Mercury General Corporation Announces Third Quarter Results and Increases Quarterly Dividend

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Oct 28, 2013, 08:30 ET

LOS ANGELES, Oct. 28, 2013 /PRNewswire/ -- Mercury General Corporation (NYSE: MCY) reported today for the third quarter of 2013:

Consolidated Highlights

	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2013			2012			$		%	2013			2012			$		%
(000's except per-share amounts and ratios)
Net premiums written (1)	$	704,895		$	684,880		$	20,015	2.9	$	2,060,878		$	1,996,800		$	64,078	3.2
Net income	$	39,570		$	66,201		$	(26,631)	(40.2)	$	96,767		$	134,293		$	(37,526)	(27.9)
Net income per diluted share	$	0.72		$	1.21		$	(0.49)	(40.5)	$	1.76		$	2.45		$	(0.69)	(28.2)
Operating income (1)	$	29,033		$	33,862		$	(4,829)	(14.3)	$	101,417		$	83,167		$	18,250	21.9
Operating income per diluted share (1)	$	0.53		$	0.62		$	(0.09)	(14.5)	$	1.85		$	1.51		$	0.34	22.5
Restructuring charges (2)	$	0		$	0		$	0	0	$	10,000		$	0		$	10,000	NM
Catastrophe losses (3)	$	2,000		$	1,000		$	1,000	100.0	$	16,000		$	9,000		$	7,000	77.8
Combined ratio (4)	99.2		%	99.1		%	—		0.1 pts	98.6		%	100.4		%	—		(1.8) pts
NM = not meaningful

(1)																							These measures are not based on U.S. generally accepted accounting principles ("GAAP") and are defined and reconciled to the most directly comparable GAAP measures in "Information Regarding Non-GAAP Measures."
(2)																							The Company consolidated its claims and underwriting operations located outside of California into hub locations in Florida, New Jersey, and Texas, which resulted in a net workforce reduction of approximately 135 employees and a $10 million expense in the first quarter of 2013. The amounts are rounded to the nearest million.
(3)																							2013 catastrophe losses were primarily the result of tornadoes in Oklahoma and severe storms in the Midwest and the Southeast region during the second quarter. 2012 catastrophe losses were primarily the result of wind and hail storms in the Midwest region. The amounts are rounded to the nearest million.
(4)																							The Company experienced unfavorable development of approximately $1 million and $4 million on prior accident years' losses and loss adjustment expenses reserves for the three months ended September 30, 2013 and 2012, respectively, and favorable development of approximately $2 million and unfavorable development of approximately $33 million on prior accident years' losses and loss adjustment expenses reserves for the nine months ended September 30, 2013 and 2012, respectively. The year-to-date favorable development in 2013 is primarily from non-California states.

Investment Results

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
(000's except average annual yield)
Average invested assets at cost (1)	$	3,025,614		$	3,007,634		$	3,038,281		$	2,998,270
Net investment income (2)
Before income taxes	$	30,857		$	33,410		$	93,706		$	96,569
After income taxes	$	27,214		$	28,881		$	82,272		$	84,909
Average annual yield on investments - after income taxes (2)	3.6		%	3.8		%	3.6		%	3.8		%

Net realized investment gains (losses):
Fixed maturity securities (3)	$	(10,763)		$	19,119		$	(81,525)		$	50,412
Equity securities	26,250			29,900			73,240			26,707
Short-term investments	182			(32)			(669)			(850)
Other	543			765			1,801			2,387
Total	$	16,212		$	49,752		$	(7,153)		$	78,656

(1)

Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at cost. Average invested assets at cost are based on the monthly amortized cost of the invested assets for each respective period.

(2)

Net investment income and average annual yield for the nine months ended September 30, 2013 slightly decreased primarily due to the maturity and replacement of higher yielding investments, purchased when market interest rates were higher, with lower yielding investments purchased during low interest rate environments.

(3)

Net realized investment losses on fixed maturity securities for the three and nine months ended September 30, 2013 primarily related to mark to market adjustments on securities that continue to be held in the portfolio. The decrease in the fixed maturity portfolio primarily resulted from the increase in interest rates that occurred in the second quarter of 2013.

The Board of Directors declared a quarterly dividend of $0.6150 per share, representing an increase over the quarterly dividend amount paid in 2012. The dividend will be paid on December 26, 2013 to shareholders of record on December 12, 2013.

Mercury General Corporation and its subsidiaries are a multiple line insurance organization offering predominantly personal automobile and homeowners insurance through a network of independent producers in many states. For more information, visit the Company's website at www.mercuryinsurance.com. The Company will be hosting a conference call and webcast today at 10:00 A.M. Pacific time where management will discuss results and address questions. The teleconference and webcast can be accessed by calling (877) 807-1888 (USA), (706) 679-3827 (International) or by visiting www.mercuryinsurance.com. A replay of the call will be available beginning at 1:30 P.M. Pacific time and running through November 4, 2013. The replay telephone numbers are (855) 859-2056 (USA) or (404) 537-3406 (International). The conference ID# is 75893466. The replay will also be available on the Company's website shortly following the call.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. The statements contained in this press release are forward-looking statements based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the demand for the Company's insurance products, inflation and general economic conditions, including general market risks associated with the Company's investment portfolio; the accuracy and adequacy of the Company's pricing methodologies; catastrophes in the markets served by the Company; uncertainties related to estimates, assumptions and projections generally; the possibility that actual loss experience may vary adversely from the actuarial estimates made to determine the Company's loss reserves in general; the Company's ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in states where the Company operates; legislation adverse to the automobile insurance industry or business generally that may be enacted in the states where the Company operates; the Company's success in managing its business in states outside of California; the presence of competitors with greater financial resources and the impact of competitive pricing and marketing efforts; changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs and marketing efforts; and legal, regulatory and litigation risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risks and uncertainties, see the Company's filings with the Securities and Exchange Commission.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES SUMMARY OF OPERATING RESULTS (000's except per-share amounts and ratios) (unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net premiums written	$	704,895		$	684,880		$	2,060,878		$	1,996,800

Revenues:
Net premium earned	$	678,913		$	646,084		$	2,017,295		$	1,919,143
Net investment income	30,857			33,410			93,706			96,569
Net realized investment gains (losses)	16,212			49,752			(7,153)			78,656
Other	2,685			2,532			7,539			7,790
Total revenues	$	728,667		$	731,778		$	2,111,387		$	2,102,158
Expenses:
Losses and loss adjustment expenses	492,558			467,929			1,446,524			1,415,096
Policy acquisition costs	126,891			121,906			377,006			357,062
Other operating expenses	54,087			50,225			166,165			154,353
Interest	338			388			864			1,176
Total expenses	$	673,874		$	640,448		$	1,990,559		$	1,927,687

Income before income taxes	54,793			91,330			120,828			174,471
Income tax expense	15,223			25,129			24,061			40,178
Net income	$	39,570		$	66,201		$	96,767		$	134,293

Basic average shares outstanding	54,959			54,911			54,941			54,895
Diluted average shares outstanding	54,973			54,925			54,957			54,918

Basic Per Share Data
Net income	$	0.72		$	1.21		$	1.76		$	2.45

Net realized investment gains (losses), net of tax	$	0.19		$	0.59		$	(0.08)		$	0.93

Diluted Per Share Data
Net income	$	0.72		$	1.21		$	1.76		$	2.45

Net realized investment gains (losses), net of tax	$	0.19		$	0.59		$	(0.08)		$	0.93

Operating Ratios-GAAP Basis
Loss ratio	72.6		%	72.4		%	71.7		%	73.7		%
Expense ratio	26.7		%	26.6		%	26.9		%	26.6		%
Combined ratio ^(a)	99.2		%	99.1		%	98.6		%	100.4		%

Reconciliations of Operating Measures to Comparable GAAP Measures

Net premiums written	$	704,895		$	684,880		$	2,060,878		$	1,996,800
Change in net unearned premiums	(25,982)			(38,796)			(43,583)			(77,657)
Net premiums earned	$	678,913		$	646,084		$	2,017,295		$	1,919,143

Paid losses and loss adjustment expenses	$	488,985		$	467,719		$	1,471,639		$	1,421,078
Change in net loss and loss adjustment expense reserves	3,573			210			(25,115)			(5,982)
Incurred losses and loss adjustment expenses	$	492,558		$	467,929		$	1,446,524		$	1,415,096

(a) Combined ratios for the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2012 do not sum due to rounding.

MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONDENSED BALANCE SHEETS AND OTHER INFORMATION (000's except per-share amounts and ratios)

	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $2,481,651; $2,270,903)	$	2,538,514		$	2,408,354
Equity securities (cost $267,614; $475,959)	336,367			477,088
Short-term investments (cost $251,550; $294,607)	251,449			294,653
Total investments	3,126,330			3,180,095
Cash	250,061			158,183
Receivables:
Premiums	372,818			345,387
Accrued investment income	35,316			31,109
Other	18,399			17,756
Total receivables	426,533			394,252
Deferred policy acquisition costs	196,284			185,910
Fixed assets, net	154,467			161,940
Current income taxes	0			7,058
Deferred income taxes	26,437			0
Goodwill	42,796			42,796
Other intangible assets, net	43,098			47,589
Other assets	74,450			11,863
Total assets	$	4,340,456		$	4,189,686

LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses	$	1,010,534		$	1,036,123
Unearned premiums	967,320			920,429
Notes payable	180,000			140,000
Accounts payable and accrued expenses	133,973			96,220
Current income taxes	26,324			0
Deferred income taxes	0			445
Other liabilities	182,150			153,972
Shareholders' equity	1,840,155			1,842,497
Total liabilities and shareholders' equity	$	4,340,456		$	4,189,686

OTHER INFORMATION
Common stock shares outstanding	54,960			54,922
Book value per share	$33.48			$33.55
Statutory surplus	$1.51 billion			$1.44 billion
Premiums written to surplus ratio	1.8			1.8
Debt to total capital ratio	8.9		%	7.1		%
Portfolio duration (including all short-term instruments)^(a)(b)	3.4 years			2.8 years
Policies-in-force (company-wide "PIF")^(a)
Personal Auto PIF	1,230			1,249
Homeowners PIF	463			442

(a) Unaudited.

(b) Modified durations reflecting anticipated early calls.

Information Regarding Non-GAAP Measures

The Company has presented information within this document containing operating measures which in management's opinion provide investors with useful, industry specific information to help them evaluate, and perform meaningful comparisons of, the Company's performance, but that may not be presented in accordance with GAAP. These measures are not intended to replace, and should be read in conjunction with, the GAAP financial results.

Operating income is net income excluding realized investment gains and losses, net of tax. Net income is the GAAP measure that is most directly comparable to operating income. Operating income is used by management along with the other components of net income to assess the Company's performance. Management uses operating income as an important measure to evaluate the results of the Company's insurance business. Management believes that operating income provides investors with a valuable measure of the Company's ongoing performance as it reveals trends in the Company's insurance business that may be obscured by the effect of net realized capital gains and losses. Realized capital gains and losses may vary significantly between periods and are generally driven by external economic developments such as capital market conditions. Accordingly, operating income highlights the results from ongoing operations and the underlying profitability of the Company's core insurance business. Operating income, which is provided as supplemental information and should not be considered as a substitute for net income, does not reflect the overall profitability of our business. It should be read in conjunction with the GAAP financial results. The Company has reconciled operating income with the most directly comparable GAAP measure in the table below.

	Three Months Ended September 30,								Nine Months Ended September 30,
	Total				Per diluted share				Total				Per diluted share
	2013		2012		2013		2012		2013		2012		2013 ^(a)		2012 ^(a)
(000's except per-share amounts)
Operating income	$	29,033	$	33,862	$	0.53	$	0.62	$	101,417	$	83,167	$	1.85	$	1.51
Net realized investment gains (losses), net of tax	10,537		32,339		0.19		0.59		(4,650)		51,126		(0.08)		0.93
Net income	$	39,570	$	66,201	$	0.72	$	1.21	$	96,767	$	134,293	$	1.76	$	2.45

(a) Net income per diluted share does not sum due to rounding.

Net premiums written represents the premiums charged on policies issued during a fiscal period. Net premiums earned, the most directly comparable GAAP measure, represents the portion of premiums written that have been recognized as income in the financial statements for the periods presented as earned on a pro-rata basis over the term of the policies. Net premiums written are meant as supplemental information and are not intended to replace net premiums earned. Such information should be read in conjunction with the GAAP financial results. The Company has reconciled net premiums written with the most directly comparable GAAP measure in the supplemental schedule entitled, "Summary of Operating Results."

Paid losses and loss adjustment expenses is the portion of incurred losses and loss adjustment expenses, the most directly comparable GAAP measure, excluding the effects of changes in the loss reserve accounts. Paid losses and loss adjustment expenses is provided as supplemental information and is not intended to replace incurred losses and loss adjustment expenses. It should be read in conjunction with the GAAP financial results. The Company has reconciled paid losses and loss adjustment expenses with the most directly comparable GAAP measure in the supplemental schedule entitled, "Summary of Operating Results."

Combined ratio-accident period basis is computed as the difference between two GAAP operating ratios: the combined ratio and the effect of prior accident periods' loss development. The most directly comparable GAAP measure is the combined ratio. The Company believes that this ratio is useful to investors and it is used by management to reveal the trends in the Company's results of operations that may be obscured by development on prior accident periods' loss reserves. Combined ratio-accident period basis is meant as supplemental information and is not intended to replace combined ratio. It should be read in conjunction with the GAAP financial results. The Company has reconciled combined ratio-accident period basis with the most directly comparable GAAP measure in the table below.

	Nine Months Ended September 30,
	2013		2012

Combined ratio-accident period basis	98.7	%	98.7	%
Effect of estimated prior periods' loss development	(0.1)	%	1.7	%
Combined ratio	98.6	%	100.4	%