Mercury Insurance 2007 Annual Report Download - page 83

2007 MERCURYNOW 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although the Company continues to believe that it has strong defenses to the action, given the California DOI’s actions in connection with
the Company’s application of the persistency discount, the proposed settlement is believed to be a favorable outcome of the case considering the
cost, inconvenience and uncertainty of litigation. The Company accrued $5 million as a reduction in premiums in the second quarter of 2007
related to the settlement of this case.
In Marissa Goodman, on her own behalf and on behalf of all others 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 include all of the Company’s insureds from 1998 to the present who
presented a medical payments claim, had the claim reduced using the computer program and whose claim did not reach the policy limits for medical
payments. On January 11, 2007, the Court certified the requested class and class notice has been sent to approximately 14,000 class members. The
Company has appealed the class certification ruling, and the Court of Appeal has stayed the case pending their review. The Plaintiff alleges that
these automated databases systematically undervalue medical payment claims to the detriment of insureds. The Plaintiff is seeking actual and
punitive damages. Similar lawsuits have been filed against other insurance carriers in the industry. The case has been coordinated with two other
similar cases, and also with ten other cases relating to total loss claims. The Court denied the Company’s Motion for Summary Judgment holding
that there is an issue of fact as to whether Ms. Goodman sustained any damages as a result of the Company’s handling of her medical payments
claim. The Company and the Plaintiff have agreed to settle the claims for an amount that is immaterial to the Company’s operations and financial
position. The settlement is subject to review and approval by the Court. The Company expects the Court will approve the settlement. The ultimate
outcome of this matter is not expected to be material to the Company’s financial position.
On March 28, 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 California Franchise Tax Board disallowed a portion of the Company’s expenses related to management
services provided to its insurance company subsidiaries. As a result of this ruling, the Company recorded an income tax charge (including penalties
and interest) of approximately $15 million, after federal tax benefit, in the first quarter of 2006. On April 24, 2007, the Company filed a complaint
in the Superior Court for the City and County of San Francisco challenging the SBE decision and seeking recovery of the taxes, penalties and
interest paid by the Company as a result of the SBE decision. The trial has been scheduled for April 28, 2008. The Company believes that the
deduction of the expenses related to management services provided to its insurance company subsidiaries is appropriate and intends to vigorously
prosecute the case.
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 that, among other
things, required the Company to accept applications for insurance from any California licensed broker with limited exceptions, restricted the
use of broker manuals and communications with brokers by the Company’s field personnel, and required the Company to compensate brokers at
the same rate based on volume of sales. The Company has implemented changes to its operations and believes that it is in compliance with the
modified injunction. At the time the injunction was issued, the Court stated that it would consider vacating the modified injunction following a
one year period of review of the changes in the Company’s operations. In March 2007, the Company filed a motion seeking to vacate the modified
injunction. At the hearing, the Court ordered that counsel be permitted to conduct a further limited investigation and to file a report for further
consideration by the Court. The Company is unable to determine whether the modified injunction will be vacated or estimate the impact of the
Court’s decision regarding the modified injunction on future trends in earnings or loss ratios.
The Company is also involved in proceedings relating to assessments and rulings made by the California Franchise Tax Board. See Note 6
of Notes to Consolidated Financial Statements.
Note 11. Profit Sharing Plan
The Company, at the option of the Board of Directors, may make annual contributions to an employee Profit Sharing Plan (the “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 $1,900,000, $1,900,000 and $1,850,000 for 2007, 2006 and 2005, respectively.
The Plan includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue Code. Company matching
contributions, at a rate set by the Board of Directors, totaled $5,056,000, $4,512,000 and $3,861,000 for 2007, 2006 and 2005, respectively.
The Plan also includes an employee stock ownership plan (“ESOP”) that covers substantially all employees. The Board of Directors authorized
the Plan to purchase $1.2 million of the Company’s common stock in the open market for allocation to the Plan participants. The Company
recognized $1,200,000, $1,200,000 and $1,100,000 as compensation expense in 2007, 2006 and 2005, respectively.