Mercury General Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Mercury primarily writes personal automobile insurance through subsidiaries in 11 states, principally California. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net premiums earned | $899.3 | $915.0 | $2,633.8 | $2,674.0 |
| Total revenues | $998.8 | $987.3 | $2,712.9 | $2,984.5 |
| Net investment income | $32.1 | $36.4 | $100.8 | $105.6 |
| Net realized investment gains (losses) | $64.4 | $33.3 | $(28.5) | $197.7 |
| Net income | $118.9 | $69.3 | $207.9 | $288.4 |
| Diluted EPS | $2.15 | $1.25 | $3.75 | $5.21 |
| Combined ratio | 94.3% | 98.6% | 93.0% | 98.1% |
Q3 underwriting was profitable, with the combined ratio improving year over year as lower auto loss frequency more than offset catastrophe losses, higher auto severity, and homeowners losses. For the nine-month period, net income fell 28% year over year, primarily reflecting the swing from substantial investment gains in 2019 to investment losses in 2020. Net premiums earned declined 1.5% for the nine months; net premiums written declined 4.2% to $2,716.0 million.
Financial position, cash flow and capital
- At September 30, total assets were $6,145.8 million and shareholders’ equity was $1,900.8 million. Loss and loss adjustment expense reserves were $1,942.0 million.
- Cash was $322.1 million and short-term investments were $253.8 million, totaling approximately $576.0 million. Management said liquidity, operating cash flow, and the undrawn credit facility should meet needs without forced investment sales.
- Nine-month operating cash flow was $443.3 million, versus $413.6 million in 2019. Investing activities used $310.9 million; dividends paid were $104.6 million.
- Debt carrying value was $372.4 million, representing $375 million of 4.40% senior unsecured notes due 2027. The $50 million revolving credit facility was undrawn; debt-to-total-capital ratio was 16.5%, and the company reported covenant compliance.
- Insurance subsidiaries’ statutory surplus was $1.64 billion; trailing-12-month net premiums written to surplus was 2.21:1. The quarterly dividend was $0.63 per share.
Material changes and unusual items
- COVID-19 premium refunds and credits totaled approximately $128 million through September, reducing nine-month net premiums earned by approximately $128 million. The Q3 reduction was approximately $21 million. Management cited declining California private-auto policy counts, partly offset by homeowners rate increases and policy growth.
- Reduced driving lowered auto claim frequency, but frequency began rising as travel resumed. Management also reported higher accident severity and potential repair-cost pressure from labor and supply-chain issues.
- Nine-month investment results included a $28.5 million realized loss, compared with a $197.7 million gain in 2019. The company uses the fair value option, with changes in investment values reflected in realized gains or losses. Management said much of the first-quarter 2020 portfolio decline recovered in the second and third quarters.
- Nine-month prior-year reserve development was unfavorable by approximately $25.5 million, mainly from homeowners and commercial auto, partly offset by favorable California private-auto development. Catastrophe losses, net of reinsurance, were approximately $43 million, versus $17 million in 2019.
- COVID-related economic conditions led to a $10 million allowance for credit losses on premiums receivable at September 30, up from $1.4 million at year-end 2019. Management warned actual uncollectible amounts could be materially higher or lower than estimated.
- California homeowners rates rose 6.99% in February and again in July; the February increase took effect in April and the July increase in October. The catastrophe treaty through June 2021 provides up to $717 million per occurrence above a $40 million retention, subject to exclusions and restrictions; its annual premium rose to approximately $50.3 million from $38.0 million.
- Mercury received approximately $23 million, net of fees, from the PG&E Subrogation Trust Fund in Q3. Because the recovery related to previously reinsured claims, it did not reduce net losses; the reported after-reinsurance, pretax benefit was approximately $3 million from lower reinstatement premiums.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management emphasized uncertainty around the duration and effects of COVID-19, including premium collection, policy demand, driving patterns, claims frequency and severity, investment markets, and reinsurer credit. Other key risks include catastrophe exposure, reserve-estimation uncertainty, rate-approval timing, competition, interest-rate and equity-market movements, and regulatory or legal developments. Management stated it did not expect pending legal or regulatory matters to have a material adverse effect on financial condition or cash flows. A California market-conduct examination report was under review for potential further action following an October 30, 2020 notice.
Important facts for investors to verify
- Whether auto claim frequency and severity trends, including repair costs, persist as driving activity normalizes.
- Whether premium collections and the $10 million credit-loss allowance adequately reflect continuing COVID-19 economic conditions.
- Subsequent development of loss reserves, especially homeowners and commercial auto, and catastrophe losses.
- Investment portfolio recovery, realized and unrealized volatility, and sensitivity to interest rates and equity markets.
- Impact of premium refunds, approved rate changes, and California regulatory matters on premiums and underwriting profitability.
- Reinsurance coverage, exclusions, renewal costs, and the company’s exposure if reinsurers cannot meet obligations.