Mercury General(MCY) - 2021 Q4 - Annual Report

PART I Business Mercury General Corporation primarily writes personal automobile insurance, heavily concentrated in California, distributing products through independent agents and focusing on a diversified investment strategy - The company's primary business is writing personal automobile insurance, constituting 67.6% of its total direct premiums written in 2021[13][14] - Operations are heavily concentrated in California, generating 84.4% of total direct premiums written in 2021[14] Direct Premiums Written by Line and State (2019-2021) | Year | Line of Business | California ($ million) | Other States ($ million) | Total ($ million) | % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | | 2021 | Private Passenger Auto | 2,286.0 | 354.7 | 2,640.7 | 67.6% | | | Homeowners | 642.3 | 159.2 | 801.5 | 20.5% | | | Commercial Auto | 182.0 | 77.9 | 259.9 | 6.6% | | | Other Lines | 188.4 | 17.0 | 205.4 | 5.3% | | | Total 2021 | 3,298.7 | 608.8 | 3,907.5 | 100.0% | | 2020 | Private Passenger Auto | 2,266.1 | 302.8 | 2,568.9 | 70.3% | | | Homeowners | 579.7 | 99.2 | 678.9 | 18.6% | | | Commercial Auto | 161.6 | 79.2 | 240.8 | 6.6% | | | Other Lines | 149.6 | 15.9 | 165.5 | 4.5% | | | Total 2020 | 3,157.1 | 497.1 | 3,654.2 | 100.0% | | 2019 | Private Passenger Auto | 2,478.5 | 342.0 | 2,820.5 | 74.6% | | | Homeowners | 520.1 | 78.5 | 598.5 | 15.9% | | | Commercial Auto | 139.4 | 78.0 | 217.3 | 5.8% | | | Other Lines | 123.7 | 14.5 | 138.2 | 3.7% | | | Total 2019 | 3,261.6 | 512.9 | 3,774.6 | 100.0% | - The company sells its policies through a network of approximately 8,190 independent agents, which accounted for about 87% of direct premiums written in 2021[30] Statutory Combined Ratio (Company-wide) | Year | Loss Ratio | Expense Ratio | Combined Ratio | | :--- | :--- | :--- | :--- | | 2021 | 73.8% | 24.9% | 98.7% | | 2020 | 67.4% | 26.2% | 93.6% | | 2019 | 75.2% | 24.5% | 99.7% | | 2018 | 76.6% | 24.5% | 101.0% | | 2017 | 76.6% | 25.3% | 101.9% | - The company maintains a catastrophe reinsurance treaty effective through June 30, 2022, providing $792 million of coverage for losses exceeding a $40 million retention limit per occurrence[58] Risk Factors The company faces significant risks from its high dependency on the California market, regulatory pressures, reliance on subsidiary dividends, and uncertainties in loss reserves and catastrophic losses - The company is highly dependent on California, generating approximately 85% of its direct automobile insurance premiums written in the state for the year ended December 31, 2021, making its financial results susceptible to local conditions[98] - As a holding company, Mercury General relies on dividends from its regulated insurance subsidiaries to meet its obligations. State insurance laws limit the amount of dividends that can be paid without prior regulatory approval[100] - The company's ability to set adequate premium rates is subject to regulatory approval in most states, including California. Delays or denials in rate approvals, particularly due to interventions by consumer groups, can adversely affect profitability[105] - Establishing adequate loss reserves is inherently uncertain. If reserves are insufficient to cover actual losses due to factors like litigation, medical cost inflation, or changing liability theories, the company's financial condition could be materially harmed[121] - The business is vulnerable to significant catastrophic property losses from natural disasters and other events, which can cause substantial volatility in financial results[125] - The COVID-19 pandemic could disrupt business through factors like premium refunds, moratoriums on policy cancellations, labor shortages in the auto repair industry, and supply chain issues, potentially impacting results of operations[155][156][157] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[169] Properties The company owns six principal office buildings across California, Florida, and Oklahoma, which adequately support its operational needs Owned Properties | Location | Purpose | Size (Square Feet) | % Occupied by Company (12/31/21) | | :--- | :--- | :--- | :--- | | Brea, CA | Home office and I.T. facilities | 236,000 | 100% | | Folsom, CA | Administrative and Data Center | 88,000 | 100% | | Los Angeles, CA | Executive offices | 41,000 | 95% | | Rancho Cucamonga, CA | Administrative | 127,000 | 100% | | Clearwater, FL | Administrative | 162,000 | 51% | | Oklahoma City, OK | Administrative | 100,000 | 25% | Legal Proceedings The company is involved in various lawsuits and regulatory actions incidental to its insurance business, with management not expecting a material adverse effect on financial condition - The company is periodically named as a defendant in lawsuits or regulatory actions incidental to its business. The majority of these relate to insurance claims and are accounted for in the normal reserving process[173] - For non-insurance claims, lawsuits, and other contingencies, reserves are established when a loss is probable and estimable. The company does not expect the ultimate resolution of pending matters to have a material adverse effect on its financial condition or cash flows[173][174] Mine Safety Disclosures This item is not applicable to the company - Not applicable[176] PART II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with a history of quarterly dividends and a board-authorized share repurchase program, though no shares have been repurchased since 2000 - The company's common stock is listed on the New York Stock Exchange under the trading symbol MCY[179] - As of December 31, 2021, the insurance subsidiaries are permitted to pay $252 million in dividends to the parent company, Mercury General, in 2022 without requiring prior regulatory approval for extraordinary dividends[182] - The company's five-year cumulative total shareholder return of 12.5% underperformed both the S&P 500 Index (133.4%) and its industry peer group (84.3%)[184][186] - On July 30, 2021, the Board extended its authorization to repurchase up to $200 million of the company's common stock for an additional year. However, no shares have been repurchased since 2000[188][189] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased in 2021 due to a higher loss ratio and increased catastrophe losses, while net premiums grew, and the GAAP combined ratio deteriorated, despite a strong liquidity position 2021 Financial Performance Summary | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income | $247.9 million | $374.6 million | | Diluted EPS | $4.48 | $6.77 | | Pre-tax Net Investment Income | $129.7 million | $134.9 million | | Pre-tax Net Realized Investment Gains | $111.7 million | $85.7 million | | Pre-tax Catastrophe Losses (net) | $103.7 million | $60.9 million | | Cash Flow from Operations | $502 million | $606 million | - The company ceased accepting new and renewal commercial automobile business in Arizona, Georgia, Illinois, and Nevada in 2021 due to volatility and challenges in achieving profitable growth in those markets[197] - The company's loss frequency, which decreased significantly in 2020 due to the pandemic, has been increasing and is now near or exceeding pre-pandemic levels for some coverages. Loss severity has also increased due to higher-speed accidents and inflationary pressures on vehicle repair costs[209] - The most significant accounting estimate is for loss and loss adjustment expense reserves, which involves inherent uncertainty. The company uses various actuarial methods, including incurred loss, paid loss, and average severity, to calculate a point estimate for these reserves[219][220][221] GAAP Combined Ratio Analysis (2021 vs. 2020) | Ratio | 2021 | 2020 | Change Driver | | :--- | :--- | :--- | :--- | | Loss Ratio | 73.8% | 67.4% | Increased loss frequency and severity, higher catastrophe losses. | | Expense Ratio | 24.5% | 25.7% | Decrease primarily due to the effect of 2020 premium refunds which lowered the premium base without a corresponding drop in expenses. | | Combined Ratio | 98.3% | 93.1% | Deterioration in underwriting results driven by the higher loss ratio. | - The company maintains a strong liquidity position, with $475.7 million in cash and short-term investments at year-end 2021 and an undrawn $75 million revolving credit facility, which is considered adequate to meet requirements without forced asset sales[267] Quantitative and Qualitative Disclosures about Market Risks The company manages market risks from its investment portfolio, including credit, equity price, and interest rate risks, through asset quality, duration limits, and diversification - The company's primary market risk exposures are credit risk, equity price risk, and interest rate risk, managed through asset allocation, duration limits, and credit quality standards[310][312] - Credit risk is managed by maintaining a high-quality portfolio. As of December 31, 2021, the fixed maturity portfolio had a weighted-average credit rating of A+[313] - The municipal securities portfolio, valued at $2.84 billion, is broadly diversified geographically, with the largest concentrations in Texas (12.1%), Florida (10.0%), New York (9.2%), and California (8.4%)[314] Equity Price Risk Sensitivity Analysis (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Average Beta of Common Stock Portfolio | 1.14 | | Estimated Portfolio Reduction from 25% Market Decline | $227.2 million | | Estimated Portfolio Reduction from 50% Market Decline | $454.3 million | Interest Rate Risk Sensitivity Analysis (as of Dec 31, 2021) | Metric | Value | | :--- | :--- | | Modified Duration of Fixed Maturity Portfolio | 3.4 years | | Estimated Fair Value Decrease from 100 bps Rate Increase | $142.3 million | | Estimated Fair Value Decrease from 200 bps Rate Increase | $284.5 million | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, including the independent auditor's unqualified opinion and detailed disclosures on key financial items - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting[328][329] - The auditor identified the evaluation of loss and loss adjustment expense reserves (excluding catastrophe losses) as a critical audit matter due to the subjective judgment required to assess the methods and assumptions used in the estimate[334] Consolidated Balance Sheet Summary (as of Dec 31) | Account | 2021 ($ in thousands) | 2020 ($ in thousands) | | :--- | :--- | :--- | | Total Investments | 5,142,589 | 4,729,270 | | Total Assets | 6,772,472 | 6,328,246 | | Loss and loss adjustment expense reserves | 2,226,430 | 1,991,304 | | Unearned premiums | 1,519,799 | 1,405,873 | | Notes payable | 372,931 | 372,532 | | Total Liabilities | 4,632,191 | 4,295,649 | | Total Shareholders' Equity | 2,140,281 | 2,032,597 | Consolidated Statement of Operations Summary (Year Ended Dec 31) | Account | 2021 ($ in thousands) | 2020 ($ in thousands) | 2019 ($ in thousands) | | :--- | :--- | :--- | :--- | | Net premiums earned | 3,741,948 | 3,555,635 | 3,599,418 | | Total revenues | 3,993,357 | 3,784,511 | 3,972,518 | | Losses and loss adjustment expenses | 2,760,155 | 2,395,343 | 2,706,024 | | Total expenses | 3,694,050 | 3,326,010 | 3,594,449 | | Income before income taxes | 299,307 | 458,501 | 378,069 | | Net income | 247,937 | 374,607 | 320,087 | | Diluted EPS | $4.48 | $6.77 | $5.78 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[546] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the quarter - Management, including 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 period covered by the report[547] - Management assessed the effectiveness of internal control over financial reporting using the COSO framework and concluded that it was effective as of December 31, 2021[550] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls[552] Other Information This item contains no information - None[554] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[554] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accounting Fees Information for directors, executive officers, corporate governance, executive compensation, and security ownership is incorporated by reference from the company's definitive proxy statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees and Services (Item 14) is incorporated by reference from the company's definitive proxy statement[556] PART IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including consolidated financial statements, schedules, and a comprehensive list of exhibits - This section includes the Consolidated Financial Statements and Financial Statement Schedules for Summary of Investments, Condensed Financial Information of Registrant, and Reinsurance[559] - A list of 55 exhibits is provided, including corporate governance documents, debt agreements, incentive plans, and required CEO/CFO certifications[560][561][562][563][564] Form 10-K Summary The company has not provided a summary for its Form 10-K - None[565]