Mercury General Corporation Announces Second Quarter Results and Declares Quarterly Dividend

Consolidated Highlights

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

2019

$

%

2020

2019

$

%

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

Net premiums earned ⁽²⁾

$

811,898

$

888,776

$

(76,878)

(8.6)

$

1,734,471

$

1,759,021

$

(24,550)

(1.4)

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

$

818,912

$

936,079

$

(117,167)

(12.5)

$

1,773,127

$

1,852,527

$

(79,400)

(4.3)

Net realized investment gains (losses), net of
tax ⁽³⁾

$

125,157

$

42,130

$

83,027

197.1

$

(73,386)

$

129,878

$

(203,264)

(156.5)

Net income

$

228,211

$

83,250

$

144,961

174.1

$

89,007

$

219,117

$

(130,110)

(59.4)

Net income per diluted share

$

4.12

$

1.50

$

2.62

174.7

$

1.61

$

3.96

$

(2.35)

(59.3)

Operating income ⁽¹⁾

$

103,054

$

41,120

$

61,934

150.6

$

162,393

$

89,239

$

73,154

82.0

Operating income per diluted share ⁽¹⁾

$

1.86

$

0.74

$

1.12

151.4

$

2.93

$

1.61

$

1.32

82.0

Catastrophe losses net of reinsurance ⁽⁴⁾

$

12,000

$

9,000

$

3,000

33.3

$

14,000

$

14,000

$

—

—

Combined ratio ⁽⁵⁾

88.2

%

98.3

%

—

(10.1) pts

92.3

%

97.8

%

—

(5.5) 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's net premiums earned and net premiums written for the three and six months ended June 30, 2020 were each
reduced by approximately $106 million due to premium refunds and credits to its eligible policyholders for reduced driving
and business activities following the outbreak of the COVID-19 pandemic. See "Update on COVID-19" below for additional
information.

⁽³⁾

Net realized investment gains (losses) before tax were $158 million and $53 million for the three months ended June 30, 2020
and 2019, respectively, and $(93) million and $164 million for the six months ended June 30, 2020 and 2019, respectively.
Net realized investment gains (losses) before and net of tax were primarily the result of the changes in fair value of the
Company's investments, which are recorded in 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. The fair value of the
Company's investments substantially declined in the first quarter of 2020, primarily due to the overall market disruptions and
dislocations following the outbreak of the COVID-19 pandemic, and has significantly recovered in the second quarter of 2020.

⁽⁴⁾

Catastrophe losses due to the events that occurred during the six months ended June 30, 2020 totaled approximately $18
million, with no reinsurance benefits used for these losses, resulting primarily from extreme weather events outside of
California and windstorms in California. These losses were partially offset by favorable development of approximately $4
million on prior years' catastrophe losses. Catastrophe losses due to the events that occurred during the six months ended
June 30, 2019 totaled approximately $17 million, with no reinsurance benefits used for these losses, resulting primarily from
winter storms in California and tornadoes and wind and hail storms in the Midwest. These losses were partially offset by
favorable development of approximately $3 million on prior years' catastrophe losses.  

⁽⁵⁾

The Company experienced unfavorable development of approximately $12 million and $9 million on prior accident years' loss
and loss adjustment expense reserves for the three months ended June 30, 2020 and 2019, respectively, and unfavorable
development of approximately $27 million and $11 million on prior accident years' loss and loss adjustment expense reserves
for the six months ended June 30, 2020 and 2019, respectively. The year-to-date unfavorable development in 2020 was
primarily attributable to higher than estimated losses and loss adjustment expenses in the commercial automobile, homeowners
and Florida private passenger automobile lines of insurance business. 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 lower than estimated California homeowners losses largely due to reductions in the
Company's retained losses on the Camp and Woolsey Fires under the 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.

Investment Results

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$

4,220,468

$

3,995,712

$

4,218,721

$

3,940,185

Net investment income ⁽²⁾

     Before income taxes

$

34,166

$

35,032

$

68,661

$

69,206

     After income taxes

$

30,435

$

31,404

$

60,968

$

61,658

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

2.9

%

3.1

%

2.9

%

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⁾

Lower net investment income before and after income taxes for the three and six months ended June 30, 2020 compared to the
corresponding periods in 2019 resulted largely from a lower average yield on investments, partially offset by higher average
invested assets. Average annual yield on investments after income taxes for the three and six months ended June 30, 2020
decreased compared to the corresponding periods in 2019, primarily due to the 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 June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Revenues:

     Net premiums earned

$

811,898

$

888,776

$

1,734,471

$

1,759,021

     Net investment income

34,166

35,032

68,661

69,206

     Net realized investment gains (losses)

158,426

53,329

(92,894)

164,403

     Other

1,353

2,350

3,915

4,600

          Total revenues

1,005,843

979,487

1,714,153

1,997,230

Expenses:

     Losses and loss adjustment expenses

495,300

656,577

1,146,970

1,286,993

     Policy acquisition costs

149,706

148,629

306,240

297,042

     Other operating expenses

71,103

68,420

147,660

135,909

     Interest

4,268

4,266

8,523

8,522

          Total expenses

720,377

877,892

1,609,393

1,728,466

Income before income taxes

285,466

101,595

104,760

268,764

     Income tax expense 

57,255

18,345

15,753

49,647

                    Net income

$

228,211

$

83,250

$

89,007

$

219,117

Basic average shares outstanding

55,358

55,353

55,358

55,347

Diluted average shares outstanding

55,358

55,363

55,358

55,356

Basic Per Share Data

Net income

$

4.12

$

1.50

$

1.61

$

3.96

Net realized investment gains (losses), net of tax

$

2.26

$

0.76

$

(1.32)

$

2.35

Diluted Per Share Data

Net income

$

4.12

$

1.50

$

1.61

$

3.96

Net realized investment gains (losses), net of tax

$

2.26

$

0.76

$

(1.32)

$

2.35

Operating Ratios-GAAP Basis

Loss ratio

61.0

%

73.9

%

66.1

%

73.2

%

Expense ratio

27.2

%

24.4

%

26.2

%

24.6

%

Combined ratio 

88.2

%

98.3

%

92.3

%

97.8

%

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
CONDENSED BALANCE SHEETS AND OTHER INFORMATION
(000's except per-share amounts and ratios)

June 30, 2020

December 31, 2019

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $3,207,125; $2,973,276)

$

3,327,362

$

3,093,275

     Equity securities (cost $737,127; $648,282)

739,163

724,751

     Short-term investments (cost $335,556; $494,060)

335,634

494,135

          Total investments

4,402,159

4,312,161

Cash

262,153

294,398

Receivables:

     Premiums

612,745

606,316

          Allowance for credit losses on premiums receivable

(10,000)

(1,445)

                  Premiums receivable, net of allowance for credit losses

602,745

604,871

     Accrued investment income

42,247

40,107

     Other

8,421

6,464

          Total receivables

653,413

651,442

Reinsurance recoverables

50,137

78,774

      Allowance for credit losses on reinsurance recoverables

(88)

—

             Reinsurance recoverables, net of allowance for credit losses

50,049

78,774

Deferred policy acquisition costs

242,740

233,166

Fixed assets, net

172,015

168,986

Operating lease right-of-use assets

43,207

44,909

Current income taxes

—

7,642

Goodwill

42,796

42,796

Other intangible assets, net

10,164

10,636

Other assets

38,041

44,247

          Total assets

$

5,916,737

$

5,889,157

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$

1,865,110

$

1,921,255

Unearned premiums

1,390,039

1,355,547

Notes payable

372,333

372,133

Accounts payable and accrued expenses

190,204

143,318

Operating lease liabilities

46,636

47,996

Current income taxes

6,853

—

Deferred income taxes

9,131

27,964

Other liabilities

219,616

221,442

Shareholders' equity

1,816,815

1,799,502

          Total liabilities and shareholders' equity

$

5,916,737

$

5,889,157

OTHER INFORMATION

Common stock shares outstanding

55,358

55,358

Book value per share

$

32.82

$

32.51

Statutory surplus ^(a)

$1.59 billion

$1.54 billion

Net premiums written to surplus ratio ^(a)

2.29

2.42

Debt to total capital ratio ^(b)

17.1

%

17.2

%

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

2.6 years

3.2 years

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

     Personal Auto PIF

1,117

1,139

     Homeowners PIF

659

646

     Commercial Auto PIF

37

36

(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 June 30,

Six Months Ended June 30,

2020

2019

2020

2019

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

Net premiums earned

$

811,898

$

888,776

$

1,734,471

$

1,759,021

Change in net unearned premiums

7,014

47,303

38,656

93,506

Net premiums written

$

818,912

$

936,079

$

1,773,127

$

1,852,527

Incurred losses and loss adjustment expenses

$

495,300

$

656,577

$

1,146,970

$

1,286,993

Change in net loss and loss adjustment expense reserves

13,271

(16,829)

29,696

(28,254)

Paid losses and loss adjustment expenses

$

508,571

$

639,748

$

1,176,666

$

1,258,739

Net income

$

228,211

$

83,250

$

89,007

$

219,117

Less: Net realized investment gains (losses)

158,426

53,329

(92,894)

164,403

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

33,269

11,199

(19,508)

34,525

             Net realized investment gains (losses), net of tax

125,157

42,130

(73,386)

129,878

Operating income

$

103,054

$

41,120

$

162,393

$

89,239

Per diluted share:

Net income

$

4.12

$

1.50

$

1.61

$

3.96

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

2.26

0.76

(1.32)

2.35

Operating income

$

1.86

$

0.74

$

2.93

$

1.61

Combined ratio

92.3

%

97.8

%

Effect of estimated prior periods' loss development

(1.6)

%

(0.6)

%

Combined ratio-accident period basis

90.7

%

97.2

%

(a)         

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

(b)   

Federal statutory rate of 21%.