California | 95-2211612 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4484 Wilshire Boulevard, Los Angeles, California | 90010 |
(Address of principal executive offices) | (Zip Code) |
Large accelerated filer | ý | Accelerated filer | o | |||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Page | ||
Item 1 | ||
Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 | ||
Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2015 and 2014 | ||
Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2015 and 2014 | ||
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 | ||
Item 2 | ||
Item 3 | ||
Item 4 | ||
Item 1 | ||
Item 1A | ||
Item 2 | ||
Item 3 | ||
Item 4 | ||
Item 5 | ||
Item 6 | ||
September 30, 2015 | December 31, 2014 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Investments, at fair value: | |||||||
Fixed maturity securities (amortized cost $2,802,441; $2,503,494) | $ | 2,886,864 | $ | 2,618,400 | |||
Equity securities (cost $307,893; $387,851) | 298,687 | 412,880 | |||||
Short-term investments (cost $162,834; $373,180) | 162,835 | 372,542 | |||||
Total investments | 3,348,386 | 3,403,822 | |||||
Cash | 295,184 | 289,907 | |||||
Receivables: | |||||||
Premiums | 442,061 | 390,009 | |||||
Accrued investment income | 41,383 | 38,737 | |||||
Other | 21,114 | 21,202 | |||||
Total receivables | 504,558 | 449,948 | |||||
Deferred policy acquisition costs | 205,245 | 197,202 | |||||
Fixed assets, net | 157,605 | 158,976 | |||||
Current income taxes | 11,915 | 503 | |||||
Deferred income taxes | 20,971 | 0 | |||||
Goodwill | 42,796 | 42,796 | |||||
Other intangible assets, net | 32,538 | 35,623 | |||||
Other assets | 27,381 | 21,512 | |||||
Total assets | $ | 4,646,579 | $ | 4,600,289 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Losses and loss adjustment expenses | $ | 1,131,553 | $ | 1,091,797 | |||
Unearned premiums | 1,063,323 | 999,798 | |||||
Notes payable | 290,000 | 290,000 | |||||
Accounts payable and accrued expenses | 139,345 | 130,887 | |||||
Deferred income taxes | — | 5,333 | |||||
Other liabilities | 192,859 | 207,028 | |||||
Total liabilities | 2,817,080 | 2,724,843 | |||||
Commitments and contingencies | |||||||
Shareholders’ equity: | |||||||
Common stock without par value or stated value: Authorized 70,000 shares; issued and outstanding 55,164; 55,121 | 91,028 | 88,705 | |||||
Additional paid-in capital | 6,644 | 3,804 | |||||
Retained earnings | 1,731,827 | 1,782,937 | |||||
Total shareholders’ equity | 1,829,499 | 1,875,446 | |||||
Total liabilities and shareholders’ equity | $ | 4,646,579 | $ | 4,600,289 |
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Revenues: | |||||||
Net premiums earned | $ | 745,520 | $ | 705,237 | |||
Net investment income | 30,898 | 32,564 | |||||
Net realized investment losses | (26,286 | ) | (20,089 | ) | |||
Other | 2,281 | 2,275 | |||||
Total revenues | 752,413 | 719,987 | |||||
Expenses: | |||||||
Losses and loss adjustment expenses | 545,692 | 492,525 | |||||
Policy acquisition costs | 132,881 | 131,090 | |||||
Other operating expenses | 60,788 | 58,545 | |||||
Interest | 785 | 707 | |||||
Total expenses | 740,146 | 682,867 | |||||
Income before income taxes | 12,267 | 37,120 | |||||
Income tax (benefit) expense | (3,003 | ) | 5,824 | ||||
Net income | $ | 15,270 | $ | 31,296 | |||
Net income per share: | |||||||
Basic | $ | 0.28 | $ | 0.57 | |||
Diluted | $ | 0.28 | $ | 0.57 | |||
Weighted average shares outstanding: | |||||||
Basic | 55,164 | 55,002 | |||||
Diluted | 55,178 | 55,014 | |||||
Dividends paid per share | $ | 0.6175 | $ | 0.6150 |
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Net income | $ | 15,270 | $ | 31,296 | |||
Other comprehensive income, before tax: | |||||||
Gains on hedging instrument | — | — | |||||
Other comprehensive income, before tax: | — | — | |||||
Income tax expense related to gains on hedging instrument | — | — | |||||
Other comprehensive income, net of tax: | — | — | |||||
Comprehensive income | $ | 15,270 | $ | 31,296 |
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Revenues: | |||||||
Net premiums earned | $ | 2,197,803 | $ | 2,086,827 | |||
Net investment income | 94,101 | 93,656 | |||||
Net realized investment (losses) gains | (75,595 | ) | 102,813 | ||||
Other | 6,823 | 6,666 | |||||
Total revenues | 2,223,132 | 2,289,962 | |||||
Expenses: | |||||||
Losses and loss adjustment expenses | 1,581,306 | 1,452,171 | |||||
Policy acquisition costs | 401,868 | 393,964 | |||||
Other operating expenses | 191,017 | 166,341 | |||||
Interest | 2,304 | 1,900 | |||||
Total expenses | 2,176,495 | 2,014,376 | |||||
Income before income taxes | 46,637 | 275,586 | |||||
Income tax (benefit) expense | (4,437 | ) | 76,681 | ||||
Net income | $ | 51,074 | $ | 198,905 | |||
Net income per share: | |||||||
Basic | $ | 0.93 | $ | 3.62 | |||
Diluted | $ | 0.93 | $ | 3.62 | |||
Weighted average shares outstanding: | |||||||
Basic | 55,154 | 54,986 | |||||
Diluted | 55,172 | 54,995 | |||||
Dividends paid per share | $ | 1.8525 | $ | 1.8450 |
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Net income | $ | 51,074 | $ | 198,905 | |||
Other comprehensive income, before tax: | |||||||
Gains on hedging instrument | — | — | |||||
Other comprehensive income, before tax: | — | — | |||||
Income tax expense related to gains on hedging instrument | — | — | |||||
Other comprehensive income, net of tax: | — | — | |||||
Comprehensive income | $ | 51,074 | $ | 198,905 |
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income | $ | 51,074 | $ | 198,905 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 19,967 | 20,145 | |||||
Net realized investment losses (gains) | 75,595 | (102,813 | ) | ||||
Bond amortization, net | 17,279 | 14,650 | |||||
Excess tax benefit from exercise of stock options | (106 | ) | (169 | ) | |||
Increase in premiums receivables | (46,952 | ) | (29,613 | ) | |||
Change in current and deferred income taxes | (35,822 | ) | 16,632 | ||||
Increase in deferred policy acquisition costs | (8,043 | ) | (6,972 | ) | |||
Increase in unpaid losses and loss adjustment expenses | 21,079 | 23,929 | |||||
Increase in unearned premiums | 56,562 | 59,092 | |||||
(Decrease) increase in accounts payable and accrued expenses | (17,509 | ) | 15,968 | ||||
Share-based compensation | 2,946 | 2,741 | |||||
Changes in other payables | 10,255 | (14,643 | ) | ||||
Other, net | 2,382 | 1,645 | |||||
Net cash provided by operating activities | 148,707 | 199,497 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Fixed maturities available-for-sale in nature: | |||||||
Purchases | (807,150 | ) | (393,208 | ) | |||
Sales | 211,724 | 175,919 | |||||
Calls or maturities | 283,311 | 213,865 | |||||
Equity securities available-for-sale in nature: | |||||||
Purchases | (573,011 | ) | (706,461 | ) | |||
Sales | 641,854 | 522,662 | |||||
Calls or maturities | 2,378 | — | |||||
Changes in securities payable and receivable | (6,658 | ) | (5,622 | ) | |||
Net decrease in short-term investments and purchased options | 210,274 | 23,788 | |||||
Purchase of fixed assets | (16,384 | ) | (20,880 | ) | |||
Sale of fixed assets | 136 | 209 | |||||
Business acquisition, net of cash acquired | 7,771 | — | |||||
Other, net | 2,291 | 2,896 | |||||
Net cash used in investing activities | (43,464 | ) | (186,832 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Dividends paid to shareholders | (102,183 | ) | (101,461 | ) | |||
Excess tax benefit from exercise of stock options | 106 | 169 | |||||
Proceeds from stock options exercised | 2,111 | 1,800 | |||||
Proceeds from bank loan | — | 100,000 | |||||
Net cash (used in) provided by financing activities | (99,966 | ) | 508 | ||||
Net increase in cash | 5,277 | 13,173 | |||||
Cash: | |||||||
Beginning of the year | 289,907 | 266,508 | |||||
End of period | $ | 295,184 | $ | 279,681 | |||
SUPPLEMENTAL CASH FLOW DISCLOSURE | |||||||
Interest paid | $ | 2,228 | $ | 1,840 | |||
Income taxes paid | $ | 31,385 | $ | 60,049 |
September 30, 2015 | December 31, 2014 | ||||||
(Amounts in thousands) | |||||||
Assets | |||||||
Investments | $ | 3,348,386 | $ | 3,403,822 | |||
Liabilities | |||||||
Options sold | $ | 266 | $ | 194 | |||
Total return swaps | $ | 6,059 | $ | 4,025 | |||
Secured notes | $ | 140,000 | $ | 140,000 | |||
Unsecured note | $ | 150,000 | $ | 150,000 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Amounts in thousands) | |||||||||||||||
Fixed maturity securities | $ | (1,602 | ) | $ | 3,536 | $ | (30,609 | ) | $ | 73,149 | |||||
Equity securities | (16,938 | ) | (23,995 | ) | (34,234 | ) | (6,355 | ) | |||||||
Short-term investments | 2 | (69 | ) | 638 | (211 | ) | |||||||||
Total | $ | (18,538 | ) | $ | (20,528 | ) | $ | (64,205 | ) | $ | 66,583 |
Level 1 | Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. |
Level 2 | Pricing inputs are other than quoted prices in active markets, which are based on the following: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in non-active markets; or • Either directly or indirectly observable inputs as of the reporting date. |
Level 3 | Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation. |
September 30, 2015 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(Amounts in thousands) | |||||||||||||||
Assets | |||||||||||||||
Fixed maturity securities: | |||||||||||||||
U.S. government bonds and agencies | $ | 25,150 | $ | 0 | $ | — | $ | 25,150 | |||||||
Municipal securities | — | 2,495,881 | — | 2,495,881 | |||||||||||
Mortgage-backed securities | — | 63,045 | — | 63,045 | |||||||||||
Corporate securities | — | 248,246 | — | 248,246 | |||||||||||
Collateralized loan obligations | — | 49,665 | — | 49,665 | |||||||||||
Other asset-backed securities | — | 4,877 | — | 4,877 | |||||||||||
Equity securities: | |||||||||||||||
Common stock: | |||||||||||||||
Public utilities | 64,324 | — | — | 64,324 | |||||||||||
Banks, trusts and insurance companies | 11,700 | — | — | 11,700 | |||||||||||
Industrial and other | 186,172 | — | — | 186,172 | |||||||||||
Non-redeemable preferred stock | — | 24,795 | — | 24,795 | |||||||||||
Private equity funds | — | 0 | 11,696 | 11,696 | |||||||||||
Short-term investments: | |||||||||||||||
Short-term bonds | 59,996 | 2,005 | — | 62,001 | |||||||||||
Money market instruments | 100,834 | 0 | — | 100,834 | |||||||||||
Total assets at fair value | $ | 448,176 | $ | 2,888,514 | $ | 11,696 | $ | 3,348,386 | |||||||
Liabilities | |||||||||||||||
Notes payable: | |||||||||||||||
Secured Notes | $ | — | $ | 140,000 | $ | — | $ | 140,000 | |||||||
Unsecured Notes | — | 150,000 | — | 150,000 | |||||||||||
Other liabilities: | |||||||||||||||
Total return swaps | — | 6,059 | — | 6,059 | |||||||||||
Options sold | 266 | 0 | — | 266 | |||||||||||
Total liabilities at fair value | $ | 266 | $ | 296,059 | $ | — | $ | 296,325 |
December 31, 2014 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(Amounts in thousands) | |||||||||||||||
Assets | |||||||||||||||
Fixed maturity securities: | |||||||||||||||
U.S. government bonds and agencies | $ | 16,108 | — | — | $ | 16,108 | |||||||||
Municipal securities | — | 2,275,455 | — | 2,275,455 | |||||||||||
Mortgage-backed securities | — | 47,691 | — | 47,691 | |||||||||||
Corporate securities | — | 256,930 | — | 256,930 | |||||||||||
Collateralized loan obligations | — | 22,216 | — | 22,216 | |||||||||||
Equity securities: | |||||||||||||||
Common stock: | |||||||||||||||
Public utilities | 105,485 | — | — | 105,485 | |||||||||||
Banks, trusts and insurance companies | 9,757 | — | — | 9,757 | |||||||||||
Energy and other | 257,356 | — | — | 257,356 | |||||||||||
Non-redeemable preferred stock | — | 28,563 | — | 28,563 | |||||||||||
Private equity fund | — | — | 11,719 | 11,719 | |||||||||||
Short-term investments: | |||||||||||||||
Short-term bonds | 69,999 | 18,362 | — | 88,361 | |||||||||||
Money market instruments | 284,181 | — | — | 284,181 | |||||||||||
Total assets at fair value | $ | 742,886 | $ | 2,649,217 | $ | 11,719 | $ | 3,403,822 | |||||||
Liabilities | |||||||||||||||
Notes payable: | |||||||||||||||
Secured Notes | $ | — | $ | 140,000 | $ | — | $ | 140,000 | |||||||
Unsecured Notes | — | 150,000 | — | 150,000 | |||||||||||
Other liabilities: | |||||||||||||||
Total return swaps | — | 4,025 | — | 4,025 | |||||||||||
Options sold | 194 | — | — | 194 | |||||||||||
Total liabilities at fair value | $ | 194 | $ | 294,025 | $ | — | $ | 294,219 |
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Private Equity Fund | Private Equity Fund | ||||||
(Amounts in thousands) | |||||||
Beginning Balance | $ | 13,745 | $ | 12,966 | |||
Realized losses included in earnings | (2,049 | ) | (296 | ) | |||
Settlement | — | — | |||||
Ending Balance | $ | 11,696 | $ | 12,670 | |||
The amount of total losses for the period included in earnings attributable to assets still held at September 30 | $ | (2,049 | ) | $ | (296 | ) |
Nine Months Ended September 30, | |||||||||||
2015 | 2014 | ||||||||||
Private Equity Fund | Collateralized Debt Obligations | Private Equity Fund | |||||||||
(Amounts in thousands) | |||||||||||
Beginning Balance | $ | 11,719 | $ | 4,302 | $ | 12,548 | |||||
Realized (losses) gains included in earnings | (2,910 | ) | (755 | ) | 122 | ||||||
Reclassification from other assets | 2,911 | — | — | ||||||||
Sales | — | (3,547 | ) | — | |||||||
Settlement | (24 | ) | — | — | |||||||
Ending Balance | $ | 11,696 | $ | 0 | $ | 12,670 | |||||
The amount of total (losses) gains for the period included in earnings attributable to assets still held at September 30 | $ | (2,910 | ) | $ | — | $ | 122 |
Asset Derivatives | Liability Derivatives | ||||||||||||||
September 30, 2015 | December 31, 2014 | September 30, 2015 | December 31, 2014 | ||||||||||||
(Amount in thousands) | |||||||||||||||
Total return swaps - Other liabilities | $ | — | $ | — | $ | 6,059 | $ | 4,025 | |||||||
Options sold - Other liabilities | — | — | 266 | 194 | |||||||||||
Total derivatives | $ | — | $ | — | $ | 6,325 | $ | 4,219 |
(Losses) Gains Recognized in Income | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(Amounts in thousands) | |||||||||||||||
Total return swaps - Net realized investment losses | $ | (4,422 | ) | $ | (3,090 | ) | $ | (710 | ) | $ | (482 | ) | |||
Options sold - Net realized investment gains | 695 | 1,627 | 2,219 | 2,681 | |||||||||||
Total | $ | (3,727 | ) | $ | (1,463 | ) | $ | 1,509 | $ | 2,199 |
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Useful Lives | ||||||||||
(Amounts in thousands) | (in years) | ||||||||||||
As of September 30, 2015: | |||||||||||||
Customer relationships | $ | 51,755 | $ | (33,084 | ) | $ | 18,671 | 11 | |||||
Trade names | 15,400 | (4,331 | ) | 11,069 | 24 | ||||||||
Technology | 4,300 | (2,902 | ) | 1,398 | 10 | ||||||||
Insurance license | 1,400 | 0 | 1,400 | Indefinite | |||||||||
Total other intangible assets, net | $ | 72,855 | $ | (40,317 | ) | $ | 32,538 | ||||||
As of December 31, 2014: | |||||||||||||
Customer relationships | $ | 51,755 | $ | (29,402 | ) | $ | 22,353 | 11 | |||||
Trade names | 15,400 | (3,850 | ) | 11,550 | 24 | ||||||||
Technology | 4,300 | (2,580 | ) | 1,720 | 10 | ||||||||
Total other intangible assets, net | $ | 71,455 | $ | (35,832 | ) | $ | 35,623 |
Year | Amortization Expense | |||
(Amounts in thousands) | ||||
Remainder of 2015 | $ | 1,495 | ||
2016 | 5,980 | |||
2017 | 5,253 | |||
2018 | 5,239 | |||
2019 | 4,809 | |||
Thereafter | 8,362 | |||
Total | $ | 31,138 |
Grant Year | ||||||||
2015 | 2014 | 2013 | ||||||
Three-year performance period ending December 31, | 2017 | 2016 | 2015 | |||||
Vesting shares, target (net of forfeited) | 96,750 | 85,500 | 78,500 | |||||
Vesting shares, maximum (net of forfeited) | 181,406 | 160,313 | 176,625 |
January 2, 2015 | |||
(Amounts in thousands) | |||
Consideration | |||
Cash | $ | 8,000 | |
Less: Amount held in escrow | 2,000 | ||
Fair value of total consideration transferred | $ | 6,000 | |
Acquisition-related costs | $ | 231 | |
Recognized amounts of identifiable assets acquired and liabilities assumed | |||
Total assets | $ | 31,078 | |
Total liabilities | (26,478 | ) | |
Total identifiable net assets | 4,600 | ||
Intangible asset - state insurance license | 1,400 | ||
Total | $ | 6,000 |
Nine Months Ended September 30, 2015 | |||
(Amounts in thousands) | |||
WAIC | |||
Revenue (1) | $ | 18,538 | |
Net loss | $ | (3,606 | ) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Private Passenger Auto | Homeowners | Commercial Auto | Other Lines | Total | ||||||||||||||||||
California | $ | 1,461,576 | $ | 247,871 | $ | 58,538 | $ | 73,671 | $ | 1,841,656 | 81.3 | % | ||||||||||
Florida | 115,808 | 8 | 20,578 | 725 | 137,119 | 6.1 | % | |||||||||||||||
Other states (1) | 185,710 | 52,952 | 35,655 | 10,993 | 285,310 | 12.6 | % | |||||||||||||||
Total | $ | 1,763,094 | $ | 300,831 | $ | 114,771 | $ | 85,389 | $ | 2,264,085 | 100.0 | % | ||||||||||
77.9 | % | 13.3 | % | 5.1 | % | 3.7 | % | 100.0 | % |
Private Passenger Auto | Homeowners | Commercial Auto | Other Lines | Total | ||||||||||||||||||
California | $ | 1,395,236 | $ | 226,833 | $ | 50,645 | $ | 61,249 | $ | 1,733,963 | 80.5 | % | ||||||||||
Florida | 100,706 | 7 | 19,717 | 4,798 | 125,228 | 5.8 | % | |||||||||||||||
Other states (1) | 182,127 | 55,405 | 30,956 | 25,905 | 294,393 | 13.7 | % | |||||||||||||||
Total | $ | 1,678,069 | $ | 282,245 | $ | 101,318 | $ | 91,952 | $ | 2,153,584 | 100.0 | % | ||||||||||
77.9 | % | 13.1 | % | 4.7 | % | 4.3 | % | 100.0 | % |
State | Exam Type | Period Under Review | Status | |||
GA | Financial | 2011 to 2013 | Fieldwork completed. Awaiting final report. | |||
CA | Market Conduct | 2013 to 2014 | Fieldwork completed. Awaiting final report. | |||
NJ | Market Conduct | 2013 to 2014 | Received final report. | |||
CA | Special Investigation Unit Performance | 2012 to 2013 | Received final report. | |||
CA | Rating and Underwriting | 2014 | Fieldwork began in July 2014 |
• | The incurred loss development method analyzes historical incurred case loss (case reserves plus paid losses) development to estimate ultimate losses. The Company applies development factors against current case incurred losses by accident period to calculate ultimate expected losses. The Company believes that the incurred loss development method provides a reasonable basis for evaluating ultimate losses, particularly in the Company’s larger, more established lines of business which have a long operating history. |
• | The average severity method analyzes historical loss payments and/or incurred losses divided by closed claims and/or total claims to calculate an estimated average cost per claim. From this, the expected ultimate average cost per claim can be estimated. The average severity method coupled with the claim count development method provides meaningful information regarding inflation and frequency trends that the Company believes is useful in establishing loss reserves. The claim count development method analyzes historical claim count development to estimate future incurred claim count development for current claims. The Company applies these development factors against current claim counts by accident period to calculate ultimate expected claim counts. |
• | The paid loss development method analyzes historical payment patterns to estimate the amount of losses yet to be paid. The Company uses this method for losses and loss adjustment expenses. |
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(Amounts in thousands) | |||||||
Net premiums written | $ | 778,921 | $ | 720,153 | |||
Change in net unearned premium | (33,401 | ) | (14,916 | ) | |||
Net premiums earned | $ | 745,520 | $ | 705,237 |
Three Months Ended September 30, | |||||
2015 | 2014 | ||||
Loss ratio | 73.2 | % | 69.8 | % | |
Expense ratio | 26.0 | % | 26.9 | % | |
Combined ratio | 99.2 | % | 96.7 | % |
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(Dollars in thousands) | |||||||
Average invested assets at cost (1) | $ | 3,278,469 | $ | 3,237,993 | |||
Net investment income (2) | |||||||
Before income taxes | $ | 30,898 | $ | 32,564 | |||
After income taxes | $ | 27,115 | $ | 28,677 | |||
Average annual yield on investments (2) | |||||||
Before income taxes | 3.8 | % | 4.0 | % | |||
After income taxes | 3.3 | % | 3.5 | % | |||
Net realized investment losses | $ | (26,286 | ) | $ | (20,089 | ) |
(1) | Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average invested assets at cost are based on the monthly amortized cost of the invested assets for each respective period. |
(2) | Net investment income and average annual yield on investments decreased slightly due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments. |
Gains (Losses) Recognized in Net Income | |||||||||
Three Months Ended September 30, 2015 | |||||||||
Sales | Changes in fair value | Total | |||||||
(Amounts in thousands) | |||||||||
Net realized investment losses | |||||||||
Fixed maturity securities (1)(2) | $ | 10 | $ | (1,602 | ) | $ | (1,592 | ) | |
Equity securities (1)(3) | (4,032 | ) | (16,938 | ) | (20,970 | ) | |||
Short-term investments (1) | — | 2 | 2 | ||||||
Total return swaps | 74 | (4,496 | ) | (4,422 | ) | ||||
Options sold | 753 | (57 | ) | 696 | |||||
Total | $ | (3,195 | ) | $ | (23,091 | ) | $ | (26,286 | ) |
Gains (Losses) Recognized in Net Income | |||||||||
Three Months Ended September 30, 2014 | |||||||||
Sales | Changes in fair value | Total | |||||||
(Amounts in thousands) | |||||||||
Net realized investment losses | |||||||||
Fixed maturity securities (1)(2) | $ | 724 | $ | 3,536 | $ | 4,260 | |||
Equity securities (1)(3) | 1,622 | (23,995 | ) | (22,373 | ) | ||||
Short-term investments (1) | (444 | ) | (69 | ) | (513 | ) | |||
Total return swap | 497 | (3,587 | ) | (3,090 | ) | ||||
Options sold | 1,303 | 324 | 1,627 | ||||||
Total | $ | 3,702 | $ | (23,791 | ) | $ | (20,089 | ) |
(1) | The changes in fair value of the investment portfolio result from the application of the fair value option. |
(2) | The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio. The fair value decreases in 2015 were slightly affected by the increase in credit-related spreads during the three months ended September 30, 2015. The fair value increases in 2014 were primarily caused by the overall improvement in the municipal bond market. |
(3) | In the 2015 period, the decreases in the fair value of equity securities were primarily due to a decline in the value of the Company’s holdings in industrial stocks and an overall decline in the equities markets. In the 2014 period, the decreases in fair value were primarily caused by the decline in the energy and utilities sectors. |
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(Amounts in thousands, except per share data) | |||||||
Net income | $ | 15,270 | $ | 31,296 | |||
Basic average shares outstanding | 55,164 | 55,002 | |||||
Diluted average shares outstanding | 55,178 | 55,014 | |||||
Basic Per Share Data: | |||||||
Net Income | $ | 0.28 | $ | 0.57 | |||
Net realized investment losses, net of tax | $ | (0.31 | ) | $ | (0.24 | ) | |
Diluted Per Share Data: | |||||||
Net Income | $ | 0.28 | $ | 0.57 | |||
Net realized investment losses, net of tax | $ | (0.31 | ) | $ | (0.24 | ) |
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(Amounts in thousands) | |||||||
Net premiums written | $ | 2,252,961 | $ | 2,143,605 | |||
Change in net unearned premium | (55,158 | ) | (56,778 | ) | |||
Net premiums earned | $ | 2,197,803 | $ | 2,086,827 |
Nine Months Ended September 30, | |||||
2015 | 2014 | ||||
Loss ratio | 71.9 | % | 69.6 | % | |
Expense ratio | 27.0 | % | 26.8 | % | |
Combined ratio | 98.9 | % | 96.4 | % |
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(Dollars in thousands) | |||||||
Average invested assets at cost (1) | $ | 3,296,775 | $ | 3,185,457 | |||
Net investment income (2) | |||||||
Before income taxes | $ | 94,101 | $ | 93,656 | |||
After income taxes | $ | 82,320 | $ | 83,227 | |||
Average annual yield on investments (2) | |||||||
Before income taxes | 3.8 | % | 3.9 | % | |||
After income taxes | 3.3 | % | 3.5 | % | |||
Net realized investment (losses) gains | $ | (75,595 | ) | $ | 102,813 |
(1) | Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average invested assets at cost are based on the monthly amortized cost of the invested assets for each respective period. |
(2) | Net investment income before income taxes increased due to higher average invested asset balances. Net investment income and average annual yield on investments after income taxes decreased slightly due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments. |
Gains (Losses) Recognized in Net Income | |||||||||
Nine Months Ended September 30, 2015 | |||||||||
Sales | Changes in fair value | Total | |||||||
(Amounts in thousands) | |||||||||
Net realized investment (losses) gains | |||||||||
Fixed maturity securities (1)(2) | $ | 214 | $ | (30,609 | ) | $ | (30,395 | ) | |
Equity securities (1)(3) | (11,718 | ) | (34,234 | ) | (45,952 | ) | |||
Short-term investments (1) | (1,396 | ) | 638 | (758 | ) | ||||
Total return swaps | 1,324 | (2,034 | ) | (710 | ) | ||||
Options sold | 2,203 | 17 | 2,220 | ||||||
Total | $ | (9,373 | ) | $ | (66,222 | ) | $ | (75,595 | ) |
(Losses) Gains Recognized in Net Income | |||||||||
Nine Months Ended September 30, 2014 | |||||||||
Sales | Changes in fair value | Total | |||||||
(Amounts in thousands) | |||||||||
Net realized investment (losses) gains | |||||||||
Fixed maturity securities (1)(2) | $ | (2,708 | ) | $ | 73,149 | $ | 70,441 | ||
Equity securities (1)(3) | 37,183 | (6,355 | ) | 30,828 | |||||
Short-term investments (1) | (452 | ) | (211 | ) | (663 | ) | |||
Total return swap | 2,455 | (2,937 | ) | (482 | ) | ||||
Options sold | 2,427 | 262 | 2,689 | ||||||
Total | $ | 38,905 | $ | 63,908 | $ | 102,813 |
(1) | The changes in fair value of the investment portfolio result from the application of the fair value option. |
(2) | The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio. The fair value decreases in 2015 were adversely affected by the increase in market interest rates during the nine months ended September 30, 2015. The increases in 2014 were primarily caused by the overall improvement in the municipal bond market. |
(3) | In the 2015 period, the decreases in the fair value of equity securities were primarily due to a decline in the value of the Company’s holdings in industrial stocks. In the 2014 period, the decreases in fair value were primarily caused by the decline in the energy and utilities sectors. |
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
(Amounts in thousands, except per share data) | |||||||
Net income | $ | 51,074 | $ | 198,905 | |||
Basic average shares outstanding | 55,154 | 54,986 | |||||
Diluted average shares outstanding | 55,172 | 54,995 | |||||
Basic Per Share Data: | |||||||
Net Income | $ | 0.93 | $ | 3.62 | |||
Net realized investment (losses) gains, net of tax | $ | (0.89 | ) | $ | 1.22 | ||
Diluted Per Share Data: | |||||||
Net Income | $ | 0.93 | $ | 3.62 | |||
Net realized investment (losses) gains, net of tax | $ | (0.89 | ) | $ | 1.22 |
Fixed Maturities | |||
(Amounts in thousands) | |||
Due in one year or less | $ | 77,659 | |
Due after one year through two years | 121,267 | ||
Due after two years through three years | 65,949 | ||
Due after three years through four years | 72,221 | ||
Due after four years through five years | 65,538 | ||
Total due within five years | $ | 402,634 |
Cost (1) | Fair Value | ||||||
(Amounts in thousands) | |||||||
Fixed maturity securities: | |||||||
U.S. government bonds and agencies | $ | 25,052 | $ | 25,150 | |||
Municipal securities | 2,406,829 | 2,495,881 | |||||
Mortgage-backed securities | 61,363 | 63,045 | |||||
Corporate securities | 254,722 | 248,246 | |||||
Collateralized loan obligations | 49,615 | 49,665 | |||||
Other asset-backed securities | 4,860 | 4,877 | |||||
2,802,441 | 2,886,864 | ||||||
Equity securities: | |||||||
Common stock: | |||||||
Public utilities | 61,275 | 64,324 | |||||
Banks, trusts and insurance companies | 10,052 | 11,700 | |||||
Industrial and other | 198,043 | 186,172 | |||||
Non-redeemable preferred stock | 25,635 | 24,795 | |||||
Private equity funds | 12,888 | 11,696 | |||||
307,893 | 298,687 | ||||||
Short-term investments | 162,834 | 162,835 | |||||
Total investments | $ | 3,273,168 | $ | 3,348,386 |
(1) | Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. |
September 30, 2015 | |||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
AAA(1) | AA(1)(2) | A(1)(2) | BBB(1)(2) | Non-Rated/Other(1) | Total Fair Value(1) | ||||||||||||||||||
U.S. government bonds and agencies: | |||||||||||||||||||||||
Treasuries | $ | 16,891 | $ | — | $ | — | $ | — | $ | — | $ | 16,891 | |||||||||||
Government agency | 8,259 | — | — | — | — | 8,259 | |||||||||||||||||
Total | 25,150 | — | — | — | — | 25,150 | |||||||||||||||||
100.0 | % | — | % | — | % | — | % | — | % | 100.0 | % | ||||||||||||
Municipal securities: | |||||||||||||||||||||||
Insured | 6,475 | 371,066 | 461,923 | 6,938 | 5,140 | 851,542 | |||||||||||||||||
Uninsured | 233,403 | 613,711 | 606,509 | 187,380 | 3,336 | 1,644,339 | |||||||||||||||||
Total | 239,878 | 984,777 | 1,068,432 | 194,318 | 8,476 | 2,495,881 | |||||||||||||||||
9.6 | % | 39.5 | % | 42.8 | % | 7.8 | % | 0.3 | % | 100.0 | % | ||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||
Commercial | 7,483 | 14,876 | 17,199 | 10,301 | — | 49,859 | |||||||||||||||||
Agencies | 4,461 | — | — | — | — | 4,461 | |||||||||||||||||
Non-agencies: | |||||||||||||||||||||||
Prime | — | 38 | 741 | — | 2,343 | 3,122 | |||||||||||||||||
Alt-A | — | — | 1,207 | — | 4,396 | 5,603 | |||||||||||||||||
Total | 11,944 | 14,914 | 19,147 | 10,301 | 6,739 | 63,045 | |||||||||||||||||
18.9 | % | 23.7 | % | 30.4 | % | 16.3 | % | 10.7 | % | 100.0 | % | ||||||||||||
Corporate securities: | |||||||||||||||||||||||
Communications | — | — | 343 | 681 | — | 1,024 | |||||||||||||||||
Consumer-cyclical | — | — | 3,205 | 1,260 | 4,361 | 8,826 | |||||||||||||||||
Consumer-non-cyclical | — | 338 | — | 7,099 | 3,680 | 11,117 | |||||||||||||||||
Industrial | — | — | — | 6,375 | 2,666 | 9,041 | |||||||||||||||||
Energy | — | — | 444 | 51,176 | 6,731 | 58,351 | |||||||||||||||||
Basic materials | — | — | — | 6,339 | 4,300 | 10,639 | |||||||||||||||||
Financial | — | 8,509 | 75,885 | 38,698 | 4,178 | 127,270 | |||||||||||||||||
Technology | — | — | — | 6,524 | 3,078 | 9,602 | |||||||||||||||||
Utilities | — | — | 2,007 | 10,369 | — | 12,376 | |||||||||||||||||
Total | — | 8,847 | 81,884 | 128,521 | 28,994 | 248,246 | |||||||||||||||||
— | % | 3.5 | % | 33.0 | % | 51.8 | % | 11.7 | % | 100.0 | % | ||||||||||||
Collateralized loan obligations: | |||||||||||||||||||||||
Corporate | — | 2,956 | 46,709 | — | — | 49,665 | |||||||||||||||||
Total | — | 2,956 | 46,709 | — | — | 49,665 | |||||||||||||||||
— | % | 6.0 | % | 94.0 | % | — | % | — | % | 100.0 | % | ||||||||||||
Other asset-backed securities | — | — | 4,877 | — | — | 4,877 | |||||||||||||||||
— | % | — | % | 100.0 | % | — | % | — | % | 100.0 | % | ||||||||||||
Total | $ | 276,972 | $ | 1,011,494 | $ | 1,221,049 | $ | 333,140 | $ | 44,209 | $ | 2,886,864 | |||||||||||
9.6 | % | 35.1 | % | 42.3 | % | 11.5 | % | 1.5 | % | 100.0 | % |
(1) | To calculate the weighted-average credit quality ratings as disclosed throughout this Quarterly Report on Form 10-Q, individual securities were weighted based on fair value and a credit quality numeric score that was assigned to each security’s average of ratings assigned by nationally recognized securities rating organizations. |
(2) | Intermediate ratings are included at each level (e.g., AA includes AA+, AA and AA-). |
September 30, 2015 | December 31, 2014 | ||||||
Corporate securities at fair value, in thousands | $ | 248,246 | $ | 256,930 | |||
Duration | 2.3 years | 2.3 years | |||||
Weighted-average rating | BBB | BBB |
September 30, 2015 | December 31, 2014 | ||||||
Collateralized loan obligations at fair value, in thousands | $ | 49,665 | $ | 22,216 | |||
Percentage of total investment portfolio | 1.5 | % | 0.7 | % | |||
Duration | 5.1 years | 5.4 years | |||||
Weighted-average rating | A | A |
Lender | Interest Rate | Expiration | September 30, 2015 | December 31, 2014 | ||||||||||
(Amounts in thousands) | ||||||||||||||
Secured credit facility | Bank of America | LIBOR plus 40 basis points | December 3, 2017 | $ | 120,000 | $ | 120,000 | |||||||
Secured loan | Union Bank | LIBOR plus 40 basis points | December 3, 2017 | 20,000 | 20,000 | |||||||||
Unsecured credit facility | Bank of America and Union Bank | (1) | December 3, 2019 | 150,000 | (1 | ) | 150,000 | (1 | ) | |||||
Total | $ | 290,000 | $ | 290,000 |
States | Fair Value | Average Rating | |||
(Amounts in thousands) | |||||
Texas | $ | 439,745 | AA | ||
California | 315,124 | A+ | |||
Florida | 234,899 | A+ | |||
Illinois | 159,546 | A+ | |||
Indiana | 112,607 | A+ | |||
Other states | 1,233,960 | A+ | |||
Total | $ | 2,495,881 |
September 30, 2015 | December 31, 2014 | |||||||
(Amounts in thousands, except average Beta) | ||||||||
Average Beta | 0.91 | 0.98 | ||||||
Hypothetical reduction in the overall value of the stock market of 25% | $ | 59,650 | $ | 91,287 | ||||
Hypothetical reduction in the overall value of the stock market of 50% | $ | 119,299 | $ | 182,573 |
15.1 | Report of Independent Registered Public Accounting Firm. |
15.2 | Awareness Letter of Independent Registered Public Accounting Firm. |
31.1 | Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. |
32.2 | Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
MERCURY GENERAL CORPORATION | |||
Date: November 2, 2015 | By: | /s/ Gabriel Tirador | |
Gabriel Tirador | |||
President and Chief Executive Officer | |||
Date: November 2, 2015 | By: | /s/ Theodore R. Stalick | |
Theodore R. Stalick | |||
Senior Vice President and Chief Financial Officer |
/S/ KPMG LLP |
Re: | Registration Statement No. 333-62228, 333-01583, 333-125460, and 333-202204 |
Very truly yours, |
/s/ KPMG LLP |
1. | I have reviewed this Quarterly Report on Form 10-Q of Mercury General Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
Date: November 2, 2015 | /s/ GABRIEL TIRADOR | |
Gabriel Tirador, Chief Executive Officer |
1. | I have reviewed this Quarterly Report on Form 10-Q of Mercury General Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
Date: November 2, 2015 | /s/ THEODORE R. STALICK | |
Theodore R. Stalick, Senior Vice President and Chief Financial Officer |
Date: November 2, 2015 | /s/ GABRIEL TIRADOR | |
Gabriel Tirador, Chief Executive Officer |
Date: November 2, 2015 | /s/ THEODORE R. STALICK | |
Theodore R. Stalick, Senior Vice President and Chief Financial Officer |
Goodwill and Other Intangible Assets - Acquired Intangible Assets (Details) - USD ($) $ in Thousands |
Sep. 30, 2015 |
Dec. 31, 2014 |
---|---|---|
Indefinite-lived Intangible Assets [Line Items] | ||
Gross Carrying Amount | $ 72,855 | $ 71,455 |
Other intangible assets, net | 32,538 | $ 35,623 |
Licensing Agreements [Member] | ||
Indefinite-lived Intangible Assets [Line Items] | ||
Gross Carrying Amount | 1,400 | |
Other intangible assets, net | $ 1,400 |
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Acquisition (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Purchase Price and Purchase Price Allocation | The following table summarizes the consideration paid for WAIC and the allocation of the purchase price:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pro Forma Revenue | The following table reflects the amount of revenue and net income of WAIC included in the Company's consolidated statement of operations for the nine months ended September 30, 2015:
____________ (1) Includes net premiums earned, net investment income, and net realized investment gains/losses. |
Share-Based Compensation (Schedule Of Performance Vesting Restricted Stock Units Granted) (Details) - shares |
9 Months Ended | 12 Months Ended | |
---|---|---|---|
Sep. 30, 2015 |
Dec. 31, 2014 |
Dec. 31, 2013 |
|
Share-based Compensation, Allocation and Classification in Financial Statements [Abstract] | |||
Three-year performance period ending December 31, | 2017 | 2016 | 2015 |
Vesting shares, target | 96,750 | 85,500 | 78,500 |
Vesting shares, maximum | 181,406 | 160,313 | 176,625 |
Goodwill and Other Intangible Assets (Narrative) (Details) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2015 |
Sep. 30, 2014 |
Sep. 30, 2015 |
Sep. 30, 2014 |
|
Goodwill and Intangible Assets Disclosure [Abstract] | ||||
Intangible assets amortization expense | $ 1.5 | $ 1.5 | $ 4.5 | $ 4.5 |
Fair Value of Financial Instruments |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Instruments, Owned, at Fair Value [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value of Financial Instruments | Fair Value of Financial Instruments The financial instruments recorded in the consolidated balance sheets include investments, receivables, options sold, total return swaps, accounts payable, and secured and unsecured notes payable. Due to their short-term maturity, the carrying values of receivables and accounts payable approximate their fair market values. The following table presents the estimated fair values of financial instruments at September 30, 2015 and December 31, 2014:
Methods and assumptions used in estimating fair values are as follows: Investments The Company applies the fair value option to all fixed maturity and equity securities and short-term investments at the time an eligible item is first recognized. The cost of investments sold is determined on a first-in and first-out method and realized gains and losses are included in net realized investment (losses) gains. For additional disclosures regarding methods and assumptions used in estimating fair values of these securities, see Note 5. Options Sold The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Company on the expiration date as realized gains from investments. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining the Company's realized gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. For additional disclosures regarding methods and assumptions used in estimating fair values of these securities, see Note 5. Total return swaps The fair values of the total return swaps reflect the estimated amounts that, upon termination of the contracts, would be received for selling an asset or paid to transfer a liability in an orderly transaction at September 30, 2015 and December 31, 2014 based on models using inputs, such as interest rate yield curves and credit spreads, observable for substantially the full term of the contract. For additional disclosures regarding methods and assumptions used in estimating fair values, see Note 5. Secured notes payable The fair value of the Company’s $120 million secured note and $20 million secured note, classified as Level 2 in the fair value hierarchy described in Note 5, is estimated based on assumptions and inputs, such as the market value of underlying collateral and reset rates, for similarly termed notes that are observable in the market. Unsecured note payable The fair value of the Company’s $150 million unsecured note, classified as Level 2 in the fair value hierarchy described in Note 5, is based on the unadjusted quoted price for similar notes in active markets. |
Income Taxes (Details) $ in Millions |
9 Months Ended |
---|---|
Sep. 30, 2015
USD ($)
| |
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract] | |
Increase in unrecognized tax benefit | $ 0.2 |
Fair Value of Financial Instruments (Narrative) (Details) - USD ($) |
Sep. 30, 2015 |
Dec. 31, 2014 |
---|---|---|
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items] | ||
Liabilities, Fair Value Disclosure, Recurring | $ 296,325,000 | $ 294,219,000 |
Level 2 [Member] | ||
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items] | ||
Liabilities, Fair Value Disclosure, Recurring | 296,059,000 | $ 294,025,000 |
Level 2 [Member] | Secured Notes One [Member] | ||
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items] | ||
Secured notes | 120,000,000 | |
Level 2 [Member] | Secured Notes Two [Member] | ||
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items] | ||
Secured notes | $ 20,000,000 |
Acquisition - Narrative (Details) - Workmen's Auto Insurance Company [Member] - USD ($) $ in Thousands |
Jan. 12, 2015 |
Jan. 02, 2015 |
---|---|---|
Business Acquisition [Line Items] | ||
Cash | $ 8,000 | |
Less: Amount held in escrow | $ 2,000 | |
Maximum duration for escrow security | 3 years | |
Capital contribution to WAIC | $ 15,000 |
Fair Value Measurement (Narrative) (Details) $ in Millions |
9 Months Ended | ||
---|---|---|---|
Sep. 30, 2015
USD ($)
transfers
broker
|
Sep. 30, 2014
transfers
|
Dec. 31, 2014
USD ($)
|
|
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | |||
Percentage of portfolio of unadjusted fair values obtained | 99.70% | ||
Percentage of portfolio of specific unadjusted broker quotes obtained | 0.30% | ||
Transfers between Levels 1, 2, and 3 of the fair value hierarchy | transfers | 0 | 0 | |
Commercial Mortgage Backed Securities [Member] | Level 2 [Member] | |||
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | |||
Trading securities, fair value disclosure | $ | $ 49.9 | $ 32.5 | |
Minimum [Member] | |||
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items] | |||
Number of knowledgeable outside security brokers consulted to determine fair value | 1 |
Recently Issued Accounting Standards |
9 Months Ended |
---|---|
Sep. 30, 2015 | |
New Accounting Pronouncements and Changes in Accounting Principles [Abstract] | |
Recently Issued Accounting Standards | Recently Issued Accounting Standards In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard that requires entities to apply a five-step model to determine the amount and timing of revenue recognition. The model specifies, among other criteria, that revenue should be recognized when an entity transfers control of goods or services to a customer at the amount at which the entity expects to be entitled. In August 2015, the FASB issued an update which defers the effective date of this standard to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that annual reporting period. Early application is now permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that annual reporting period. The Company is evaluating the impact of this standard on its consolidated financial statements and related disclosures. In February 2015, the FASB issued amendments affecting the consolidation evaluation of limited partnerships and similar entities, fees paid to a decision maker or a service provider as a variable interest, and variable interests in a variable interest entity held by related parties of the reporting entities. The amendments are effective for annual and interim reporting periods beginning after December 15, 2015. The adoption of the new standard will not have a material impact on the Company's consolidated financial statements. In May 2015, the FASB issued a new standard that requires insurance entities to provide additional disclosures related to claims liabilities. The additional disclosure requirements for the annual reports include: (1) the claims development information by accident year, on a net of reinsurance basis, for the number of years for which claims incurred remain outstanding but not to exceed the most recent 10 years, and for the most recent reporting period presented, an insurer also needs to disclose the amount of total net outstanding claims for all accident years included in the claims development tables; (2) a reconciliation of claims development information and the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses; and (3) information about the claims frequency and the amount of the incurred-but-not-reported liabilities for each accident year presented. In addition, a description of the methodology used to determine the amounts disclosed is required. The roll forward of the liability for unpaid claims and claims adjustment expenses, currently required only for annual periods, will also be required for interim periods. This standard will be effective for annual periods beginning after December 15, 2015, and interim periods within annual reporting periods beginning after December 15, 2016. Although the adoption of this standard will not have a material impact on its consolidated financial statements, the Company will expand the nature and extent of its insurance contracts disclosures. |
Goodwill and Other Intangible Assets (Schedule Of Estimated Future Amortization Expense Related To Intangible Assets) (Details) $ in Thousands |
Sep. 30, 2015
USD ($)
|
---|---|
Goodwill and Intangible Assets Disclosure [Abstract] | |
Remainder of 2015 | $ 1,495 |
2016 | 5,980 |
2017 | 5,253 |
2018 | 5,239 |
2019 | 4,809 |
Thereafter | 8,362 |
Total | $ 31,138 |
Derivative Financial Instruments (Summary Of Location And Amounts Of Derivative Fair Values In The Consolidated Balance Sheets) (Details) - USD ($) $ in Thousands |
Sep. 30, 2015 |
Dec. 31, 2014 |
---|---|---|
Derivative [Line Items] | ||
Total return swap | $ 6,059 | $ 4,025 |
Non-hedging derivatives [Member] | ||
Derivative [Line Items] | ||
Asset Derivatives | 0 | 0 |
Total return swap | 6,325 | 4,219 |
Non-hedging derivatives [Member] | Interest rate swap agreements [Member] | Other Assets [Member] | ||
Derivative [Line Items] | ||
Asset Derivatives | 0 | 0 |
Non-hedging derivatives [Member] | Interest rate swap agreements [Member] | Other liabilities [Member] | ||
Derivative [Line Items] | ||
Total return swap | 6,059 | 4,025 |
Non-hedging derivatives [Member] | Equity contracts [Member] | Other liabilities [Member] | ||
Derivative [Line Items] | ||
Asset Derivatives | 0 | 0 |
Total return swap | $ 266 | $ 194 |
Derivative Financial Instruments (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General Discussion of Derivative Instruments and Hedging Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary Of Location And Amounts Of Derivative Fair Values In The Consolidated Balance Sheets | The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative (losses) gains in the consolidated statements of operations:
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Schedule Of Derivative Gains And Losses In The Consolidated Statements Of Operations |
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Derivative Financial Instruments (Schedule Of Derivative Gains And Losses In The Consolidated Statements Of Operations) (Details) - Derivatives Not Designated as Hedging Instrument [Member] - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2015 |
Sep. 30, 2014 |
Sep. 30, 2015 |
Sep. 30, 2014 |
|
Derivative [Line Items] | ||||
Gain Recognized in Income (Loss) | $ (3,727) | $ (1,463) | $ 1,509 | $ 2,199 |
Total Return Swap [Member] | Other revenue [Member] | ||||
Derivative [Line Items] | ||||
Gain Recognized in Income (Loss) | (4,422) | (3,090) | (710) | (482) |
Equity contracts [Member] | Net realized investment (losses) gains [Member] | ||||
Derivative [Line Items] | ||||
Gain Recognized in Income (Loss) | $ 695 | $ 1,627 | $ 2,219 | $ 2,681 |
Share-Based Compensation (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2015 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based Compensation, Allocation and Classification in Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Performance Vesting Restricted Stock Units Granted | The Compensation Committee of the Company’s Board of Directors granted performance vesting restricted stock units to the Company’s senior management and key employees under the 2015 Plan for 2015, and under the Company’s 2005 Equity Incentive Award Plan for 2014 and 2013 as follows:
|
General |
9 Months Ended |
---|---|
Sep. 30, 2015 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
General | General Consolidation and Basis of Presentation The condensed consolidated financial statements include the accounts of Mercury General Corporation and its subsidiaries (referred to herein collectively as the “Company”). For the list of the Company’s subsidiaries, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which differ in some respects from those filed in reports to insurance regulatory authorities. All intercompany transactions and balances have been eliminated. The financial data of the Company included herein are unaudited. In the opinion of management, all material adjustments of a normal recurring nature have been made to present fairly the Company’s financial position at September 30, 2015 and the results of operations, comprehensive income, and cash flows for the periods presented. These statements were prepared in accordance with the instructions for interim reporting and do not contain certain information that was included in the annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more complete descriptions and discussions. Operating results and cash flows for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates require the Company to apply complex assumptions and judgments, and often the Company must make estimates about effects of matters that are inherently uncertain and will likely change in subsequent periods. The most significant assumptions in the preparation of these condensed consolidated financial statements relate to reserves for losses and loss adjustment expenses. Actual results could differ from those estimates (See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014). Earnings per Share Potentially dilutive securities representing approximately 5,000 and 18,000 shares of common stock for the three months ended September 30, 2015 and 2014, respectively, and 2,000 and 31,000 shares of common stock for the nine months ended September 30, 2015 and 2014, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive. Deferred Policy Acquisition Costs Deferred policy acquisition costs consist of commissions paid to outside agents, premium taxes, salaries, and certain other underwriting costs that are incremental or directly related to the successful acquisition of new and renewal insurance contracts and are amortized over the life of the related policy in proportion to premiums earned. Deferred policy acquisition costs are limited to the amount that will remain after deducting from unearned premiums and anticipated investment income, the estimated losses and loss adjustment expenses, and the servicing costs that will be incurred as premiums are earned. The Company’s deferred policy acquisition costs are further limited by excluding those costs not directly related to the successful acquisition of insurance contracts. Deferred policy acquisition cost amortization was $132.9 million and $131.1 million for the three months ended September 30, 2015 and 2014, respectively, and $401.9 million and $394.0 million for the nine months ended September 30, 2015 and 2014, respectively. The Company does not defer advertising expenditures but expenses them as incurred. The Company recorded net advertising expense of approximately $39.0 million and $17.1 million for the nine months ended September 30, 2015 and 2014, respectively. |
Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands |
Sep. 30, 2015 |
Dec. 31, 2014 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Amortized cost on fixed maturities trading investments | $ 2,802,441 | $ 2,503,494 |
Cost - equity security trading investments | 307,893 | 387,851 |
Cost - short-term investments | $ 162,834 | $ 373,180 |
Common Stock | ||
Common stock, no par value (in dollars per share) | $ 0 | $ 0 |
Common stock, shares authorized (in shares) | 70,000,000 | 70,000,000 |
Common stock, shares issued (in shares) | 55,164,000 | 55,121,000 |
Common stock, shares outstanding (in shares) | 55,164,000 | 55,121,000 |
Contingencies |
9 Months Ended |
---|---|
Sep. 30, 2015 | |
Commitments and Contingencies Disclosure [Abstract] | |
Contingencies | Contingencies The Company is, from time to time, named as a defendant in various lawsuits or regulatory actions incidental to its insurance business. The majority of lawsuits brought against the Company relate to insurance claims that arise in the normal course of business and are reserved for through the reserving process. For a discussion of the Company’s reserving methods, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The Company also establishes reserves for non-insurance claims related lawsuits, regulatory actions, and other contingencies when the Company believes a loss is probable and is able to estimate its potential exposure. For loss contingencies believed to be reasonably possible, the Company also discloses the nature of the loss contingency and an estimate of the possible loss, range of loss, or a statement that such an estimate cannot be made. While actual losses may differ from the amounts recorded and the ultimate outcome of the Company's pending actions is generally not yet determinable, the Company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse effect on its financial condition, results of operations, or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. |
Document And Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2015 |
Oct. 29, 2015 |
|
Document And Entity Information [Abstract] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2015 | |
Document Fiscal Year Focus | 2015 | |
Document Fiscal Period Focus | Q3 | |
Entity Registrant Name | MERCURY GENERAL CORP | |
Entity Central Index Key | 0000064996 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Large Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 55,164,462 |
General (Policy) |
9 Months Ended |
---|---|
Sep. 30, 2015 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Consolidation and Basis of Presentation | The condensed consolidated financial statements include the accounts of Mercury General Corporation and its subsidiaries (referred to herein collectively as the “Company”). For the list of the Company’s subsidiaries, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which differ in some respects from those filed in reports to insurance regulatory authorities. All intercompany transactions and balances have been eliminated. The financial data of the Company included herein are unaudited. In the opinion of management, all material adjustments of a normal recurring nature have been made to present fairly the Company’s financial position at September 30, 2015 and the results of operations, comprehensive income, and cash flows for the periods presented. These statements were prepared in accordance with the instructions for interim reporting and do not contain certain information that was included in the annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Readers are urged to review the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more complete descriptions and discussions. Operating results and cash flows for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. |
Use of Estimates | The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates require the Company to apply complex assumptions and judgments, and often the Company must make estimates about effects of matters that are inherently uncertain and will likely change in subsequent periods. The most significant assumptions in the preparation of these condensed consolidated financial statements relate to reserves for losses and loss adjustment expenses. Actual results could differ from those estimates (See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014). |
Earnings per Share | Potentially dilutive securities representing approximately 5,000 and 18,000 shares of common stock for the three months ended September 30, 2015 and 2014, respectively, and 2,000 and 31,000 shares of common stock for the nine months ended September 30, 2015 and 2014, respectively, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been anti-dilutive. |
Deferred Policy Acquisition Costs | Deferred policy acquisition costs consist of commissions paid to outside agents, premium taxes, salaries, and certain other underwriting costs that are incremental or directly related to the successful acquisition of new and renewal insurance contracts and are amortized over the life of the related policy in proportion to premiums earned. Deferred policy acquisition costs are limited to the amount that will remain after deducting from unearned premiums and anticipated investment income, the estimated losses and loss adjustment expenses, and the servicing costs that will be incurred as premiums are earned. The Company’s deferred policy acquisition costs are further limited by excluding those costs not directly related to the successful acquisition of insurance contracts. Deferred policy acquisition cost amortization was $132.9 million and $131.1 million for the three months ended September 30, 2015 and 2014, respectively, and $401.9 million and $394.0 million for the nine months ended September 30, 2015 and 2014, respectively. The Company does not defer advertising expenditures but expenses them as incurred. The Company recorded net advertising expense of approximately $39.0 million and $17.1 million for the nine months ended September 30, 2015 and 2014, respectively. |
Recently Issued Accounting Standards | In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard that requires entities to apply a five-step model to determine the amount and timing of revenue recognition. The model specifies, among other criteria, that revenue should be recognized when an entity transfers control of goods or services to a customer at the amount at which the entity expects to be entitled. In August 2015, the FASB issued an update which defers the effective date of this standard to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that annual reporting period. Early application is now permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that annual reporting period. The Company is evaluating the impact of this standard on its consolidated financial statements and related disclosures. In February 2015, the FASB issued amendments affecting the consolidation evaluation of limited partnerships and similar entities, fees paid to a decision maker or a service provider as a variable interest, and variable interests in a variable interest entity held by related parties of the reporting entities. The amendments are effective for annual and interim reporting periods beginning after December 15, 2015. The adoption of the new standard will not have a material impact on the Company's consolidated financial statements. In May 2015, the FASB issued a new standard that requires insurance entities to provide additional disclosures related to claims liabilities. The additional disclosure requirements for the annual reports include: (1) the claims development information by accident year, on a net of reinsurance basis, for the number of years for which claims incurred remain outstanding but not to exceed the most recent 10 years, and for the most recent reporting period presented, an insurer also needs to disclose the amount of total net outstanding claims for all accident years included in the claims development tables; (2) a reconciliation of claims development information and the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses; and (3) information about the claims frequency and the amount of the incurred-but-not-reported liabilities for each accident year presented. In addition, a description of the methodology used to determine the amounts disclosed is required. The roll forward of the liability for unpaid claims and claims adjustment expenses, currently required only for annual periods, will also be required for interim periods. This standard will be effective for annual periods beginning after December 15, 2015, and interim periods within annual reporting periods beginning after December 15, 2016. Although the adoption of this standard will not have a material impact on its consolidated financial statements, the Company will expand the nature and extent of its insurance contracts disclosures. |
Consolidated Statements Of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2015 |
Sep. 30, 2014 |
Sep. 30, 2015 |
Sep. 30, 2014 |
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Revenues: | ||||
Net premiums earned | $ 745,520 | $ 705,237 | $ 2,197,803 | $ 2,086,827 |
Net investment income | 30,898 | 32,564 | 94,101 | 93,656 |
Net realized investment losses | (26,286) | (20,089) | (75,595) | 102,813 |
Other | 2,281 | 2,275 | 6,823 | 6,666 |
Total revenues | 752,413 | 719,987 | 2,223,132 | 2,289,962 |
Expenses: | ||||
Losses and loss adjustment expenses | 545,692 | 492,525 | 1,581,306 | 1,452,171 |
Policy acquisition costs | 132,881 | 131,090 | 401,868 | 393,964 |
Other operating expenses | 60,788 | 58,545 | 191,017 | 166,341 |
Interest | 785 | 707 | 2,304 | 1,900 |
Total expenses | 740,146 | 682,867 | 2,176,495 | 2,014,376 |
Income before income taxes | 12,267 | 37,120 | 46,637 | 275,586 |
Income tax (benefit) expense | (3,003) | 5,824 | (4,437) | 76,681 |
Net income | $ 15,270 | $ 31,296 | $ 51,074 | $ 198,905 |
Net income per share: | ||||
Basic (in dollars per share) | $ 0.28 | $ 0.57 | $ 0.93 | $ 3.62 |
Diluted (in dollars per share) | $ 0.28 | $ 0.57 | $ 0.93 | $ 3.62 |
Weighted average shares outstanding: | ||||
Basic (in shares) | 55,164 | 55,002 | 55,154 | 54,986 |
Diluted (in shares) | 55,178 | 55,014 | 55,172 | 54,995 |
Dividends paid per share (in dollars per share) | $ 0.6175 | $ 0.6150 | $ 1.8525 | $ 1.845 |
Derivative Financial Instruments |
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General Discussion of Derivative Instruments and Hedging Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Financial Instruments | Derivative Financial Instruments The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts on various equity securities are intended to manage the price risk associated with forecasted purchases or sales of such securities. Interest rate swaps are intended to manage the interest rate risk associated with the Company’s debts with fixed or floating rates. The Company also enters into derivative contracts to enhance returns on its investment portfolio. On February 13, 2014, Fannette Funding LLC (“FFL”), a special purpose investment vehicle, entered into a total return swap agreement with Citibank. Under the total return swap agreement, FFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest equal to LIBOR plus 135 basis points on the outstanding notional amount of the underlying obligations, which was approximately $115 million as of September 30, 2015. The total return swap is secured by approximately $20 million of U.S. Treasuries and $10 million of cash as collateral, which are included in short-term investments and cash, respectively, on the consolidated balance sheets. The agreement had an initial term of one year, subject to annual renewal, and was renewed for an additional one-year term expiring February 13, 2016. On August 9, 2013, Animas Funding LLC (“AFL”), a special purpose investment vehicle, entered into a three-year total return swap agreement with Citibank. Under the total return swap agreement, AFL receives the income equivalent on underlying obligations due to Citibank and pays to Citibank interest equal to LIBOR plus 120 basis points on the outstanding notional amount of the underlying obligations, which was approximately $128 million as of September 30, 2015. The total return swap is secured by approximately $40 million of U.S. Treasuries as collateral, which are included in short-term investments on the consolidated balance sheets. Fair value amounts, and (losses) gains on derivative instruments The following tables present the location and amounts of derivative fair values in the consolidated balance sheets and derivative (losses) gains in the consolidated statements of operations:
Most options sold consist of covered calls. The Company writes covered calls on underlying equity positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under statutory regulations. The Company manages the risk associated with covered calls through strict capital limitations and asset diversification throughout various industries. For additional disclosures regarding options sold, see Note 5. |
Fair Value Measurement |
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Financial Instruments, Financial Assets, Balance Sheet Groupings [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurement | Fair Value Measurement The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable data are not readily available, the Company’s own assumptions are used to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the level of judgment associated with inputs used to measure their fair values and the level of market price observability, as follows:
In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset or liability. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer. Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities The Company’s fair value measurements are based on the market approach, which utilizes market transaction data for the same or similar instruments. The Company obtained unadjusted fair values on 99.7% of its portfolio from an independent pricing service. For 0.3% of its portfolio, classified as Level 3, the Company obtained specific unadjusted broker quotes based on net fund value and, to a lesser extent, unobservable inputs from at least one knowledgeable outside security broker to determine the fair value as of September 30, 2015. Level 1 Measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure that reasonable fair values are used in pricing the investment portfolio. U.S. government bonds and agencies/Short-term bonds: Valued using unadjusted quoted market prices for identical assets in active markets. Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued based on unadjusted quoted prices for identical assets in active markets. Money market instruments: Valued based on unadjusted quoted prices for identical assets in active markets. Options sold/Purchased options: Comprised of free-standing exchange listed derivatives that are actively traded and valued based on unadjusted quoted prices for identical instruments in active markets. Level 2 Measurements - Fair values of financial assets and financial liabilities are obtained from an independent pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the investment portfolio. Municipal securities: Valued based on models or matrices using inputs such as quoted prices for identical or similar assets in active markets. Mortgage-backed securities: Comprised of securities that are collateralized by residential and commercial mortgage loans valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. The Company had holdings of $49.9 million and $32.5 million at September 30, 2015 and December 31, 2014, respectively, in commercial mortgage-backed securities. Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar assets in active markets. Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in active markets. Total return swaps: Valued based on multi-dimensional models using inputs such as interest rate yield curves, underlying debt/credit instruments and the appropriate benchmark spread for similar assets in active markets, observable for substantially the full term of the contract. Collateralized loan obligations: Valued based on underlying debt instruments and the appropriate benchmark spread for similar assets in active markets. Other asset-backed securities: Comprised of securities that are collateralized by non-mortgage assets, such as auto loans, valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. Secured notes payable: Valued based on underlying collateral and reset rates for similarly termed notes that are observable in the market. Unsecured notes payable: Valued based on the unadjusted quoted price for similar notes in active markets. Level 3 Measurements - Fair values of financial assets are based on inputs that are both unobservable and significant to the overall fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed trading level. Collateralized debt obligations/Private equity funds: Valued based on underlying debt/credit instruments and the appropriate benchmark spread for similar assets in active markets; taking into consideration unobservable inputs related to liquidity assumptions. The Company’s financial instruments at fair value are reflected in the consolidated balance sheets on a trade-date basis. Related unrealized gains or losses are recognized in net realized investment (losses) gains in the consolidated statements of operations. Fair value measurements are not adjusted for transaction costs. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
The following tables present a summary of changes in fair value of Level 3 financial assets and financial liabilities held at fair value:
There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy during the nine months ended September 30, 2015 and 2014. At September 30, 2015, the Company did not have any nonrecurring fair value measurements of nonfinancial assets or nonfinancial liabilities. |
Goodwill and Other Intangible Assets (Tables) |
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Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Components Of Other Intangible Assets | The following table presents the components of other intangible assets as of September 30, 2015 and December 31, 2014:
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Schedule Of Estimated Future Amortization Expense Related To Intangible Assets | The following table presents the estimated future amortization expense of other intangible assets as of September 30, 2015:
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Fair Value of Financial Instruments (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Financial Instruments, Owned, at Fair Value [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated Fair Values of Financial Instruments | The following table presents the estimated fair values of financial instruments at September 30, 2015 and December 31, 2014:
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Income Taxes |
9 Months Ended |
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Sep. 30, 2015 | |
Components of Income Tax Expense (Benefit), Continuing Operations [Abstract] | |
Income Taxes | Income Taxes For financial statement purposes, the Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if, the positions are “more-likely-than-not” sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. There was a $0.2 million decrease to the total amount of unrecognized tax benefit related to tax uncertainties during the nine months ended September 30, 2015. The decrease was the result of tax positions taken regarding state tax apportionment issues based on management’s best judgment given the facts, circumstances, and information available at the reporting date. The Company does not expect any changes in such unrecognized tax benefits to have a significant impact on its consolidated financial statements within the next 12 months. The Company and its subsidiaries file income tax returns with the Internal Revenue Service and the taxing authorities of various states. Tax years that remain subject to examination by major taxing jurisdictions are 2012 through 2014 for federal taxes, and 2003 through 2014 for California state taxes. The Company is currently under examination by the California Franchise Tax Board (“FTB”) for tax years 2003 through 2013. The FTB issued Notices of Proposed Assessments to the Company for tax years 2003 through 2010, which the Company formally protested. The proposed adjustments for tax years 2003 through 2006 were affirmed following an administrative protest process with the FTB examination. The Company is in settlement discussions with the FTB. If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with the State Board of Equalization or litigation in superior court. Management believes that the resolution of these examinations and assessments will not have a material impact on the consolidated financial statements. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of the Company’s assets and liabilities, and expected benefits of utilizing net operating loss, capital loss, and tax-credit carryforwards. The Company assesses the likelihood that its deferred tax assets will be realized and, to the extent management does not believe these assets are more likely than not to be realized, a valuation allowance is established. At September 30, 2015, the Company’s deferred income taxes were in a net asset position, which included a combination of ordinary and capital deferred tax benefits. In assessing the Company’s ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature, and tax-planning strategies in making this assessment. The Company believes that through the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in order to maximize the full benefits of its deferred tax assets. Although realization is not assured, management believes that it is more likely than not that the Company’s deferred tax assets will be realized. |
Goodwill and Other Intangible Assets |
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Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill and Other Intangible Assets | Goodwill and Other Intangible Assets Goodwill There were no changes in the carrying amount of goodwill for the nine months ended September 30, 2015. Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during any of the periods presented. Other Intangible Assets The following table presents the components of other intangible assets as of September 30, 2015 and December 31, 2014:
Other intangible assets are amortized on a straight-line basis over their useful lives. Other intangible assets amortization expense was $1.5 million for each of the three months ended September 30, 2015 and 2014, and $4.5 million for each of the nine months ended September 30, 2015 and 2014. The following table presents the estimated future amortization expense of other intangible assets as of September 30, 2015:
The Company recognized $1.4 million of intangible assets for a state insurance license related to the acquisition of Workmen's Automobile Insurance Company. See Note 10 for the acquisition's cost allocation. Other intangible assets are reviewed annually for impairment and more frequently if potential impairment indicators exist. No impairment indicators were identified during any of the periods presented. |
Share-Based Compensation |
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Share-based Compensation, Allocation and Classification in Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-Based Compensation | Share-Based Compensation Share-based compensation expense for all share-based payment awards granted or modified is based on the estimated grant-date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is the option vesting term of four or five years for options granted prior to 2008, and four years for options granted subsequent to January 1, 2008, for only those shares expected to vest. The fair value of stock option awards is estimated using the Black-Scholes option pricing model with the grant-date assumptions and weighted-average fair values. The Company adopted the 2015 Incentive Award Plan (the “2015 Plan”) in 2015 as described fully on Form S-8 filed in February 2015 with the Securities and Exchange Commission, and which was approved at the Company's Annual Meeting of Shareholders in May 2015. The Compensation Committee of the Company’s Board of Directors granted performance vesting restricted stock units to the Company’s senior management and key employees under the 2015 Plan for 2015, and under the Company’s 2005 Equity Incentive Award Plan for 2014 and 2013 as follows:
The restricted stock units vest at the end of a three-year performance period beginning with the year of the grant, and then only if, and to the extent that, the Company’s performance during the performance period achieves the threshold established by the Compensation Committee of the Company’s Board of Directors. Vesting of grants will be based on the Company’s cumulative underwriting income, annual underwriting income, and net earned premium growth. As of September 30, 2015, 1,000, 8,000 and 6,000 target restricted stock units granted in 2015, 2014 and 2013, respectively, were forfeited because the recipients are no longer employed by the Company. The fair value of each restricted share grant was determined based on the market price on the grant date. Compensation cost is recognized based on management’s best estimate that performance goals will be achieved. If such goals are not met, no compensation cost will be recognized and any recognized compensation cost will be reversed. |
Acquisition |
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Sep. 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition | Acquisition Pursuant to an October 22, 2014 Stock Purchase Agreement, on January 2, 2015, the Company purchased all the issued and outstanding shares of Workmen's Automobile Insurance Company ("WAIC"), a California domiciled property and casualty insurance company. The Company paid $8 million in cash for the shares of WAIC, of which $2 million has been withheld in escrow for up to three years as security for any loss development on claims incurred on or prior to June 30, 2014. Based on its most recent evaluation of the claims reserves for WAIC for loss incurred on or prior to June 30, 2014, the Company estimates that it will recover the $2 million held in escrow and, therefore, the Company has deducted it from cash consideration to arrive at the fair value of total consideration transferred. In accordance with regulatory approval requirements, the Company made a $15 million cash capital contribution to WAIC on January 12, 2015. The total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based upon estimates of their fair values at the acquisition date. The following table summarizes the consideration paid for WAIC and the allocation of the purchase price:
The fair value of the total assets acquired includes cash, investments, receivables, deferred taxes, other assets, and fixed assets. The fair value of the total liabilities assumed includes loss and loss adjustment expenses, unearned premiums, accounts payable, and other accrued liabilities. The intangible asset has an indefinite life. See Note 7 for further discussion. The following table reflects the amount of revenue and net income of WAIC included in the Company's consolidated statement of operations for the nine months ended September 30, 2015:
____________ (1) Includes net premiums earned, net investment income, and net realized investment gains/losses. |
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