Mercury General Corporation Announces Second Quarter Results and Declares Quarterly Dividend

Consolidated Highlights

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

2022

2021

$

%

2022

2021

$

%

(000's except per-share amounts and ratios)

Net premiums earned 

$     987,512

$     926,820

$     60,692

6.5

$ 1,950,062

$  1,842,741

$  107,321

5.8

Net premiums written ⁽¹⁾

$  1,016,994

$     957,342

$     59,652

6.2

$ 2,027,791

$  1,907,724

$    20,067

6.3

Net realized investment (losses) gains, net of tax ⁽²⁾

$   (191,131)

$       46,456

$  (237,587)

(511.4)

$  (345,249)

$       79,392

$  (424,641)

(534.9)

Net (loss) income

$   (210,681)

$     109,181

$  (319,862)

(293.0)

$  (407,599)

$     216,176

$  (623,775)

(288.5)

Net (loss) income per diluted share ⁽³⁾

$         (3.80)

$           1.97

$        (5.77)

(292.9)

$        (7.36)

$           3.90

$      (11.26)

(288.7)

Operating (loss) income ⁽¹⁾

$     (19,550)

$      62,725

$    (82,275)

(131.2)

$    (62,350)

$     136,784

$  (199,134)

(145.6)

Operating (loss) income per diluted share ⁽¹⁾

$         (0.35)

$          1.13

$        (1.48)

(131.0)

$        (1.13)

$           2.47

$          (3.6)

(145.7)

Catastrophe losses net of reinsurance ⁽⁴⁾

$      21,000

$      25,000

$      (4,000)

(16.0)

$     43,000

$       60,000

$    (17,000)

(28.3)

Combined ratio ⁽⁵⁾

106.6 %

94.9 %

—

       11.7 pts

108.1 %

94.2 %

—

       13.9 pts

(1)

These measures are not based on U.S. generally accepted accounting principles ("GAAP"), are defined in "Information Regarding GAAP and Non-GAAP Measures" and are reconciled to the most directly comparable GAAP measures in "Supplemental Schedules."

(2)

Net realized investment (losses) gains before tax were $(242) million and $59 million for the three months ended June 30, 2022 and 2021, respectively, and $(437) million and $100 million for the six months ended June 30, 2022 and 2021, respectively. The changes in fair value of the Company's investments are recorded as part of net realized investment gains or losses in its consolidated statements of operations due to the adoption of the fair value option for its investments as permitted under GAAP.

(3)

The dilutive impact of incremental shares is excluded from net loss position in accordance with GAAP.

(4)

Catastrophe losses due to the events that occurred during the six months ended June 30, 2022 totaled approximately $40 million, with no reinsurance benefits used for these losses, resulting primarily from winter storms, rainstorms and hail in Texas and winter storms in California. Catastrophe losses due to the events that occurred during the six months ended June 30, 2021 totaled approximately $64 million, with no reinsurance benefits used for these losses, resulting primarily from the deep freeze and other extreme weather events in Texas and Oklahoma and winter storms in California. In addition, the Company experienced unfavorable development of approximately $3 million and favorable development of approximately $4 million on prior years' catastrophe losses for the six months ended June 30, 2022 and 2021, respectively.  

(5)

Inflationary trends have accelerated to their highest level in decades, which has had a significant impact on the cost of auto parts and labor as well as medical expenses for bodily injuries, and supply chain and labor shortage issues have lengthened the time to repair vehicles. Bodily injury costs are also under pressure from social inflation. These factors have increased losses and loss adjustment expenses for the insured events of the current accident year for the six months ended June 30, 2022 compared to the corresponding period in 2021. In addition, the Company experienced favorable development of approximately $2 million and approximately $14 million on prior accident years' loss and loss adjustment expense reserves for the three months ended June 30, 2022 and 2021, respectively, and unfavorable development of approximately $51 million and favorable development of approximately $15 million on prior accident years' loss and loss adjustment expense reserves for the six months ended June 30, 2022 and 2021, respectively. The year-to-date unfavorable development in 2022 was primarily attributable to higher than estimated losses and loss adjustment expenses in the private passenger automobile and commercial property lines of insurance business, partially offset by favorable development in the commercial automobile and homeowners lines of insurance business. The inflationary pressures and the supply chain and labor shortage issues discussed above were major contributors to the adverse reserve development in the private passenger automobile line of insurance business for the first half of 2022. The year-to-date favorable development in 2021 was primarily attributable to lower than estimated losses and loss adjustment expenses in the commercial property and private passenger automobile lines of insurance business, partially offset by unfavorable development in the commercial automobile line of insurance business. The Company has filed for rate increases in many states and is taking various non-rate actions to improve profitability.

Investment Results

Three Months Ended June 30,

Six Months Ended June 30,

2022

2021

2022

2021

(000's except average annual yield)

Average invested assets at cost ⁽¹⁾

$   4,900,223

$   4,657,097

$   4,879,634

$   4,590,386

Net investment income ⁽²⁾

     Before income taxes

$        38,555

$        30,953

$        73,906

$        63,232

     After income taxes

$        33,517

$        27,676

$        64,438

$        56,460

Average annual yield on investments - after income taxes 

2.7 %

2.4 %

2.6 %

2.5 %

(1)

Fixed maturities and short-term bonds at amortized cost; equities and other short-term investments at cost. Average invested assets
at cost are based on the monthly amortized cost of the invested assets for each period.

(2)

Higher net investment income before and after income taxes for the three and six months ended June 30, 2022 compared to the
corresponding periods in 2021 resulted largely from higher average yield combined with higher average invested assets. Average
annual yield on investments after income taxes for the three and six months ended June 30, 2022 increased compared to the
corresponding periods in 2021, primarily due to the maturity and replacement of lower yielding investments purchased when market
interest rates were lower with higher yielding investments, as a result of increasing market interest rates.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

SUMMARY OF OPERATING RESULTS

(000's except per-share amounts and ratios)

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2022

2021

2022

2021

Revenues:

     Net premiums earned

$         987,512

$         926,820

$      1,950,062

$      1,842,741

     Net investment income

38,555

30,953

73,906

63,232

     Net realized investment (losses) gains

(241,938)

58,805

(437,024)

100,496

     Other

1,496

2,197

4,142

5,402

          Total revenues

785,625

1,018,775

1,591,086

2,011,871

Expenses:

     Losses and loss adjustment expenses

826,779

657,228

1,648,713

1,283,572

     Policy acquisition costs

156,482

150,984

318,574

315,414

     Other operating expenses

69,430

70,927

139,720

136,485

     Interest

4,274

4,235

8,548

8,577

          Total expenses

1,056,965

883,374

2,115,555

1,744,048

(Loss) income before income taxes

(271,340)

135,401

(524,469)

267,823

     Income tax (benefit) expense

(60,659)

26,220

(116,870)

51,647

                    Net (loss) income

$       (210,681)

$         109,181

$       (407,599)

$         216,176

Basic average shares outstanding

55,371

55,371

55,371

55,366

Diluted average shares outstanding

55,371

55,376

55,371

55,375

Basic Per Share Data

Net (loss) income

$             (3.80)

$               1.97

$             (7.36)

$               3.90

Net realized investment (losses) gains, net of tax

$             (3.45)

$               0.84

$             (6.24)

$               1.43

Diluted Per Share Data

Net (loss) income

$             (3.80)

$               1.97

$             (7.36)

$               3.90

Net realized investment (losses) gains, net of tax

$             (3.45)

$               0.84

$             (6.24)

$               1.43

Operating Ratios-GAAP Basis

Loss ratio

83.7 %

70.9 %

84.6 %

69.7 %

Expense ratio

22.9 %

23.9 %

23.5 %

24.5 %

Combined ratio ^(a)

106.6 %

94.9 %

108.1 %

94.2 %

(a)     Combined ratio for the three months ended June 30, 2021 does not sum due to rounding.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES

CONDENSED BALANCE SHEETS AND OTHER INFORMATION

(000's except per-share amounts and ratios)

June 30, 2022

December 31, 2021

(unaudited)

ASSETS

Investments, at fair value:

     Fixed maturity securities (amortized cost $4,003,142; $3,909,780)

$             3,878,684

$             4,031,523

     Equity securities (cost $741,090; $754,536)

782,802

970,939

     Short-term investments (cost $174,874; $141,206)

172,130

140,127

          Total investments

4,833,616

5,142,589

Cash

290,002

335,557

Receivables:

     Premiums

639,272

621,740

          Allowance for credit losses on premiums receivable

(6,000)

(6,000)

                  Premiums receivable, net of allowance for credit losses

633,272

615,740

     Accrued investment income

46,071

43,299

     Other

7,358

7,600

          Total receivables

686,701

666,639

Reinsurance recoverables

27,707

45,000

Deferred policy acquisition costs

273,533

258,259

Fixed assets, net

189,600

191,332

Operating lease right-of-use assets

26,952

31,967

Current income taxes

44,460

20,108

Deferred income taxes

39,071

—

Goodwill

42,796

42,796

Other intangible assets, net

9,722

10,255

Other assets

35,505

27,970

          Total assets

$             6,499,665

$             6,772,472

LIABILITIES AND SHAREHOLDERS' EQUITY

Loss and loss adjustment expense reserves

$             2,386,822

$             2,226,430

Unearned premiums

1,597,940

1,519,799

Notes payable

373,130

372,931

Accounts payable and accrued expenses

165,922

169,125

Operating lease liabilities

29,799

34,577

Deferred income taxes

—

53,569

Other liabilities

283,687

255,760

Shareholders' equity

1,662,365

2,140,281

          Total liabilities and shareholders' equity

$             6,499,665

$             6,772,472

OTHER INFORMATION

Common stock shares outstanding

55,371

55,371

Book value per share

$                    30.02

$                    38.65

Statutory surplus ^(a)

$1.63 billion

$1.83 billion

Net premiums written to surplus ratio ^(a)

2.44

2.11

Debt to total capital ratio ^(b)

18.4 %

14.9 %

Portfolio duration (including all short-term instruments) ^{(a) (c)}

3.5 years

3.4 years

Policies-in-force (company-wide "PIF") ^(a)

     Personal Auto PIF

1,136

1,122

     Homeowners PIF

727

705

     Commercial Auto PIF

39

39

(a)       Unaudited.

(b)       Debt to Debt plus Shareholders' Equity (Debt at face value).

(c)       Modified duration reflecting anticipated early calls.

SUPPLEMENTAL SCHEDULES

(000's except per-share amounts and ratios)

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2022

2021

2022

2021

Reconciliations of Comparable GAAP Measures to Operating Measures^(a)

Net premiums earned

$         987,512

$         926,820

$   1,950,062

$   1,842,741

Change in net unearned premiums

29,482

30,522

77,729

64,983

Net premiums written

$      1,016,994

$         957,342

$   2,027,791

$   1,907,724

Incurred losses and loss adjustment expenses

$         826,779

$         657,228

$   1,648,713

$   1,283,572

Change in net loss and loss adjustment expense reserves

(85,622)

(52,601)

(175,183)

(101,975)

Paid losses and loss adjustment expenses

$         741,157

$         604,627

$   1,473,530

$   1,181,597

Net (loss) income

$        (210,681)

$         109,181

$    (407,599)

$      216,176

Less: Net realized investment (losses) gains

(241,938)

58,805

(437,024)

100,496

         Tax on net realized investment (losses) gains ^(b)

(50,807)

12,349

(91,775)

21,104

             Net realized investment (losses) gains, net of tax

(191,131)

46,456

(345,249)

79,392

Operating (loss) income

$          (19,550)

$           62,725

$      (62,350)

$      136,784

Per diluted share:

Net (loss) income

$              (3.80)

$               1.97

$          (7.36)

$            3.90

Less: Net realized investment (losses) gains, net of tax

(3.45)

0.84

(6.24)

1.43

Operating (loss) income ^(c)

$              (0.35)

$               1.13

$          (1.13)

$            2.47

Combined ratio

108.1 %

94.2 %

Effect of estimated prior periods' loss development

(2.6) %

0.8 %

Combined ratio-accident period basis

105.5 %

95.0 %

(a)     See "Information Regarding GAAP and Non-GAAP Measures" on page 7. 

(b)     Based on federal statutory rate of 21%.

(c)     Operating loss per diluted share for the six months ended June 30, 2022 does not sum due to rounding.