Condensed Financial Information of Registrant

12 Months Ended

Dec. 31, 2018

Condensed Financial Information Disclosure [Abstract]

Condensed Financial Information of Registrant

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS

	December 31,
	2018		2017
	(Amounts in thousands)
ASSETS
Investments, at fair value:
Equity securities (cost $110,279; $113,216)	$	119,037	$	141,227
Short-term investments (cost $3,166; $21,233)	3,166		21,231
Investment in subsidiaries	1,850,582		1,976,400
Total investments	1,972,785		2,138,858
Cash	24,140		8,475
Accrued investment income	161		178
Amounts receivable from affiliates	1,172		231
Current income taxes	—		8,857
Income tax receivable from affiliates	19,225		6,338
Other assets	446		663
Total assets	$	2,017,929	$	2,163,600
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable	$	371,734	$	371,335
Accounts payable and accrued expenses	25		—
Amounts payable to affiliates	3,082		507
Income tax payable to affiliates	580		17,213
Current income taxes	17,773		—
Deferred income taxes	1,691		8,242
Other liabilities	5,360		4,916
Total liabilities	400,245		402,213
Commitments and contingencies
Shareholders’ equity:
Common stock	98,026		97,523
Retained earnings	1,519,658		1,663,864
Total shareholders’ equity	1,617,684		1,761,387
Total liabilities and shareholders’ equity	$	2,017,929	$	2,163,600

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2018			2017		2016
	(Amounts in thousands)
Revenues:
Net investment income	$	4,661		$	4,090	$	4,032
Net realized investment (losses) gains	(10,797		)	19,279		6,062
Other	2			—		17
Total revenues	(6,134		)	23,369		10,111
Expenses:
Other operating expenses	2,343			1,918		2,673
Interest	17,036			14,856		2,690
Total expenses	19,379			16,774		5,363
(Loss) income before income taxes and equity in net income of subsidiaries	(25,513		)	6,595		4,748
Income tax (benefit) expense	(5,144		)	1,572		8,514
(Loss) income before equity in net income of subsidiaries	(20,369		)	5,023		(3,766		)
Equity in net income of subsidiaries	14,641			139,854		76,810
Net (loss) income	$	(5,728	)	$	144,877	$	73,044

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2018			2017			2016
	(Amounts in thousands)
Cash flows from operating activities:
Net cash (used in) provided by operating activities	$	(16,108	)	$	(14,503	)	$	4,731
Cash flows from investing activities:
Capital contribution to subsidiaries	(541		)	(140,125		)	(30,125		)
Distributions received from special purpose entities	5,998			5,243			4,898
Dividends received from subsidiaries	135,000			109,000			110,800
Fixed maturity securities available for sale in nature:
Purchases	—			—			(1,060		)
Sales	—			1,614			—
Equity securities available for sale in nature
Purchases	(22,286		)	(22,406		)	(64,807		)
Sales	33,052			18,876			73,942
Calls	—			4,000			—
Decrease (increase) in short-term investments	18,065			(20,607		)	515
Other, net	605			310			1,614
Net cash provided by (used in) investing activities	169,893			(44,095		)	95,777
Cash flows from financing activities:
Dividends paid to shareholders	(138,478		)	(137,886		)	(137,201		)
Employee taxes paid with shares related to share-based compensation	—			—			(3,292		)
Proceeds from stock options exercised	358			2,162			1,632
Net proceeds from issuance of senior notes	—			371,011			—
Payoff of principal on loan and credit facilities	—			(180,000		)	—
Proceeds from bank loan	—			—			30,000
Net cash (used in) provided by financing activities	(138,120		)	55,287			(108,861		)
Net increase (decrease) in cash	15,665			(3,311		)	(8,353		)
Cash:
Beginning of year	8,475			11,786			20,139
End of year	$	24,140		$	8,475		$	11,786
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	16,586		$	9,435		$	2,397
Income taxes paid (refunded), net	$	4,296		$	346		$	(339	)

The accompanying condensed financial information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.

Distributions received from Special Purpose Entities

On February 13, 2014, Fannette Funding LLC ("FFL"), a special purpose investment vehicle, formed by and consolidated into the Company, entered into a total return swap agreement with Citibank. Under the agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap is secured by approximately $31 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. The Company paid interest equal to LIBOR plus 128 basis points prior to the renewal of the agreement in January 2018 and LIBOR plus 120 basis points subsequent to the January 2018 renewal through July 2018, on approximately $100 million of underlying obligations as of December 31, 2018 and 2017. The agreement had an initial term of one year, subject to periodic renewal. In July 2018, the agreement was renewed through January 24, 2020, and the interest rate was changed to LIBOR plus 105 basis points.

On August 9, 2013, Animas Funding LLC ("AFL"), a special purpose investment vehicle, formed and consolidated by the Company, entered into a three-year total return swap agreement with Citibank, which was renewed for an additional one-year term through February 17, 2018. The total portfolio of underlying obligations was liquidated during June 2017, and the total return swap agreement between AFL and Citibank was terminated on July 7, 2017. Under the agreement, AFL received the income equivalent on underlying obligations due to Citibank and paid to Citibank interest on the outstanding notional amount of the underlying obligations. The total return swap was secured by approximately $40 million of U.S. Treasuries as collateral, which were included in short-term investments on the consolidated balance sheets. The Company paid interest, which was equal to LIBOR plus 135 basis points prior to the amendment of the agreement in January 2017 and LIBOR plus 128 basis points subsequent to the amendment until June 2017, on approximately $152 million of underlying obligations as of December 31, 2016.

Distributions of $6.0 million and $5.2 million were received in 2018 and 2017, respectively, from these special purpose entities.

Dividends received from Subsidiaries

Dividends of $135,000,000, $109,000,000 and $110,800,000 were received by Mercury General from its 100% owned insurance subsidiaries in 2018, 2017 and 2016, respectively, and are recorded as a reduction to investment in subsidiaries.

Capitalization of Insurance Subsidiaries

Mercury General made capital contributions to its insurance subsidiaries of $541,000, $140,125,000 and $30,125,000 in 2018, 2017 and 2016, respectively.

Notes Payable

On March 8, 2017, Mercury General completed a public debt offering issuing $375 million of senior notes. The notes are unsecured senior obligations of Mercury General, with a 4.4% annual coupon payable on March 15 and September 15 of each year commencing September 15, 2017. These notes mature on March 15, 2027. The Company used the proceeds from the notes to pay off the total outstanding balance of $320 million under the existing loan and credit facility agreements and terminated the agreements on March 8, 2017. The remainder of the proceeds from the notes was used for general corporate purposes. Mercury General incurred debt issuance costs of approximately $3.4 million, inclusive of underwriters' fees. The notes were issued at a slight discount of 99.847% of par, resulting in the effective annualized interest rate, including debt issuance costs, of approximately 4.45%.

Commitments and Contingencies

On March 29, 2017, Mercury General entered into an unsecured credit agreement that provides for revolving loans of up to $50 million and matures on March 29, 2022. The interest rates on borrowings under the credit facility are based on the Company's debt to total capital ratio and range from LIBOR plus 112.5 basis points when the ratio is under 15% to LIBOR plus 162.5 basis points when the ratio is greater than or equal to 25%. Commitment fees for the undrawn portions of the credit facility range from 12.5 basis points when the ratio is under 15% to 22.5 basis points when the ratio is greater than or equal to 25%. The debt to total capital ratio is expressed as a percentage of (a) consolidated debt to (b) consolidated shareholders' equity plus consolidated debt. The Company's debt to total capital ratio was 18.8% at December 31, 2018, resulting in a 15 basis point commitment fee on the $50 million undrawn portion of the credit facility. As of February 7, 2019, there have been no borrowings under this facility.

Federal Income Taxes

The Company files a consolidated federal income tax return for the following entities:



Mercury Casualty Company		Mercury County Mutual Insurance Company
Mercury Insurance Company		Mercury Insurance Company of Florida
California Automobile Insurance Company		Mercury Indemnity Company of America
California General Underwriters Insurance Company, Inc.		Mercury Select Management Company, Inc.
Mercury Insurance Company of Illinois		Mercury Insurance Services LLC
Mercury Insurance Company of Georgia		AIS Management LLC
Mercury Indemnity Company of Georgia		Auto Insurance Specialists LLC
Mercury National Insurance Company		PoliSeek AIS Insurance Solutions, Inc.
American Mercury Insurance Company		Animas Funding LLC
American Mercury Lloyds Insurance Company		Fannette Funding LLC
Workmen's Auto Insurance Company

The method of allocation between the companies is subject to an agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses incurred by the insurance subsidiaries to the extent it can be used in the current consolidated return.