreciated over 5 years, using an accelerated method.
Earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding of 27,311,707 for 1995, 27,273,192 for 1994 and 27,361,831 for 1993.
In December 1992 the Financial Accounting Standards Board issued SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts." Among other provisions, SFAS No. 113 requires a balance sheet gross up of reinsurance accounts and increases the degree of analysis required to assess risk transfer. SFAS No. 113 was adopted by the Company on January 1, 1993. The impact of the adoption of SFAS No. 113 was not material to the consolidated financial statements.
During October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning after December 15, 1995. Presently, management expects to continue use of the accounting methods prescribed by Accounting Principles Board Opinion No. 25 and expand its disclosure of stock-based compensation as permitted by SFAS No. 123. Accordingly, adoption of this pronouncement is not expected to have a material effect on the financial statements of the Company.
The amortized cost and estimated market values of investments in fixed maturities available for sale as of December 31, 1994 are as follows:
The Insurance Companies are subject to the financial capacity guidelines established by the Office of the Commissioner of Insurance of their domicile states. The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations. For the year 1996, Mercury Casualty Company and California Automobile Insurance Company are permitted to pay approximately $50,869,000 in dividends to the Company without the prior approval of the California Commissioner of Insurance.
The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay dividends.
The Insurance Companies' statutory net income, as reported to regulatory authorities, was $86,210,000, $62,861,000 and $93,877,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The statutory policyholders' surplus of the Insurance Companies, as reported to regulatory authorities, as of December 31, 1995 and 1994 was $479,114,000 and $411,898,000, respectively.
The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1995 according to the formula issued by the NAIC. Each of the companies' policyholders' surplus exceeded the highest level of recommended capital requirements.
The Company, at the option of the Board of Directors, may make annual contributions to an employee profit sharing plan. The contributions are not to exceed the greater of the Company's net income for the plan year or its retained earnings at that date. In addition, the annual contributions may not exceed an amount equal to 15% of the compensation paid or accrued during the year to all participants under the plan. The annual contribution was $1,000,000, $1,000,000 and $2,000,000 for the plan years ended December 31, 1995, 1994 and 1993.
Effective March 11, 1994 the Profit Sharing Plan also includes a leveraged employee stock ownership plan (ESOP) that covers substantially all employees. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends received by the ESOP on unallocated shares are used to pay debt service and the ESOP shares serve as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with Statement of Position 93-6. Accordingly, the debt of the ESOP, which was $4,000,000 and $5,000,000 at December 31, 1995 and 1994, respectively, is recorded in the balance sheet as other liabilities. The shares pledged as collateral are reported as unearned ESOP compensation in the shareholders' equity section of the balance sheet. As shares are committed to be released from collateral, the Company reports compensation expense equal to the current market price of the shares, and reduces unearned ESOP compensation by the original cost of the shares. The difference between the market price and cost of the shares is charged to common stock. As shares are committed to be released from collateral, the shares become outstanding for earnings-per-share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of accrued interest. ESOP compensation expense was $1,145,000 and $919,000 in 1995 and 1994, respectively. The ESOP shares as of December 31 were as follows: