Mercury General(MCY) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION The first part of the report provides detailed financial statements, management's discussion and analysis, market risk disclosures, and internal controls Item 1. Financial Statements This section presents the unaudited interim consolidated financial statements for Mercury General Corporation as of June 30, 2020, and for the three and six-month periods then ended Consolidated Balance Sheets As of June 30, 2020, total assets were $5.92 billion, a slight increase from $5.89 billion at December 31, 2019 Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $5,916,737 | $5,889,157 | | Total Investments | $4,402,159 | $4,312,161 | | Cash | $262,153 | $294,398 | | Premiums receivable, net | $602,745 | $604,871 | | Total Liabilities | $4,099,922 | $4,089,655 | | Loss and loss adjustment expense reserves | $1,865,110 | $1,921,255 | | Unearned premiums | $1,390,039 | $1,355,547 | | Notes payable | $372,333 | $372,133 | | Total Shareholders' Equity | $1,816,815 | $1,799,502 | Consolidated Statements of Operations For the three months ended June 30, 2020, net income surged to $228.2 million from $83.3 million in the prior-year period Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net premiums earned | $811,898 | $888,776 | $1,734,471 | $1,759,021 | | Total revenues | $1,005,843 | $979,487 | $1,714,153 | $1,997,230 | | Losses and loss adjustment expenses | $495,300 | $656,577 | $1,146,970 | $1,286,993 | | Total expenses | $720,377 | $877,892 | $1,609,393 | $1,728,466 | | Net income | $228,211 | $83,250 | $89,007 | $219,117 | | Diluted EPS | $4.12 | $1.50 | $1.61 | $3.96 | Consolidated Statements of Cash Flows For the six months ended June 30, 2020, net cash provided by operating activities was $259.6 million, slightly down from $265.6 million in the same period of 2019 Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $259,583 | $265,623 | | Net cash used in investing activities | ($222,078) | ($270,725) | | Net cash used in financing activities | ($69,750) | ($68,869) | | Net decrease in cash | ($32,245) | ($73,971) | | Cash, end of period | $262,153 | $240,320 | Notes to Consolidated Financial Statements The notes detail the company's accounting policies and provide further information on financial statement items - On January 1, 2020, the Company adopted ASU 2016-13 regarding credit losses, resulting in a cumulative-effect adjustment of approximately $2 million to beginning retained earnings[39] - The company's Catastrophe Reinsurance Treaty, effective through June 30, 2021, provides $717 million of coverage per occurrence after a $40 million retention[31] - As a subsequent event, the company plans to return an additional $22 million in July premiums to policyholders in August 2020 as part of its 'Mercury Giveback' program, bringing the total premium returned since the start of the COVID-19 pandemic to approximately $128 million[138] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impacts of the COVID-19 pandemic, including reduced auto loss frequency, premium refunds, and investment portfolio volatility Overview This section provides a general overview of the company's business and the operating environment, highlighting the significant impact of the COVID-19 pandemic - The COVID-19 pandemic led to a significant decrease in auto loss frequency starting in mid-to-late March 2020 due to shelter-in-place orders, though accident severity increased[146] - In response to reduced driving and regulatory directives, the company implemented the "Mercury Giveback" program, returning approximately $106 million in premiums for March through June 2020[155] - The company received approval for two 6.99% rate increases on its California homeowners line of business in February and July 2020[156][158] Results of Operations The company's results of operations are analyzed for the three and six months ended June 30, 2020, compared to the same periods in 2019 Underwriting Ratios (GAAP) | Ratio | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Loss ratio | 61.0% | 73.9% | 66.1% | 73.2% | | Expense ratio | 27.2% | 24.4% | 26.2% | 24.6% | | Combined ratio | 88.2% | 98.3% | 92.3% | 97.8% | - Net premiums earned and written for Q2 2020 were each reduced by approximately $106 million due to premium refunds and credits from the 'Mercury Giveback' program[180] - The Q2 2020 loss ratio decreased primarily due to a significant drop in loss frequency in the private passenger auto line, stemming from COVID-19 stay-at-home orders[185] - The expense ratio increased in Q2 and H1 2020 largely because net premiums earned decreased due to refunds, while policy acquisition costs (commissions) were not correspondingly reduced[188][205] Liquidity and Capital Resources The company maintains strong liquidity with $597.8 million in cash and short-term investments and an undrawn $50 million credit facility as of June 30, 2020 - The company believes its cash flow from operations, combined with $597.8 million in cash and short-term investments and a $50 million undrawn credit facility, is adequate to satisfy liquidity requirements[215] - The Catastrophe Reinsurance Treaty for the year ending June 30, 2021, provides increased coverage of $717 million (up from $600 million) per occurrence after a $40 million retention, with an annual premium of $50.3 million[220][227] - At June 30, 2020, 76.9% of the company's fixed maturity securities portfolio at fair value was invested in tax-exempt state and municipal bonds[238] - The ratio of net premiums written to statutory surplus was 2.29 to 1 at June 30, 2020, well within the regulatory guideline of 3.0 to 1[264] Item 3. Quantitative and Qualitative Disclosures about Market Risks The company is exposed to market risks, primarily from changes in interest rates, equity prices, and credit risk - The company's primary market risk exposures are interest rate risk, equity price risk, and credit risk[265] - Credit risk is managed by maintaining a high credit quality portfolio, with the fixed maturity portfolio having a weighted-average rating of A+ at June 30, 2020[268] - A hypothetical 100 basis point increase in interest rates would decrease the fair value of the fixed maturity securities portfolio by an estimated $96.0 million as of June 30, 2020[276] - A hypothetical 25% reduction in the stock market's value would lead to an estimated $172.6 million reduction in the value of the company's common stock portfolio[272] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of June 30, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the quarter[278] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[279] PART II - OTHER INFORMATION The second part of the report covers legal proceedings, updated risk factors, equity sales, and other corporate information Item 1. Legal Proceedings The company is involved in various lawsuits and regulatory actions incidental to its insurance business, the majority of which relate to claims and are handled through the normal reserving process - The company is party to various lawsuits and regulatory actions that are incidental to its insurance business, with the majority related to claims arising in the normal course of business[282] - The company does not believe that the ultimate resolution of currently pending legal or regulatory proceedings will have a material adverse effect on its financial condition or cash flows[283] Item 1A. Risk Factors This section highlights that the risk factors identified in the company's 2019 Annual Report on Form 10-K have not materially changed, with the exception of a new risk factor concerning pandemics - A new risk factor has been added regarding the potential for pandemics, epidemics, or other public health emergencies like COVID-19 to disrupt business and adversely affect financial results[287][288] - Potential pandemic-related risks include disruptions to employees and agents, declines in premiums, delays in premium payments by policyholders, and negative impacts from disruptions at third-party service providers and in the auto repair industry[289][290] - Market disruptions caused by a pandemic could lead to substantial investment losses, reduced liquidity, and heightened credit risk from reinsurers[291] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section discloses information about equity securities purchased by an affiliated purchaser during the quarter ended June 30, 2020 Affiliated Purchaser Equity Purchases (Q2 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2020 | N/A | N/A | | May 2020 | 728,485 | $36.67 | | June 2020 | N/A | N/A | | Total | 728,485 | $36.67 | Item 5. Other Information On July 31, 2020, the company's Board of Directors authorized a new share repurchase program - On July 31, 2020, the Board of Directors authorized a new share repurchase program for up to $200 million of the Company's Common Stock over a one-year period[297] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO as required by the Sarbanes-Oxley Act, and XBRL data files - The report includes standard exhibits such as CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL interactive data files[301]