Mercury General Corporation Announces Third Quarter Results and Increases Quarterly Dividend

Consolidated Highlights

Three Months Ended
September 30,

Change

Nine Months Ended
September 30,

Change

2019

2018

$

%

2019

2018

$

%

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

Net premiums earned

$

915,012

$

858,135

$

56,877

6.6

$

2,674,034

$

2,500,178

$

173,856

7.0

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

$

983,056

$

905,339

$

77,717

8.6

$

2,835,583

$

2,645,024

$

190,559

7.2

Net income

$

69,282

$

58,578

$

10,704

18.3

$

288,399

$

76,151

$

212,248

278.7

Net income per diluted share

$

1.25

$

1.06

$

0.19

17.9

$

5.21

$

1.38

$

3.83

277.5

Operating income ⁽¹⁾

$

42,956

$

61,667

$

(18,711)

(30.3)

$

132,195

$

114,351

$

17,844

15.6

Operating income per diluted share ⁽¹⁾

$

0.78

$

1.11

$

(0.33)

(29.7)

$

2.39

$

2.07

$

0.32

15.5

Catastrophe losses net of reinsurance ⁽³⁾

$

3,000

$

13,000

$

(10,000)

(76.9)

$

17,000

$

24,000

$

(7,000)

(29.2)

Combined ratio ⁽⁴⁾

98.6

%

95.6

%

—

3.0 pts

98.1

%

98.7

%

—

(0.6) 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 $96 million and $57 million for the three months ended September 30, 2019 and 2018, respectively, and $266 million and $142 million for the nine months ended September 30, 2019 and 2018, respectively.

⁽³⁾

Catastrophe losses due to the catastrophe events that occurred during the three and nine months ended September 30, 2019 totaled approximately $3 million and $20 million, respectively, with no reinsurance benefits used for these losses. The majority of the 2019 catastrophe losses resulted from winter storms in California, a hurricane in Texas, and tornadoes and wind and hail storms in the Midwest. The 2019 catastrophe losses were partially offset by favorable development of approximately $3 million on prior years' catastrophe losses, primarily resulting from reductions in the Company's retained portion of losses on the Camp and Woolsey Fires under the Company's catastrophe reinsurance treaty, after accounting for the assignment of subrogation rights that occurred in the first quarter of 2019 and the re-estimation of reserves as part of normal reserving procedures. Catastrophe losses before reinsurance benefits totaled approximately $26 million and $34 million for the three and nine months ended September 30, 2018, respectively. The majority of the 2018 catastrophe losses were caused by the Carr Wildfire in Northern California, which resulted in $21 million of gross losses ($10 million of net losses after reinsurance benefits). Weather-related catastrophes across several states made up the remainder of the 2018 catastrophe losses.

⁽⁴⁾

The Company experienced favorable development of approximately $1 million and unfavorable development of approximately $6 million on prior accident years' loss and loss adjustment expense reserves for the three months ended September 30, 2019 and 2018, respectively, and unfavorable development of approximately $10 million and $70 million on prior accident years' loss and loss adjustment expense reserves for the nine months ended September 30, 2019 and 2018, respectively. The year-to-date unfavorable development in 2019 was primarily attributable to higher than estimated defense and cost containment expenses in the California automobile line of insurance business, partially offset by favorable development in certain of the Company's other lines of insurance business. 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.

Investment Results

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$

4,048,498

$

3,809,689

$

3,976,582

$

3,722,365

Net investment income ⁽²⁾

     Before income taxes

$

36,356

$

38,159

$

105,562

$

104,455

     After income taxes

$

32,186

$

33,522

$

93,844

$

92,867

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

3.2

%

3.5

%

3.2

%

3.3

%

⁽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⁾

Lower net investment income before and after income taxes for the three months ended September 30, 2019 compared to the corresponding period in 2018 resulted largely from lower average yield on investments, partially offset by higher net investment income resulting from higher average invested assets. Higher net investment income before and after income taxes for the nine months ended September 30, 2019 compared to the corresponding period in 2018 resulted largely from higher average invested assets, partially offset by lower net investment income resulting from lower average yield on investments. Average annual yield on investments after income taxes for the three and nine months ended September 30, 2019 decreased compared to the corresponding periods in 2018, primarily due to maturity and replacement of higher yielding investments purchased when market interest rates were higher with lower yielding investments, as a result of decreasing 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,

2019

2018

2019

2018

Revenues:

     Net premiums earned

$

915,012

$

858,135

$

2,674,034

$

2,500,178

     Net investment income

36,356

38,159

105,562

104,455

     Net realized investment gains (losses)

33,324

(3,910)

197,726

(48,355)

     Other

2,603

2,427

7,203

7,108

          Total revenues

987,295

894,811

2,984,525

2,563,386

Expenses:

     Losses and loss adjustment expenses

680,928

614,069

1,967,921

1,851,850

     Policy acquisition costs

150,929

142,295

447,971

424,799

     Other operating expenses

70,341

63,904

206,250

190,125

     Interest

4,257

4,257

12,779

12,779

          Total expenses

906,455

824,525

2,634,921

2,479,553

Income before income taxes

80,840

70,286

349,604

83,833

     Income tax expense

11,558

11,708

61,205

7,682

                    Net income

$

69,282

$

58,578

$

288,399

$

76,151

Basic average shares outstanding

55,355

55,337

55,349

55,334

Diluted average shares outstanding

55,366

55,341

55,360

55,337

Basic Per Share Data

Net income

$

1.25

$

1.06

$

5.21

$

1.38

Net realized investment gains (losses), net of tax

$

0.47

$

(0.05)

$

2.82

$

(0.69)

Diluted Per Share Data

Net income

$

1.25

$

1.06

$

5.21

$

1.38

Net realized investment gains (losses), net of tax

$

0.47

$

(0.05)

$

2.82

$

(0.69)

Operating Ratios-GAAP Basis

Loss ratio

74.4

%

71.6

%

73.6

%

74.1

%

Expense ratio

24.2

%

24.0

%

24.5

%

24.6

%

Combined ratio

98.6

%

95.6

%

98.1

%

98.7

%

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

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

September 30, 2019

December 31, 2018

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $3,013,260; $2,969,541)

$

3,139,439

$

2,985,161

     Equity securities (cost $604,609; $544,082)

657,135

529,631

     Short-term investments (cost $421,895; $254,518)

421,574

253,299

          Total investments

4,218,148

3,768,091

Cash

315,370

314,291

Receivables:

     Premiums

629,836

555,038

     Accrued investment income

41,492

45,373

     Other

5,554

6,132

          Total receivables

676,882

606,543

Reinsurance recoverables

103,448

221,088

Deferred policy acquisition costs

237,694

215,131

Fixed assets, net

168,294

153,023

Operating lease right-of-use assets

45,834

—

Current income taxes

13,265

38,885

Deferred income taxes

—

13,339

Goodwill

42,796

42,796

Other intangible assets, net

11,903

15,534

Other assets

39,608

45,008

          Total assets

$

5,873,242

$

5,433,729

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$

1,855,211

$

1,829,412

Unearned premiums

1,383,965

1,236,181

Notes payable

372,034

371,734

Accounts payable and accrued expenses

156,276

115,071

Operating lease liabilities

48,699

—

Deferred income taxes

21,068

—

Other liabilities

233,445

263,647

Shareholders' equity

1,802,544

1,617,684

          Total liabilities and shareholders' equity

$

5,873,242

$

5,433,729

OTHER INFORMATION

Common stock shares outstanding

55,355

55,340

Book value per share

$

32.56

$

29.23

Statutory surplus ^(a)

$1.56 billion

$1.47 billion

Net premiums written to surplus ratio ^(a)

2.36

2.38

Debt to total capital ratio ^(b)

17.2

%

18.8

%

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

3.4 years

4.0 years

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

     Personal Auto PIF

1,152

1,157

     Homeowners PIF

641

600

     Commercial Auto PIF

37

37

(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,

2019

2018

2019

2018

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

Net premiums earned

$

915,012

$

858,135

$

2,674,034

$

2,500,178

Change in net unearned premiums

68,044

47,204

161,549

144,846

Net premiums written

$

983,056

$

905,339

$

2,835,583

$

2,645,024

Incurred losses and loss adjustment expenses

$

680,928

$

614,069

$

1,967,921

$

1,851,850

Change in net loss and loss adjustment expense reserves

(74,558)

(26,932)

(102,811)

(83,414)

Paid losses and loss adjustment expenses

$

606,370

$

587,137

$

1,865,110

$

1,768,436

Net income

$

69,282

$

58,578

$

288,399

$

76,151

Less: Net realized investment gains (losses)

33,324

(3,910)

197,726

(48,355)

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

6,998

(821)

41,522

(10,155)

             Net realized investment gains (losses), net of tax

26,326

(3,089)

156,204

(38,200)

Operating income

$

42,956

$

61,667

$

132,195

$

114,351

Per diluted share:

Net income

$

1.25

$

1.06

$

5.21

$

1.38

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

0.47

(0.05)

2.82

(0.69)

Operating income

$

0.78

$

1.11

$

2.39

$

2.07

Combined ratio

98.1

%

98.7

%

Effect of estimated prior periods' loss development

(0.4)

%

(2.8)

%

Combined ratio-accident period basis

97.7

%

95.9

(a)

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

(b)

Federal statutory rate of 21%.