Mercury General Corporation Announces First Quarter Results and Declares Quarterly Dividend

May 2, 2016

LOS ANGELES, May 2, 2016 /PRNewswire/ -- Mercury General Corporation (NYSE: MCY) reported today for the first quarter of 2016:

Consolidated Highlights



Three Months Ended
March 31,

Change



2016

2015

$

%


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





Net premiums written (1)

$

797,666


$

740,492


$

57,174


7.7



Net income

$

23,323


$

26,165


$

(2,842)


(10.9)



Net income per diluted share

$

0.42


$

0.47


$

(0.05)


(10.6)



Operating income (1)

$

7,036


$

32,640


$

(25,604)


(78.4)



Operating income per diluted share (1)

$

0.13


$

0.59


$

(0.46)


(78.0)



Catastrophe losses (2)

$

8,000


$

2,000


$

6,000


300.0



Combined ratio (3)

103.9

%

99.1

%


4.8 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)

2016 catastrophe losses were primarily the result of severe winter storms in northern California and in Texas. 2015 catastrophe losses were primarily the result of tornadoes in Oklahoma.

(3)

The Company experienced unfavorable development of approximately $40 million and favorable development of approximately $3 million on prior accident years' losses and loss adjustment expenses reserves for the three months ended March 31, 2016 and 2015, respectively.  The majority of the unfavorable development in the first quarter of 2016 was from the re-estimation of losses for California and Florida automobile liability coverages.  Approximately $34 million of the $40 million of unfavorable development  in 2016 relates to 2014 and prior accident years.

 

Investment Results



Three Months Ended
March 31,


2016

2015

(000's except average annual yield)



Average invested assets at cost (1)

$

3,327,084


$

3,320,746


Net investment income (2)



     Before income taxes

$

29,655


$

31,506


     After income taxes

$

26,033


$

27,495


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

3.1

%

3.3

%



(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)

For the three months ended March 31, 2016, net investment income, before and after income taxes,  and average annual yields on investments after income taxes decreased slightly 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.

 

Additional Commentary:

The Company has been unable to profitably grow its business in Michigan and Pennsylvania.  Consequently, the Company plans to cease operations in those two states to focus resources on other states with better opportunities for sustained profitable growth. Combined results for Michigan and Pennsylvania were as follows:           


Years ended December 31,

(000's except ratios)

2015

2014

Net premiums written

$

14,413


$

18,375


Net premiums earned

$

15,366


$

18,573


Combined ratio

137

%

130

%

 

On April 29, 2016, the Company filed plans to exit these states with the respective state regulatory agencies. The Company expects to substantially complete the run-off of its Michigan and Pennsylvania operations in 2017.

In line with the goal of improving operating efficiencies outside of California and overall long-term profitability, the Company restructured its claims operations in states outside of California resulting in a workforce reduction of approximately 100 employees on April 29, 2016.  The affected employees were located primarily in the Company's New Jersey and Florida branch offices.  The Company expects to record a charge, in the second quarter of 2016, of approximately $2 million for employment termination costs, and to realize estimated annual pre-tax savings of approximately $7 million.

In February 2016, the California Department of Insurance ("CA DOI") approved a 5.0% rate increase on Mercury Insurance Company's private passenger automobile line of insurance business, which represented approximately 50% of the Company's net premiums earned in the first quarter of 2016. This rate increase was implemented in March 2016. In April 2016, the CA DOI approved a 6.9% rate increase on California Automobile Insurance Company's private passenger automobile line of insurance business, which represented approximately 17% of the Company's total net premiums earned in the first quarter of 2016. The Company anticipates that this rate increase will be implemented in June 2016.

The Board of Directors declared a quarterly dividend of $0.62 per share. The dividend will be paid on June 30, 2016 to shareholders of record on June 16, 2016.

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 (1:00 P.M. Eastern 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 on May 2, 2016 and running through May 9, 2016. The replay telephone numbers are (855) 859-2056 (USA) or (404) 537-3406 (International). The conference ID# is 89618866. 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; the ability of the Company to successfully manage its claims organization outside of California following the announced reduction in workforce; the Company's ability to successfully allocate the resources used in the Michigan and Pennsylvania markets to its operations in other states; 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 March 31,


2016


2015

Net premiums written

$

797,666



$

740,492






Revenues:




     Net premium earned

$

767,085



$

720,737


     Net investment income

29,655



31,506


     Net realized investment gains (losses)

25,057



(9,961)


     Other

2,123



2,266


          Total revenues

$

823,920



$

744,548


Expenses:




     Losses and loss adjustment expenses

$

594,082



$

514,400


     Policy acquisition costs

141,560



133,847


     Other operating expenses

61,294



65,692


     Interest

950



750


          Total expenses

$

797,886



$

714,689






Income before income taxes

$

26,034



$

29,859


     Income tax expense

2,711



3,694


                    Net income

$

23,323



$

26,165






Basic average shares outstanding

55,201



55,139


Diluted average shares outstanding

55,208



55,159






Basic Per Share Data




Net income

$

0.42



$

0.47






Net realized investment gains (losses), net of tax

$

0.30



$

(0.12)






Diluted Per Share Data




Net income

$

0.42



$

0.47






Net realized investment gains (losses), net of tax

$

0.29



$

(0.12)






Operating Ratios-GAAP Basis




Loss ratio

77.5

%


71.4

%

Expense ratio

26.4

%


27.7

%

Combined ratio

103.9

%


99.1

%





Reconciliations of Operating Measures to Comparable GAAP Measures





Net premiums written

$

797,666



$

740,492


Change in net unearned premiums

(30,581)



(19,755)


Net premiums earned

$

767,085



$

720,737






Paid losses and loss adjustment expenses

$

565,595



$

519,754


Change in net loss and loss adjustment expense reserves

28,487



(5,354)


Incurred losses and loss adjustment expenses

$

594,082



$

514,400


 

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

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



March 31, 2016


December 31, 2015


(unaudited)



ASSETS




Investments, at fair value:




     Fixed maturity securities (amortized cost $2,855,224; $2,804,275)

$

2,942,514



$

2,880,003


     Equity securities (cost $326,875; $313,528)

335,616



315,362


     Short-term investments (cost $155,201; $185,353)

155,185



185,277


          Total investments

3,433,315



3,380,642


Cash

235,109



264,221


Receivables:




     Premiums

465,737



436,621


     Accrued investment income

40,768



42,747


     Other

21,176



21,925


          Total receivables

527,681



501,293


Deferred policy acquisition costs

203,565



201,762


Fixed assets, net

158,412



157,131


Current income taxes

11,907



9,041


Deferred income taxes

18,637



23,231


Goodwill

42,796



42,796


Other intangible assets, net

30,182



31,702


Other assets

30,459



16,826


          Total assets

$

4,692,063



$

4,628,645






LIABILITIES AND SHAREHOLDERS' EQUITY




Losses and loss adjustment expenses

$

1,174,968



$

1,146,688


Unearned premiums

1,078,571



1,049,314


Notes payable

290,000



290,000


Accounts payable and accrued expenses

116,765



122,571


Other liabilities

224,381



199,187


Shareholders' equity

1,807,378



1,820,885


          Total liabilities and shareholders' equity

$

4,692,063



$

4,628,645






OTHER INFORMATION




Common stock shares outstanding

55,254



55,164


Book value per share

$32.71



$33.01


Statutory surplus (a)

$1.42 billion



$1.45 billion


Premiums written to surplus ratio (a)

2.15



2.07


Debt to total capital ratio (b)

13.8

%


13.7

%

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

3.2 years



3.1 years


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




     Personal Auto PIF

1,197



1,191


     Homeowners PIF

540



528


     Commercial Auto PIF

44



44


(a)

Unaudited.

(b)

Debt to Debt plus Shareholders' Equity.

(c)

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 March 31,


Total

Per diluted share


2016

2015

2016

2015

(000's except per-share amounts)





Operating income

$

7,036


$

32,640


$

0.13


$

0.59


Net realized investment gains (losses), net of tax

16,287


(6,475)


0.29


(0.12)


Net income

$

23,323


$

26,165


$

0.42


$

0.47


               

Net premiums written represents the premiums charged on policies issued during a fiscal period less any applicable reinsurance. Net premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that have been recognized as revenue in the financial statements for the periods presented and 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.


Three Months Ended March 31,


2016


2015





Combined ratio-accident period basis

98.7

%


99.5

%

Effect of estimated prior periods' loss development

5.2

%


(0.4)

%

Combined ratio

103.9

%


99.1

%

 

Mercury General Corporation logo (PRNewsFoto/Mercury General Corporation) (PRNewsFoto/Mercury General Corporation)

Logo - http://photos.prnewswire.com/prnh/20140414/73019

 

SOURCE Mercury General Corporation

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


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