Mercury General Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited, compared with Q1 2021. Mercury primarily writes personal automobile insurance, principally in California, and reports one Property and Casualty segment.
Financial results and position
- Premiums: Net premiums earned were $962.6 million, up 5.1% year over year. Management reported net premiums written of $1,010.8 million, up 6.4%, citing homeowners rate increases and growth in policies outside California, partly offset by fewer California private-passenger auto policies.
- Earnings: Total revenue was $805.5 million versus $993.1 million. The company recorded a net loss of $196.9 million, or $3.56 per diluted share, compared with net income of $107.0 million, or $1.93 per share.
- Investments: Net investment income was $35.4 million, up from $32.3 million. Net realized investment losses were $195.1 million, versus gains of $41.7 million, primarily reflecting declines in fixed-maturity and equity fair values. Pretax annualized investment yield was 2.9% in both periods.
- Underwriting: The combined ratio rose to 109.5% from 93.5% (above 100% generally indicates an underwriting loss). The loss ratio was 85.4% versus 68.4%; the expense ratio improved to 24.1% from 25.1%. Excluding catastrophe losses and prior-year reserve development, the loss ratio was 77.7% versus 64.3%.
- Cash flow: Operating cash flow was $106.6 million, down from $174.5 million. Investing activities used $110.4 million and financing activities used $36.0 million; cash declined $39.8 million to $295.8 million.
- Liquidity and debt: Cash plus short-term investments totaled $429.7 million. Debt carrying value was $373.0 million, comprising $375 million principal of 4.40% senior notes due 2027, net of issuance costs. The $75 million revolving facility was undrawn; management said cash flows and available liquidity should meet needs without forced investment sales. Debt-to-total-capital was 16.4%, and the company reported compliance with facility covenants.
- Balance sheet: Total assets were $6.67 billion and shareholders’ equity was $1.91 billion at March 31, versus $6.77 billion and $2.14 billion at year-end 2021. Loss and LAE reserves were $2.31 billion; unearned premiums were $1.57 billion.
Changes versus Q1 2021
- Net premiums earned increased, but underwriting results deteriorated sharply: underwriting loss was $91.7 million versus underwriting income of $59.5 million.
- Loss and LAE expense rose to $821.9 million from $626.3 million. Current-year losses increased, and prior-year reserves had $52.9 million of adverse development versus $1.2 million of favorable development in Q1 2021. Management attributed pressure particularly to auto and commercial-property claims, including inflation, repair costs, labor shortages, medical costs and social inflation.
- Net catastrophe losses were approximately $22 million versus $35 million. Q1 2022 events, mainly winter storms in Texas and California, did not exceed the company’s $40 million per-occurrence reinsurance retention.
- Investment fair-value losses were a major contributor to the swing in reported earnings. Rising interest rates reduced fixed-maturity values, while declining equity markets reduced equity values.
Outlook, risks and contingencies
- The filing gives no specific earnings or premium guidance. Management said it submitted private-passenger auto rate filings in multiple states; approval timing and adequacy are uncertain. It described auto loss frequency as near pre-pandemic levels and severity as elevated.
- Key risks include persistent inflation and associated reserve-estimate and pricing uncertainty, rate-regulatory constraints, catastrophe losses, investment-market volatility, and delayed or prolonged bodily-injury claims settlements. A 100-basis-point rate increase was estimated to reduce fixed-maturity fair value by $138.8 million; a 200-basis-point increase by $277.5 million.
- California DOI proceedings include a notice alleging rating and underwriting violations and a separate inquiry into pandemic-era auto premium relief. Two private class actions make substantially similar premium-relief allegations. The company cited about $128 million in refunds or credits already provided, but said it cannot predict the outcome or estimate potential additional refunds or penalties.
- The catastrophe treaty effective through June 30, 2022 provided up to $792 million per occurrence above the $40 million retention, subject to terms and exclusions. The company also assumes catastrophe risk under a contract with a potential 2022 loss obligation of up to $25 million.
- Management stated pending legal and regulatory matters were not expected to materially adversely affect financial condition or cash flows, while noting some outcomes and possible penalties or refunds cannot be estimated. Disclosure controls were deemed effective; no material quarterly change in internal control was reported.
Investor facts to verify
- Whether requested auto rate increases are approved and keep pace with claim severity and inflation.
- Subsequent reserve development, particularly auto and commercial-property claims, and the adequacy of the $2.31 billion gross reserve.
- Investment portfolio exposure to further interest-rate and equity-market declines, including the effect on reported earnings and equity.
- Developments in the California DOI matter and premium-relief litigation, including any additional refunds, penalties or settlement costs.
- Liquidity and catastrophe protection after the June 30, 2022 treaty renewal, including retention levels, coverage terms and pricing.