Mercury General Corporation Announces Second Quarter Results and Declares Quarterly Dividend

Three Months Ended
June 30,

Change

Six Months Ended
June 30,

Change

2018

2017

$

%

2018

2017

$

%

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

Net premiums earned

$

833,959

$

797,666

$

36,293

4.5

$

1,642,043

$

1,587,436

$

54,607

3.4

Net premiums written ^{(1) (2)}

$

878,418

$

797,650

$

80,768

10.1

$

1,739,685

$

1,609,244

$

130,441

8.1

Net income

$

60,180

$

51,633

$

8,547

16.6

$

17,573

$

78,613

$

(61,040)

(77.6)

Net income per diluted share

$

1.09

$

0.93

$

0.16

17.2

$

0.32

$

1.42

$

(1.10)

(77.5)

Operating income ⁽¹⁾

$

48,891

$

37,882

$

11,009

29.1

$

52,685

$

48,963

$

3,722

7.6

Operating income per diluted share ⁽¹⁾

$

0.88

$

0.68

$

0.20

29.4

$

0.95

$

0.89

$

0.06

6.7

Catastrophe losses ⁽³⁾

$

2,000

$

10,000

$

(8,000)

(80.0)

$

11,000

$

40,000

$

(29,000)

(72.5)

Combined ratio ⁽⁴⁾

96.9%

97.8%

—

(0.9) pts

100.3%

100.4%

—

(0.1) pts

⁽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⁾                

The Company, which predominantly offers six-month personal automobile insurance policies, reintroduced twelve-month personal automobile policies for new business in its largest insurance subsidiary, Mercury Insurance Company ("MIC"), in March 2018. Twelve-month policies are generally sold for twice the price of six-month policies. The Company estimates that the total net premiums written for the three and six months ended June 30, 2018 increased by approximately $20 million and $23 million, respectively, due to the reintroduction of twelve-month policies in MIC, compared to what the total would have been without the reintroduction. There was no material impact to net premiums earned resulting from the reintroduction of twelve-month policies.

⁽³⁾                

The 2018 catastrophe losses were primarily due to winter storms and mudslides in California, winter storms in the states along the Atlantic Seaboard, and storms in Texas. The 2017 catastrophe losses were primarily due to severe rainstorms in California, as well as storms and tornadoes in Oklahoma and Texas.

⁽⁴⁾                

The Company experienced unfavorable development of approximately $21 million and $10 million on prior accident years' loss and loss adjustment expense reserves for the three months ended June 30, 2018 and 2017, respectively, and unfavorable development of approximately $64 million and $14 million on prior accident years' loss and loss adjustment expense reserves for the six months ended June 30, 2018 and 2017, respectively. The year-to-date unfavorable development in 2018 was primarily attributable to higher than estimated California automobile losses resulting from severity in excess of expectations for bodily injury claims as well as higher than estimated defense and cost containment expenses in the California automobile line of insurance business, while the year-to-date unfavorable development in 2017 was primarily attributable to higher than estimated California property losses.

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$

3,715,905

$

3,561,717

$

3,676,386

$

3,532,454

Net investment income ⁽²⁾

     Before income taxes

$

34,786

$

31,901

$

66,296

$

63,070

     After income taxes

$

30,949

$

27,991

$

59,345

$

55,310

Average annual yield on investments - after income taxes ⁽²⁾

3.3%

3.1%

3.2%

3.1%

⁽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⁾          

The higher net investment income before and after income taxes for the three and six months ended June 30, 2018 compared to the corresponding periods in 2017 resulted largely from higher average invested assets. Average annual yield on investments after income taxes for the three months ended June 30, 2018 increased compared to the corresponding period in 2017, primarily due to yield increases in short-term and floating-rate securities resulting from rising market interest rates. Average annual yield on investments after income taxes for the three and six months ended June 30, 2018 benefited modestly from the lower tax rate effective January 1, 2018 applied to taxable investment income.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
SUMMARY OF OPERATING RESULTS
(000's except per-share amounts and ratios)
(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

Revenues:

     Net premiums earned

$

833,959

$

797,666

$

1,642,043

$

1,587,436

     Net investment income

34,786

31,901

66,296

63,070

     Net realized investment gains (losses)

14,290

21,156

(44,445)

45,616

     Other

2,356

2,124

4,681

4,229

          Total revenues

885,391

852,847

1,668,575

1,700,351

Expenses:

     Losses and loss adjustment expenses

605,547

588,595

1,237,781

1,195,260

     Policy acquisition costs

141,520

137,839

282,504

280,438

     Other operating expenses

60,822

53,432

126,221

118,620

     Interest

4,256

4,229

8,522

6,682

          Total expenses

812,145

784,095

1,655,028

1,601,000

Income before income taxes

73,246

68,752

13,547

99,351

     Income tax expense (benefit)

13,066

17,119

(4,026)

20,738

                    Net income

$

60,180

$

51,633

$

17,573

$

78,613

Basic average shares outstanding

55,332

55,311

55,332

55,304

Diluted average shares outstanding

55,335

55,323

55,335

55,318

Basic Per Share Data

Net income

$

1.09

$

0.93

$

0.32

$

1.42

Net realized investment gains (losses), net of tax

$

0.21

$

0.25

$

(0.63)

$

0.53

Diluted Per Share Data

Net income

$

1.09

$

0.93

$

0.32

$

1.42

Net realized investment gains (losses), net of tax

$

0.21

$

0.25

$

(0.63)

$

0.53

Operating Ratios-GAAP Basis

Loss ratio

72.6%

73.8%

75.4%

75.3%

Expense ratio

24.3%

24.0%

24.9%

25.1%

Combined ratio

96.9%

97.8%

100.3%

100.4%

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

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

June 30, 2018

December 31, 2017

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $2,925,678; $2,823,230)

$

2,949,236

$

2,892,777

     Equity securities (cost $554,647; $474,197)

614,336

537,240

     Short-term investments (cost $270,914; $302,693)

270,584

302,711

          Total investments

3,834,156

3,732,728

Cash

243,751

291,413

Receivables:

     Premiums

527,280

474,060

     Accrued investment income

45,657

39,368

     Other

6,152

6,658

          Total receivables

579,089

520,086

Reinsurance recoverables

47,837

56,349

Deferred policy acquisition costs

209,275

198,151

Fixed assets, net

148,214

145,223

Current income taxes

51,855

61,257

Goodwill

42,796

42,796

Other intangible assets, net

18,256

20,728

Other assets

29,242

32,592

          Total assets

$

5,204,471

$

5,101,323

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$

1,549,850

$

1,510,613

Unearned premiums

1,190,766

1,101,927

Notes payable ^(a)

371,535

371,335

Accounts payable and accrued expenses

133,293

108,252

Deferred income taxes

8,807

22,932

Other liabilities

240,362

224,877

Shareholders' equity

1,709,858

1,761,387

          Total liabilities and shareholders' equity

$

5,204,471

$

5,101,323

OTHER INFORMATION

Common stock shares outstanding

55,332

55,332

Book value per share

$

30.90

$

31.83

Statutory surplus ^(b)

$1.57 billion

$1.59 billion

Net premiums written to surplus ratio ^(b)

2.13

2.02

Debt to total capital ratio ^(c)

18.0%

17.6%

Portfolio duration (including all short-term instruments)^(b)(d)

4.0 years

4.0 years

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

     Personal Auto PIF

1,145

1,121

     Homeowners PIF

574

553

     Commercial Auto PIF

39

40

(a)       

$375 million aggregate face value of 4.40% senior notes due 2027 issued in March 2017 through a public offering, net of unamortized discount and debt issuance costs.

(b)      

Unaudited.

(c)       

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

(d)      

Modified durations reflecting anticipated early calls.

SUPPLEMENTAL SCHEDULES

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

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

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

Net premiums earned

$

833,959

$

797,666

$

1,642,043

$

1,587,436

Change in net unearned premiums

44,459

(16)

97,642

21,808

Net premiums written

$

878,418

$

797,650

$

1,739,685

$

1,609,244

Incurred losses and loss adjustment expenses

$

605,547

$

588,595

$

1,237,781

$

1,195,260

Change in net loss and loss adjustment expense reserves

(24,915)

(10,707)

(56,482)

(38,150)

Paid losses and loss adjustment expenses

$

580,632

$

577,888

$

1,181,299

$

1,157,110

Net income

$

60,180

$

51,633

$

17,573

$

78,613

Less: Net realized investment gains (losses)

14,290

21,156

(44,445)

45,616

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

3,001

7,405

(9,333)

15,966

             Net realized investment gains (losses), net of tax

11,289

13,751

(35,112)

29,650

Operating income

$

48,891

$

37,882

$

52,685

$

48,963

Per diluted share:

Net income

$

1.09

$

0.93

$

0.32

$

1.42

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

0.21

0.25

(0.63)

0.53

Operating income

$

0.88

$

0.68

$

0.95

$

0.89

Combined ratio

100.3%

100.4%

Effect of estimated prior periods' loss development

(3.9)%

(0.9)%

Combined ratio-accident period basis

96.4%

99.5%

(a)          

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

(b)      

Federal statutory rate of 21% for the three and six months ended June 30, 2018 and 35% for the three and six months ended June 30, 2017.