Mercury General Corporation — Q3 2023 Form 10-Q
Business context and period. Mercury General writes personal auto insurance and related property and casualty products through subsidiaries in 11 states, principally California. This unaudited filing covers the three and nine months ended September 30, 2023; comparisons are with the same 2022 periods. Unless stated otherwise, dollar amounts below are in millions.
Financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net premiums earned | $1,090.3 | $996.9 | $3,129.5 | $2,947.0 |
| Net premiums written | $1,206.5 | $1,034.5 | $3,332.0 | $3,062.3 |
| Net investment income | $61.0 | $44.6 | $171.3 | $118.5 |
| Net realized investment losses | $(90.0) | $(144.2) | $(60.8) | $(581.2) |
| Net loss | $(8.2) | $(98.3) | $(95.1) | $(505.9) |
| Loss per diluted share | $(0.15) | $(1.78) | $(1.72) | $(9.14) |
| Combined ratio | 98.6% | 102.8% | 107.9% | 106.3% |
Q3 underwriting was profitable, with a $15.8 million underwriting gain and a combined ratio below 100%. The nine-month underwriting loss was $247.6 million. Net losses for both periods also reflected investment marks: Mercury elected fair-value accounting for its investment portfolio, with changes in fair value included in net realized investment gains or losses.
For the first nine months, operating cash flow was $227.7 million, down from $284.9 million; investing activities used $184.9 million and financing activities provided $121.4 million, including $175.0 million of bank borrowings. Cash at September 30 was $453.9 million. Cash plus short-term investments totaled $665.7 million.
At September 30, total assets were $6.92 billion, total liabilities $5.55 billion, and shareholders’ equity $1.37 billion. Debt was $573.6 million, up from $398.3 million at year-end 2022. The $375 million senior notes mature in 2027. The $200 million revolving credit facility was fully drawn by October 26, 2023, at an approximately 6.75% annual rate, with no remaining availability. The company reported compliance with its credit-facility financial covenants at quarter-end.
The company declared and paid a quarterly dividend of $0.3175 per share in Q3 2023, unchanged from Q3 2022.
Changes versus prior periods
- Q3 net premiums earned increased 9.4%; nine-month premiums earned rose 6.2%. Management attributed growth mainly to rate increases and increased policy counts outside California. Nine-month California auto and homeowners policy counts declined.
- Q3 combined ratio improved to 98.6% from 102.8%, while the nine-month ratio worsened to 107.9% from 106.3%. The nine-month loss ratio was higher despite favorable prior-year reserve development, reflecting catastrophe losses and elevated auto severity.
- Investment income increased as average yields rose and invested assets grew. Investment losses were substantially lower year over year, particularly for the nine-month period, but remained significant in Q3.
- Cash increased from $289.8 million at December 31, 2022 to $453.9 million at September 30, 2023; debt rose over the same period.
Outlook, commentary, risks and unusual items
- Rates and underwriting: California approved auto rate increases of 6.9% effective March 2023 and 6.99% effective July 2023 for MIC and CAIC, and a 12.6% homeowners increase effective May 2023. Applications filed in 2023—including additional auto increases and a homeowners increase—were pending at filing. Management said it was pursuing rate and non-rate actions to improve profitability. No quantified earnings guidance was provided.
- Claims and catastrophes: Nine-month prior-year reserve development was favorable by $32.1 million, versus unfavorable development of $49.9 million in 2022. Current-year auto loss severity remained affected by inflation, which management said had moderated but remained elevated. The filing reports approximately $223 million of net catastrophe losses for the first nine months, versus $62 million in 2022; events included storms and Hurricane Hilary. No treaty recovery was available because no individual event exceeded the applicable retention.
- Reinsurance: The catastrophe treaty effective through June 30, 2024 provides up to approximately $1.11 billion per occurrence above a $100 million retention, subject to exclusions and other terms. The annual premium increased to approximately $99 million from $74 million. Reinsurer inability to pay could leave Mercury responsible for policyholder obligations.
- Investments and market risk: The fixed-maturity portfolio had a 3.7-year modified duration. Management estimated that a 100-basis-point increase in interest rates would reduce its fair value by $161.2 million, and a 200-basis-point increase by $322.3 million. Lower interest rates could reduce reinvestment yields. Equity-market declines also affect reported results.
- Legal and regulatory matters: Mercury agreed to provide $25 million in renewal-premium credits to specified California auto policyholders over up to 18 months beginning July 7, 2023; credits reduce premiums as policies renew. The related private actions were dismissed and the judgment became final. Separately, a California DOI notice alleging rating and underwriting violations remains under discussion; Mercury said it cannot reasonably predict the outcome or estimate potential penalties.
- Other items: The company sold office buildings during 2023, recognizing a $7.9 million gain on one sale and a $1.8 million loss on another. It classified a Brea, California building as held for sale. Management said current legal and regulatory proceedings were not expected to have a material adverse effect on financial condition or cash flows, but outcomes remain uncertain.
Important facts for investors to verify
- Whether pending California rate applications are approved, and whether approved rates adequately address auto severity and underwriting losses.
- Catastrophe exposure against treaty retentions, particularly given that recent events did not trigger recoveries, and the cost and renewal terms of reinsurance.
- Reserve adequacy and future development, especially in auto, homeowners, and commercial property claims.
- Investment portfolio sensitivity to interest rates and equity markets, including the effect of fair-value changes on reported earnings.
- Funding and interest costs for the fully drawn credit facility, along with liquidity and statutory-capital trends.
- Resolution and potential financial consequences of the outstanding California DOI rating and underwriting matter.