Mercury General Corporation Announces Third Quarter Results and Declares Quarterly Dividend

Consolidated Highlights

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2022

2021

$

%

2022

2021

$

%

(000's except per-share amounts and ratios)

Net premiums earned 

$     996,939

$     940,941

$   55,998

6.0

$  2,947,000

$  2,783,682

$    163,318

5.9

Net premiums written ⁽¹⁾

$  1,034,476

$  1,014,967

$   19,509

1.9

$  3,062,267

$  2,922,691

$    139,576

4.8

Net realized investment (losses) gains, net of tax ⁽²⁾

$    (113,928)

$      (34,399)

$  (79,529)

NM

$    (459,177)

$       44,993

$   (504,170)

(1,120.6)

Net (loss) income

$      (98,303)

$         1,288

$  (99,591)

(7,732.2)

$    (505,902)

$     217,464

$   (723,366)

(332.6)

Net (loss) income per diluted share ⁽³⁾

$          (1.78)

$           0.02

$      (1.80)

(9,000.0)

$          (9.14)

$           3.93

$       (13.07)

(332.6)

Operating income (loss) ⁽¹⁾

$       15,625

$       35,687

$  (20,062)

(56.2)

$      (46,725)

$     172,471

$   (219,196)

(127.1)

Operating income (loss) per diluted share ⁽¹⁾

$           0.28

$           0.64

$      (0.36)

(56.3)

$          (0.84)

$           3.11

$         (3.95)

(127.0)

Catastrophe losses net of reinsurance ⁽⁴⁾

$       19,000

$       25,000

$    (6,000)

(24.0)

$       62,000

$       85,000

$     (23,000)

(27.1)

Combined ratio ⁽⁵⁾

102.8 %

99.0 %

—

     3.8  pts

106.3 %

95.8 %

—

10.5  pts

NM = Not Meaningful

(1)

These measures are not based on U.S. generally accepted accounting principles ("GAAP"), are defined in "Information Regarding GAAP and Non-GAAP Measures" and are reconciled to the most directly comparable GAAP measures in "Supplemental Schedules."

(2)

Net realized investment (losses) gains before tax were $(144) million and $(44) million for the three months ended September 30, 2022 and 2021, respectively, and $(581) million and $57 million for the nine months ended September 30, 2022 and 2021, respectively. The changes in fair value of the Company's investments are recorded as part of net realized investment gains or losses in its consolidated statements of operations due to the adoption of the fair value option for its investments as permitted under GAAP.

(3)

The dilutive impact of any incremental shares is excluded from net loss position in accordance with GAAP.

(4)

Catastrophe losses due to the events that occurred during the nine months ended September 30, 2022 totaled approximately $58 million, with no reinsurance benefits used for these losses, resulting primarily from winter storms, rainstorms and hail in Texas and Oklahoma, the impact of Hurricane Ian in Florida which caused $11 million in losses, and winter storms in California. Catastrophe losses due to the events that occurred during the nine months ended September 30, 2021 totaled approximately $91 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze and other extreme weather events in Texas and Oklahoma, wildfires and winter storms in California, and the impact of Hurricane Ida in New Jersey and New York. In addition, the Company experienced unfavorable development of approximately $4 million and favorable development of approximately $6 million on prior years' catastrophe losses for the nine months ended September 30, 2022 and 2021, respectively.  

(5)

Inflationary trends have accelerated to their highest level in decades in 2022, which has had a significant impact on the cost of auto parts and labor as well as medical expenses for bodily injuries, and supply chain and labor shortage issues have lengthened the time to repair vehicles. Bodily injury costs are also under pressure from social inflation. These factors have increased losses and loss adjustment expenses for the insured events of the current accident year for the three and nine months ended September 30, 2022 compared to the corresponding periods in 2021, and have led to adverse development on prior accident years' loss and loss adjustment expense reserves for the nine months ended September 30, 2022 as those factors affected the loss estimates recorded at December 31, 2021. The Company experienced favorable development of approximately $1 million and $8 million on prior accident years' loss and loss adjustment expense reserves for the three months ended September 30, 2022 and 2021, respectively, and unfavorable development of approximately $50 million and favorable development of approximately $24 million on prior accident years' loss and loss adjustment expense reserves for the nine months ended September 30, 2022 and 2021, respectively. The Company has filed for rate increases in many states and is taking various non-rate actions to improve profitability.

Investment Results

Three Months Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$      4,912,521

$      4,751,171

$      4,889,050

$      4,643,916

Net investment income ⁽²⁾

     Before income taxes

$           44,563

$           32,334

$         118,469

$           95,566

     After income taxes

$           38,653

$           28,708

$         103,091

$           85,168

Average annual yield on investments - after income taxes 

3.2 %

2.4 %

2.8 %

2.5 %

(1)

Fixed maturities and short-term bonds at amortized cost; 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 period.

(2)

Higher net investment income before and after income taxes for the three and nine months ended September 30, 2022 compared to the corresponding periods in 2021 resulted largely from higher average yield combined with higher average invested assets. Average annual yield on investments after income taxes for the three and nine months ended September 30, 2022 increased compared to the corresponding periods in 2021, primarily due to the maturity and replacement of lower yielding investments purchased when market interest rates were lower with higher yielding investments, as a result of increasing market interest rates.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

SUMMARY OF OPERATING RESULTS

(000's except per-share amounts and ratios)

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

Revenues:

     Net premiums earned

$         996,939

$         940,941

$      2,947,000

$      2,783,682

     Net investment income

44,563

32,334

118,469

95,566

     Net realized investment (losses) gains

(144,213)

(43,543)

(581,237)

56,953

     Other

2,998

2,481

7,141

7,883

          Total revenues

900,287

932,213

2,491,373

2,944,084

Expenses:

     Losses and loss adjustment expenses

787,462

697,947

2,436,175

1,981,519

     Policy acquisition costs

168,870

153,142

487,444

468,556

     Other operating expenses

68,585

80,238

208,305

216,723

     Interest

4,273

4,267

12,822

12,845

          Total expenses

1,029,190

935,594

3,144,746

2,679,643

(Loss) income before income taxes

(128,903)

(3,381)

(653,373)

264,441

     Income tax (benefit) expense

(30,600)

(4,669)

(147,471)

46,977

                    Net (loss) income

$         (98,303)

$             1,288

$       (505,902)

$         217,464

Basic average shares outstanding

55,371

55,371

55,371

55,367

Diluted average shares outstanding

55,371

55,375

55,371

55,375

Basic Per Share Data

Net (loss) income

$             (1.78)

$               0.02

$             (9.14)

$               3.93

Net realized investment (losses) gains, net of tax

$             (2.06)

$              (0.62)

$             (8.29)

$               0.82

Diluted Per Share Data

Net (loss) income

$             (1.78)

$               0.02

$             (9.14)

$               3.93

Net realized investment (losses) gains, net of tax

$             (2.06)

$              (0.62)

$             (8.29)

$               0.82

Operating Ratios-GAAP Basis

Loss ratio

79.0 %

74.2 %

82.7 %

71.2 %

Expense ratio

23.8 %

24.8 %

23.6 %

24.6 %

Combined ratio

102.8 %

99.0 %

106.3 %

95.8 %

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

(000's except per-share amounts and ratios)

September 30, 2022

December 31, 2021

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $4,105,574; $3,909,780)

$             3,897,859

$             4,031,523

     Equity securities (cost $688,401; $754,536)

684,335

970,939

     Short-term investments (cost $101,548; $141,206)

100,621

140,127

          Total investments

4,682,815

5,142,589

Cash

335,886

335,557

Receivables:

     Premiums

646,942

621,740

          Allowance for credit losses on premiums receivable

(6,000)

(6,000)

                  Premiums receivable, net of allowance for credit losses

640,942

615,740

     Accrued investment income

48,894

43,299

     Other

7,871

7,600

          Total receivables

697,707

666,639

Reinsurance recoverables

25,309

45,000

Deferred policy acquisition costs

279,726

258,259

Fixed assets, net

189,753

191,332

Operating lease right-of-use assets

23,610

31,967

Current income taxes

48,429

20,108

Deferred income taxes

65,705

—

Goodwill

42,796

42,796

Other intangible assets, net

9,455

10,255

Other assets

53,470

27,970

          Total assets

$             6,454,661

$             6,772,472

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$             2,432,734

$             2,226,430

Unearned premiums

1,635,459

1,519,799

Notes payable

373,230

372,931

Accounts payable and accrued expenses

155,441

169,125

Operating lease liabilities

26,366

34,577

Deferred income taxes

—

53,569

Other liabilities

284,950

255,760

Shareholders' equity

1,546,481

2,140,281

          Total liabilities and shareholders' equity

$             6,454,661

$             6,772,472

OTHER INFORMATION

Common stock shares outstanding

55,371

55,371

Book value per share

$                    27.93

$                    38.65

Statutory surplus ^(a)

$1.59 billion

$1.83 billion

Net premiums written to surplus ratio ^(a)

2.51

2.11

Debt to total capital ratio ^(b)

19.5 %

14.9 %

Portfolio duration (including all short-term instruments) ^{(a) (c)}

3.8 years

3.4 years

Policies-in-force (company-wide "PIF") ^(a)

     Personal Auto PIF

1,124

1,122

     Homeowners PIF

733

705

     Commercial Auto PIF

39

39

(a)

Unaudited.

(b)

Debt to Debt plus Shareholders' Equity (Debt at face value).

(c)

Modified duration reflecting anticipated early calls.

SUPPLEMENTAL SCHEDULES

(000's except per-share amounts and ratios)

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

Reconciliations of Comparable GAAP Measures to Operating Measures^(a)

Net premiums earned

$          996,939

$          940,941

$    2,947,000

$    2,783,682

Change in net unearned premiums

37,537

74,026

115,267

139,009

Net premiums written

$       1,034,476

$       1,014,967

$    3,062,267

$    2,922,691

Incurred losses and loss adjustment expenses

$          787,462

$          697,947

$    2,436,175

$    1,981,519

Change in net loss and loss adjustment expense reserves

(48,086)

(51,874)

(223,269)

(153,849)

Paid losses and loss adjustment expenses

$          739,376

$          646,073

$    2,212,906

$    1,827,670

Net (loss) income

$          (98,303)

$              1,288

$     (505,902)

$       217,464

Less: Net realized investment (losses) gains

(144,213)

(43,543)

(581,237)

56,953

         Tax on net realized investment (losses) gains ^(b)

(30,285)

(9,144)

(122,060)

11,960

             Net realized investment (losses) gains, net of tax

(113,928)

(34,399)

(459,177)

44,993

Operating income (loss)

$            15,625

$            35,687

$       (46,725)

$       172,471

Per diluted share:

Net (loss) income

$              (1.78)

$                0.02

$           (9.14)

$             3.93

Less: Net realized investment (losses) gains, net of tax

(2.06)

(0.62)

(8.29)

0.82

Operating income (loss) ^(c)

$                0.28

$                0.64

$           (0.84)

$             3.11

Combined ratio

106.3 %

95.8 %

Effect of estimated prior periods' loss development

(1.7) %

0.9 %

Combined ratio-accident period basis

104.6 %

96.7 %

(a)

See "Information Regarding GAAP and Non-GAAP Measures" on page 7. 

(b)

Based on federal statutory rate of 21%.

(c)

Operating loss per diluted share for the nine months ended September 30, 2022 does not sum due to rounding.