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

2018

2017

$

%

2018

2017

$

%

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

Net premiums earned

$

858,135

$

801,205

$

56,930

7.1

$

2,500,178

$

2,388,641

$

111,537

4.7

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

$

905,339

$

827,419

$

77,920

9.4

$

2,645,024

$

2,436,663

$

208,361

8.6

Net income

$

58,578

$

46,485

$

12,093

26.0

$

76,151

$

125,098

$

(48,947)

(39.1)

Net income per diluted share

$

1.06

$

0.84

$

0.22

26.2

$

1.38

$

2.26

$

(0.88)

(38.9)

Operating income ⁽¹⁾

$

61,667

$

33,018

$

28,649

86.8

$

114,351

$

81,981

$

32,370

39.5

Operating income per diluted share ⁽¹⁾

$

1.11

$

0.60

$

0.51

85.0

$

2.07

$

1.48

$

0.59

39.9

Catastrophe losses, net of reinsurance ⁽³⁾

$

13,000

$

19,000

$

(6,000)

(31.6)

$

24,000

$

59,000

$

(35,000)

(59.3)

Combined ratio ⁽⁴⁾

95.6

%

99.3

%

—

(3.7) pts

98.7

%

100.1

%

—

(1.4) 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. The Company estimates that the total net premiums written for the three and nine months ended September 30, 2018 increased by approximately $20 million and $43 million, respectively, due to the reintroduction of twelve-month policies in MIC, compared to what the total would have been without the reintroduction. There was no material impact to net premiums earned resulting from the reintroduction of twelve-month policies.

⁽³⁾ 

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. The 2017 catastrophe losses were primarily due to severe rainstorms in California, the impact of Hurricane Harvey in Texas and Hurricane Irma in Florida and Georgia, and storms and tornadoes in Oklahoma and Texas. There were no reinsurance benefits used for catastrophe losses incurred during the first nine months of 2017.

⁽⁴⁾ 

The Company experienced unfavorable development of approximately $6 million and $4 million on prior accident years' loss and loss adjustment expense reserves for the three months ended September 30, 2018 and 2017, respectively, and unfavorable development of approximately $70 million and $18 million on prior accident years' loss and loss adjustment expense reserves for the nine months ended September 30, 2018 and 2017, respectively. 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, while the year-to-date unfavorable development in 2017 was primarily attributable to higher than estimated California automobile and property losses.

Investment Results

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$

3,809,689

$

3,630,223

$

3,722,365

$

3,563,855

Net investment income ⁽²⁾

     Before income taxes

$

38,159

$

30,988

$

104,455

$

94,058

     After income taxes

$

33,522

$

27,071

$

92,867

$

82,381

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

3.5

%

3.0

%

3.3

%

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⁾ 

The higher net investment income before and after income taxes for the three and nine months ended September 30, 2018 compared to the corresponding periods in 2017 resulted largely from higher average invested assets combined with rising market interest rates. Average annual yield on investments after income taxes for the three and nine months ended September 30, 2018 increased compared to the corresponding periods in 2017, primarily due to yield increases in short-term and floating-rate securities resulting from rising market interest rates. Net investment income and average annual yield on investments after income taxes for the three and nine months ended September 30, 2018 also benefited modestly from the lower tax rate effective January 1, 2018 applied to taxable investment income.

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,

2018

2017

2018

2017

Revenues:

     Net premiums earned

$

858,135

$

801,205

$

2,500,178

$

2,388,641

     Net investment income

38,159

30,988

104,455

94,058

     Net realized investment (losses) gains

(3,910)

20,718

(48,355)

66,334

     Other

2,427

5,446

7,108

9,675

          Total revenues

894,811

858,357

2,563,386

2,558,708

Expenses:

     Losses and loss adjustment expenses

614,069

595,290

1,851,850

1,790,550

     Policy acquisition costs

142,295

136,290

424,799

416,728

     Other operating expenses

63,904

64,339

190,125

182,959

     Interest

4,257

4,191

12,779

10,873

          Total expenses

824,525

800,110

2,479,553

2,401,110

Income before income taxes

70,286

58,247

83,833

157,598

     Income tax expense

11,708

11,762

7,682

32,500

                    Net income

$

58,578

$

46,485

$

76,151

$

125,098

Basic average shares outstanding

55,337

55,324

55,334

55,311

Diluted average shares outstanding

55,341

55,334

55,337

55,323

Basic Per Share Data

Net income

$

1.06

$

0.84

$

1.38

$

2.26

Net realized investment (losses) gains, net of tax

$

(0.05)

$

0.24

$

(0.69)

$

0.78

Diluted Per Share Data

Net income

$

1.06

$

0.84

$

1.38

$

2.26

Net realized investment (losses) gains, net of tax

$

(0.05)

$

0.24

$

(0.69)

$

0.78

Operating Ratios-GAAP Basis

Loss ratio

71.6

%

74.3

%

74.1

%

75.0

%

Expense ratio

24.0

%

25.0

%

24.6

%

25.1

%

Combined ratio

95.6

%

99.3

%

98.7

%

100.1

%

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

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

September 30, 2018

December 31, 2017

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $2,951,571; $2,823,230)

$

2,952,871

$

2,892,777

     Equity securities (cost $619,444; $474,197)

688,387

537,240

     Short-term investments (cost $263,037; $302,693)

262,806

302,711

          Total investments

3,904,064

3,732,728

Cash

261,680

291,413

Receivables:

     Premiums

558,004

474,060

     Accrued investment income

48,021

39,368

     Other

6,077

6,658

          Total receivables

612,102

520,086

Reinsurance recoverables

53,419

56,349

Deferred policy acquisition costs

216,480

198,151

Fixed assets, net

149,719

145,223

Current income taxes

27,012

61,257

Goodwill

42,796

42,796

Other intangible assets, net

16,901

20,728

Other assets

28,864

32,592

          Total assets

$

5,313,037

$

5,101,323

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$

1,580,054

$

1,510,613

Unearned premiums

1,240,776

1,101,927

Notes payable ^(a)

371,635

371,335

Accounts payable and accrued expenses

138,643

108,252

Deferred income taxes

7,146

22,932

Other liabilities

240,553

224,877

Shareholders' equity

1,734,230

1,761,387

          Total liabilities and shareholders' equity

$

5,313,037

$

5,101,323

OTHER INFORMATION

Common stock shares outstanding

55,340

55,332

Book value per share

$

31.34

$

31.83

Statutory surplus ^(b)

$1.59 billion

$1.59 billion

Net premiums written to surplus ratio ^(b)

2.15

2.02

Debt to total capital ratio ^(c)

17.8

%

17.6

%

Portfolio duration (including all short-term instruments) ^{(b) (d)}

4.1 years

4.0 years

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

     Personal Auto PIF

1,150

1,121

     Homeowners PIF

588

553

     Commercial Auto PIF

38

40

(a)

$375 million aggregate face value of 4.40% senior notes due 2027 issued in March 2017 through a public offering, net of unamortized discount and debt issuance costs.

(b)

Unaudited.

(c)

Debt to Debt plus Shareholders' Equity (Debt at face value).

(d)

Modified durations 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,

2018

2017

2018

2017

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

Net premiums earned

$

858,135

$

801,205

$

2,500,178

$

2,388,641

Change in net unearned premiums

47,204

26,214

144,846

48,022

Net premiums written

$

905,339

$

827,419

$

2,645,024

$

2,436,663

Incurred losses and loss adjustment expenses

$

614,069

$

595,290

$

1,851,850

$

1,790,550

Change in net loss and loss adjustment expense reserves

(26,932)

(46,129)

(83,414)

(84,279)

Paid losses and loss adjustment expenses

$

587,137

$

549,161

$

1,768,436

$

1,706,271

Net income

$

58,578

$

46,485

$

76,151

$

125,098

Less: Net realized investment (losses) gains

(3,910)

20,718

(48,355)

66,334

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

(821)

7,251

(10,155)

23,217

             Net realized investment (losses) gains, net of tax

(3,089)

13,467

(38,200)

43,117

Operating income

$

61,667

$

33,018

$

114,351

$

81,981

Per diluted share:

Net income

$

1.06

$

0.84

$

1.38

$

2.26

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

(0.05)

0.24

(0.69)

0.78

Operating income

$

1.11

$

0.60

$

2.07

$

1.48

Combined ratio

98.7

%

100.1

%

Effect of estimated prior periods' loss development

(2.8)

%

(0.8)

%

Combined ratio-accident period basis

95.9

%

99.3

%

(a) 

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

(b) 

Federal statutory rate of 21% for the three and nine months ended September 30, 2018 and 35% for the three and nine months ended September 30, 2017.