Mercury General(MCY) - 2025 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The company's unaudited interim statements show a significant net loss for the quarter, driven by substantial catastrophe losses from wildfires Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Total Investments | $5,396,542 | $6,076,370 | -11.2% | | Cash | $1,284,790 | $720,257 | +78.4% | | Total Assets | $9,027,658 | $8,310,632 | +8.6% | | Loss and loss adjustment expense reserves | $3,792,581 | $3,152,031 | +20.3% | | Total Liabilities | $7,207,047 | $6,364,108 | +13.2% | | Total Shareholders' Equity | $1,820,611 | $1,946,524 | -6.5% | Consolidated Statements of Operations Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q1 2025 | Q1 2024 | YoY Change | | :--- | :--- | :--- | :--- | | Net premiums earned | $1,283,069 | $1,166,679 | +10.0% | | Total revenues | $1,393,879 | $1,274,085 | +9.4% | | Losses and loss adjustment expenses | $1,220,813 | $903,965 | +35.1% | | Total expenses | $1,536,175 | $1,184,865 | +29.6% | | (Loss) income before income taxes | $(142,296) | $89,220 | N/A | | Net (loss) income | $(108,327) | $73,462 | N/A | | Diluted EPS | $(1.96) | $1.33 | N/A | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(68,729) | $192,626 | | Net cash provided by (used in) investing activities | $651,602 | $(194,879) | | Net cash used in financing activities | $(18,340) | $(18,565) | | Net increase (decrease) in cash | $564,533 | $(20,818) | - The company experienced negative cash flow from operations in Q1 2025, a significant reversal from the positive cash flow in Q1 2024, primarily driven by large loss reserve payments related to catastrophe events[20] Notes to Consolidated Financial Statements - The company's reinsurance program was significantly impacted by Southern California wildfires, with ceded losses and LAE increasing to approximately $1,292.5 million from $(0.8) million YoY[34][35] - The company incurred net catastrophe losses of approximately $447 million in Q1 2025, a sharp increase from $72 million in Q1 2024, exhausting the full $1,290 million limit of its catastrophe reinsurance treaty[107][109] - For the January 2025 wildfires, the company estimates gross catastrophe losses of $2,150 million, offset by reinsurance and subrogation, resulting in net catastrophe losses of about $331 million for this single event[108][110] - The company settled with the California DOI, agreeing to pay $5 million in refunds to policyholders and make changes to its practices[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the $108.3 million net loss to unprecedented catastrophe losses, which drove the combined ratio to 119.2% Results of Operations - Net premiums earned increased by 10.0% in Q1 2025 due to rate increases, but net premiums written only grew 2.3% due to a significant rise in ceded reinsurance premiums[158] Underwriting Ratios (GAAP) | Ratio | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Loss Ratio | 95.1% | 77.5% | | Expense Ratio | 24.0% | 23.4% | | Combined Ratio | 119.2% | 100.9% | - The Q1 2025 loss ratio was severely impacted by $459 million of current year catastrophe losses, primarily from Southern California wildfires, partially offset by $51 million in favorable prior year development[163][164] - Excluding prior year development and catastrophe losses, the underlying loss ratio improved to 63.4% in Q1 2025 from 72.2% in Q1 2024, reflecting the benefit of rate increases[165] Liquidity and Capital Resources - Net cash used in operating activities was $68.7 million, a $261.4 million decrease from the prior year, mainly due to increased payments for catastrophe losses[178] - The company's Catastrophe Reinsurance Treaty, providing $1,290 million of coverage, was fully exhausted by the Southern California wildfires in Q1 2025[184][190] - The ratio of net premiums written to surplus was 2.88 to 1 at March 31, 2025, remaining within the regulatory guideline of 3.0 to 1[219] Invested Assets Investment Portfolio Composition (March 31, 2025) | Asset Class | Fair Value (in thousands) | % of Total | | :--- | :--- | :--- | | Fixed maturity securities | $4,600,058 | 85.2% | | Equity securities | $588,341 | 10.9% | | Short-term investments | $208,143 | 3.9% | | Total Investments | $5,396,542 | 100.0% | - The fixed maturity portfolio has a moderate duration, with a call-adjusted average maturity of 4.1 years and a modified duration of 3.8 years[200][232] - The company reduced its equity security holdings in January 2025 to ensure ample liquidity for wildfire losses and to reduce portfolio volatility[216] Item 3. Quantitative and Qualitative Disclosures About Market Risks The company's primary market risks are credit, equity price, and interest rate, managed through a high-quality, moderate-duration portfolio - The company's fixed maturity securities portfolio maintains a high credit quality, with a weighted-average rating of A+ at fair value[223] - A hypothetical 25% reduction in the stock market's value would lead to an estimated $80.6 million reduction in the value of the company's common stock portfolio[229] - A 100 basis point rise in interest rates is estimated to decrease the fixed maturity portfolio's fair value by $181.1 million, reflecting a modified duration of 3.8 years[232][233] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[235] - No material changes occurred in the company's internal control over financial reporting during the most recent fiscal quarter[236] PART II - OTHER INFORMATION Item 1. Legal Proceedings Pending legal and regulatory proceedings are not expected to have a material adverse effect on the company's financial condition - The company does not expect the ultimate resolution of currently pending legal or regulatory proceedings to have a material adverse effect on its financial condition or cash flows[239] Item 1A. Risk Factors Risk factors remain materially unchanged, except for an updated risk concerning geopolitical conflicts impacting loss costs and investments - The risk factor related to geopolitical conflicts has been updated to reflect that increased tariffs and trade barriers could adversely affect the company's business by increasing costs and decreasing investment portfolio value[243][246] Other Information Items This section confirms no unregistered equity sales, senior security defaults, or new Rule 10b5-1 trading arrangements by insiders - The company reported no unregistered sales of equity securities or defaults on senior securities for the period[247][248] - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the quarter ended March 31, 2025[250]