Mercury General(US:MCY)2023-08-01 20:09PART I - FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited interim consolidated financial statements for the period ended June 30, 2023 Consolidated Balance Sheets Total assets grew to $6.69 billion, while shareholders' equity declined to $1.40 billion as of June 30, 2023 Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $6,690,640 | $6,514,188 | | Total Investments | $4,955,185 | $4,910,800 | | Cash | $357,723 | $289,776 | | Total Liabilities | $5,290,500 | $4,992,057 | | Loss and loss adjustment expense reserves | $2,720,007 | $2,584,910 | | Unearned premiums | $1,632,390 | $1,545,639 | | Notes payable | $448,529 | $398,330 | | Total Shareholders' Equity | $1,400,140 | $1,522,131 | Consolidated Statements of Operations The company's net loss narrowed to $41.5 million in Q2 2023, driven by higher earned premiums and lower investment losses Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Net premiums earned | $1,034,469 | $987,512 | $2,039,173 | $1,950,062 | | Total revenues | $1,083,227 | $785,625 | $2,189,806 | $1,591,086 | | Total expenses | $1,144,437 | $1,056,965 | $2,313,094 | $2,115,555 | | Net loss | $(41,543) | $(210,681) | $(86,831) | $(407,599) | | Diluted net loss per share | $(0.75) | $(3.80) | $(1.57) | $(7.36) | Consolidated Statements of Cash Flows Net cash from operations decreased to $105.4 million, while overall cash increased by $67.9 million in H1 2023 Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $105,362 | $194,906 | | Net cash used in investing activities | $(51,613) | $(169,203) | | Net cash provided by (used in) financing activities | $14,198 | $(71,258) | | Net increase (decrease) in cash | $67,947 | $(45,555) | Notes to Consolidated Financial Statements Notes detail accounting policies, reinsurance, loss reserves, and a significant increase in catastrophe losses - The company declared and paid dividends of $0.3175 per share in Q2 2023, a reduction from $0.6350 per share in Q2 202224 - The company has a Catastrophe Reinsurance Treaty effective through June 30, 2024, providing $1.11 billion of coverage per occurrence after a $100 million retention31 - For the six months ended June 30, 2023, the company experienced favorable development of $19.8 million on prior years' loss reserves, primarily from private passenger auto and homeowners lines99 - Catastrophe losses, net of reinsurance, were approximately $190 million for the first six months of 2023, a significant increase from $43 million in the same period of 2022100 Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial results, focusing on rate increases, catastrophe losses, and underwriting profitability Overview The company's primary focus is California personal auto insurance, with loss reserves being a critical accounting estimate - The California DOI approved two separate rate increases for private passenger auto insurance in 2023: 6.9% effective in March and 6.99% effective in July127 - A 12.6% rate increase for the California homeowners line became effective in May 2023, and the company has filed for an additional 6.99% increase128129 - Estimating loss reserves is the most significant accounting estimate, requiring assumptions about claim settlement patterns, inflation, and legal environments; as of June 30, 2023, gross loss reserves were $2.72 billion133138 Results of Operations The combined ratio deteriorated to 110.1% in Q2 2023, driven by a significant increase in catastrophe losses GAAP Combined Ratio Comparison | Period | 2023 | 2022 | | :--- | :--- | :--- | | Three Months Ended June 30 | | | | Loss Ratio | 86.8% | 83.7% | | Expense Ratio | 23.3% | 22.9% | | Combined Ratio | 110.1% | 106.6% | | Six Months Ended June 30 | | | | Loss Ratio | 89.6% | 84.6% | | Expense Ratio | 23.3% | 23.5% | | Combined Ratio | 112.9% | 108.1% | - Q2 2023 catastrophe losses were approximately $93 million, primarily from rainstorms in Texas and Oklahoma, compared to $19 million in Q2 2022147 - For the first half of 2023, catastrophe losses were approximately $191 million, mainly from winter storms in California, Texas, and Oklahoma, compared to $40 million in H1 2022160 - Net investment income increased to $58.4 million in Q2 2023 from $38.6 million in Q2 2022, driven by higher yields on investments153 Liquidity and Capital Resources The company maintains adequate liquidity, supported by its investment portfolio and a robust reinsurance program - The company's Catastrophe Reinsurance Treaty for the period ending June 30, 2024, provides $1,111 million of coverage on a per-occurrence basis after a $100 million retention175176 - The investment portfolio is heavily weighted towards tax-exempt state and municipal bonds, which comprised 59.2% of total fixed maturity securities at fair value184 - The modified duration of the fixed maturity securities portfolio was 3.3 years as of June 30, 2023, reflecting a moderate sensitivity to interest rate changes188 - The ratio of net premiums written to surplus was 2.83 to 1 at June 30, 2023, remaining within the regulatory guideline of 3.0 to 1209 Quantitative and Qualitative Disclosures about Market Risks The company manages market risks, primarily interest rate and equity price risk, through its investment strategy - The fixed maturity securities portfolio has a weighted-average credit quality rating of A+ as of June 30, 2023213 - A hypothetical 25% reduction in the stock market's value would lead to an estimated $107.3 million reduction in the value of the company's common stock portfolio218 - A 100 basis point rise in interest rates would decrease the fair value of the fixed maturity portfolio by an estimated $133.8 million222 Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter covered by the report225 - No changes occurred in the company's internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls226 PART II - OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings not expected to have a material adverse financial effect - The company is party to various lawsuits and regulatory actions that arise in the normal course of business and management believes their ultimate resolution will not materially impact the company's financial condition228229 Risk Factors No material changes were reported to the risk factors disclosed in the company's latest Annual Report on Form 10-K - The risk factors identified in the Annual Report on Form 10-K for the year ended December 31, 2022, have not changed in any material respect232 Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities during the reporting period - None233 Defaults upon Senior Securities The company reports no defaults upon senior securities during the reporting period - None234 Other Information No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the second quarter - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended June 30, 2023236 Exhibits This section lists all exhibits filed with the Form 10-Q, including required certifications and XBRL data