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FORM 10-K
MERCURY GENERAL CORP
(Annual Report (Regulation S-K, item 405))
Filed 3/28/1997 For Period Ending 12/31/
Address 4484 WILSHIRE BOULEVARD
LOS ANGELES, California 90010
Telephone 213-937-
CIK 0000064996
Industry Insurance (Prop. & Casualty)
Sector Financial
Fiscal Year 12/
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-
MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (213)937-
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to Section 12(g) of the Act
Common Stock
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's voting stock held by non- affiliates of the Registrant at March 18, 1997, was approximately
$837,029,058 (based upon the closing sales price of such date, as reported by the Wall Street Journal).
At March 18, 1997, the Registrant had issued and outstanding an aggregate of 27,531,425 shares of its Common Stock.
Documents Incorporated by Reference
Proxy statement for the Annual Meeting of Stockholders of Registrant to be held on May 14, 1997 (only portions of which are incorporated by
reference).
California 95-221- (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)
insurance operations in California are conducted through three California insurance company subsidiaries, Mercury Casualty Company
("Mercury Casualty"), Mercury Insurance Company ("Mercury Insurance"), and California Automobile Insurance Company. Two subsidiaries,
Mercury Insurance Company of Georgia and Mercury Insurance Company of Illinois, received authority in late 1989 to write automobile
insurance in those two states. In 1992, Mercury Indemnity Company of Georgia and Mercury Indemnity Company of Illinois were formed to
write preferred risk automobile insurance in those two states. Through the Company's first acquisition in December 1996, three additional
subsidiaries were added to the group: American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron Insurance Company,
domiciled in Kansas; and, AFI Management Company, Inc., a Texas corporation which serves as the attorney-in-fact for American Fidelity
Lloyds Insurance Company (AFL), a Texas insurer. Accordingly, their operations are included in the consolidated financial statements of the
Company effective December 1, 1996.
Mercury General furnishes management services to its California, Georgia and Illinois subsidiaries. Mercury General, its subsidiaries, and
AFL, are referred to as the "Company" unless the context indicates otherwise, Mercury General Corporation individually is referred to as
"Mercury General." The term California Companies refers to Mercury Casualty Company, Mercury Insurance Company and California
Automobile Insurance Company.
Underwriting
The Company sets its own automobile insurance premium rates, subject to rating regulations issued by the Insurance Commissioners of the
applicable states. Automobile insurance rates on voluntary business in California have been subject to approval by the DOI since November
1989. The Company uses its own extensive data base to establish rates and classifications.
On February 25, 1994, the California Department of Insurance (DOI) approved a revised rating plan and rates for the California Companies
which became effective on May 1, 1994. These rates were designed to improve the California Companies' competitive position for new
insureds and included a modest overall rate reduction. Further rate modifications were approved and made effective on October 15, 1995 and
April 15, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."
In September 1996 the DOI issued new rating factor regulations, replacing expired emergency regulations issued in 1989. See "Regulation -
Automobile Insurance Rating Factor Regulations."
Approximately 80% of the Company's new applications for automobile insurance in California during 1996 were placed in the lowest risk
classifications, known as "good drivers" (as defined by the California Insurance Code), while approximately 20% of new applications were
accepted in higher risk classifications at increased rate levels. Policies are reclassified at the time of renewal and may be changed to a higher or
lower risk classification.
At December 31, 1996, "good drivers" accounted for approximately three quarters of all voluntary private passenger automobile policies in
force in
California, while the higher risk categories accounted for approximately one quarter. The renewal rate in California (the rate of acceptance of
offers to renew) averages approximately 95%.
AFI's private passenger automobile business in force is predominantly standard and preferred type risks, although they plan to offer more non-
standard programs in the future.
Production and Servicing of Business
The Company sells its policies through more than 1500 independent agents, of which approximately 800 are located in California and
approximately 600 others represent AFI in Oklahoma, Kansas and Texas. Approximately half of the agents in California have represented the
Company for more than ten years. The agents, most of whom also represent one or more competing insurance companies, are independent
contractors selected and appointed by the Company.
One agency produced direct premiums written of approximately 17%, 15% and 13% during 1996, 1995 and 1994, respectively, of the
Company's total direct premiums. No other agent accounted for more than 2% of direct premiums written.
The Company believes that its agents' compensation is higher than the industry average. During 1996 total commissions and bonuses incurred
averaged 16.0% of direct premiums written. The Company is not responsible for any of its agents' expenses.
Traditionally, any advertising done has been handled by the individual agents. During the fourth quarter of 1995, the Company began its first
advertising program in major newspapers in Southern California. While the Company plans, coordinates and executes the program, the agents
are responsible for the cost of the advertisements. The program has been satisfactory and was expanded to Northern California in early 1996.
The program was temporarily suspended during the first quarter of 1997 due to a large influx of new business. See "Regulation- Financial
Responsibility Law."
Claims
Claims operations are supervised by the Company. The claims staff in California, Georgia, Illinois and Oklahoma administers all claims and
directs all legal and adjustment aspects of the claims process. The Company adjusts most claims without the assistance of outside adjusters.
Loss and Loss Adjustment Expense Reserves
The Company maintains reserves for the payment of losses and loss adjustment expenses for both reported and unreported claims. Loss
reserves are estimated based upon a case-by-case evaluation of the type of claim involved and the expected development of such claim. The
amount of loss reserves and loss adjustment expense reserves for unreported claims are determined on the basis of historical information by
line of insurance. Inflation is reflected in the reserving process through analysis of cost trends and reviews of historical reserving results.
The following table represents the development of loss reserves for the period 1987 through 1996. The top line of the table shows the reserves
at the balance sheet date net of reinsurance recoverable for each of the indicated years. This represents the estimated amount of losses and loss
adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but
not yet reported to the Company. The upper portion of the table shows the cumulative amounts paid as of successive years with respect to that
reserve liability. The lower portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of
the end of each succeeding year, including cumulative payments made since the end of the respective year. The estimate changes as more
information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the
original reserve estimate is greater (less) than the re-estimated reserves at December 31, 1996.
In evaluating the information in the table, it should be noted that each amount includes the effects of all changes in amounts for prior periods.
This table does not present accident or policy year development data. Conditions and trends that have affected development of the liability in
the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based
on this table.
December 31,
1996 1995 1994
(Amounts in thousands) Reserves reported on a SAP basis...................... $311,754 $250,990 $223, Reinsurance recoverable............................... 24,931 2,556 $4,
Reserves reported on a GAAP basis..................... $336,685 253,546 $227, ======== ======== ========
As of December 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(Amounts in thousands) Net reserves for losses and loss adjustment expenses. $178,605 $241,037 $291,408 $301,354 $280,157 $239,203 $214,525 $223,392 $250,990 $311, Paid (cumulative) as of: One year later..... 112,099 139,874 167,850 181,781 151,866 135,188 143,272 145,664 167, Two years later.... 147,641 195,453 227,503 238,030 197,640 184,119 187,641 198, Three years later.. 166,477 218,335 249,371 254,884 213,824 197,371 204, Four years later... 175,232 226,384 256,659 261,058 218,067 201, Five years later... 177,328 229,168 259,147 263,011 220, Six years later.... 177,938 229,773 259,781 262, Seven years later.. 178,178 229,815 259, Eight years later.. 178,215 229, Nine years later... 178,
Net reserves re-estimated as of: One year later..... 173,325 230,249 269,934 285,212 230,991 204,479 204,451 216,684 247, Two years later.... 175,876 233,607 269,652 265,618 218,404 204,999 207,089 222, Three years later.. 179,157 234,757 259,635 259,624 220,620 203,452 210, Four years later... 180,084 228,909 256,694 264,259 221,118 204, Five years later... 177,591 228,326 260,365 264,127 221, Six years later.... 177,335 230,102 260,402 263, Seven years later.. 178,364 229,998 260, Eight years later.. 178,303 229, Nine years later... 178, Net Cumulative Redundancy (deficiency)....... 460 11,228 31,310 38,018 58,893 34,600 3,687 531 3,
For the calendar years 1987 through 1995, the Company's previously estimated loss reserves produced redundancies. The Company attributes
this favorable loss development to several factors. First, the Company had completed its development of a full complement of claims personnel
early in this period. Second, during 1988, the California Supreme Court reversed what was known as the "Royal Globe" doctrine, which, since
1978, had permitted third party plaintiffs to sue insurers for alleged "bad faith" in resolving claims, even when the plaintiff had voluntarily
agreed to a settlement. This doctrine had placed undue pressures on claims representatives to settle legitimate disputes at unfairly high
settlement amounts. After the reversal of Royal Globe, the Company believes that it has been able to achieve fairer settlements, because both
parties are in a more equal bargaining position. Third, during the years 1988 through 1990, the volume of business written in the Assigned Risk
Program expanded substantially as rates were suppressed at grossly inadequate levels. Following the Insurance Commissioner's approval of an
85% temporary rate increase in September 1990, the volume of assigned risk business has declined by nearly 80%. Many of the claims
associated with the high volume of assigned risk business in the 1988-1990 period were later found to be fraudulent or grossly exaggerated and
were settled in subsequent periods for substantially less than had been initially reserved. Fourth, a number of factors have combined to produce
favorable frequency and severity trends in recent years, and actuarial assumptions based on historical trends have proved to be conservative.
Operating Ratios
Loss and Expense Ratios
Loss and underwriting expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. Losses
and loss adjustment expenses, on a statutory basis, are stated as a percentage of premiums earned because losses occur over the life of a policy.
Underwriting expenses on a statutory basis are stated as a percentage of premiums written rather than premiums earned because most
underwriting expenses are incurred when policies are written and are not spread over the policy period. The statutory underwriting profit
margin is the extent to which the combined loss and underwriting expense ratios are less than 100%. The Company's loss ratio, expense ratio
and combined ratio, and the private passenger automobile industry combined ratio, on a statutory basis, are shown in the following table. The
1992 ratios exclude the effect of a rate refund made pursuant to a settlement with the
As of December 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(Amounts in thousands) Gross liability - end of year 240,183 215,301 227,499 253,546 336, Reinsurance recoverable (980) (776) (4,107) (2,556) (24,931)
Net liability - end of year 239,203 214,525 223,392 250,990 311, ======= ======= ======= ======= ======= Gross re-estimated liability - latest 209,988 217,237 234,199 254, Re-estimated recoverable - latest (5,385) (6,399) (11,338) (7,770)
Net re-estimated liability - latest 204,603 210,838 222,861 247, ======= ======= ======= ======= Gross cumulative redundancy 39,005 9,310 7,762 9, ======= ======= ======= =======
policies, reinsurance arrangements and a number of other factors. Based on the formula adopted by the NAIC, the Company has estimated the
Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1996. Each of the companies exceeded the highest
level of recommended capital requirements.
Investments and Investment Results
The investments of the Company are made by the Company's Chief Financial Officer under the supervision of the Company's Board of
Directors. The Company follows an investment policy which is regularly reviewed and revised. The Company's policy emphasizes investment
grade, fixed income securities and maximization of after-tax yields. The Company does not invest with a view to achieving realized gains, and
does not maintain a trading account. However, sales of securities are undertaken, with resulting gains or losses, in order to enhance after-tax
yield and keep its portfolio in line with current market conditions. Tax considerations are important in portfolio management, and have been
made more so since 1986 when the alternative minimum tax was imposed on casualty companies. Changes in loss experience, growth rates and
profitability produce significant changes in the Company's exposure to alternative minimum tax liability, requiring appropriate shifts in the
investment asset mix between taxable bonds, tax-exempt bonds and equities in order to maximize after-tax yield. The optimum asset mix is
subject to continuous review. At year-end, approximately 68% of the Company's portfolio, at market values, was invested in medium to long
term, investment grade tax-exempt revenue and municipal bonds. The average Standard & Poor's rating of the Company's bond holdings was A
at December 31, 1996.
The nominal average maturity of the bond portfolio excluding AFI, was 16.8 years at December 31, 1996, but the call-adjusted average
maturity of the portfolio is shorter, approximately 8.7 years, because holdings are heavily weighted with high coupon issues which are expected
to be called prior to maturity. The modified duration of the bond portfolio reflecting anticipated early calls was 5.9 years at December 31, 1996
excluding AFI. Duration is a measure of how long it takes, on average, to receive all the cash flows produced by a bond, including
reinvestment of interest. Because of its sensitivity to interest rates, it is a proxy for a bond's price volatility. The longer the duration, the greater
the price volatility in relation to changes in interest rates.
Holdings of lower than investment grade bonds constitute approximately 1.3% of total investments. All but $1.5 million of such holdings were
downgraded to their current ratings subsequent to purchase. Equity holdings consist primarily of perpetual preferred stocks and relatively high
yielding electric utility common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion.
The following table summarizes the investment results of the Company for the five years ended December 31, 1996.
(1) Includes AFI for the month of December 1996.
(2) Fixed maturities at cost, equities at market.
The following table sets forth the composition of the investment portfolio of the Company at the dates indicated, including AFI at December
At December 31, 1996, the Company had a net unrealized gain on all investments of $29,163,000 before income taxes.
Year ended December 31,
1996(1) 1995 1994 1993 1992
(Amounts in thousands) Averaged invested assets (includes short-term cash investments)..(2) $975,058 $827,861 $727,866 $683,874 $649, Net investment income: Before income taxes......... 70,180 62,964 54,586 54,121 52, After income taxes.......... 63,371 57,035 49,787 48,223 46, Average annual return on investments: Before income taxes.............. 7.2% 7.6% 7.5% 7.9% 8.2% After income taxes............... 6.5% 6.9% 6.8% 7.1% 7.2% Net realized investment gains (losses) after income taxes...... $ (2,062) $ 681 $ (6,485) $ 1,954 $ 3, Net increase (decrease) in un- realized gains on all invest- ments after income taxes......... $ (6,271) $ 37,960 $(36,503) $ 556 $ (2,501)
December 31,
1996 1995 1994
Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value
(Amounts in thousands) Taxable Bonds........................... $ 76,494 $ 76,113 $ 21,518 $ 22,539 $ 18,332 $ 18, Tax-Exempt State and Municipal Bonds........................ 781,586 808,761 630,811 663,163 529,592 520, Sinking Fund Preferred Stocks................................. 66,713 69,234 90,080 94,081 108,858 105,
Total Fixed Maturity Investments.......................... 924,793 954,108 742,409 779,783 656,782 644, Equity Investments incl. Perpetual Preferred Stocks................................. 148,264 148,112 113,478 114,915 91,726 84, Short-term Cash Invest- ments.................................. 66,067 66,067 28,496 28,496 22,695 22,
Total Investments....... $1,139,124 $1,168,287 $884,383 $923,194 $771,203 $751, ========== ========= ======== ======== ======== ========
second layer of coverage provides an additional $1,000,000 in excess of the first $1,000,000 per risk subject to a maximum of $2,000,000 for
any one occurrence.
Prior to February 1, 1995, ERC provided catastrophe reinsurance for property and auto physical damage business. Under the treaty, ERC
agreed to pay 95% of $9,000,000 in excess of $1,000,000 for any single occurrence and 95% of $18,000,000 for all occurrences in one calendar
year. Effective February 1, 1995, the treaty with ERC was amended to provide coverage for 95% of $7,500,000 in excess of $5,000,000 each
occurrence subject to an aggregate limit of 95% of $15,000,000 for all occurrences. Effective April 1, 1995 this treaty was replaced with a new
catastrophe treaty covering all physical damage and property lines with several reinsurers arranged through E.W. Blanch Company, a
reinsurance intermediary. The main reinsurers are rated A or better by A.M. Best. Under the new treaty, the first layer of protection is 95% of
$7,500,000 in excess of $10,000,000, for a single occurrence, with a second layer providing 95% of $12,500,000 in excess of $17,500,000.
Effective September 1, 1996 the treaty was replaced to provide coverage under two new layers through the same principal reinsurers. Under the
new treaty coverage is provided for 95% of $10,000,000 in excess of $15,000,000 per occurrence in the first layer and 95% of $15,000,000 in
excess of $25,000,000 in the second layer.
Employers Reinsurance Corporation reinsures AFI through working layer treaties for property and casualty losses in excess of $150,000. For
the years 1990 through 1996 the mechanical breakdown line of business was reinsured with Constitution Reinsurance Corporation through a
quota-share treaty covering 50%- 85% of the business written depending on the year the policy incepted. For policies effective on or after
January 1, 1997, AFI is retaining the full exposure. AFI has other reinsurance treaties and facultative arrangements in place for various smaller
lines of business.
If the reinsurers were unable to perform their obligations under the reinsurance treaty, the Company would be required, as primary insurer, to
discharge all obligations to its insureds in their entirety.
Regulation
The Company's business in California is subject to regulation and supervision by the DOI, which has broad regulatory, supervisory and
administrative powers.
The powers of the DOI primarily include the prior approval of insurance rates and rating factors and the establishment of standards of solvency
which must be met and maintained. The regulation and supervision by the DOI are designed principally for the benefit of policyholders and not
for insurance company shareholders. The DOI conducts periodic examinations of the Company's insurance subsidiaries. The DOI recently
conducted an examination of the California insurance subsidiaries as of December 31, 1994. The reports on the results of that examination
recommended no adjustments to the statutory financial statements as filed by the Company.
The insurance subsidiaries outside California, including AFI, are subject to the regulatory powers of the insurance departments of those states.
Those powers are similar to the regulatory powers in California enumerated above. Generally, the regulations relate primarily to standards of
solvency and are designed for the benefit of policyholders and not for insurance company shareholders.
In California, insurance rates have required prior approval since November 1989. Georgia and Kansas are also prior approval states, while
Illinois only requires that rates be filed with the Department of Insurance prior to their use. Texas and Oklahoma have a modified version of
prior approval laws. In all states, the insurance code provides that rates must not be "excessive, inadequate or unfairly discriminatory."
The Georgia DOI recently conducted an examination of Mercury Insurance Company of Georgia and Mercury Indemnity Company of Georgia
as of December 31, 1994. The reports on that audit have recommended no changes to the statutory financial statements as filed. The DOI of
Illinois conducted an examination of Mercury Insurance Company of Illinois and Mercury Indemnity Company of Illinois as of December 31,
1995. The reports on that audit have not been issued but the auditors have indicated there will be no changes recommended to the statutory
financial statements as filed. The states of Oklahoma, Kansas and Texas will also conduct periodic examinations of AFI.
The operations of the Company are dependent on the laws of the state in which it does business and changes in those laws can materially affect
the revenue and expenses of the Company. The Company retains its own legislative advocates in California. The Company also makes
financial contributions to officeholders and candidates. In 1996 and 1995, those contributions amounted to $548,000 and $209,000,
respectively. The Company believes in supporting the political process and intends to continue to make such contributions in amounts which it
determines are appropriate and lawful.
Insurance Guarantee Association
In 1969, the California Insurance Guarantee Association (the "Association") was created pursuant to California law to provide for payment of
claims for which insolvent insurers of most casualty lines are liable but which cannot be paid out of such insurers' assets. The Company is
subject to assessment by the Association for its pro-rata share of such claims based on premiums written in the particular line in the year
preceding the assessment by insurers writing that line of insurance in California. Such assessments are based upon estimates of losses to be
incurred in liquidating an insolvent insurer. In a particular year, the Company cannot be assessed an amount greater than 1% of its premiums
written in the preceding year. The only assessment imposed during the past five years was an immaterial amount in 1994. Assessments are
recouped through a mandated surcharge to policyholders the year after the assessment. Insurance subsidiaries in the other states are subject to
the provisions of similar insurance guaranty associations. No material assessments were imposed in the last 5 years in those states either.
their driving records or other relevant characteristics make them difficult to insure in the voluntary market. During the last five years,
approximately 0.9% of the direct automobile insurance premium written was for assigned risk business. In 1996, assigned risks represented
0.6% of total automobile direct premiums written and 0.8% of total automobile direct premium earned. Premium rates for assigned risk
business are set by the DOI. In October, 1990 more stringent rules for gaining entry into the plan were approved, resulting in a substantial
reduction in the number of assigned risks insured by the Company since 1991. Effective January 1, 1994, the California Insurance Code
requires that rates established for the Plan be adequate to support the Plan's losses and expenses. The last rate increase approved by the
Commissioner approximated 4.8% and became effective June 1, 1995.
Automobile Insurance Rating Factor Regulations
Commencing November 8, 1989, Proposition 103 required that property and casualty insurance rates must be approved by the Commissioner
prior to their use, and that no rate shall be approved which is excessive, inadequate, unfairly discriminatory or otherwise in violation of the
provisions of the initiative. The proposition specified three statutory factors required to be applied in "decreasing order of importance" in
determining rates for private passenger automobile insurance: (1) the insured's driving safety record, (2) the number of miles the insured drives
annually, and (3) the number of years of driving experience of the insured. The new law also gave the Commissioner discretion to adopt other
factors by regulation that have a substantial relationship to risk of loss. The new statute further provided that insurers are required to give at
least a 20% discount to "good drivers," as defined, from rates that would otherwise be charged to such drivers and that no insurer may refuse to
insure a "good driver."
The Company, and most other insurers, historically charged different rates for residents of different geographical areas within California. The
rates for urban areas, particularly in Los Angeles, have been generally substantially higher than for suburban and rural areas. The Company's
geographical rate differentials have been derived by actuarial analysis of the claims costs in a given area.
In September 1996, the California Insurance Commissioner issued new permanent rating factor regulations which replaced the emergency
regulations which have been in use since their issuance in 1989. The new regulations require all automobile insurers in California to submit
new rating plans complying with the regulations by February 18, 1997. The Company does not expect the newly filed rating plan, if approved
by the Commissioner, to have a material effect on its competitive position or its profitability. However, the Company has not been able to
review the filings of its competitors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -
Overview."
California Financial Responsibility Law
Effective January 1, 1997 California has a new law which requires proof of insurance for the registration (new or renewal) of a motor vehicle.
It also provides for substantial penalties for failure to supply proof of insurance if
one is stopped for a traffic violation. Media attention to the new law has resulted in a surge of new business applications in January. Although
the initial demand has tapered off, it has produced a backlog of applications, which are being processed. The persistence of this new business is
uncertain, but the new law could produce additional growth considering the large proportion of uninsured motorists in California. The
Company has suspended its advertising program while it works to eliminate the backlog of new business.
In November 1996 an initiative sponsored by the California Insurance Commissioner was overwhelmingly approved by the California voters. It
provides that uninsured drivers who are injured in an automobile accident are able to recover only actual, out-of-pocket medical expenses and
lost wages and are not entitled to receive awards for general damages, i.e., "pain and suffering." This restriction also applies to drunk drivers
and fleeing felons. The law will help in controlling loss costs, but its constitutionality is being challenged by an association of attorneys.
Item 2. Properties
The home office of the California insurance subsidiaries and the Company's computer facilities are located in Brea, California in an 80,
sq.ft. office building owned by the Company.
Since December 1986, Mercury General's executive offices are located in a 36,000 sq. ft. office building, in Los Angeles, owned by Mercury
Casualty Company. The Company occupies approximately 95% of the building and leases the remaining office space to others.
In October 1992 the Company purchased a 158,000 square foot office building in Brea, California. The Company occupies approximately 43%
of the facility and leases the remaining office space to others.
The Company leases all of its other offices under short-term leases. Office location is not material to the Company's operations, and the
Company anticipates no difficulty in extending these leases or obtaining comparable office space.
Item 3. Legal Proceedings
The Company is from time to time named as a defendant in various lawsuits incidental to its insurance business. In most of these actions,
plaintiffs assert claims for punitive damages which are not insurable under California judicial decisions. The Company vigorously defends
these actions, unless a reasonable settlement appears appropriate. The Company believes that adverse results, if any, in the actions currently
pending should not have a material effect on the Company's operations or financial position.
Mr. Norman, Vice President in charge of Marketing, has been employed by the Company since 1971. Mr. Norman was named to this position
in October 1985, and has been a Vice President of Mercury Casualty since 1983. Mr. Norman has supervised the selection and training of
agents and managed relations between agents and the Company since 1977. In February of 1996 he was elected to the Board of Directors of the
California Companies.
Ms. Joanna Moore, Vice President & Chief Claims Officer, joined the Company in the claims department in March 1981. She was named Vice
President of Claims of Mercury General in August 1991 and has held her present position since July 1995.
Mr. Kitzmiller, Vice President in charge of Underwriting, has been employed by the Company in the underwriting department since 1972. In
August 1991 he was appointed Vice President of Underwriting of Mercury General and has supervised the underwriting activities of the
Company since early 1996.
Ms. Donna Moore, Vice President and Controller, joined the Company in June 1983 as its Controller. She was appointed Vice President in
October 1985. Ms. Moore has over 15 years of experience in the insurance industry and is a Certified Public Accountant in the state of
California.
Ms. Walters has been employed by the Company since 1967, and has served as its Secretary since 1982.
PART II
Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters
Price Range of Common StocK
The following table shows the price range per share in each quarter as reported on the Nasdaq National Market until October 9, 1996 and on the
New York Stock Exchange since that date. These quotations do not include adjustments for retail mark-ups, mark-downs or commissions.
Dividends
Following the public offering of its Common Stock in November 1985, the Company has paid regular quarterly dividends on its common
stock. On February 7, 1997, the Directors declared a $0.29 quarterly dividend ($1.16 annually) payable on March 31, 1997 to stockholders of
record on March 17, 1997. The dividend rate has been increased thirteen times since dividends were initiated in January, 1986, at an annual rate
of $0.10, adjusted for the two-for-one stock split in September 1992. For financial statement purposes, the Company records dividends on the
declaration date. The Company expects to continue the payment of quarterly dividends. The continued payment and amount of cash dividends
will depend upon, among other factors, the Company's operating results, overall financial condition, capital requirements and general business
conditions.
As a holding company, Mercury General is largely dependent upon dividends from its subsidiaries to pay dividends to its shareholders. These
subsidiaries are subject to state laws that restrict their ability to distribute dividends. The state laws permit a casualty insurance company to pay
dividends and advances within any 12-month period, without any prior regulatory approval, in an amount up to the greater of ten percent of
statutory earned surplus at the preceding December 31, or net income for the calendar year preceding the date the dividend is paid. Under this
test, the direct insurance subsidiaries of the Company are
High Low
1995
1st Quarter............................... $34.250 $28. 2nd Quarter............................... $35.000 $28. 3rd Quarter............................... $39.000 $31. 4th Quarter............................... $39.750 $37.
1996 High Low
1st Quarter............................... $52.000 $41. 2nd Quarter............................... $47.750 $40. 3rd Quarter............................... $47.750 $39. 4th Quarter............................... $58.250 $47.
1997 1st Quarter (January 1 - March 14)........ $65.000 $52.
