Mercury General Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 13, 2012. This is an annual report, not a standalone fourth-quarter filing. Mercury primarily writes personal automobile insurance through subsidiaries, with 75.8% of 2011 direct premiums written in California.
Financial results and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $2.777 billion | $2.776 billion |
| Net premiums earned | $2.566 billion | $2.567 billion |
| Net premiums written | $2.575 billion | $2.555 billion |
| Net investment income | $140.9 million | $143.8 million |
| Net realized investment gains | $58.4 million | $57.1 million |
| Net income / diluted EPS | $191.2 million / $3.49 | $152.2 million / $2.78 |
| GAAP combined ratio | 98.5% | 100.7% |
| Cash from operating activities | $158.5 million | $91.8 million |
2011 net income improved despite nearly flat earned premiums. Lower acquisition and operating expenses helped underwriting results; the expense ratio fell to 27.2% from 29.6%. The loss ratio was nearly unchanged at 71.3% versus 71.1%. A combined ratio below 100% indicates an underwriting profit on this measure.
At year-end, total assets were $4.070 billion, shareholders’ equity $1.857 billion, and GAAP losses and loss-adjustment-expense liabilities $985.3 million, including $344 million of IBNR reserves. Total investments were $3.062 billion; cash was $211.4 million and short-term investments $236.4 million. Management cited combined cash and short-term investments of $447.8 million as available liquidity.
Debt declined to $140 million from $267.2 million after repayment of $125 million of senior notes at maturity. The remaining secured borrowings—$120 million and $20 million—mature January 2, 2015. Shareholders received $132.1 million in dividends in 2011 ($2.41 per share); the board declared a $0.61 quarterly dividend for payment in March 2012.
Changes, outlook, and material matters
- Written premiums rose about 0.8%; non-California net written premiums grew 4.5%, while California net written premiums declined 0.4%. Private passenger auto remained the dominant line, at 81.6% of direct premiums written.
- Prior-year reserves developed unfavorably by approximately $18 million in 2011, versus favorable development of approximately $13 million in 2010. Drivers included higher estimated California bodily-injury severity for 2008–2010, Florida PIP reserve increases following adverse court decisions, and New Jersey BI settlements above expectations. Reserve estimates remain inherently uncertain.
- Severe weather losses were estimated at $18 million in 2011, including Georgia tornadoes, Hurricane Irene, and California winter storms. Florida homeowners losses and sinkhole claims remain a concern; the company expected to complete its Florida homeowners withdrawal by September 2012.
- A California personal-auto class-plan filing took effect in December 2011, with rate decreases for some risks and increases for others. Management reported only a slight preliminary decline in renewals, but the ultimate renewal effect was unknown; the plan is intended to improve risk pricing and competitiveness.
- Management said the company did not expect to enter new states in 2012. It continued expanding technology platforms and digital capabilities. No numerical earnings or premium guidance was provided.
- The portfolio was heavily concentrated in tax-exempt municipal bonds: 74.0% of total investments and 92.6% of fixed maturities at fair value. Portfolio fair-value gains and losses affect reported earnings; the third quarter included a $64.3 million decline in investment fair value, while the fourth quarter included a $54.1 million increase.
- California DOI notices of non-compliance from 2004 and 2010 remained unresolved. The company denied the allegations, said it intended to defend them, and did not expect a material financial effect; potential penalties were not quantified clearly in the filing. The company also reported California tax assessments under protest and ongoing tax examinations, which management likewise did not expect to have a material effect.
- Other exposures include catastrophe losses and potential California Earthquake Authority assessments (maximum exposure reported as $55.8 million based on information available April 2011), reinsurer nonperformance, interest-rate and municipal-credit risks, and regulated-subsidiary limits on dividends to the holding company. The company reported sufficient statutory capital at year-end and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Subsequent California DOI developments and any penalties, remedies, or changes to rating and underwriting practices in the 2004 and 2010 matters.
- Subsequent reserve development, especially California bodily-injury severity and Florida PIP, sinkhole, and homeowners claims.
- Actual renewal, retention, and new-business trends after implementation of California’s class plan, and progress exiting Florida homeowners.
- Municipal-bond credit quality, valuation sensitivity, and realized versus fair-value investment gains; 2011 earnings included $58.4 million of realized investment gains.
- Holding-company liquidity and subsidiary dividend capacity, the terms and refinancing or repayment plan for $140 million of debt due in 2015, and sustainability of shareholder dividends.