Mercury General Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Unaudited consolidated results. Mercury primarily writes personal automobile insurance, principally in California, and reports one primary segment: Property and Casualty.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net premiums earned | $1,034.5 million | $987.5 million | $2,039.2 million | $1,950.1 million |
| Total revenues | $1,083.2 million | $785.6 million | $2,189.8 million | $1,591.1 million |
| Loss before income taxes | $(61.2) million | $(271.3) million | $(123.3) million | $(524.5) million |
| Net loss | $(41.5) million | $(210.7) million | $(86.8) million | $(407.6) million |
| Net loss per diluted share | $(0.75) | $(3.80) | $(1.57) | $(7.36) |
| Combined ratio | 110.1% | 106.6% | 112.9% | 108.1% |
| Net investment income | $58.4 million | $38.6 million | $110.3 million | $73.9 million |
| Net realized investment gains (losses) | $(19.8) million | $(241.9) million | $29.2 million | $(437.0) million |
For the first half, net cash from operating activities was $105.4 million, down from $194.9 million. Cash and short-term investments totaled $547.7 million at June 30. Total debt was $448.5 million, consisting principally of $375 million of senior notes and $75 million drawn on the credit facility. The company also had $125 million of undrawn credit availability. Total assets were $6.69 billion; shareholders’ equity was $1.40 billion. Loss and LAE reserves were $2.72 billion.
Changes versus prior periods
- Premium growth reflected rate increases and growth in policies outside California. Net premiums earned rose 4.8% in Q2 and 4.6% for the first half; net premiums written rose 9.7% and 4.8%, respectively. First-half direct premiums written in California were $1.70 billion, or 78.7% of the total.
- Underwriting remained unprofitable, with combined ratios above 100% and worsening year over year. The first-half loss ratio rose to 89.6% from 84.6%; the expense ratio improved to 23.3% from 23.5%.
- Investment income increased as yields and average invested assets rose. The large year-over-year improvement in net loss also reflects the much smaller investment losses compared with 2022; Q2 2023 still recorded net realized investment losses.
- First-half catastrophe losses, net of reinsurance, were approximately $190 million versus $43 million in 2022. No treaty recovery applied because no individual event exceeded the applicable retention. Favorable prior-year reserve development was $19.8 million in the first half of 2023, versus unfavorable development of $51.4 million in 2022.
- Quarterly dividend per share was $0.3175, compared with $0.6350 in Q2 2022. First-half dividends paid were $35.2 million versus $70.3 million.
Management commentary, outlook, risks and unusual items
- Management said 2022 inflationary pressures have moderated but remain elevated; automobile loss severity continued to pressure current-year claims. The company has raised rates, filed for further increases, and is taking non-rate actions to improve profitability. The filing provides no formal earnings or revenue guidance.
- California approved private passenger auto rate increases of 6.9% in January and a further 6.99% in June 2023, effective March and July, respectively. In July, Mercury filed for additional increases of 22.5% for MIC and 6.99% for CAIC. California also approved a 12.6% homeowners increase, effective May; a further 6.99% homeowners increase was filed in May.
- Rate approval timing, catastrophe frequency and severity, reserve estimation, claims inflation, investment-market movements, regulatory restrictions, competition and litigation are material risks. A 100- or 200-basis-point increase in interest rates was estimated to reduce fixed-maturity fair value by $133.8 million or $267.6 million, respectively.
- Under a California DOI settlement, MIC and CAIC agreed to provide $25 million of renewal-premium credits to California private passenger auto policyholders over no more than 18 months starting July 7, 2023. Credits will reduce premiums in the periods policies renew. A separate Orion Indemnity settlement involved approximately $0.25 million. Two related private class actions remain pending; the company seeks dismissal and cannot estimate potential additional exposure.
- A separate California DOI rating and underwriting non-compliance matter remains under discussion; the company cannot predict its outcome or estimate potential penalties. Management stated pending legal and regulatory matters are not expected to have a material adverse effect, but outcomes are uncertain.
- Unusual property transactions included a Rancho Cucamonga office sale that generated a $7.9 million gain in Q2 and a Clearwater sale that generated a $1.8 million loss in Q1. The Clearwater transaction included a $9.8 million seller note.
Important facts for investors to verify
- Whether approved and pending rate increases are sufficient, and how quickly they affect earned premiums and underwriting results.
- Claims severity, catastrophe losses, and future reserve development, particularly given the $2.72 billion reserve balance and elevated first-half catastrophe claims.
- The resolution and financial impact, if any, of the pending California DOI examination matter and the private COVID-refund lawsuits, beyond agreed policyholder credits.
- Investment portfolio sensitivity to market rates and equity prices, including the fair-value effects of the company’s substantial municipal-bond and equity holdings.
- Liquidity and borrowing costs: operating cash flow declined, while $75 million was drawn under the revolving facility at an approximately 6.58% annual rate as of July 27, 2023.