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

2018

$

%

2019

2018

$

%

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

Net premiums earned

$

888,776

$

833,959

$

54,817

6.6

$

1,759,021

$

1,642,043

$

116,978

7.1

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

$

936,079

$

878,418

$

57,661

6.6

$

1,852,527

$

1,739,685

$

112,842

6.5

Net income

$

83,250

$

60,180

$

23,070

38.3

$

219,117

$

17,573

$

201,544

1,146.9

Net income per diluted share

$

1.50

$

1.09

$

0.41

37.6

$

3.96

$

0.32

$

3.64

1,137.5

Operating income ⁽¹⁾

$

41,120

$

48,891

$

(7,771)

(15.9)

$

89,239

$

52,685

$

36,554

69.4

Operating income per diluted share ⁽¹⁾

$

0.74

$

0.88

$

(0.14)

(15.9)

$

1.61

$

0.95

$

0.66

69.5

Catastrophe losses net of reinsurance ⁽³⁾

$

9,000

$

2,000

$

7,000

350.0

$

14,000

$

11,000

$

3,000

27.3

Combined ratio ⁽⁴⁾

98.3

%

96.9

%

—

1.4 pts

97.8

%

100.3

%

—

(2.5) 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 $94 million and $54 million for the three months ended June 30, 2019 and 2018, respectively, and $170 million and $85 million for the six months ended June 30, 2019 and 2018, respectively.

⁽³⁾

Gross catastrophe losses due to the catastrophe events that occurred during the six months ended June 30, 2019 totaled approximately $17 million resulting primarily from winter storms in California and tornadoes and wind and hail storms in the Midwest, and no reinsurance benefits were used for these losses. These 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 during the first quarter of 2019 and the re-estimation of reserves as part of normal reserving procedures. 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. There were no reinsurance benefits used for catastrophe losses incurred during the first half of 2018.

⁽⁴⁾ 

The Company experienced unfavorable development of approximately $9 million and $21 million on prior accident years' loss and loss adjustment expense reserves for the three months ended June 30, 2019 and 2018, respectively, and unfavorable development of approximately $11 million and $64 million on prior accident years' loss and loss adjustment expense reserves for the six months ended June 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 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, as described above. The year-to-date unfavorable development in 2018 was largely due 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 June 30,

Six Months Ended June 30,

2019

2018

2019

2018

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$

3,995,712

$

3,715,905

$

3,940,185

$

3,676,386

Net investment income ⁽²⁾

     Before income taxes

$

35,032

$

34,786

$

69,206

$

66,296

     After income taxes

$

31,404

$

30,949

$

61,658

$

59,345

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

3.1

%

3.3

%

3.1

%

3.2

%

⁽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, 2019 compared to the corresponding periods in 2018 resulted largely from higher average invested assets. Average annual yield on investments after income taxes for the three and six months ended June 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 June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Revenues:

     Net premiums earned

$

888,776

$

833,959

$

1,759,021

$

1,642,043

     Net investment income

35,032

34,786

69,206

66,296

     Net realized investment gains (losses)

53,329

14,290

164,403

(44,445)

     Other

2,350

2,356

4,600

4,681

          Total revenues

979,487

885,391

1,997,230

1,668,575

Expenses:

     Losses and loss adjustment expenses

656,577

605,547

1,286,993

1,237,781

     Policy acquisition costs

148,629

141,520

297,042

282,504

     Other operating expenses

68,420

60,822

135,909

126,221

     Interest

4,266

4,256

8,522

8,522

          Total expenses

877,892

812,145

1,728,466

1,655,028

Income before income taxes

101,595

73,246

268,764

13,547

     Income tax expense (benefit)

18,345

13,066

49,647

(4,026)

                    Net income

$

83,250

$

60,180

$

219,117

$

17,573

Basic average shares outstanding

55,353

55,332

55,347

55,332

Diluted average shares outstanding

55,363

55,335

55,356

55,335

Basic Per Share Data

Net income

$

1.50

$

1.09

$

3.96

$

0.32

Net realized investment gains (losses), net of tax

$

0.76

$

0.21

$

2.35

$

(0.63)

Diluted Per Share Data

Net income

$

1.50

$

1.09

$

3.96

$

0.32

Net realized investment gains (losses), net of tax

$

0.76

$

0.21

$

2.35

$

(0.63)

Operating Ratios-GAAP Basis

Loss ratio

73.9

%

72.6

%

73.2

%

75.4

%

Expense ratio

24.4

%

24.3

%

24.6

%

24.9

%

Combined ratio

98.3

%

96.9

%

97.8

%

100.3

%

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

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

June 30, 2019

December 31, 2018

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $3,053,621; $2,969,541)

$

3,157,398

$

2,985,161

     Equity securities (cost $594,810; $544,082)

645,407

529,631

     Short-term investments (cost $362,191; $254,518)

362,197

253,299

          Total investments

4,165,002

3,768,091

Cash

240,320

314,291

Receivables:

     Premiums

592,732

555,038

     Accrued investment income

42,691

45,373

     Other

5,252

6,132

          Total receivables

640,675

606,543

Reinsurance recoverables

126,571

221,088

Deferred policy acquisition costs

227,167

215,131

Fixed assets, net

162,650

153,023

Operating lease right-of-use assets

44,432

—

Current income taxes

18,210

38,885

Deferred income taxes

—

13,339

Goodwill

42,796

42,796

Other intangible assets, net

13,170

15,534

Other assets

35,525

45,008

          Total assets

$

5,716,518

$

5,433,729

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$

1,783,924

$

1,829,412

Unearned premiums

1,314,995

1,236,181

Notes payable

371,934

371,734

Accounts payable and accrued expenses

147,424

115,071

Operating lease liabilities

47,091

—

Deferred income taxes

15,654

—

Other liabilities

267,534

263,647

Shareholders' equity

1,767,962

1,617,684

          Total liabilities and shareholders' equity

$

5,716,518

$

5,433,729

OTHER INFORMATION

Common stock shares outstanding

55,355

55,340

Book value per share

$

31.94

$

29.23

Statutory surplus ^(a)

$1.56 billion

$1.47 billion

Net premiums written to surplus ratio ^(a)

2.32

2.38

Debt to total capital ratio ^(b)

17.5

%

18.8

%

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

3.6 years

4.0 years

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

     Personal Auto PIF

1,166

1,157

     Homeowners PIF

630

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 June 30,

Six Months Ended June 30,

2019

2018

2019

2018

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

Net premiums earned

$

888,776

$

833,959

$

1,759,021

$

1,642,043

Change in net unearned premiums

47,303

44,459

93,506

97,642

Net premiums written

$

936,079

$

878,418

$

1,852,527

$

1,739,685

Incurred losses and loss adjustment expenses

$

656,577

$

605,547

$

1,286,993

$

1,237,781

Change in net loss and loss adjustment expense reserves

(16,829)

(24,915)

(28,254)

(56,482)

Paid losses and loss adjustment expenses

$

639,748

$

580,632

$

1,258,739

$

1,181,299

Net income

$

83,250

$

60,180

$

219,117

$

17,573

Less: Net realized investment gains (losses)

53,329

14,290

164,403

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

11,199

3,001

34,525

(9,333)

             Net realized investment gains (losses), net of tax

42,130

11,289

129,878

(35,112)

Operating income

$

41,120

$

48,891

$

89,239

$

52,685

Per diluted share:

Net income

$

1.50

$

1.09

$

3.96

$

0.32

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

0.76

0.21

2.35

(0.63)

Operating income

$

0.74

$

0.88

$

1.61

$

0.95

Combined ratio

97.8

%

100.3

%

Effect of estimated prior periods' loss development

(0.6)

(3.9)

%

Combined ratio-accident period basis

97.2

96.4

(a)

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

(b)

Federal statutory rate of 21%.