Mercury General Corporation Announces Fourth Quarter and Fiscal 2018 Results and Declares Quarterly Dividend

Consolidated Highlights

Three Months Ended
December 31,

Change

Twelve Months Ended
December 31,

Change

2018

2017

$

%

2018

2017

$

%

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

Net premiums earned

$

868,233

$

806,796

$

61,437

7.6

%

$

3,368,411

$

3,195,437

$

172,974

5.4

%

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

$

850,609

$

779,247

$

71,362

9.2

%

$

3,495,633

$

3,215,910

$

279,723

8.7

%

Net (loss) income

$

(81,879)

$

19,779

$

(101,658)

(514.0)

%

$

(5,728)

$

144,877

$

(150,605)

(104.0)

%

Net (loss) income per diluted share ⁽³⁾

$

(1.48)

$

0.36

$

(1.84)

(511.1)

%

$

(0.10)

$

2.62

$

(2.72)

(103.8)

%

Operating (loss) income ⁽¹⁾

$

(14,599)

$

8,524

$

(23,123)

(271.3)

%

$

99,753

$

90,505

$

9,248

10.2

%

Operating (loss) income per diluted share ⁽¹⁾

$

(0.26)

$

0.15

$

(0.41)

(273.3)

%

$

1.80

$

1.64

$

0.16

9.8

%

Catastrophe losses net of reinsurance ⁽⁴⁾

$

43,000

$

20,000

$

23,000

115.0

%

$

67,000

$

79,000

$

(12,000)

(15.2)

%

Combined ratio ⁽⁵⁾

106.7

%

104.5

%

—

2.2

pts

100.7

%

101.2

%

—

(0.5)

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. MIC's net premiums written from twelve-month policies was approximately $63 million and $16 million for the three months ended December 31, 2018 and 2017, respectively, and approximately $205 million and $70 million for the twelve months ended December 31, 2018 and 2017, respectively.

⁽³⁾

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

⁽⁴⁾

Catastrophe losses before reinsurance benefits totaled approximately $255 million and $109 million for the three months ended December 31, 2018 and 2017, respectively, and approximately $289 million and $168 million for the twelve months ended December 31, 2018 and 2017, respectively. 2018 catastrophe losses were primarily due to wildfires in Northern and Southern California. Weather-related catastrophes across several states made up the remainder of the 2018 catastrophe losses. 2017 catastrophe losses were primarily due to wildfires in Northern and Southern California, severe rainstorms in California, and the impact of hurricanes in Texas, Florida and Georgia.

⁽⁵⁾

The Company experienced unfavorable development of approximately $23 million and $36 million on prior accident years' loss and loss adjustment expense reserves for the three months ended December 31, 2018 and 2017, respectively, and unfavorable development of approximately $93 million and $54 million on prior accident years' loss and loss adjustment expense reserves for the twelve months ended December 31, 2018 and 2017, respectively. The 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 unfavorable development in 2017 was primarily attributable to higher than estimated California automobile and property losses.

Investment Results

Three Months Ended

December 31,

Twelve Months Ended

December 31,

2018

2017

2018

2017

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$

3,808,842

$

3,637,256

$

3,740,497

$

3,582,122

Net investment income ⁽²⁾

     Before income taxes

$

31,383

$

30,872

$

135,838

$

124,930

     After income taxes

$

28,608

$

26,862

$

121,476

$

109,243

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

3.0

%

3.0

%

3.3

%

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 twelve months ended December 31, 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 twelve months ended December 31, 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.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

SUMMARY OF OPERATING RESULTS

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

(unaudited)

Three Months Ended

December 31,

Twelve Months Ended
December 31,

2018

2017

2018

2017

Revenues:

     Net premium earned

$

868,233

$

806,796

$

3,368,411

$

3,195,437

     Net investment income

31,383

30,872

135,838

124,930

     Net realized investment (losses) gains

(85,165)

17,316

(133,520)

83,650

     Other

2,167

2,270

9,275

11,945

          Total revenues

$

816,618

$

857,254

$

3,380,004

$

3,415,962

Expenses:

     Losses and loss adjustment expenses

724,939

654,334

2,576,789

2,444,884

     Policy acquisition costs

147,365

138,622

572,164

555,350

     Other operating expenses

54,505

50,516

244,630

233,475

     Interest

4,257

4,295

17,036

15,168

          Total expenses

$

931,066

$

847,767

$

3,410,619

$

3,248,877

(Loss) income before income taxes

(114,448)

9,487

(30,615)

167,085

     Income tax (benefit) expense

(32,569)

(10,292)

(24,887)

22,208

                    Net (loss) income

$

(81,879)

$

19,779

$

(5,728)

$

144,877

Basic average shares outstanding

55,340

55,332

55,335

55,316

Diluted average shares outstanding

55,340

55,340

55,335

55,327

Basic Per Share Data

Net (loss) income

$

(1.48)

$

0.36

$

(0.10)

$

2.62

Net realized investment (losses) gains, net of tax

$

(1.22)

$

0.21

$

(1.90)

$

0.98

Diluted Per Share Data

Net (loss) income

$

(1.48)

$

0.36

$

(0.10)

$

2.62

Net realized investment (losses) gains, net of tax

$

(1.22)

$

0.21

$

(1.90)

$

0.98

Operating Ratios-GAAP Basis

Loss ratio

83.5

%

81.1

%

76.5

%

76.5

%

Expense ratio

23.3

%

23.4

%

24.2

%

24.7

%

Combined ratio ^(a)

106.7

%

104.5

%

100.7

%

101.2

%

(a)

Combined ratio for the three months ended December 31, 2018 does not sum due to rounding.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

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

December 31, 2018

December 31, 2017

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $2,969,541; $2,823,230)

$

2,985,161

$

2,892,777

     Equity securities (cost $544,082; $474,197)

529,631

537,240

     Short-term investments (cost $254,518; $302,693)

253,299

302,711

          Total investments

3,768,091

3,732,728

Cash

314,291

291,413

Receivables:

     Premiums

555,038

474,060

     Accrued investment income

45,373

39,368

     Other

6,132

6,658

          Total receivables

606,543

520,086

Reinsurance recoverables

221,088

56,349

Deferred policy acquisition costs

215,131

198,151

Fixed assets, net

153,023

145,223

Current income taxes

38,885

61,257

Deferred income taxes

13,339

—

Goodwill

42,796

42,796

Other intangible assets, net

15,534

20,728

Other assets

45,008

32,592

          Total assets

$

5,433,729

$

5,101,323

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$

1,829,412

$

1,510,613

Unearned premiums

1,236,181

1,101,927

Notes payable ^(a)

371,734

371,335

Accounts payable and accrued expenses

115,071

108,252

Deferred income taxes

—

22,932

Other liabilities

263,647

224,877

Shareholders' equity

1,617,684

1,761,387

          Total liabilities and shareholders' equity

$

5,433,729

$

5,101,323

OTHER INFORMATION

Common stock shares outstanding

55,340

55,332

Book value per share

$

29.23

$

31.83

Statutory surplus ^(b)

$1.47 billion

$1.59 billion

Net premiums written to surplus ratio ^(b)

2.38

2.02

Debt to total capital ratio ^(c)

18.8

%

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

1,157

1,121

     Homeowners PIF

600

553

     Commercial Auto PIF

37

40

(a)

The amount at December 31, 2018 represents $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 duration reflecting anticipated early calls.

SUPPLEMENTAL SCHEDULES

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

(unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

2018

2017

2018

2017

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

Net premiums earned

$

868,233

$

806,796

$

3,368,411

$

3,195,437

Change in net unearned premiums

(17,624)

(27,549)

127,222

20,473

Net premiums written

$

850,609

$

779,247

$

3,495,633

$

3,215,910

Incurred losses and loss adjustment expenses

$

724,939

$

654,334

$

2,576,789

$

2,444,884

Change in net loss and loss adjustment expense reserves

(118,528)

(85,245)

(201,942)

(169,523)

Paid losses and loss adjustment expenses

$

606,411

$

569,089

$

2,374,847

$

2,275,361

Net (loss) income

$

(81,879)

$

19,779

$

(5,728)

$

144,877

Less: Net realized investment (losses) gains

(85,165)

$

17,316

(133,520)

83,650

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

(17,885)

6,061

(28,039)

29,278

             Net realized investment (losses) gains, net of tax

(67,280)

11,255

(105,481)

54,372

Operating (loss) income

$

(14,599)

$

8,524

$

99,753

$

90,505

Per diluted share:

Net (loss) income

$

(1.48)

$

0.36

$

(0.10)

$

2.62

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

(1.22)

0.21

(1.90)

0.98

Operating (loss) income

$

(0.26)

$

0.15

$

1.80

$

1.64

Combined ratio

100.7

%

101.2

%

Effect of estimated prior periods' loss development

(2.8)

%

(1.7)

%

Combined ratio-accident period basis

97.9

%

99.5

%

(a)

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

(b)

Federal statutory rate of 21% for the three and twelve months ended December 31, 2018 and 35% for the three and twelve months ended December 31, 2017.