Mercury General Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Mercury writes personal auto and related property-and-casualty insurance through subsidiaries in 11 states, principally California.
Financial results and position
- Revenue: $1.107 billion, up 37.4% year over year. Net premiums earned were $1.005 billion (+4.4%); net investment income was $52.0 million (+47.0%); realized investment gains were $49.0 million versus losses of $195.1 million in Q1 2022. The investment result includes fair-value changes.
- Profitability: Net loss was $45.3 million, or $0.82 per diluted share, compared with a $196.9 million loss, or $3.56 per share. Pre-tax loss was $62.1 million. Underwriting loss was $159.1 million versus $91.7 million.
- Underwriting ratios: Loss ratio 92.5% versus 85.4%; expense ratio 23.3% versus 24.1%; combined ratio 115.8% versus 109.5%. A combined ratio above 100% indicates underwriting losses. Excluding catastrophe losses and prior-year reserve development, the loss ratio was 84.3% versus 77.7%.
- Premium production: Net premiums written were $1.010 billion, essentially flat year over year. Direct premiums written were also nearly unchanged at $1.019 billion. Earned premiums grew mainly from business outside California and rate increases, partly offset by fewer California private-auto policies.
- Cash flow and liquidity: Operating cash flow was $18.2 million versus $106.6 million. Investing activities used $69.5 million and financing provided $31.9 million, including $50 million of credit-facility borrowing. Cash was $270.4 million; cash plus short-term investments totaled $417.2 million. Management said operating cash flow, available credit and investment maturities were expected to meet liquidity needs, while noting future needs could change.
- Debt and capital: Notes payable were $448.4 million, up from $398.3 million at year-end, including $375 million of 4.40% senior notes and $75 million drawn under the revolving facility. The facility had $125 million undrawn at quarter-end; the company reported compliance with its financial covenants. Insurance-subsidiary statutory surplus was $1.47 billion, and net premiums written to surplus was 2.70:1.
- Balance sheet: Total assets were $6.589 billion and shareholders’ equity $1.459 billion at March 31, 2023, compared with $6.514 billion and $1.522 billion, respectively, at December 31, 2022. Loss reserves increased to $2.678 billion from $2.585 billion.
- Dividends: $0.3175 per share declared and paid in Q1 2023, versus $0.6350 in Q1 2022.
Material changes and management commentary
- Current-year claim costs were pressured by auto repair, labor and medical-cost inflation, as well as social inflation. Management said it had implemented rate increases, filed for additional increases and was taking non-rate actions to improve profitability.
- Catastrophe losses were approximately $98 million, mainly from California, Texas and Oklahoma storms, versus approximately $22 million in Q1 2022. None of the individual events exceeded the $60 million retention, so the catastrophe treaty provided no recovery for these losses.
- Prior-year reserve development was favorable by $15.5 million, primarily in homeowners, versus $52.9 million unfavorable in Q1 2022, primarily in auto and commercial property.
- California approved a 6.9% private-auto rate increase for MIC and CAIC, effective March 2023; a further 6.99% increase was filed in March. A 12.6% California homeowners increase was approved and was to take effect in May 2023.
- On April 24, 2023, Mercury agreed to provide $25 million in renewal-premium credits to certain California private-auto policyholders, over up to 18 months, after the specified rate applications are approved and effective. The credits will reduce premiums in periods when policies renew. Related private actions remained pending; the company said it would seek dismissal and could not estimate potential additional losses.
- A separate California DOI rating and underwriting matter remained under discussion; the company could not reasonably predict its outcome or estimate potential penalties.
- Mercury sold its Clearwater, Florida office building on March 31 for $19.6 million and recorded a $1.8 million loss. A $9.8 million secured note is part of the consideration. It also classified a Rancho Cucamonga office building, carried at $13.6 million, as held for sale.
Outlook, risks and contingencies
The filing provides no quantitative earnings or full-year financial guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results. Key stated risks include catastrophe frequency and severity, reserve-estimation uncertainty, inflation and claim trends, investment-market and interest-rate movements, competition, regulatory approval and timing of rate changes, and litigation. The California COVID-refund settlement and other regulatory and legal matters remain relevant; management said it could not estimate certain potential outcomes. The filing reports no material change to the risk factors in the 2022 Form 10-K.
Investor facts to verify
- Whether approved and pending rate increases sufficiently offset worsening auto claim severity, and how they affect policy retention and written premiums.
- Subsequent catastrophe losses, treaty renewals and coverage terms, including the $60 million retention and exclusions.
- Loss-reserve development and the adequacy of reserves amid inflation and legal/social inflation.
- Implementation and financial impact of the $25 million California policyholder credits, and status of the related private lawsuits and DOI matters.
- Investment portfolio valuation and sensitivity: a 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $143.5 million; a 200-basis-point increase by $286.9 million.
- Use and cost of revolving-credit borrowings, liquidity and capital levels, and the pending sale of the Rancho Cucamonga property.