Mercury General Corporation Announces Second Quarter Results and Declares Quarterly Dividend

Jul 28, 2014

LOS ANGELES, July 28, 2014 /PRNewswire/ -- Mercury General Corporation (NYSE: MCY) reported today for the second quarter of 2014:

Consolidated Highlights

	Three Months Ended June 30,				Change			Six Months Ended June 30,				Change
	2014		2013		$		%	2014		2013		$		%
(000's except per-share amounts and ratios)
Net premiums written (1)	$	698,759	$	665,479	$	33,280	5.0	$	1,423,452	$	1,355,983	$	67,469	5.0
Net income (loss)	$	94,960	$	(9,264)	$	104,224	NM	$	167,609	$	57,197	$	110,412	193.0
Net income (loss) per diluted share (2)	$	1.73	$	(0.17)	$	1.90	NM	$	3.05	$	1.04	$	2.01	193.3
Operating income (1)	$	45,437	$	34,556	$	10,881	31.5	$	87,723	$	72,384	$	15,339	21.2
Operating income per diluted share (1)	$	0.83	$	0.63	$	0.20	31.7	$	1.60	$	1.32	$	0.28	21.2
Restructuring charges (3)	$	0	$	0	$	0	NM	$	0	$	10,000	$	(10,000)	NM
Catastrophe losses (4)	$	2,000	$	13,000	$	(11,000)	NM	$	6,000	$	14,000	$	(8,000)	NM
Combined ratio (5)	96.0%		98.7%			—	(2.7) pts		96.3%		98.3%		—	(2.0) pts
NM = not meaningful


(1)	These measures are not based on U.S. generally accepted accounting principles ("GAAP") and are defined and reconciled to the most directly comparable GAAP measures in "Information Regarding Non-GAAP Measures."
(2)	The dilutive impact of incremental shares is excluded from loss positions in accordance with GAAP.
(3)	In the first quarter of 2013, the Company consolidated its claims and underwriting operations located outside of California into hub locations in Florida, New Jersey, and Texas, which resulted in a net workforce reduction of approximately 135 employees and a $10 million expense. The amounts are rounded to the nearest million.
(4)	2014 catastrophe losses were primarily related to winter freeze events on the East Coast. 2013 catastrophe losses were primarily the result of tornadoes in Oklahoma and severe storms in the Midwest and the Southeast region. The amounts are rounded to the nearest million.
(5)	The Company experienced favorable development of approximately $4 million and no development on prior accident years' losses and loss adjustment expenses reserves for the three months ended June 30, 2014 and 2013, respectively, and favorable development of approximately $8 million and $3 million on prior accident years' losses and loss adjustment expenses reserves for the six months ended June 30, 2014 and 2013, respectively. The year-to-date favorable development in 2014 is primarily from California lines of business.

Investment Results

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
(000's except average annual yield)
Average invested assets at cost (1)	$	3,132,330	$	3,046,790	$	3,097,087	$	3,050,372
Net investment income (2)
Before income taxes	$	30,850	$	31,674	$	61,092	$	62,849
After income taxes	$	27,561	$	27,787	$	54,521	$	55,058
Average annual yield on investments - after income taxes (2)	3.5%		3.7%		3.5%		3.6%


(1)	Fixed maturities and short-term bonds at amortized cost and 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 respective period.
(2)	Net investment income and average annual yield decreased slightly primarily due to the maturity and replacement of higher yielding investments, purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments.

The Board of Directors declared a quarterly dividend of $0.6150 per share. The dividend will be paid on September 25, 2014 to shareholders of record on September 11, 2014.

Mercury General Corporation and its subsidiaries are a multiple line insurance organization offering predominantly personal automobile and homeowners insurance through a network of independent producers in many states. For more information, visit the Company's website at www.mercuryinsurance.com. The Company will be hosting a conference call and webcast today at 10:00 A.M. Pacific time where management will discuss results and address questions. The teleconference and webcast can be accessed by calling (877) 807-1888 (USA), (706) 679-3827 (International) or by visiting www.mercuryinsurance.com. A replay of the call will be available beginning at 1:30 P.M. Pacific time and running through August 4, 2014. The replay telephone numbers are (855) 859-2056 (USA) or (404) 537-3406 (International). The conference ID# is 70976709. The replay will also be available on the Company's website shortly following the call.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. The statements contained in this press release are forward-looking statements based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the demand for the Company's insurance products, inflation and general economic conditions, including general market risks associated with the Company's investment portfolio; the accuracy and adequacy of the Company's pricing methodologies; catastrophes in the markets served by the Company; uncertainties related to estimates, assumptions and projections generally; the possibility that actual loss experience may vary adversely from the actuarial estimates made to determine the Company's loss reserves in general; the Company's ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in states where the Company operates; legislation adverse to the automobile insurance industry or business generally that may be enacted in the states where the Company operates; the Company's success in managing its business in non-California states; the presence of competitors with greater financial resources and the impact of competitive pricing and marketing efforts; changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs and marketing efforts; and legal, regulatory and litigation risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see the Company's filings with the Securities and Exchange Commission.

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,
	2014		2013		2014		2013
Net premiums written	$	698,759	$	665,479	$	1,423,452	$	1,355,983

Revenues:
Net premium earned	$	697,889	$	675,787	$	1,381,590	$	1,338,382
Net investment income	30,850		31,674		61,092		62,849
Net realized investment gains (losses)	76,190		(67,415)		122,902		(23,365)
Other	2,090		2,521		4,391		4,854
Total revenues	$	807,019	$	642,567	$	1,569,975	$	1,382,720
Expenses:
Losses and loss adjustment expenses	483,043		486,906		959,646		953,966
Policy acquisition costs	133,060		126,393		262,874		250,115
Other operating expenses	53,792		54,015		107,796		112,078
Interest	688		212		1,193		526
Total expenses	$	670,583	$	667,526	$	1,331,509	$	1,316,685

Income (loss) before income taxes	136,436		(24,959)		238,466		66,035
Income tax expense (benefit)	41,476		(15,695)		70,857		8,838
Net income (loss)	$	94,960	$	(9,264)	$	167,609	$	57,197

Basic average shares outstanding	54,978		54,941		54,977		54,931
Diluted average shares outstanding ^(a)	54,989		54,941		54,988		54,948

Basic Per Share Data
Net income (loss)	$	1.73	$	(0.17)	$	3.05	$	1.04

Net realized investment gains (losses), net of tax	$	0.90	$	(0.80)	$	1.45	$	(0.28)

Diluted Per Share Data^(a)
Net income (loss)	$	1.73	$	(0.17)	$	3.05	$	1.04

Net realized investment gains (losses), net of tax	$	0.90	$	(0.80)	$	1.45	$	(0.28)

Operating Ratios-GAAP Basis
Loss ratio	69.2%		72.1%		69.5%		71.3%
Expense ratio	26.8%		26.7%		26.8%		27.1%
Combined ratio ^(b)	96.0%		98.7%		96.3%		98.3%

Reconciliations of Operating Measures to Comparable GAAP Measures

Net premiums written	$	698,759	$	665,479	$	1,423,452	$	1,355,983
Change in net unearned premiums	(870)		10,308		(41,862)		(17,601)
Net premiums earned	$	697,889	$	675,787	$	1,381,590	$	1,338,382

Paid losses and loss adjustment expenses	$	473,831	$	489,174	$	945,322	$	982,654
Change in net loss and loss adjustment expense reserves	9,212		(2,268)		14,324		(28,688)
Incurred losses and loss adjustment expenses	$	483,043	$	486,906	$	959,646	$	953,966

(a) The dilutive impact of incremental shares is excluded from loss positions in accordance with GAAP.

(b) Combined ratios for the three and six months ended June 30, 2013 do not sum due to rounding.

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

	June 30, 2014		December 31, 2013
	(unaudited)
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $2,597,393; $2,523,042)	$	2,704,628	$	2,560,653
Equity securities (cost $379,951; $223,933)	455,542		281,883
Short-term investments (cost $229,665; $315,886)	229,412		315,776
Total investments	3,389,582		3,158,312
Cash	258,473		266,508
Receivables:
Premiums	384,388		366,075
Accrued investment income	39,254		36,120
Other	21,462		23,029
Total receivables	445,104		425,224
Deferred policy acquisition costs	199,217		194,466
Fixed assets, net	157,428		156,716
Deferred income taxes	—		15,220
Goodwill	42,796		42,796
Other intangible assets, net	38,613		41,603
Other assets	31,187		14,336
Total assets	$	4,562,400	$	4,315,181

LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses	$	1,053,030	$	1,038,984
Unearned premiums	993,462		953,527
Notes payable	270,000		190,000
Accounts payable and accrued expenses	120,839		127,663
Current income taxes	24,476		11,856
Deferred income taxes	12,962		—
Other liabilities	163,968		170,665
Shareholders' equity	1,923,663		1,822,486
Total liabilities and shareholders' equity	$	4,562,400	$	4,315,181

OTHER INFORMATION
Common stock shares outstanding	54,979		54,975
Book value per share	$34.99		$33.15
Statutory surplus	$1.48 billion		$1.53 billion
Premiums written to surplus ratio	1.9		1.8
Debt to total capital ratio	12.3%		9.4%
Portfolio duration (including all short-term instruments)^(a)(b)	2.8 years		3.6 years
Policies-in-force (company-wide "PIF")^(a)
Personal Auto PIF	1,200		1,217
Homeowners PIF	466		465

(a) Unaudited.

(b) Modified durations reflecting anticipated early calls.

Information Regarding Non-GAAP Measures

The Company has presented information within this document containing operating measures which in management's opinion provide investors with useful, industry specific information to help them evaluate, and perform meaningful comparisons of, the Company's performance, but that may not be presented in accordance with GAAP. These measures are not intended to replace, and should be read in conjunction with, the GAAP financial results.

Operating income is net income excluding realized investment gains and losses, net of tax. Net income is the GAAP measure that is most directly comparable to operating income. Operating income is used by management along with the other components of net income to assess the Company's performance. Management uses operating income as an important measure to evaluate the results of the Company's insurance business. Management believes that operating income provides investors with a valuable measure of the Company's ongoing performance as it reveals trends in the Company's insurance business that may be obscured by the effect of net realized capital gains and losses. Realized capital gains and losses may vary significantly between periods and are generally driven by external economic developments such as capital market conditions. Accordingly, operating income highlights the results from ongoing operations and the underlying profitability of the Company's core insurance business. Operating income, which is provided as supplemental information and should not be considered as a substitute for net income, does not reflect the overall profitability of our business. It should be read in conjunction with the GAAP financial results. The Company has reconciled operating income with the most directly comparable GAAP measure in the table below.

	Three Months Ended June 30,								Six Months Ended June 30,
	Total				Per diluted share				Total				Per diluted share
	2014		2013		2014		2013 ^(a)		2014		2013		2014		2013
(000's except per-share amounts)
Operating income	$	45,437	$	34,556	$	0.83	$	0.63	$	87,723	$	72,384	$	1.60	$	1.32
Net realized investment gains (losses), net of tax	49,523		(43,820)		0.90		(0.80)		79,886		(15,187)		1.45		(0.28)
Net income (loss)	$	94,960	$	(9,264)	$	1.73	$	(0.17)	$	167,609	$	57,197	$	3.05	$	1.04

(a) The dilutive impact of incremental shares is excluded from loss positions in accordance with GAAP.

Net premiums written represents the premiums charged on policies issued during a fiscal period. Net premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that have been recognized as income in the financial statements for the periods presented as earned on a pro-rata basis over the term of the policies. Net premiums written are meant as supplemental information and are not intended to replace net premiums earned. Such information should be read in conjunction with the GAAP financial results. The Company has reconciled net premiums written with the most directly comparable GAAP measure in the supplemental schedule entitled, "Summary of Operating Results."

Paid losses and loss adjustment expenses is the portion of incurred losses and loss adjustment expenses, the most directly comparable GAAP measure, excluding the effects of changes in the loss reserve accounts. Paid losses and loss adjustment expenses is provided as supplemental information and is not intended to replace incurred losses and loss adjustment expenses. It should be read in conjunction with the GAAP financial results. The Company has reconciled paid losses and loss adjustment expenses with the most directly comparable GAAP measure in the supplemental schedule entitled, "Summary of Operating Results."

Combined ratio-accident period basis is computed as the difference between two GAAP operating ratios: the combined ratio and the effect of prior accident periods' loss development. The most directly comparable GAAP measure is the combined ratio. The Company believes that this ratio is useful to investors and it is used by management to reveal the trends in the Company's results of operations that may be obscured by development on prior accident periods' loss reserves. Combined ratio-accident period basis is meant as supplemental information and is not intended to replace combined ratio. It should be read in conjunction with the GAAP financial results. The Company has reconciled combined ratio-accident period basis with the most directly comparable GAAP measure in the table below.

	Six Months Ended June 30,
	2014	2013

Combined ratio-accident period basis	96.9%	98.5%
Effect of estimated prior periods' loss development	(0.6)%	(0.2)%
Combined ratio	96.3%	98.3%

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SOURCE Mercury General Corporation

For further information: Theodore Stalick, SVP/CFO, (323) 937-1060, www.mercuryinsurance.com