Mercury General Corp 10-Q for FY2020 Q2

Mercury General Corp (MCY)

10-Q 2020-08-04 For: 2020-06-30

Added on April 10, 2026

About this 10-Q

Mercury General Corp filed this 10-Q on August 4, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).

Headline figures

Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $1.01B; up 2.7% from $979.49M a year earlier
Net income: $228.21M; up 174.1% from net income of $83.25M a year earlier
Diluted EPS: $4.12; up 174.7% from $1.50 a year earlier

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California			95-2211612
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

4484 Wilshire Boulevard
Los Angeles,	California	90010
(Address of principal executive offices)			(Zip Code)


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock	MCY	New York Stock Exchange



		Page
PART I - FINANCIAL INFORMATION

Item 1	Financial Statements	3
	Consolidated Balance Sheets as of June 3 0 , 2020 and December 31, 2019	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30 , 2020 and 2019	4
	Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30 , 2020 and 2019	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30 , 2020 and 2019	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3	Quantitative and Qualitative Disclosures about Market Risks	47
Item 4	Controls and Procedures	49

PART II - OTHER INFORMATION

Item 1	Legal Proceedings	49
Item 1A	Risk Factors	49
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3	Defaults upon Senior Securities	51
Item 4	Mine Safety Disclosures	51
Item 5	Other Information	51
Item 6	Exhibits	52

SIGNATURES			53


	June 30, 2020		December 31, 2019
	(unaudited)
ASSETS
Investments, at fair value:
Fixed maturity securities (amortized cost $3,207,125; $2,973,276)	$	3,327,362	$	3,093,275
Equity securities (cost $737,127; $648,282)	739,163		724,751
Short-term investments (cost $335,556; $494,060)	335,634		494,135
Total investments	4,402,159		4,312,161
Cash	262,153		294,398
Receivables:
Premiums	612,745		606,316
Allowance for credit losses on premiums receivable	(10,000)		(1,445)
Premiums receivable, net of allowance for credit losses	602,745		604,871
Accrued investment income	42,247		40,107
Other	8,421		6,464
Total receivables	653,413		651,442
Reinsurance recoverables	50,137		78,774
Allowance for credit losses on reinsurance recoverables	(88)		—
Reinsurance recoverables, net of allowance for credit losses	50,049		78,774
Deferred policy acquisition costs	242,740		233,166
Fixed assets (net of accumulated depreciation $294,479; $312,060)	172,015		168,986
Operating lease right-of-use assets	43,207		44,909
Current income taxes	—		7,642
Goodwill	42,796		42,796
Other intangible assets, net	10,164		10,636
Other assets	38,041		44,247
Total assets	$	5,916,737	$	5,889,157
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and loss adjustment expense reserves	$	1,865,110	$	1,921,255
Unearned premiums	1,390,039		1,355,547
Notes payable	372,333		372,133
Accounts payable and accrued expenses	190,204		143,318
Operating lease liabilities	46,636		47,996
Current income taxes	6,853		—
Deferred income taxes	9,131		27,964
Other liabilities	219,616		221,442
Total liabilities	4,099,922		4,089,655
Commitments and contingencies
Shareholders’ equity:
Common stock without par value or stated value: Authorized 70,000 shares; issued and outstanding 55,358; 55,358	98,898		98,828
Retained earnings	1,717,917		1,700,674
Total shareholders’ equity	1,816,815		1,799,502
Total liabilities and shareholders’ equity	$	5,916,737	$	5,889,157


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenues:
Net premiums earned	$	811,898	$	888,776	$	1,734,471	$	1,759,021
Net investment income	34,166		35,032		68,661		69,206
Net realized investment gains (losses)	158,426		53,329		(92,894)		164,403
Other	1,353		2,350		3,915		4,600
Total revenues	1,005,843		979,487		1,714,153		1,997,230
Expenses:
Losses and loss adjustment expenses	495,300		656,577		1,146,970		1,286,993
Policy acquisition costs	149,706		148,629		306,240		297,042
Other operating expenses	71,103		68,420		147,660		135,909
Interest	4,268		4,266		8,523		8,522
Total expenses	720,377		877,892		1,609,393		1,728,466
Income before income taxes	285,466		101,595		104,760		268,764
Income tax expense	57,255		18,345		15,753		49,647
Net income	$	228,211	$	83,250	$	89,007	$	219,117
Net income per share:
Basic	$	4.12	$	1.50	$	1.61	$	3.96
Diluted	$	4.12	$	1.50	$	1.61	$	3.96
Weighted average shares outstanding:
Basic	55,358		55,353		55,358		55,347
Diluted	55,358		55,363		55,358		55,356


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	June 30, 2020		December 31, 2019

	(Amounts in thousands)
Assets
Investments	$	4,402,159	$	4,312,161
Note receivable	5,697		5,665
Liabilities
Options sold	1,977		77
Unsecured notes	409,050		394,279


Level 1			Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2			Pricing inputs are other than quoted prices in active markets, which are based on the following: • Quoted prices for similar assets or liabilities in active markets; • Quoted prices for identical or similar assets or liabilities in non-active markets; or • Either directly or indirectly observable inputs as of the reporting date.
Level 3			Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation.


	Private Equity Fund
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

	(Amounts in thousands)
Beginning balance	$	—	$	1,213	$	1,203	$	1,445
Realized (losses) gains included in earnings	—		(7)		(1)		104
Settlements	—		—		—		(343)
Transfer out ⁽¹⁾	—		—		(1,202)		—
Ending balance	$	—	$	1,206	$	—	$	1,206
The amount of total gains for the period included in earnings attributable to assets still held at June 30	$	—	$	(7)	$	—	$	96


	June 30, 2020
	Carrying Value		Fair Value		Level 1		Level 2		Level 3

	(Amounts in thousands)
Liabilities
Notes payable:
Unsecured notes	$	372,333	$	409,050	$	—	$	409,050	$	—


	Liability Derivatives
	June 30, 2020		December 31, 2019

	(Amount in thousands)
Options sold - Other liabilities	$	1,977	$	77
Total derivatives	$	1,977	$	77


	Gains (Losses) Recognized in Net Income (Loss)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

	(Amounts in thousands)
Total return swap - Net realized investment gains (losses)	$	—	$	515	$	—	$	2,281
Options sold - Net realized investment gains (losses)	8,944		2,472		10,656		3,344
Total	$	8,944	$	2,987	$	10,656	$	5,625


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Useful Lives

	(Amounts in thousands)							(in years)
As of June 30, 2020:
Customer relationships	$	53,213	$	(52,470)	$	743	11
Trade names	15,400		(7,379)		8,021		24
Technology	4,300		(4,300)		—		10
Insurance license	1,400		—		1,400		Indefinite
Total other intangible assets, net	$	74,313	$	(64,149)	$	10,164

As of December 31, 2019:
Customer relationships	$	53,213	$	(52,319)	$	894	11
Trade names	15,400		(7,058)		8,342		24
Technology	4,300		(4,300)		—		10
Insurance license	1,400		—		1,400		Indefinite
Total other intangible assets, net	$	74,313	$	(63,677)	$	10,636


Year	Amortization Expense
	(Amounts in thousands)
Remainder of 2020	$	451
2021	902
2022	878
2023	714
2024	686
Thereafter	5,133
Total	$	8,764


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Common stock, beginning of period	$	98,863	$	98,495	$	98,828	$	98,026
Proceeds from stock options exercised	—		138		—		591
Share-based compensation expense	35		36		70		52
Withholding tax on stock options exercised	—		(22)		—		(22)
Common stock, end of period	98,898		98,647		98,898		98,647
Retained earnings, beginning of period	1,524,581		1,620,799		1,700,674		1,519,658
Cumulative effect of adopting ASU 2016-13 (Note1)	—		—		(2,014)		—
Retained earnings, beginning of period, as adjusted	1,524,581		1,620,799		1,698,660		1,519,658
Net income	228,211		83,250		89,007		219,117
Dividends paid to shareholders	(34,875)		(34,734)		(69,750)		(69,460)
Retained earnings, end of period	1,717,917		1,669,315		1,717,917		1,669,315
Total shareholders’ equity, end of period	$	1,816,815	$	1,767,962	$	1,816,815	$	1,767,962


	Six Months Ended June 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	89,007	$	219,117
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	32,982		31,164
Net realized investment losses (gains)	92,894		(164,403)
Decrease (increase) in premiums receivable	271		(37,693)
Decrease in reinsurance recoverables	28,566		94,517
Changes in current and deferred income taxes	(4,338)		49,667
Increase in deferred policy acquisition costs	(9,574)		(12,036)
Decrease in loss and loss adjustment expense reserves	(56,145)		(45,488)
Increase in unearned premiums	34,492		78,814
Increase in accounts payable and accrued expenses	48,778		32,560
Share-based compensation	70		52
Other, net	2,580		19,352
Net cash provided by operating activities	259,583		265,623
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities available for sale in nature:
Purchases	(449,641)		(294,561)
Sales	106,986		53,969
Calls or maturities	84,238		138,846
Equity securities available for sale in nature:
Purchases	(680,955)		(554,130)
Sales	564,635		508,365
Calls	3,000		—
Changes in securities payable and receivable	(2,219)		2,450
Decrease (increase) in short-term investments	159,112		(108,370)
Purchases of fixed assets	(19,789)		(20,874)
Other, net	12,555		3,580
Net cash used in investing activities	(222,078)		(270,725)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders	(69,750)		(69,460)
Proceeds from stock options exercised	—		591
Net cash used in financing activities	(69,750)		(68,869)
Net decrease in cash	(32,245)		(73,971)
Cash:
Beginning of the year	294,398		314,291
End of period	$	262,153	$	240,320


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

	(Amounts in thousands)
Beginning balance	$	10,000	$	1,321	$	1,445	$	1,458
Cumulative effect of adopting ASU 2016-13 for premiums receivable	—		—		1,855		—
Beginning balance, as adjusted	10,000		1,321		3,300		1,458
Provision during the period for expected credit losses ⁽¹⁾	719		331		8,888		1,894
Write-off amounts during the period	(885)		(680)		(2,543)		(2,550)
Recoveries during the period of amounts previously written off	166		227		355		397
Ending balance	$	10,000	$	1,199	$	10,000	$	1,199


Weighted-average grant-date fair value	$	8.09
Expected volatility	33.18		%
Risk-free interest rate	2.62		%
Expected dividend yield	5.40		%
Expected term in months	72


	Lender	Interest Rate	Maturity Date	June 30, 2020		December 31, 2019

				(Amounts in thousands)
Senior unsecured notes⁽¹⁾	Publicly traded	4.40%	March 15, 2027	$	375,000	$	375,000
Unsecured credit facility⁽²⁾	Bank of America and Wells Fargo Bank	LIBOR plus 112.5-162.5 basis points	March 29, 2022	—		—
Total principal amount				375,000		375,000
Less unamortized discount and debt issuance costs⁽³⁾				2,667		2,867
Total debt				$	372,333	$	372,133


Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations


	Six Months Ended June 30, 2020
	(Dollars in thousands)

	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California ⁽¹⁾	$	1,115,535		$	283,606		$	77,631		$	68,206		$	1,544,978		86.5	%
Other states^{(2) (3)}	149,868			44,554			39,914			7,377			241,713			13.5	%
Total	$	1,265,403		$	328,160		$	117,545		$	75,583		$	1,786,691		100.0	%
	70.8		%	18.4		%	6.6		%	4.2		%	100.0		%


	Six Months Ended June 30, 2019
	(Dollars in thousands)

	Private Passenger Automobile			Homeowners			Commercial Automobile			Other Lines			Total
California	$	1,230,853		$	252,608		$	68,901		$	58,894		$	1,611,256		86.2	%
Other states ⁽³⁾	172,065			37,318			41,278			6,254			256,915			13.8	%
Total	$	1,402,918		$	289,926		$	110,179		$	65,148		$	1,868,171		100.0	%
	75.1		%	15.5		%	5.9		%	3.5		%	100.0		%


	Three Months Ended June 30, 2020
	Gains (Losses) Recognized in Net Income
	Sales		Changes in fair value		Total

	(Amounts in thousands)
Net realized investment gains (losses)
Fixed maturity securities ⁽¹⁾⁽²⁾	$	(2,040)	$	50,251	$	48,211
Equity securities ⁽¹⁾⁽³⁾	(13,159)		111,940		98,781
Short-term investments ⁽¹⁾	(2,148)		4,639		2,491
Note receivable ⁽¹⁾	—		(1)		(1)
Options sold	8,189		755		8,944
Total	$	(9,158)	$	167,584	$	158,426


	Three Months Ended June 30, 2019
	Gains (Losses) Recognized in Net Income
	Sales		Changes in fair value		Total

	(Amounts in thousands)
Net realized investment gains (losses)
Fixed maturity securities ⁽¹⁾⁽²⁾	$	102	$	38,382	$	38,484
Equity securities ⁽¹⁾⁽³⁾	689		11,361		12,050
Short-term investments ⁽¹⁾	(730)		491		(239)
Note receivable ⁽¹⁾	—		47		47
Total return swaps	(75)		590		515
Options sold	2,503		(31)		2,472
Total	$	2,489	$	50,840	$	53,329


	Fixed Maturity Securities
	(Amounts in thousands)
Due in one year or less	$	144,581
Due after one year through two years	268,092
Due after two years through three years	219,893
Due after three years through four years	85,441
Due after four years through five years	64,855
Total due within five years	$	782,862


	Catastrophe Losses and LAE
	In Excess of		Up to		Percentage of Coverage

	(Amounts in millions)
Retained	$	—	$	40	—	%
Layer of Coverage	40		100		70
Layer of Coverage ⁽¹⁾	100		400		100
Layer of Coverage^{(1) (2) (3)}	400		775		100


Treaty	Annual Premium		Reinstatement Premium ⁽¹⁾		Total Combined Premium ⁽¹⁾

	(Amounts in millions)
For the 12 months ending June 30, 2021	$	50	$	—	$	50
For the 12 months ending June 30, 2020	$	38	$	—	$	38


	Cost ⁽¹⁾		Fair Value

	(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds	$	23,603	$	23,852
Municipal securities	2,604,563		2,727,359
Mortgage-backed securities	77,521		78,492
Corporate securities	261,504		262,739
Collateralized loan obligations	204,288		199,945
Other asset-backed securities	35,646		34,975
	3,207,125		3,327,362
Equity securities:
Common stock	605,372		645,362
Non-redeemable preferred stock	31,429		28,696
Private equity funds measured at net asset value ⁽²⁾	100,326		65,105
	737,127		739,163
Short-term investments	335,556		335,634
Total investments	$	4,279,808	$	4,402,159


	June 30, 2020
	(Dollars in thousands)
Security Type	AAA⁽¹⁾			AA⁽¹⁾			A⁽¹⁾			BBB⁽¹⁾			Non-Rated/Other⁽¹⁾			Total Fair Value⁽¹⁾
U.S. government bonds:
Treasuries	$	23,852		$	—		$	—		$	—		$	—		$	23,852
Total	23,852			—			—			—			—			23,852
	100.0		%	—		%	—		%	—		%	—		%	100.0		%
Municipal securities:
Insured	37,632			172,969			110,742			55,652			4,156			381,151
Uninsured	121,374			697,930			1,274,681			214,854			37,369			2,346,208
Total	159,006			870,899			1,385,423			270,506			41,525			2,727,359
	5.8		%	31.9		%	50.9		%	9.9		%	1.5		%	100.0		%
Mortgage-backed securities:
Commercial	7,077			—			1,462			4,129			—			12,668
Agencies	7,452			—			—			—			—			7,452
Non-agencies:
Prime	19,542			29,388			6,496			63			670			56,159
Alt-A	—			799			—			654			760			2,213
Total	34,071			30,187			7,958			4,846			1,430			78,492
	43.4		%	38.5		%	10.1		%	6.2		%	1.8		%	100.0		%
Corporate securities:
Basic materials	—			—			—			398			2,559			2,957
Communications	—			—			193			663			—			856
Consumer, cyclical	—			2,627			7,212			5,502			4,725			20,066
Consumer, non-cyclical	—			10,459			14,062			11,823			—			36,344
Energy	—			—			2,361			21,340			2,541			26,242
Financial	—			26,280			105,889			21,446			—			153,615
Industrial	—			—			—			15,810			—			15,810
Utilities	—			—			6,849			—			—			6,849
Total	—			39,366			136,566			76,982			9,825			262,739
	—		%	15.0		%	52.0		%	29.3		%	3.7		%	100.0		%
Collateralized loan obligations:
Corporate	32,331			32,240			135,374			—			—			199,945
Total	32,331			32,240			135,374			—			—			199,945
	16.2		%	16.1		%	67.7		%	—		%	—		%	100.0		%

Other asset-backed securities	—			20,000			6,336			2,395			6,244			34,975
	—		%	57.2		%	18.1		%	6.8		%	17.9		%	100.0		%
Total	$	249,260		$	992,692		$	1,671,657		$	354,729		$	59,024		$	3,327,362
	7.5		%	29.8		%	50.2		%	10.7		%	1.8		%	100.0		%


States	Fair Value		Average Rating
	(Amounts in thousands)
Texas	$	374,216	AA-
Florida	249,981		A+
Illinois	218,223		A+
New York	174,455		A+
Pennsylvania	170,932		A+
Other states	1,539,552		A+
Total	$	2,727,359


	June 30, 2020		December 31, 2019

	(Amounts in thousands, except average Beta)
Average Beta	1.07		0.83
Hypothetical reduction of 25% in the overall value of the stock market	$	172,634	$	121,671
Hypothetical reduction of 50% in the overall value of the stock market	$	345,269	$	243,342


15.1			Report of Independent Registered Public Accounting Firm.

15.2			Awareness Letter of Independent Registered Public Accounting Firm.

31.1			Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.

32.2			Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.

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