Mercury General Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Mercury primarily writes personal auto insurance, with operations in 11 states and concentration in California. Figures below are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net premiums earned | $987.5 million | $926.8 million | $1,950.1 million | $1,842.7 million |
| Total revenue | $785.6 million | $1,018.8 million | $1,591.1 million | $2,011.9 million |
| Net income (loss) | $(210.7) million | $109.2 million | $(407.6) million | $216.2 million |
| Loss ratio | 83.7% | 70.9% | 84.6% | 69.7% |
| Expense ratio | 22.9% | 23.9% | 23.5% | 24.5% |
| Combined ratio | 106.6% | 94.9% | 108.1% | 94.2% |
- Premium growth was supported by higher average premiums, including California homeowners rate increases, and growth in policies outside California; fewer California private passenger auto policies partly offset growth.
- Net realized investment losses were $241.9 million for Q2 and $437.0 million for the first half, versus gains of $58.8 million and $100.5 million, respectively, in 2021. The 2022 losses primarily reflected higher interest rates reducing fixed-income fair values and declines in equity markets. Net investment income increased to $38.6 million in Q2 and $73.9 million in the first half.
- Underwriting was unprofitable: combined ratios exceeded 100% in both 2022 periods. The first-half loss ratio excluding prior-year reserve development and catastrophe losses was 79.9%, versus 67.0% in 2021.
- Operating cash flow was $194.9 million for the first half, down from $317.2 million. Cash and short-term investments totaled $462.1 million at June 30. Investing activities used $169.2 million; dividends used $70.3 million.
- Total assets were $6.50 billion and shareholders’ equity was $1.66 billion at June 30, versus $6.77 billion and $2.14 billion at year-end 2021. Retained earnings fell to $1.56 billion, reflecting the first-half loss and dividends.
Debt, liquidity and capital
Debt was $373.1 million, principally $375 million of 4.40% senior unsecured notes due in 2027. The $75 million revolving credit facility was undrawn; the company reported a debt-to-total-capital ratio of 18.4% and compliance with its financial covenants. Management said available cash, short-term investments, operating cash flows, investment maturities and the undrawn facility were expected to support liquidity without forced investment sales. Statutory net premiums written to surplus was 2.44 to 1.
Material changes, outlook and risks
- Management cited elevated inflation, auto repair and medical costs, supply-chain and labor constraints, and social inflation as drivers of higher claim severity. Auto loss frequency had also recovered to near pre-pandemic levels. These conditions contributed to current-year loss increases and $51.4 million of adverse prior-year reserve development for the first half, mainly in private passenger auto and commercial property.
- First-half catastrophe losses were approximately $40 million, primarily from storms and hail in Texas and winter storms in California; no reinsurance benefits applied to those events. The company filed for rate increases in multiple states and said it was pursuing other actions to improve profitability; timing and approval of rate changes remain uncertain.
- On July 29, 2022, the Board declared a quarterly dividend of $0.3175 per share, down from the previous $0.6350, citing challenging conditions and high claim inflation. The Board also allowed its authorization to repurchase up to $200 million of shares to expire; no shares had been repurchased under it.
- California regulatory and legal matters include a DOI notice alleging rating and underwriting violations, with the DOI announcing on August 1 its intention to pursue an administrative action. The company said it could not predict the outcome or estimate potential penalties. The DOI and private plaintiffs have also challenged the sufficiency of pandemic-era premium relief; Mercury reported approximately $128 million of refunds or credits already provided and could not estimate potential additional refunds or losses.
- Other identified risks include continued inflation, investment-market volatility from interest-rate changes, catastrophe exposure, uncertainty in loss-reserve estimates, reinsurance counterparty performance, and economic and market effects of the Russia-Ukraine conflict. The company reported no material change to other 2021 Form 10-K risk factors.
Important facts for investors to verify
- Whether filed rate increases are approved and keep pace with claims inflation, and whether auto frequency and severity stabilize.
- How reserve estimates develop, particularly the adverse prior-year auto experience and the effect of social inflation and delayed claims settlement.
- Whether investment losses and portfolio fair values recover or change further as interest rates and equity markets move.
- Developments in the California DOI administrative action and pandemic premium-relief matters, including any penalties or additional refunds.
- Effects of the reduced dividend on future capital returns and the company’s ability to maintain liquidity while underwriting remains loss-making.