Mercury General(MCY) - 2021 Q3 - Quarterly Report

PART I Financial Statements The company's total assets grew to $6.75 billion as of September 30, 2021, with net income for the nine months ended September 30, 2021, increasing to $217.5 million, while Q3 2021 net income plummeted to $1.3 million due to investment losses and higher insurance losses Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total investments | $5,074,754 | $4,729,270 | | Total assets | $6,754,373 | $6,328,246 | | Loss and loss adjustment expense reserves | $2,142,121 | $1,991,304 | | Total liabilities | $4,609,440 | $4,295,649 | | Total shareholders' equity | $2,144,933 | $2,032,597 | Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $932,213 | $998,774 | $2,944,084 | $2,712,928 | | Losses and loss adjustment expenses | $697,947 | $618,657 | $1,981,519 | $1,765,627 | | Net income | $1,288 | $118,857 | $217,464 | $207,864 | | Diluted EPS | $0.02 | $2.15 | $3.93 | $3.75 | Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $428,029 | $443,252 | | Net cash used in investing activities | ($329,286) | ($310,895) | | Net cash used in financing activities | ($105,616) | ($104,626) | | Net (decrease) increase in cash | ($6,873) | $27,731 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant drop in Q3 2021 profitability to a higher combined ratio of 99.0%, driven by increased loss frequency and severity in auto insurance, coupled with significant catastrophe losses and unfavorable investment performance, while maintaining strong liquidity and capital Overview The company's performance is influenced by cyclical industry competition, loss trends, and regulation, with auto loss frequency and severity returning to pre-pandemic levels, and ongoing regulatory inquiries regarding COVID-19 premium refunds - Loss frequency, which decreased significantly after the COVID-19 outbreak, is now increasing and approaching pre-pandemic levels, with loss severity also increasing due to a higher percentage of high-speed accidents and rising vehicle repair costs[129] - The company received approval for a 6.99% rate increase on its California homeowners line of business, implemented in June 2021[139] - The California Department of Insurance (DOI) is requesting additional information on premium refunds provided during the pandemic, alleging insufficient premium relief from the company and two other insurers[110] Results of Operations For Q3 2021, net premiums earned increased 4.6% to $940.9 million, but the combined ratio deteriorated to 99.0% due to rising auto claim frequency, severity, and $27 million in catastrophe losses, with investment results showing a net realized loss of $43.5 million Underwriting Ratios Comparison | Ratio | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Loss Ratio | 74.2% | 68.8% | 71.2% | 67.0% | | Expense Ratio | 24.8% | 25.5% | 24.6% | 25.9% | | Combined Ratio | 99.0% | 94.3% | 95.8% | 93.0% | - Q3 2021 catastrophe losses were approximately $27 million, primarily from California wildfires and Hurricane Ida, compared to $30 million in Q3 2020[170] - For the nine months ended Sep 30, 2021, catastrophe losses were approximately $91 million, a significant increase from $48 million in the same period of 2020[183] - Net premiums written for the nine months ended Sep 30, 2021, increased by 7.6% year-over-year, primarily due to $128 million in premium refunds and credits issued in the 2020 period under the "Mercury Giveback" program, which were not repeated in 2021[178] Liquidity and Capital Resources The company maintains strong liquidity with $535.2 million in cash and short-term investments and an undrawn $75 million credit facility, supported by a $5.1 billion investment portfolio primarily in high-quality fixed-income securities and a strong regulatory capital position - The company has a Catastrophe Reinsurance Treaty effective through June 30, 2022, providing $792 million of coverage on a per-occurrence basis after a $40 million retention[198] - Catastrophe events in 2021 caused approximately $91 million in losses, but no single event exceeded the $40 million per-occurrence retention limit, so no reinsurance benefits were utilized[203] Investment Portfolio Composition (at Fair Value, Sep 30, 2021) | Asset Class | Fair Value (in thousands) | % of Total | | :--- | :--- | :--- | | Fixed maturity securities | $3,990,513 | 78.6% | | Equity securities | $890,620 | 17.6% | | Short-term investments | $193,621 | 3.8% | | Total investments | $5,074,754 | 100.0% | - The ratio of net premiums written to statutory surplus was 2.07 to 1 at September 30, 2021, indicating a strong capital position relative to regulatory guidelines[235] Quantitative and Qualitative Disclosures About Market Risks The company is exposed to market risks from changes in interest rates, equity prices, and credit risk, which are managed through a high-quality fixed maturity portfolio and duration management, with sensitivity analysis indicating potential impacts from market fluctuations - The fixed maturity securities portfolio has a weighted-average credit quality rating of A+[239] Market Risk Sensitivity Analysis (at Sep 30, 2021) | Risk Factor | Scenario | Estimated Impact (in thousands) | | :--- | :--- | :--- | | Equity Price Risk | 25% decline in stock market | ($209,732) reduction in common stock portfolio value | | Interest Rate Risk | 100 basis point rate increase | ($139,300) reduction in fixed maturity portfolio value | - The modified duration of the overall fixed maturity securities portfolio, reflecting anticipated early calls, was 3.3 years at September 30, 2021[249] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the quarter, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2021[252] - There have been no material changes to the Company's internal control over financial reporting during the most recent fiscal quarter[253] PART II - OTHER INFORMATION Legal Proceedings The company is involved in various lawsuits and regulatory actions incidental to its insurance business, which are accounted for in the normal reserving process, and are not expected to have a material adverse effect on its financial condition or cash flows - The company is subject to various lawsuits and regulatory actions in the normal course of business, but management does not expect them to have a material adverse effect on its financial condition[256][259] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - The risk factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, have not changed in any material respect[262] Unregistered Sales of Equity Securities and Use of Proceeds None Defaults upon Senior Securities None Mine Safety Disclosures Not applicable Other Information None Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act (Sections 302 and 906) and XBRL data files - Key exhibits include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL interactive data files[269]