Mercury General Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. Mercury primarily writes personal auto insurance, principally in California, and also offers homeowners and other property and casualty products. Results for this quarter are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net premiums earned | $789.8 million | $767.1 million | Up 3.0% |
| Net premiums written | $811.6 million | $797.7 million | Up 1.7%; attributed mainly to higher California auto premiums and homeowner policy growth |
| Total revenue | $847.5 million | $823.9 million | Up 2.9% |
| Net income | $27.0 million | $23.3 million | Up 15.7%; diluted EPS was $0.49 versus $0.42 |
| Pre-tax underwriting result | $(24.7) million | $(29.8) million | Underwriting remained unprofitable, but the loss narrowed |
| Loss / expense / combined ratios | 76.8% / 26.3% / 103.1% | 77.5% / 26.4% / 103.9% | Combined ratio improved 0.8 percentage point but remained above 100% |
| Net investment income | $31.2 million | $29.7 million | Average annual yield was 3.6% before tax in both periods |
| Net realized investment gains | $24.5 million | $25.1 million | Included gains from fair-value changes under the company’s fair value option |
| Operating cash flow | $74.2 million | $49.8 million | Increase attributed primarily to higher premium collections and lower operating expense payments, partly offset by higher paid losses |
| Dividends paid per share | $0.6225 | $0.6200 | Total dividends paid were $34.4 million |
Balance sheet, debt and liquidity
- At March 31, 2017, total assets were $4.864 billion, total liabilities $3.118 billion and shareholders’ equity $1.746 billion.
- Cash was $236.6 million and short-term investments $260.7 million, or approximately $497.3 million combined. Management said operating cash flow, available credit and investment maturities were expected to meet liquidity needs without forced investment sales, while noting future needs could change.
- Debt carrying value was $371.0 million. In March, the company issued $375 million of 4.40% senior unsecured notes due in 2027, used proceeds in part to repay $320 million of prior facilities, and entered a new undrawn $50 million revolving facility due 2022. The notes’ effective annualized rate, including issuance costs, was approximately 4.45%. Debt-to-capital was 17.7%; the company reported compliance with its financial covenants.
- Insurance subsidiaries’ combined statutory surplus was $1.58 billion; trailing-twelve-month net premiums written to surplus was 2.01 to 1.
Material changes, outlook and risks
- Premium growth reflected higher average premiums from California private passenger auto rate increases and growth in California homeowners policies. California regulators approved 6.9% rate increases for auto, expected effective May 2017, and homeowners, expected effective August 2017.
- Q1 catastrophe losses were approximately $30 million, mainly from severe California rainstorms, versus approximately $8 million in Q1 2016. Prior-year reserve development was unfavorable by about $4 million, primarily due to higher-than-estimated California property losses; the comparable 2016 charge was about $40 million, mainly for California and Florida auto liability claims.
- Loss reserves were $1.317 billion at quarter-end, including approximately $552.7 million of incurred-but-not-reported reserves. Management considers reserves adequate, but actual claim costs may differ from estimates.
- A California court vacated a $27.6 million penalty previously paid by the company and ordered a refund with statutory interest. The Commissioner appealed in January 2017. The company has not recognized a refund receivable or the vacatur while the appeal is pending; related proceedings are stayed pending appeal.
- Investment and market risks include interest-rate, equity-price and credit exposure. Fixed maturities were 80.9% of investments, with an A+ weighted-average credit rating. The company estimated that a 100- or 200-basis-point rate increase would reduce bond portfolio fair value by approximately $127.4 million or $254.8 million, respectively.
- Management provided no specific earnings or premium guidance. It cautioned that results may fluctuate with competition and pricing, claims severity and frequency, catastrophes, reserve estimates, regulation, investment values and other factors. It reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improved combined ratio can continue to move below 100%, given the quarter’s underwriting loss and catastrophe impact.
- Subsequent development of California property and other loss reserves, including the adequacy of IBNR estimates.
- Outcome and timing of the appeal concerning the $27.6 million California penalty and potential interest refund.
- Actual implementation and premium effects of the approved California rate increases.
- Debt costs, liquidity needs and investment portfolio sensitivity to interest rates, equity markets and credit deterioration.