Mercury General Corporation Announces Third Quarter Results and Increases Quarterly Dividend

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Oct 30, 2017, 08:30 ET

LOS ANGELES, Oct. 30, 2017 /PRNewswire/ -- Mercury General Corporation (NYSE: MCY) reported today for the third quarter of 2017:

Consolidated Highlights

	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2017			2016			$		%	2017			2016			$		%
(000's except per-share amounts and ratios)
Net premiums earned	$	801,205		$	790,850		$	10,355	1.3	$	2,388,641		$	2,337,256		$	51,385	2.2
Net premiums written ⁽¹⁾	$	827,419		$	808,375		$	19,044	2.4	$	2,436,663		$	2,387,709		$	48,954	2.1

Net income	$	46,485		$	26,930		$	19,555	72.6	$	125,098		$	99,126		$	25,972	26.2
Net income per diluted share	$	0.84		$	0.49		$	0.35	71.4	$	2.26		$	1.79		$	0.47	26.3

Operating income ⁽¹⁾	$	33,018		$	36,982		$	(3,964)	(10.7)	$	81,981		$	63,393		$	18,588	29.3
Operating income per diluted share ⁽¹⁾	$	0.60		$	0.67		$	(0.07)	(10.4)	$	1.48		$	1.15		$	0.33	28.7
Catastrophe losses ⁽²⁾	$	19,000		$	4,000		$	15,000	375.0	$	59,000		$	23,000		$	36,000	156.5
Combined ratio ⁽³⁾	99.3		%	98.1		%	—		1.2 pts	100.1		%	101.2		%	—		(1.1) pts


⁽¹⁾	These measures are not based on U.S. generally accepted accounting principles ("GAAP"), are defined in "Information Regarding GAAP and Non-GAAP Measures" and are reconciled to the most directly comparable GAAP measures in "Supplemental Schedules."
⁽²⁾	The 2017 catastrophe losses were primarily due to severe rainstorms in California, the impact of Hurricane Harvey in Texas and Hurricane Irma in Florida and Georgia, and storms and tornadoes in Oklahoma and Texas. The 2016 catastrophe losses were primarily attributable to severe storms in Texas and Northern California and claims from the Sand Fire in Southern California.
⁽³⁾	The Company experienced unfavorable development of approximately $4 million and $7 million on prior accident years' loss and loss adjustment expense reserves for the three months ended September 30, 2017 and 2016, respectively, and unfavorable development of approximately $18 million and $69 million on prior accident years' loss and loss adjustment expense reserves for the nine months ended September 30, 2017 and 2016, respectively. The year-to-date unfavorable development in 2017 was primarily attributable to higher than estimated California automobile and property losses, while the year-to-date unfavorable development in 2016 was largely due to the re-estimation of losses for California and Florida automobile liability coverages.

Investment Results

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
(000's except average annual yield)
Average invested assets at cost ⁽¹⁾	$	3,630,223		$	3,391,752		$	3,563,855		$	3,359,037
Net investment income ⁽²⁾
Before income taxes	$	30,988		$	30,371		$	94,058		$	91,440
After income taxes	$	27,071		$	26,777		$	82,381		$	80,365
Average annual yield on investments - after income taxes ⁽²⁾	3.0		%	3.2		%	3.1		%	3.2		%


⁽¹⁾	Fixed maturities and short-term bonds at amortized cost; 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 period.
⁽²⁾	Average annual yield on investments after income taxes for the three and nine months ended September 30, 2017 decreased slightly compared to the corresponding periods in 2016, largely 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. The higher net investment income before and after income taxes resulted from higher average invested assets.

Subsequent Event

In October 2017, a series of destructive wildfires burned across several counties in Northern California. Recent estimates put the total number of structures destroyed at over 8,000. Based on claims reported to date and expected to be reported, the Company estimates that its share of the total structures destroyed will be fewer than 100. The Company estimates a total gross loss in the range of $60 million to $100 million and a net loss, after the benefit of reinsurance, of $10 million, plus any reinstatement premiums required under the terms of the Company's catastrophe reinsurance treaty. Due to the recent occurrence and magnitude of this event, the total losses from these wildfires are difficult to estimate, and these figures may change in the future.

The Company benefited significantly from its newly expanded catastrophe reinsurance treaty that became effective July 1, 2017. Under the reinsurance treaty, covered catastrophe losses are reinsured 100% up to $190 million above the Company's $10 million retention. Losses above $200 million are shared pro-rata with 5% coverage by the reinsurers and 95% retention by the Company, up to a total of $15 million in coverage provided by the reinsurers. The reinsurance treaty is subject to reinstatement premiums based on the amount of reinsurance benefits paid to the Company, up to the maximum reinstatement premium of $19 million if the full amount of benefit is used.

The Board of Directors declared a quarterly dividend of $0.6250 per share. The dividend will be paid on December 28, 2017 to shareholders of record on December 14, 2017.

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 (1:00 P.M. Eastern 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 on October 30, 2017 and running through November 6, 2017. The replay telephone numbers are (855) 859-2056 (USA) or (404) 537-3406 (International). The conference ID# is 70768746. 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. Certain statements contained in this report 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 non-California states; the presence of competitors with greater financial resources and the impact of competitive pricing and marketing efforts; the ability of the Company to successfully manage its claims organization outside of California; the Company's ability to successfully allocate the resources used in the states with reduced or exited operations to its operations in other states; 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 9, 2017.

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,
	2017			2016			2017			2016
Revenues:
Net premiums earned	$	801,205		$	790,850		$	2,388,641		$	2,337,256
Net investment income	30,988			30,371			94,058			91,440
Net realized investment gains (losses)	20,718			(15,465)			66,334			54,973
Other	5,446			2,406			9,675			6,416
Total revenues	858,357			808,162			2,558,708			2,490,085
Expenses:
Losses and loss adjustment expenses	595,290			576,316			1,790,550			1,765,484
Policy acquisition costs	136,290			140,203			416,728			421,685
Other operating expenses	64,339			59,006			182,959			178,000
Interest	4,191			1,012			10,873			2,922
Total expenses	800,110			776,537			2,401,110			2,368,091
Income before income taxes	58,247			31,625			157,598			121,994
Income tax expense	11,762			4,695			32,500			22,868
Net income	$	46,485		$	26,930		$	125,098		$	99,126

Basic average shares outstanding	55,324			55,259			55,311			55,238
Diluted average shares outstanding	55,334			55,328			55,323			55,304

Basic Per Share Data
Net income	$	0.84		$	0.49		$	2.26		$	1.79
Net realized investment gains (losses), net of tax	$	0.24		$	(0.18)		$	0.78		$	0.65

Diluted Per Share Data
Net income	$	0.84		$	0.49		$	2.26		$	1.79
Net realized investment gains (losses), net of tax	$	0.24		$	(0.18)		$	0.78		$	0.65

Operating Ratios-GAAP Basis
Loss ratio	74.3		%	72.9		%	75.0		%	75.5		%
Expense ratio	25.0		%	25.2		%	25.1		%	25.7		%
Combined ratio	99.3		%	98.1		%	100.1		%	101.2		%

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

	September 30, 2017			December 31, 2016
	(unaudited)
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $2,776,887; $2,795,410)	$	2,841,736		$	2,814,553
Equity securities (cost $479,410; $331,770)	519,194			357,327
Short-term investments (cost $366,512; $375,700)	366,402			375,680
Total investments	3,727,332			3,547,560
Cash	284,639			220,318
Receivables:
Premiums	485,868			459,152
Accrued investment income	42,535			41,205
Other	18,041			24,635
Total receivables	546,444			524,992
Deferred policy acquisition costs	201,919			200,826
Fixed assets, net	144,478			155,910
Deferred income taxes	30,339			45,277
Goodwill	42,796			42,796
Other intangible assets, net	21,611			25,625
Other assets	26,041			25,414
Total assets	$	5,025,599		$	4,788,718

LIABILITIES AND SHAREHOLDERS' EQUITY
Loss and loss adjustment expense reserves	$	1,372,164		$	1,290,248
Unearned premiums	1,119,973			1,074,437
Notes payable ^(a)	371,236			320,000
Accounts payable and accrued expenses	130,825			112,334
Current income taxes	13,173			9,962
Other liabilities	242,037			229,335
Shareholders' equity	1,776,191			1,752,402
Total liabilities and shareholders' equity	$	5,025,599		$	4,788,718

OTHER INFORMATION
Common stock shares outstanding	55,332			55,289
Book value per share	$32.10			$31.70
Statutory surplus ^(b)	$1.59 billion			$1.44 billion
Net premiums written to surplus ratio ^(b)	2.02			2.19
Debt to total capital ratio^(c)	17.4		%	15.4		%
Portfolio duration (including all short-term instruments)^(b)(d)	3.9 years			3.7 years
Policies-in-force (company-wide "PIF")^(b)
Personal Auto PIF	1,121			1,135
Homeowners PIF	545			524
Commercial Auto PIF	40			41


(a)	The amount at September 30, 2017 represents $375 million aggregate face value of 4.40% senior notes due 2027 issued in March 2017 through a public offering, net of unamortized discount and debt issuance costs. $320 million outstanding at December 31, 2016 under the bank loan and credit facility agreements were paid off in March 2017 with the proceeds from the public offering of the $375 million senior notes.
(b)	Unaudited.
(c)	Debt to Debt plus Shareholders' Equity (Debt at face value).
(d)	Modified duration reflecting anticipated early calls.

SUPPLEMENTAL SCHEDULES
(000's except per-share amounts and ratios) (unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016

Reconciliations of Comparable GAAP Measures to Operating Measures^(a)

Net premiums earned	$	801,205	$	790,850	$	2,388,641		$	2,337,256
Change in net unearned premiums	26,214		17,525		48,022			50,453
Net premiums written	$	827,419	$	808,375	$	2,436,663		$	2,387,709

Incurred losses and loss adjustment expenses	$	595,290	$	576,316	$	1,790,550		$	1,765,484
Change in net loss and loss adjustment expense reserves	(46,129)		(33,854)		(84,279)			(98,157)
Paid losses and loss adjustment expenses	$	549,161	$	542,462	$	1,706,271		$	1,667,327

Net income	$	46,485	$	26,930	$	125,098		$	99,126
Less: Net realized investment gains (losses)	20,718		(15,465)		66,334			54,973
Tax on net realized investment gains (losses) ^(b)	7,251		(5,413)		23,217			19,240
Net realized investment gains (losses), net of tax	13,467		(10,052)		43,117			35,733
Operating income	$	33,018	$	36,982	$	81,981		$	63,393

Per diluted share:
Net income	$	0.84	$	0.49	$	2.26		$	1.79
Less: Net realized investment gains (losses), net of tax	0.24		(0.18)		0.78			0.65
Operating income	$	0.60	$	0.67	$	1.48		$	1.15

Combined ratio					100.1		%	101.2		%
Effect of estimated prior periods' loss development					(0.8)		%	(3.0)		%
Combined ratio-accident period basis					99.3		%	98.2		%


(a)	See "Information Regarding GAAP and Non-GAAP Measures" on page 7.
(b)	Federal statutory rate of 35%.

Information Regarding GAAP and 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.

Net income is the GAAP measure that is most directly comparable to operating income. Operating income is net income excluding realized investment gains and losses, net of tax. 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 investment gains and losses. Realized investment 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 the Company's business. It should be read in conjunction with the GAAP financial results. See "Supplemental Schedules" above for a reconciliation of net income to operating income.

Net premiums earned, the most directly comparable GAAP measure to net premiums written, represents the portion of premiums written that is recognized as revenue in the financial statements for the periods presented and earned on a pro-rata basis over the term of the policies. Net premiums written is a statutory financial measure which represents the premiums charged on policies issued during a fiscal period less any applicable reinsurance. Net premiums written is designed to determine production levels and is meant as supplemental information and not intended to replace net premiums earned. Such information should be read in conjunction with the GAAP financial results. See "Supplemental Schedules" above for a reconciliation of net premiums earned to net premiums written.

Incurred losses and loss adjustment expenses is the most directly comparable GAAP measure to paid losses and loss adjustment expenses. Paid losses and loss adjustment expenses excludes 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. See "Supplemental Schedules" above for a reconciliation of incurred losses and loss adjustment expenses to paid losses and loss adjustment expenses.

Combined ratio is the most directly comparable measure to combined ratio-accident period basis. Combined ratio-accident period basis is computed as the difference between two GAAP operating ratios: the combined ratio and prior accident periods' loss development ratio. Management believes that combined ratio-accident period basis is useful to investors and it is used 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 the GAAP combined ratio. It should be read in conjunction with the GAAP financial results. See "Supplemental Schedules" above for a reconciliation of GAAP combined ratio to combined ratio-accident period basis.

SOURCE Mercury General Corporation