Mercury General Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited consolidated results. Mercury primarily writes personal auto insurance, principally in California, and also offers homeowners and other property and casualty products.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums earned | $940.9 million | $899.3 million | $2,783.7 million | $2,633.8 million |
| Total revenues | $932.2 million | $998.8 million | $2,944.1 million | $2,712.9 million |
| Pre-tax income (loss) | $(3.4) million | $146.6 million | $264.4 million | $251.4 million |
| Net income | $1.3 million | $118.9 million | $217.5 million | $207.9 million |
| Diluted EPS | $0.02 | $2.15 | $3.93 | $3.75 |
| Combined ratio | 99.0% | 94.3% | 95.8% | 93.0% |
- Underwriting: Q3 underwriting gain was $9.6 million, versus $51.5 million a year earlier. Nine-month underwriting gain was $116.7 million, down from $185.1 million. The combined ratio remained below 100% in both periods, indicating underwriting profitability, but weakened year over year.
- Investment results: Q3 net realized investment losses were $43.5 million, compared with gains of $64.4 million in Q3 2020; the filing attributes the 2021 decline mainly to higher interest rates and weaker equity markets in September. For nine months, realized gains were $57.0 million versus losses of $28.5 million. Net investment income was $95.6 million for nine months, down from $100.8 million, as lower yields more than offset higher invested assets.
- Cash flow and liquidity: Operating cash flow for nine months was $428.0 million, versus $443.3 million. At September 30, cash was $341.6 million and short-term investments were $193.6 million; management cited $535.2 million of combined cash and short-term investments and $75 million available under its revolver. Investing activities used $329.3 million; dividends paid were $105.1 million.
- Balance sheet and debt: Total assets were $6.75 billion and shareholders’ equity was $2.14 billion. Debt carrying value was $372.8 million, representing $375 million of senior unsecured notes due 2027. The amended revolving facility increased to $75 million and matures in 2026; it was undrawn as of October 28, 2021. Debt-to-total-capital was 14.9%, and the company reported compliance with financial covenants.
- Dividends: The company paid $0.6325 per share in Q3 and $1.8975 per share for the nine-month period.
Changes versus comparable periods
- Net premiums earned rose 4.6% in Q3 and 5.7% for nine months. Net premiums written rose 7.6% for both periods. Growth reflected prior-year COVID-related premium refunds, homeowners rate increases, and growth outside California; excluding the prior-year refunds, earned premium growth was 2.2% in Q3 and 0.8% for nine months.
- Q3 net income fell sharply because of the swing from prior-year investment gains to current-quarter losses and higher insurance losses. Nine-month net income increased 4.6%, supported by the swing in realized investment results, despite weaker underwriting results.
- The reported loss ratio increased to 74.2% in Q3 from 68.8%, and to 71.2% for nine months from 67.0%. Excluding prior-year reserve development and catastrophe losses, the loss ratio was 72.2% versus 65.7% in Q3 and 68.8% versus 64.3% for nine months.
- Nine-month catastrophe losses were approximately $91 million, compared with $48 million a year earlier. Nine-month favorable prior-year reserve development was $23.7 million, versus unfavorable development of $25.5 million in 2020.
- Investments totaled $5.07 billion, up from $4.73 billion at year-end 2020. Loss and LAE reserves increased to $2.14 billion from $1.99 billion; unearned premiums increased to $1.55 billion from $1.41 billion.
Outlook, commentary and key risks
- The filing provides no formal earnings or premium guidance. Management said rising auto claim frequency and sustained high severity have pressured results; frequency was approaching pre-pandemic levels for some coverages and above them for comprehensive coverage. Vehicle repair costs may remain elevated because of supply-chain and labor constraints. If frequency rises or severity stays high, results could deteriorate and the company may seek private passenger auto rate increases.
- Management implemented a 6.99% California homeowners rate increase in June 2021. A planned fourth-quarter 2021 transfer of qualifying California “Good Drivers” between subsidiaries, alongside broader coverage, is expected to reduce annual California private passenger auto premiums by about $25 million over 24 months beginning in Q1 2022; the related increase in losses was not estimable but was not expected to be material.
- Catastrophe exposure remains important. The catastrophe treaty provides up to $792 million per occurrence after a $40 million retention, subject to coverage exclusions and other terms. No treaty recovery was available for the reported 2021 catastrophe events because no individual event exceeded the retention.
- California regulators are seeking information about pandemic-related auto premium relief and have publicly alleged that relief may have been insufficient. Mercury reported approximately $128 million of refunds or credits for 2020, in addition to policy-level mileage adjustments. The company disputes that further refunds are legally required, but cannot predict whether further action will be taken or estimate potential additional costs.
- A California Department of Insurance notice alleges violations related to a prior rating and underwriting examination and seeks penalties. Discussions continue; the company cannot predict the outcome or estimate any penalties.
- Other notable exposures include reserve-estimate uncertainty, investment-market and interest-rate risk, reinsurance counterparty risk, and COVID-19 effects. A 100- or 200-basis-point increase in interest rates was estimated to reduce fixed-maturity fair value by $139.3 million or $278.7 million, respectively. The company also disclosed approximately $40 million of unfunded private-equity commitments callable before April 30, 2022.
- Management stated it believes liquidity is sufficient without forced investment sales, while cautioning that future cash needs and receipts are uncertain. Disclosure controls were considered effective; no material change in internal control over financial reporting was reported.
Investor verification points
- Reconcile Q3 near-break-even earnings with the investment portfolio’s fair-value losses and the deterioration in underlying auto loss experience.
- Track auto claim frequency, severity, repair-cost inflation, catastrophe losses, and reserve development in subsequent filings.
- Monitor California DOI proceedings and any additional premium-relief orders, penalties, or required customer refunds.
- Verify the expected timing and premium impact of the California policyholder transfer and the effect of homeowners rate increases.
- Assess investment portfolio sensitivity to interest rates and equity markets, alongside liquidity, treaty renewals, and reinsurance recoveries.