Mercury General Corporation — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Although the request metadata refers to 2021 Q4, this filing reports annual results; it does not provide a clear standalone fourth-quarter financial summary.
Business context
Mercury General primarily writes personal automobile insurance through subsidiaries in 11 states, principally California, and also offers homeowners and other property and casualty coverage. Private passenger auto represented about 68% of 2021 direct premiums written; California accounted for about 84% of total direct premiums written and approximately 87% of the company’s California voluntary private-auto policies were classified as good drivers.
Financial and operating metrics
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Net premiums earned | $3.742 billion | $3.556 billion |
| Net premiums written | $3.855 billion | $3.612 billion |
| Total revenues | $3.993 billion | $3.785 billion |
| Income before income taxes | $299.3 million | $458.5 million |
| Net income | $247.9 million | $374.6 million |
| Diluted earnings per share | $4.48 | $6.77 |
| GAAP loss / expense / combined ratios | 73.8% / 24.5% / 98.3% | 67.4% / 25.7% / 93.1% |
| Net cash provided by operating activities | $501.6 million | $605.6 million |
| Net investment income | $129.7 million | $134.9 million |
| Net realized investment gains | $111.7 million | $85.7 million |
- Net premiums earned increased 5.2% and net premiums written increased 6.8%. Excluding the approximately $128 million of 2020 COVID-related refunds and credits, management reported increases of 1.6% and 3.1%, respectively.
- Net income fell about 34% year over year. Underwriting gain declined to $65.0 million from $246.6 million, while the combined ratio remained below 100% but deteriorated by 5.2 percentage points.
- Losses and loss adjustment expenses rose to $2.760 billion from $2.395 billion. The 2021 loss ratio was affected by approximately $109 million of catastrophe losses from events during the year, with no reinsurance benefits used for those events; net catastrophe losses including prior-year development were approximately $104 million.
- Excluding catastrophe losses and prior-period reserve development, the loss ratio was 71.5%, versus 64.8% in 2020. Management attributed the increase mainly to higher auto loss frequency and severity, including rising repair costs and vehicle thefts.
- Pre-tax investment income declined despite higher average invested assets, as reinvestment yields fell. The investment portfolio’s fair value was $5.143 billion at year-end, including $4.032 billion of fixed maturities and $970.9 million of equity securities.
- Operating cash flow decreased approximately $104 million, primarily because of increased claim and underwriting payments, higher income taxes paid, and lower reinsurer collections. Cash was $335.6 million; cash plus short-term investments totaled approximately $475.7 million.
- Year-end total assets were $6.772 billion, total liabilities $4.632 billion, and shareholders’ equity $2.140 billion. Loss reserves were $2.226 billion, including approximately $1.03 billion of incurred-but-not-reported liabilities.
- Debt was $372.9 million carrying value, consisting principally of $375 million of 4.40% senior unsecured notes due in 2027. The $75 million revolving facility was undrawn; the company reported compliance with its financial covenants. Debt-to-total-capital was 14.9%.
- Insurance subsidiaries reported statutory capital and surplus of $1.827 billion. Their net-premiums-written-to-surplus ratio was 2.1 to 1, below the cited 3-to-1 guideline; all subsidiaries exceeded minimum risk-based capital requirements.
Material changes and management commentary
- Auto loss frequency, which had fallen during the pandemic, increased as driving resumed; severity also rose. Management noted that frequency was near pre-pandemic levels for some coverages and above them for comprehensive coverage.
- Market conditions hardened in many states in the second half of 2021 as insurers sought rate increases. California remained a soft market, in management’s view, partly because rate increases are difficult to obtain promptly.
- California approved a 6.99% homeowners rate increase, implemented in June 2021. Management expects the planned transfer of qualified good drivers between California subsidiaries, alongside broader coverage in one product, to reduce annual California private-auto premiums earned by about $25 million over 24 months beginning in Q1 2022; the resulting loss increase was not estimable but was not expected to be material.
- The company stopped accepting new and renewal commercial-auto business in Arizona, Georgia, Illinois, and Nevada during 2021, citing volatility and difficulty achieving profitable growth.
- Management expects 2022 capital spending to be similar to 2021’s $41.4 million, principally for technology and facilities. It also plans continued platform modernization and expected completion of specified California auto and umbrella system migrations. No quantified earnings or premium-growth guidance is provided.
- Shareholder dividends paid totaled $140.2 million in 2021. The board declared a $0.635 quarterly dividend in February 2022. A $200 million share-repurchase authorization was extended, but the company had made no repurchases since 2000.
Risks, contingencies, and unusual items
- California concentration and regulation: Dependence on California exposes results to local market conditions and prior-approval rate regulation. The California DOI requested information about pandemic-related premium relief and alleged that refunds may have been insufficient. The company disputes that position; any additional refund obligation or loss could not be reasonably estimated.
- Regulatory notice: A September 2021 California DOI notice alleged violations related to an earlier rating and underwriting examination and sought penalties. Discussions continued; the company could not predict the outcome or estimate potential penalties.
- Reserving uncertainty: Reserve adequacy is a significant judgment area and the auditor identified loss reserves as a critical audit matter. Management said California auto bodily-injury severity for 2021 accident-year claims could vary by 12%; its sensitivity analysis showed approximately $53.6 million of favorable or unfavorable development for that accident year under the stated scenario. Pandemic-related claims reporting and settlement patterns add uncertainty.
- Catastrophe exposure: The company has substantial exposure to severe weather, wildfire, and other events. Its catastrophe treaty provided up to $792 million per occurrence after a $40 million company retention for the period ending June 30, 2022, subject to exclusions and limits. No 2021 events exceeded the retention individually.
- Earthquake assessment: The company’s stated maximum exposure to California Earthquake Authority assessments was $77.1 million based on information available at April 1, 2021; no assessment was made in 2021.
- Investment and rate risk: Municipal bonds were about 47% of the total portfolio at fair value. A 100- or 200-basis-point rate increase was estimated to reduce fixed-maturity fair value by $142.3 million or $284.5 million, respectively. Lower rates could further pressure reinvestment income.
- Other exposures: Reinsurer performance, inflation and repair costs, COVID-19 disruptions, litigation, cyber and technology risks, and restrictions on subsidiary dividends could affect results or liquidity. The company is a holding company reliant on regulated subsidiaries for cash distributions; up to $252 million of ordinary subsidiary dividends was available in 2022 without extraordinary-dividend approval.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective at December 31, 2021.
Most important facts for investors to verify
- Whether auto frequency, severity, and repair-cost inflation continue to pressure loss ratios, and whether approved rates keep pace with claims costs.
- Developments in California DOI proceedings concerning pandemic premium relief and the rating and underwriting examination, including any refunds, penalties, or required business changes.
- Whether 2020–2021 bodily-injury claims and catastrophe reserves develop adversely as claims are reported and settled.
- Investment portfolio performance, municipal-bond credit exposure, and the effect of interest-rate changes on income and fair value.
- Subsidiary dividend capacity, holding-company liquidity, and continued ability to support shareholder dividends and debt service.