Mercury General(MCY) - 2022 Q4 - Annual Report

Premiums and Revenue - Direct premiums written for the year ended December 31, 2022, totaled $4,048.5 million, with California accounting for 80.8% of the total[14] - The Company reported a 6.2% contribution from Texas, with direct premiums written amounting to $252.7 million[14] - Approximately 88% of the Company's direct premiums written in 2022 came from independent agents and agencies[29] - Approximately 81% of the Company's direct automobile insurance premiums written in 2022 were generated in California[102] - Approximately 64% of the Company's direct premiums written for the year ended December 31, 2022, were generated from private passenger automobile insurance policies[138] - The Company plans to implement a 6.9% rate increase for its private passenger automobile insurance lines in California, effective March 2023, which represents approximately 51% of total net premiums earned in 2022[212] Losses and Reserves - The Company maintains loss reserves for both reported and unreported claims, reflecting inflation through analysis of cost trends[35] - Gross reserves at December 31, 2022, were $2,584,910,000, an increase from $2,226,430,000 in 2021[37] - Total incurred losses and loss adjustment expenses for 2022 were $3,362,219,000, compared to $2,760,155,000 in 2021, reflecting a significant increase due to inflationary trends[39] - The net reserves at December 31, 2022, stood at $2,559,587,000, up from $2,185,051,000 in 2021[37] - The loss ratio for the company-wide basis in 2022 was 85.1%, an increase from 73.8% in 2021[47] - The combined ratio for the company's private passenger automobile only was 110.3% in 2022, compared to 96.0% in 2021[47] - Catastrophe losses net of reinsurance in 2022 were approximately $102 million, primarily due to extreme weather events[42] - The Company recorded a provision increase for insured events of prior years in 2022 of approximately $47.3 million, mainly due to higher losses in the automobile line[39] Investments and Financial Performance - The total investment portfolio as of December 31, 2022, was valued at $5,019,561,000, an increase from $4,910,800,000 in 2021[53] - Net investment income after income taxes rose to $146.20 million in 2022, up from $115.22 million in 2021, marking a 27% increase[1] - Average annual yield on investments after income taxes improved to 3.0% in 2022 from 2.5% in 2021, an increase of 20%[1] - The Company recognized net realized investment losses of $385.58 million in 2022, compared to gains of $88.21 million in 2021[1] - The Company generated $168.4 million in pre-tax net investment income from a portfolio valued at $4.9 billion as of December 31, 2022, down from $129.7 million on a $5.1 billion portfolio in 2021[198] - The Company experienced significant pre-tax net realized investment losses of $(488.1) million in 2022, primarily due to decreases in the fair value of fixed maturity and equity securities[198] Regulatory and Compliance - The Company relies on the ability of its Insurance Companies to pay dividends to meet its obligations, which are regulated by state insurance laws[103] - The Insurance Companies must adhere to risk-based capital standards and minimum capital and surplus requirements, with potential regulatory actions for non-compliance[104] - The Company's insurance rates require approval from the departments of insurance in most states, including California, which can be subject to delays and political influences[108] - The Holding Company Act restricts certain transactions and requires prior approval from the California DOI for changes in control of the Company[82][83] - The Company must file an annual enterprise risk report identifying material risks within the insurance holding company system[80] - The Company faces pressure from regulators to adjust insurance rates, which may not align with underlying costs, potentially impacting financial performance[109] Operational and Market Conditions - The Company had approximately 4,300 employees as of December 31, 2022, focusing on attracting and retaining talent[22] - The Company depends on approximately 7,450 independent agents for policy sales, and competition for these agents could affect business renewal and growth[128] - The Company is in the process of reducing its office footprint as most employees work from home under the "Mercury's My Workplace" policy[174] - High inflation levels may adversely impact the Company's ability to accurately price insurance products and could increase operating costs[168] - The ongoing conflict between Russia and Ukraine could lead to increased volatility in financial markets and affect the Company's business[169] - The insurance industry is highly competitive, with many competitors being better capitalized, which may affect the Company's ability to compete effectively[135] Legal and Litigation Risks - The Company is involved in various lawsuits and regulatory actions related to its insurance business, primarily concerning insurance claims[213] - The Company establishes accruals for estimated liabilities for non-insurance claims when a loss is probable and can be estimated[213] - The Company discloses the nature and estimated range of possible losses for material loss contingencies[213] - Anticipated legal defense costs associated with lawsuits and regulatory actions are accrued by the Company[213] - The Company believes that the resolution of pending legal or regulatory proceedings will not have a material adverse effect on its financial condition or cash flows[213] - The Company vigorously defends itself in legal matters unless a reasonable settlement is deemed appropriate[214] Employee and Talent Management - The Company may face challenges in attracting and retaining talented employees, which is critical for its business operations and expansion[165] - The Company reduced its workforce by approximately 40 employees in October 2022, incurring a one-time cost of $3 million, but expects ongoing annual cost savings of approximately $6 million[210] Technology and Cybersecurity - The Company has a significant reliance on its information technology systems for underwriting, claims processing, and maintaining policyholder data, which are critical to its operations[153] - The Company is exposed to cybersecurity risks that could damage its reputation and lead to significant expenses, fines, or lawsuits[156] Financial Condition and Dividends - The Company reduced its dividend per share for the first time since 1985 due to challenging business conditions in 2022[160] - The Company has $175 million of undrawn credit in its unsecured credit facility, ensuring sufficient liquidity to support operations amid market volatility[208] - The Company has consistently paid cash dividends since its public offering in November 1985, but future dividends will depend on profitability and financial condition[160] Goodwill and Intangible Assets - The Company recognized approximately $43 million of goodwill and $9 million of other intangible assets as of December 31, 2022, which may be subject to impairment write-downs[132]