Business context and reporting period
Mercury General Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the same 2020 period. The insurer writes primarily personal automobile coverage through 14 insurance subsidiaries in 11 states, principally California, and also offers homeowners and other property and casualty products.
Financial performance and position
Unless otherwise indicated, amounts are U.S. dollars.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net premiums earned | $915.9 million | $922.6 million |
| Total revenues | $993.1 million | $708.3 million |
| Net investment income | $32.3 million | $34.5 million |
| Net realized investment gains (losses) | $41.7 million | $(251.3) million |
| Pre-tax income (loss) | $132.4 million | $(180.7) million |
| Net income (loss) | $107.0 million | $(139.2) million |
| Diluted earnings (loss) per share | $1.93 | $(2.51) |
| Operating cash flow | $174.5 million | $97.1 million |
The insurer’s loss ratio was 68.4%, expense ratio 25.1%, and combined ratio 93.5%; the comparable 2020 combined ratio was 95.9%. A combined ratio below 100% generally indicates underwriting profit. Segment underwriting gain was $59.5 million versus $37.8 million.
At March 31, 2021, total investments were $4.946 billion and cash was $338.4 million. Cash plus short-term investments totaled $886.5 million. Total assets were $6.554 billion, total liabilities $4.450 billion, and shareholders’ equity $2.104 billion. Gross loss and loss adjustment expense reserves were $2.041 billion.
Debt carrying value was $372.6 million, representing $375 million of 4.40% senior unsecured notes due in 2027. The company had no borrowings under its revolving credit facility and $75 million available; its debt-to-total-capital ratio was 15.1%. Q1 dividends paid were $35.0 million, or $0.6325 per share.
Material changes versus the prior comparable period
- Net income improved by $246.2 million, chiefly reflecting the swing in realized investment results from a $251.3 million loss to a $41.7 million gain. The 2021 result included $26.5 million of gains from investment fair-value changes; 2020 included $241.0 million of losses from such changes.
- Net premiums earned declined 0.7%, and net premiums written declined 0.4%. Lower private passenger auto premiums were partly offset by homeowners and commercial auto growth.
- The combined ratio improved 2.4 percentage points. Excluding prior-period reserve development and catastrophe losses, the loss ratio was 64.3% versus 68.6% in Q1 2020, largely reflecting lower auto loss frequency during the pandemic, partly offset by higher severity and lower average auto premiums.
- Net cash from operations increased $77.4 million, primarily because of lower loss and LAE payments, partly offset by lower premium collections and reinsurer collections.
- Net investment income fell as lower portfolio yields more than offset higher average invested assets; the pre-tax average annual yield declined to 2.9% from 3.3%.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or premium guidance. It cautioned that quarterly results are not necessarily indicative of full-year results.
- COVID-19 continued to affect driving and claims: auto claim frequency remained below historical levels, while accident severity and vehicle repair costs had increased. Management noted uncertainty around claim reporting, settlement timing, future loss trends, and policyholder premium collection.
- Q1 catastrophe losses were approximately $39 million before favorable prior-catastrophe development; no treaty recovery applied because no event exceeded the $40 million retention. Events included the Texas and Oklahoma deep freeze and California winter storms. Net catastrophe losses recognized were approximately $35 million.
- The catastrophe treaty in force through June 30, 2021 provides up to $717 million per occurrence above the $40 million retention, subject to exclusions and restrictions. Annual treaty premium was approximately $50.3 million, up from $38.0 million for the prior treaty year.
- California approved a 6.99% homeowners rate increase, expected to take effect in June 2021. A California DOI market-conduct examination is subject to potential enforcement action; the company may seek to resolve alleged violations before a formal notice is filed. The filing does not quantify a potential loss.
- The company cited interest-rate, equity-market, credit, catastrophe, reserve-estimation, regulatory, competition, and pandemic-related risks. A 100- or 200-basis-point interest-rate increase was estimated to reduce fixed-maturity portfolio fair value by $120.3 million or $240.7 million, respectively. Management said liquidity was adequate without forced investment sales, while noting future needs could change.
- Management reported no material expected adverse effect from pending legal or regulatory proceedings, and no material change to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- How much of the earnings rebound reflects recurring underwriting and investment income versus fair-value-driven realized gains.
- Whether auto claim frequency, severity, repair costs, and delayed bodily-injury claims change as driving patterns normalize.
- Reserve adequacy and future development, particularly given the uncertainty in long-tail claims and catastrophe estimates.
- Catastrophe exposure net of reinsurance, including treaty exclusions, retention levels, and any recoveries after June 30, 2021.
- Implementation and premium impact of the California homeowners rate increase, and the outcome of the DOI enforcement process.
- Investment portfolio sensitivity to interest rates, equity-market declines, and municipal-bond credit changes; the portfolio is heavily weighted toward municipal securities.
- Premium collection and credit-loss trends as pandemic-related economic conditions evolve.