Mercury General Corporation — Q1 2024 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2024, compared with Q1 2023. Mercury primarily writes personal auto insurance, with related homeowners and commercial lines, through subsidiaries operating in 11 states, principally California.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net premiums earned | $1,166.7 million | $1,004.7 million |
| Total revenues | $1,274.1 million | $1,106.6 million |
| Net investment income | $65.0 million | $52.0 million |
| Net realized investment gains | $38.2 million | $49.0 million |
| Pre-tax income (loss) | $89.2 million | $(62.1) million |
| Net income (loss) | $73.5 million | $(45.3) million |
| Diluted earnings (loss) per share | $1.33 | $(0.82) |
| Operating cash flow | $192.6 million | $18.2 million |
Underwriting. Net premiums earned rose 16.1%; net premiums written increased 27.2% to $1,285.0 million. The combined ratio improved to 100.9% from 115.8%, but remained above 100%, indicating an underwriting loss. The loss ratio was 77.5% versus 92.5%; the expense ratio was 23.4% versus 23.3%. Excluding catastrophe losses and prior-year reserve development, the loss ratio was 72.2% versus 84.3%. The Property & Casualty segment recorded a $9.9 million underwriting loss, compared with a $159.0 million loss in Q1 2023.
Balance sheet and liquidity at March 31, 2024. Total assets were $7.40 billion, including $5.45 billion of investments and $530.1 million of cash. Cash plus short-term investments totaled $692.6 million. Total liabilities were $5.79 billion and shareholders’ equity was $1.60 billion. Loss and LAE reserves were $2.86 billion; unearned premiums were $1.85 billion. Cash decreased $20.8 million during the quarter as operating cash was primarily used for net investment purchases and dividends. Management said operating cash flow and investment maturities are expected to support liquidity, while noting future funding needs cannot be assured.
Debt and capital. Debt carrying value was $573.8 million: $375 million of 4.40% senior unsecured notes due March 2027 and $200 million drawn on a $250 million revolving credit facility due November 2026. The drawn facility rate was approximately 6.79% as of April 25, 2024, leaving $50 million available. The company reported compliance with facility covenants. Its net-premiums-written-to-statutory-surplus ratio was 2.79:1, against an industry/regulatory guideline cited by the company of 3.0:1.
Material changes and management commentary
- Premium growth was attributed primarily to rate increases and more policies in California auto and homeowners. Direct premiums written increased to $1.30 billion from $1.02 billion; California represented 79.1% of Q1 2024 direct written premiums.
- California regulators approved auto rate increases effective February 2024 of 22.5% for Mercury Insurance Company and 3.8% for California Automobile Insurance Company. A 6.99% California homeowners increase was approved in March and expected to take effect in May 2024.
- Net investment income increased, with the average annual pre-tax investment yield rising to 4.4% from 4.0%. Net realized gains fell to $38.2 million from $49.0 million. Q1 2024 fair-value gains in equities were partly offset by fixed-maturity losses as interest rates rose.
- Q1 catastrophe losses were approximately $72 million net of reinsurance, versus $98 million a year earlier. The 2024 events primarily involved California winter and rainstorms and convective storms in Texas and Oklahoma; none individually exceeded the $100 million retention for the catastrophe treaty.
- Prior-year reserve development was favorable by $5.8 million, mainly from lower-than-estimated auto LAE, partly offset by unfavorable development on prior catastrophe losses. Management emphasizes that loss reserves rely on estimates and actual ultimate costs may differ.
Risks, contingencies and outlook
- No specific earnings or financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results and identified rate approvals, competition, inflation, claims severity, catastrophe activity, investment markets, regulation, litigation and reserve-estimation uncertainty as risks.
- The catastrophe reinsurance treaty in force through June 30, 2024 provides approximately $1.11 billion of per-occurrence coverage above specified retentions, subject to exclusions and layered terms. Annual treaty premium was approximately $99 million, versus $74 million for the prior treaty year. Reinsurance may not respond to events below retentions; reinsurer performance is also a risk.
- A California Department of Insurance administrative matter alleges rating and underwriting violations. Mediation on March 4, 2024 made no meaningful settlement progress; discussions continued. The company said it could not reasonably predict the outcome or estimate potential penalties.
- The investment portfolio is exposed to interest-rate and equity-price movements. A 100- or 200-basis-point rate increase was estimated to reduce fixed-maturity fair value by $134.2 million or $268.3 million, respectively. The company also reported modeled reductions of $152.6 million and $305.1 million in common-stock portfolio value under 25% and 50% market declines.
- Management stated that pending legal and regulatory matters are not expected, individually or collectively, to materially adversely affect financial condition or cash flows. Existing risk factors were reported as not materially changed.
Important facts for investors to verify
- Whether approved California rate increases continue to receive regulatory approval and translate into earned premiums and improved underwriting results.
- Claims severity, catastrophe frequency, reserve development and the sustainability of the combined-ratio improvement; the reported ratio remained above 100%.
- Renewal terms, cost and coverage of catastrophe reinsurance after June 30, 2024, including retention levels and exclusions.
- Investment portfolio sensitivity to interest rates and equity markets, and the effect of fair-value gains and losses on reported earnings.
- Progress and potential consequences of the California DOI proceeding, for which penalties could not be estimated.
- Liquidity and debt costs, including the variable-rate credit-facility borrowing and remaining $50 million capacity.