Mercury Insurance 2007 Annual Report Download

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MERCURYNOW
ANNUAL REPORT
07
MERCURY GENERAL CORPORATION ANNUAL REPORT 2007
2007
Financial
Highlights
Including Management’s
Discussion & Analysis
INSIDE>>
SPRING 2008
www.mercuryinsurance.com
CUSTOMER
TESTIMONIALS
What Our Customers
Say About Us
Keep it
Coming!
A few words with
CEO, Gabriel Tirador
Financials
Ten Year Summary
and more
At a Glance
Return on Equity, Dividends Per Share
and Trading Range of Stock
Guidance
A Guide for How to Choose the
Right Insurance Company for You
Feature
When it Comes to
Customer Service, is Enough
Really Enough?
MERCURYNOW
ANNUAL REPORT
07
MERCURY GENERAL CORPORATION ANNUAL REPORT 2007
2007
Financial
Highlights
Including Management’s
Discussion & Analysis
INSIDE>>
SPRING 2008
www.mercuryinsurance.com
CUSTOMER
TESTIMONIALS
What Our Customers
Say About Us
Keep it
Coming!
A few words with
CEO, Gabriel Tirador
Financials
Ten Year Summary
and more
www.mercur
yi
nsurance.com
At a Glance
Return on Equity, Dividends Per Share
and Trading Range of Stock
AGl
Guidance
A Guide for How to Choose the
Right Insurance Company for You
Feature
When it Comes to
Customer Service, is Enough
Really Enough?

Table of contents

  • Page 1
    MERCURY GENERAL CORPORATION ANNUAL REPORT 2007 MERCURYNOW SPRING 2008 INSIDE>> Keep it Coming! A few words with CEO, Gabriel Tirador Financials Ten Year Summary and more 2007 Financial Highlights Including Management's Discussion & Analysis Feature When it Comes to Customer Service, is Enough ...

  • Page 2
    Protection for the Road Ahead

  • Page 3
    Mercury's low rates and great service have provided our policyholders with one of the best insurance values available for more than 45 years. Contact us today to see how much we can save you! www.mercuryinsurance.com

  • Page 4
    ...4 Directors and Officers Our list of who's who LEADERSHIP 8 Keep it Coming! A few words from Gabriel Tirador, Mercury's CEO 38 Products by State Mercury serves 13 states throughout the U.S. GUIDANCE 36 A Guide for How to Choose the Right Insurance Company for You Our experts answer your questions...

  • Page 5
    ... and Trading Range of Stock 16 Guidance 36 Feature 30 A guide for how to choose the right insurance company for you When it Comes to Customer Service, is Enough Really Enough? FINANCIAL HIGHLIGHTS 40 Ten Year Summary MANAGEMENT'S DISCUSSION 42 Management's Discussion & Analysis STATEMENTS...

  • Page 6
    .... Mercury offers auto and homeowners insurance, as well as the peace of mind that comes from knowing that we'll always be there when you need us most. Contact us today for a fast, free quote. www.mercuryinsurance.com Richard E. Grayson Senior Vice President - Customer Service Retired Senior Vice...

  • Page 7
    ... providing comfort Like a favorite pair of slippers, Mercury Insurance provides the kind of coverage that fits just right. Our local independent agents will tailor an insurance plan just for you and your family. Contact us today for a fast, free quote. www.mercuryinsurance.com 2007 MERCURYNOW 5

  • Page 8
    ... the 2003 Annual Report. In traditional mapmaker's fashion, this report helps readers navigate through the company's most significant developments and financial milestones at a time when the company was hitting the road and expanding into new markets outside of its home state of California. Through...

  • Page 9
    ... available, but low rates are just the beginning. When you insure with Mercury you will also benefit from the personalized attention and expert advice you will receive from our local independent agents. They will work closely with you to create a customized protection plan designed to meet your...

  • Page 10
    ... him about the company's performance in 2007 and what progress they have made within and outside of California. He shared some insight on current industry trends and discussed how some recent regulatory changes might impact their business. He also shared some exciting new corporate initiatives that...

  • Page 11
    TITLE TITL TI TLE GOES HERE 2007 20 2 200 00 0 7M 007 MERCURY MER ERCUR CUR CU URY RYNOW N OW W 9

  • Page 12
    ... tune of mid-single digits, in 2008. In other news, we recently obtained approval from the California Department of Insurance on our application for auto rate changes. The end result was a 3.6% rate reduction in our preferred California personal auto business. Incidentally, performance over time.

  • Page 13
    ... to a screeching halt. Luckily, you have Mercury Insurance. With experienced professionals at the ready, Mercury will help get you back on the road in no time. So, let Mercury help you turn the page, and have a better tomorrow. Contact us today for a fast, free quote to see how much you can save...

  • Page 14
    ... low rates will make you smile. Oklahoma drivers report saving an average of a year when they switch to Mercury. Contact us today for a fast, free quote to see how much you can save! (866) 602-0242 www.mercuryinsurance.com $309 Average savings of $309 based on a March-August 2007 survey of 574 new...

  • Page 15
    ... agent interface program - MercuryFirst - is scheduled to launch in New York in the second quarter of 2008. This new system is designed to make life easier for agents who represent Mercury. The system includes point of sale processing for quotes, for new business and In April 2007, the Department...

  • Page 16
    ... the best service I've ever received. Thank you." ELIZABETH C. (CHICAGO, IL) "Mercury Insurance not only gave me the policy I needed at the right price, but when I filed a claim it was handled ï¬,awlessly. Now that's the measure of a great insurance company! Mercury, you were fast, professional...

  • Page 17
    ... been made after these quotes were obtained. All rates reï¬,ect full payment of premium at time of purchase. Mercury auto insurance policies are written through Mercury County Mutual Insurance Co. in Texas. Average savings of $377 based on a Jan-Mar 2007 survey of 964 new TX Mercury policyholders.

  • Page 18
    ...returns for its shareholders. Mercury has increased its quarterly cash dividends every year since 1986, and has averaged a 13% rate of increase over the past 10... 05 06 07 15 TRADING RANGE OF STOCK in dollars 80 10 70 60 50 40 30 20 10 5 0 03 04 05 06 07 0 03 04 05 06 07 16 MERCURYNOW 2007

  • Page 19
    ..., we've been answering the call for more than 45 years, saving drivers like you hundreds, even thousands, of dollars on auto insurance. With 93% of Mercury's California customers choosing to renew with us, we must be doing something right. For your fast, free quote visit www. mercuryinsurance.com.

  • Page 20
    Did you know?

  • Page 21
    At Mercury Insurance we believe you should never have to compromise service in order to get a low auto insurance rate. That's why we are committed to going above and beyond what our customers expect of their insurance company, while still offering some of the lowest auto insurance rates possible-...

  • Page 22
    ... of change, leveraging new technological resources to streamline operations. MERCURY recently announced it is launching MercuryFirst, a web-based agency integration tool. The new system is reported to aggregate all of an agent's Mercury auto business into one web-based solution. 20 MERCURYNOW 2007

  • Page 23

  • Page 24
    ... quotes, processing applications or making changes to existing policies as easy as a click of the mouse. The company is reported to have invested millions of dollars and tens of thousands of hours working with agency principals, producers and customer service representatives to build a system...

  • Page 25
    Action Growth Drive Service Security Speed Momentum Devotion Patience Knowledge Leadership Integrity 2007 MERCURYNOW 23

  • Page 26
    So, you watched this went "green" and It's time to save a little California drivers (even the ones that aren't so For a fast free, quote visit us

  • Page 27
    global warming movie, decided to save the earth... "green" for yourself ! "green") report saving an average of $380 a year. at www.mercuryinsurance.com. Average savings of $380 based on a October-November 2007 survey of 2,280 new CA Mercury policyholders.

  • Page 28
    ... average of $378 a year; Florida drivers report saving an average of $358 a year; and Oklahoma drivers report saving an average of $309 a year. YES, IT'S PERSONAL So, you find yourself in need of a new auto insurance agent, either because you are not happy with your coverage, you've recently moved...

  • Page 29
    ... it is! When it comes to auto insurance, Mercury takes the cake. Mercury is committed to providing our customers with first class service at the lowest possible rates. But the best part is that these low rates and superior service are backed by Mercury's tremendous financial strength and stability...

  • Page 30
    ...Additional living expenses • Personal liability protection • Guest medical protection • Identify theft protection Mercury offers a variety of discounts that will help you save a bundle: • Auto + homeowners discount • Protective device discount • Newer home • Gated community • Higher...

  • Page 31
    ... auto insurance business, Mercury has been, and continues to be, a high-performance vehicle rated one of the safest on the road. 13% rate of increase over the past ten years. Mercury finished 2007 with 5,200 employees and 4,500 independent insurance agents and brokers in 13 states. 2007 MERCURYNOW...

  • Page 32
    TITLE GOES HERE 30 MERCURYNOW 2007

  • Page 33
    FEATURE WHEN IT COMES TO CUSTOMER SERVICE, IS ENOUGH REALLY ENOUGH? Mercury Rolls Out Service Excellence Initiative 2007 MERCURYNOW 31

  • Page 34
    ...their customers' complete satisfaction. The question is, in today's highly competitive business environment, is this enough? One company, Mercury General Corporation, a well established auto insurance provider, says, "no." Good is often not good enough. Recently, the company embarked on a program to...

  • Page 35
    ... quickly and to the satisfaction of the customer. That's why the customer should only have to make one phone call, with the onus on Mercury's staff to work through the system, rather than having the customer absorb that burden. The dispatch team now acts more as a help desk rather than a message...

  • Page 36

  • Page 37
    Florida drivers report saving an average of $358 a year when they switch to Mercury. Contact us today to see how much we can save you! (866) 602-0245 www.mercuryinsurance.com Average savings based upon a survey of 400 new FL Mercury policyholders conducted May to September 2007.

  • Page 38
    ...-car discounts; professional/association discounts; anti-theft device discount; good student discount; or a multi-policy discount. How can I tell if an insurance company is reputable? Do your homework. Look at their financial history. How long have they been in business? What kind of credit ratings...

  • Page 39
    ...Per share data Diluted net income Diluted net realized gains (losses)* Dividends declared Book value Diluted average shares (000's) Period-end shares (000's) Total assets Total investments Shareholders' equity Return on average equity** Premiums to surplus ratio *Net of income tax effect **Excluding...

  • Page 40
    ... Automobile Mechanical Breakdown NEW JERSEY NEW YORK Private Passenger Automobile Mechanical Breakdown Private Passenger Automobile Homeowners Commercial Automobile Commercial Packages Mechanical Breakdown Personal Umbrella Private Passenger Automobile Homeowners Commercial Automobile Mechanical...

  • Page 41
    ... 60 Consolidated Balance Sheets 66 Notes to Consolidated Financial Statements 61 Consolidated Statements of Income 62 Consolidated Statements of Comprehensive Income 84 Reports of Independent Registered Public Accounting Firm 63 Consolidated Statements of Shareholders' Equity 2007 MERCURYNOW 39

  • Page 42
    ... 54,515 1.48 60.26-46.29 Operating Results (GAAP Basis): Net premiums written Decrease (increase) in unearned premiums Earned premiums Losses and loss adjustment expenses Underwriting expenses Net investment income Net realized investment gains (losses) Other income Interest expense Income before...

  • Page 43
    ...,645 6.5% 5.9% 1,877,025 405,976 338,006 78,000 767,223 917,375 16.80 20.8% 55,003 54,684 0.70 69.44-33.25 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2007 MERCURYNOW 41

  • Page 44
    ... of premium rates and other factors such as changes in tax laws. 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...

  • Page 45
    .... OPPORTUNITIES, CHALLENGES AND RISKS The Company currently underwrites personal automobile insurance in thirteen states: Arizona, California, Florida, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas and Virginia. The Company expects to continue its growth by...

  • Page 46
    ... their book of business through the Mercury First Agent Portal, a single entry point to the Company's suite of agency applications. For customers and potential customers, IBS will provide the ability to obtain a quote and offer self-services such as paying bills and reporting claims through the...

  • Page 47
    ... by the consumer's insurance broker. Through this action, the California DOI seeks to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee, which the California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the...

  • Page 48
    ... in the number of claims reported subsequent to a period-end relating to that period - particularly on coverages that take longer to settle such as the California automobile bodily injury coverage. 3) Variability between Company loss experience and industry averages for those lines of business where...

  • Page 49
    ... medical costs and general damages. The following table represents the typical closure patterns of BI claims in the California automobile insurance coverage: % of Total Claims Closed BI claims closed in the accident year reported BI claims closed one year after the accident year reported BI claims...

  • Page 50
    ... NEW JERSEY BODILY INJURY CLAIMS New Jersey is a no-fault state, which means that the majority of medical costs are paid directly by a policyholder's insurance company rather than by the insurance company of the person who was at-fault in the accident. This coverage is known as personal injury...

  • Page 51
    ... its exposure to extra-contractual claims in Florida and increased its reserve estimates for prior accident years. To mitigate this specific risk, during 2006 the Company established new claims handling and review procedures in Florida, as well as in other states, that are intended to reduce...

  • Page 52
    ...for in the bodily injury figures, approximately $7 million came from the California homeowners line of business and the remainder came from multiple sources including changes in estimates for loss adjustment expenses and changes in estimates for many of the short-tail coverages within the automobile...

  • Page 53
    ... the Company's non-California operations, mostly in New Jersey and Florida, which are experiencing significant competition. The decrease is partially offset by a slight increase in the average premium collected per policy. During 2007, the Company implemented no rate changes in California. In states...

  • Page 54
    ... to increased policy sales. During 2006, the Company implemented no rate increases in California and implemented automobile rate increases in one of the twelve non-California states. Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued...

  • Page 55
    ... sale: U.S. government bonds and agencies Municipal bonds Mortgage-backed securities Corporate bonds Redeemable preferred stock $ 2,860,455 Equity securities available for sale: Common stock: Public utilities Banks, trusts and insurance companies Industrial and other Non-redeemable preferred stock...

  • Page 56
    ...to $200 million of Mercury General's common stock. The purchases may be made from time to time in the open market at the discretion of management. The program will be funded by dividends received from the Company's insurance subsidiaries that generate cash flow through the sale of lower yielding tax...

  • Page 57
    ... building that they currently occupy. The Company is in the process of implementing its NextGen computer system to replace its existing underwriting, billings, claims and commissions legacy systems. The NextGen system has been successfully implemented in Virginia, New York, Florida, and California...

  • Page 58
    ... deferred policy acquisition costs associated with internal replacements of insurance and investment contracts other than those already described in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain LongDuration Contracts and for Realized Gains and Losses from the Sale of...

  • Page 59
    ...ability to obtain and the timing of the approval of the California DOI for premium rate changes for private passenger automobile policies issued in California and similar rate approvals in other states where the Company does business, the level of investment yields the Company is able to obtain with...

  • Page 60
    ... resulting from the October 2007 Southern California fire storms. For the quarter ended June 30, 2006, net income was negatively impacted by adverse loss reserve development of $35 million recorded for the Company's Florida and New Jersey automobile lines of business, partially offset by positive...

  • Page 61
    ... finally arrives, Mercury wants to make sure you and your teenage driver are well prepared and well protected. That is why we created Road Rules, a quick reference guide featuring a variety of safe driving tips and things to consider when your teen begins to drive. To receive your free copy, please...

  • Page 62
    ... sale, at fair value (cost $317,869 in 2007 and $258,310 in 2006) Equity securities trading, at fair value (cost $13,126 in 2007) Short-term investments, at cost, which approximates fair value Total investments Cash Receivables: Premiums receivable Premium notes Accrued investment income Other Total...

  • Page 63
    ...OF INCOME Amounts expressed in thousands, except per share data 2007 $ 2,993,877 158,911 20,808 5,154 3,178...premiums Net investment income Net realized investment gains Other Total revenues Expenses: Losses and loss adjustment expenses Policy acquisition costs Other operating expenses Interest Total...

  • Page 64
    ... December 31, 2006 $ 214,817 $ Amounts expressed in thousands 2007 $ 237,832 2005 253,259 Net income Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period Less: reclassification adjustment for net gains...

  • Page 65
    ..., beginning of year Proceeds of stock options exercised Share-based compensation expense Tax benefit on sales of incentive stock options Common stock, end of year Accumulated other comprehensive income, beginning of year Net increase (decrease) in other comprehensive income, net of tax Accumulated...

  • Page 66
    ...operating activities: Depreciation and amortization Net realized investment gains Bond amortization, net Excess tax benefit from exercise of stock options Decrease (increase) in premiums receivable Decrease (increase) in premium notes receivable Increase in deferred policy acquisition costs Increase...

  • Page 67
    CONSOLIDATED STATEMENTS OF CASH FLOWS Amounts expressed in thousands 2007 (113,802) 273 (11,250) 2,173 (122,606) 639 47,... tax benefit from exercise of stock options Mortgage loan pay-off Proceeds from stock options exercised Net cash used in financing activities Net increase (decrease) in cash Cash...

  • Page 68
    ...The Company operates primarily 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...

  • Page 69
    ... other agent or broker accounted for more than 2% of direct premiums written. PREMIUM NOTES Premium notes receivable represent the balance due to the Company from policyholders who elect to finance their premiums over the policy term. The Company requires both a down payment and monthly payments as...

  • Page 70
    ...Company generally projects ultimate losses using industry average loss data or expected loss ratios. As the Company develops an operating history in these states, the Company will rely increasingly on the incurred loss development and average severity and claim count development methods. The Company...

  • Page 71
    ...in Brea, California. SHARE-BASED COMPENSATION Prior to January 1, 2006, the Company accounted for share-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under that method, when options...

  • Page 72
    ... deferred policy acquisition costs associated with internal replacements of insurance and investment contracts other than those already described in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of...

  • Page 73
    .... In addition, in 2007, net realized investment gains and losses also includes $2.0 million gain and $1.4 million loss related to the change in the fair value of trading securities and hybrid financial instruments, respectively. Gross gains and losses realized on the sales of investments (excluding...

  • Page 74
    ... Gross Unrealized Losses Estimated Fair Value Amounts in thousands U.S. Treasury securities and obligations of U.S. government corporations and agencies Obligations of states and political subdivisions Mortgage-backed securities Corporate securities Redeemable preferred stock Totals $ 36,157...

  • Page 75
    ... or more Unrealized Losses Fair Value Unrealized Losses Total Fair Value U.S. Treasury Securities and obligations of U.S. government corporations and agencies Obligations of states and political subdivisions Corporate securities Mortgage-backed securities Redeemable preferred stock Subtotal, debt...

  • Page 76
    ... or more Unrealized Losses Fair Value Unrealized Losses Total Fair Value U.S. Treasury Securities and obligations of U.S. government corporations and agencies Obligations of states and political subdivisions Corporate securities Mortgage-backed securities Redeemable preferred stock Subtotal, debt...

  • Page 77
    ...discount of 99.723%, resulting in the effective annualized interest rate including debt issuance costs of approximately 7.44%. 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...

  • Page 78
    ...$ $ $ $ $ Amounts in thousands 2007 $ $ 82,016 (7,844) 74,172 1,994 1,038 3,032 84,010 (6,806) 77,204 2005 82,509 13,520 96,029 2,463 888 3,351 84,972 14,408 99,380 Federal Current Deferred State Current Deferred $ $ Total Current Deferred Total $ $ The income tax provision reflected in the...

  • Page 79
    ... 2006, 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...

  • Page 80
    ... the provision for insured events of prior years in 2006 relates largely to the unexpected development of several large extracontractual claims in the state of Florida and increases in reserve estimates for the bodily injury and personal injury protection coverages in New Jersey. 78 MERCURYNOW 2007

  • Page 81
    ... provision for insured events of prior years in 2005 relates largely to a decrease in the estimated inflation rates on earlier accident years on bodily injury coverage for California automobile insurance. During 2005, the state of Florida was struck by several hurricanes. The pre-tax loss resulting...

  • Page 82
    ...those similarly situated v. Mercury Insurance Company, et al., was originally filed on April 20, 2001 in the Los Angeles Superior Court, asserting, among other things, a claim that the Company's calculation of persistency discounts to determine premiums is an unfair business practice, a violation of...

  • Page 83
    ...similarly situated v. Mercury Insurance Company (Los Angeles Superior Court), filed June 16, 2002, the Plaintiff is challenging the Company's use of certain automated database vendors to assist in valuing claims for medical payments. The Plaintiff filed a motion seeking class action certification to...

  • Page 84
    ... under the 2005 Plan. A combined total of 5,400,000 shares of Common Stock under the 1995 Plan and the 2005 Plan are authorized for issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. The maximum number of shares that...

  • Page 85
    ... value in the table above represents the total pretax intrinsic value (the difference between the Company's closing stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all options been exercised on December 31...

  • Page 86
    ... Organizations of the Treadway Commission (COSO), and our report dated February 25, 2008 expressed an unqualified opinion on the effectiveness of Mercury General Corporation and subsidiaries' internal control over financial reporting. KPMG LLP Los Angeles, CA February 25, 2008 84 MERCURYNOW 2007

  • Page 87
    ... OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Mercury General Corporation: We have audited Mercury General Corporation's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued...

  • Page 88
    ... 31 to its 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission certificates of its Chief Executive Officer and Chief Financial Officer regarding the Company's public disclosure. In addition, the Company has submitted to the New York Stock Exchange a certificate of...

  • Page 89
    ... MARKET INFORMATION PRICE RANGE OF COMMON STOCK The Company's common stock is traded on the New York Stock Exchange (symbol: MCY). The following table shows the high and low sales prices per share in each quarter during the past two years as reported in the consolidated transaction reporting system...

  • Page 90
    ... INFORMATION CORPORATE INFORMATION MERCURY GENERAL CORPORATION Corporate Headquarters 4484 Wilshire Boulevard Los Angeles, California 90010 Telephone: (323) 937-1060 Fax: (323) 857-7116 INDEPENDENT AUDITORS KPMG LLP Los Angeles, California TRANSFER AGENT & REGISTRAR BNY Mellon Shareowner Services...

  • Page 91
    "Hi. I am your local Mercury agent. How can I help you?" Along with thousands of other independent agents across the country, I am proud to offer you personalized, professional and friendly service. I like being on a first-name basis with my customers, because low you rates are more aservice ...

  • Page 92
    ... for in an auto insurance company - customized coverage, low rates, excellent service and financial stability. Maybe that's why Mercury has a 93% customer renewal rate in California. No driver is an island unto himself. It's nice to know that even if gas prices have gone overboard, Mercury is ready...