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Mercury General Corporation Announces Third Quarter Results and Increases Quarterly Dividend

November 3, 2020 GMT
Mercury General Corporation logo (PRNewsFoto/Mercury General Corporation) (PRNewsFoto/Mercury General Corporation)
Mercury General Corporation logo (PRNewsFoto/Mercury General Corporation) (PRNewsFoto/Mercury General Corporation)

LOS ANGELES, Nov. 3, 2020 /PRNewswire/ -- Mercury General Corporation (NYSE: MCY) reported today for the third quarter of 2020:

Consolidated Highlights



Three Months Ended
September 30,


Change


Nine Months Ended
September 30,


Change


2020


2019


$


%


2020


2019


$


%

(000's except per-share amounts and ratios)


















Net premiums earned (2)

$

899,304



$

915,012



$

(15,708)



(1.7)



$

2,633,775



$

2,674,034



$

(40,259)



(1.5)


Net premiums written (1) (2)

$

942,888



$

983,056



$

(40,168)



(4.1)



$

2,716,016



$

2,835,583



$

(119,567)



(4.2)


















Net realized investment gains (losses), net of tax (3)

$

50,904



$

26,326



$

24,578



93.4



$

(22,482)



$

156,204



$

(178,686)



(114.4)


Net income

$

118,857



$

69,282



$

49,575



71.6



$

207,864



$

288,399



$

(80,535)



(27.9)


Net income per diluted share

$

2.15



$

1.25



$

0.90



72.0



$

3.75



$

5.21



$

(1.46)



(28.0)


















Operating income (1)

$

67,953



$

42,956



$

24,997



58.2



$

230,346



$

132,195



$

98,151



74.2


Operating income per diluted share (1)

$

1.23



$

0.78



$

0.45



57.7



$

4.16



$

2.39



$

1.77



74.1


Catastrophe losses net of reinsurance (4)

$

29,000



$

3,000



$

26,000



866.7



$

43,000



$

17,000



$

26,000



152.9


Combined ratio (5)

94.3

%


98.6

%




(4.3) pts



93.0

%


98.1

%




(5.1) 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 Company's net premiums earned and written were reduced by approximately $21 million and $128 million for the three and nine months ended September 30, 2020, respectively, due to premium refunds and credits to its eligible policyholders for reduced driving and business activities following the outbreak of the COVID-19 pandemic.

(3)

Net realized investment gains (losses) before tax were $64 million and $33 million for the three months ended September 30, 2020 and 2019, respectively, and $(28) million and $198 million for the nine months ended September 30, 2020 and 2019, respectively. The changes in fair value of the Company's investments are recorded as part of net realized investment gains or losses in its consolidated statements of operations due to the adoption of the fair value option for its investments as permitted under GAAP. The fair value of the Company's investments substantially declined in the first quarter of 2020, primarily due to the overall market disruptions and dislocations following the outbreak of the COVID-19 pandemic, and has significantly recovered in the second and third quarters of 2020.

(4)

Catastrophe losses due to the events that occurred during the nine months ended September 30, 2020 totaled approximately $48 million, with no reinsurance benefits used for these losses, resulting primarily from wildfires and windstorms in California and extreme weather events outside of California. These losses were partially offset by favorable development of approximately $5 million on prior years' catastrophe losses. Catastrophe losses due to the events that occurred during the nine months ended September 30, 2019 totaled approximately $20 million, with no reinsurance benefits used for these losses, resulting primarily from winter storms in California, a hurricane in Texas, and tornadoes and wind and hail storms in the Midwest. These losses were partially offset by favorable development of approximately $3 million on prior years' catastrophe losses.

(5)

The Company experienced favorable development of approximately $2 million and $1 million on prior accident years' loss and loss adjustment expense reserves for the three months ended September 30, 2020 and 2019, respectively, and unfavorable development of approximately $26 million and $10 million on prior accident years' loss and loss adjustment expense reserves for the nine months ended September 30, 2020 and 2019, respectively. The year-to-date unfavorable development in 2020 was primarily attributable to higher than estimated losses and loss adjustment expenses in the homeowners and commercial automobile lines of insurance business, partially offset by favorable development in the California private passenger automobile line of insurance business. The year-to-date unfavorable development in 2019 was primarily attributable to higher than estimated defense and cost containment expenses in the California automobile line of insurance business, partially offset by favorable development in certain of the Company's other lines of insurance business.

Investment Results



Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


2020


2019

(000's except average annual yield)








Average invested assets at cost (1)

$

4,328,804



$

4,048,498



$

4,256,759



$

3,976,582


Net investment income (2)








Before income taxes

$

32,140



$

36,356



$

100,801



$

105,562


After income taxes

$

28,789



$

32,186



$

89,757



$

93,844


Average annual yield on investments - after income taxes (2)

2.7

%


3.2

%


2.8

%


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)

Lower net investment income before and after income taxes for the three and nine months ended September 30, 2020 compared to the corresponding periods in 2019 resulted largely from a lower average yield on investments, partially offset by higher average invested assets. Average annual yield on investments after income taxes for the three and nine months ended September 30, 2020 decreased compared to the corresponding periods in 2019, primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher with lower yielding investments, as a result of decreasing market interest rates.

Consolidated Highlights



Three Months Ended
September 30,


Change


Nine Months Ended
September 30,


Change


2020


2019


$


%


2020


2019


$


%

(000's except per-share amounts and ratios)


















Net premiums earned (2)

$

899,304



$

915,012



$

(15,708)



(1.7)



$

2,633,775



$

2,674,034



$

(40,259)



(1.5)


Net premiums written (1) (2)

$

942,888



$

983,056



$

(40,168)



(4.1)



$

2,716,016



$

2,835,583



$

(119,567)



(4.2)


















Net realized investment gains (losses), net of tax (3)

$

50,904



$

26,326



$

24,578



93.4



$

(22,482)



$

156,204



$

(178,686)



(114.4)


Net income

$

118,857



$

69,282



$

49,575



71.6



$

207,864



$

288,399



$

(80,535)



(27.9)


Net income per diluted share

$

2.15



$

1.25



$

0.90



72.0



$

3.75



$

5.21



$

(1.46)



(28.0)


















Operating income (1)

$

67,953



$

42,956



$

24,997



58.2



$

230,346



$

132,195



$

98,151



74.2


Operating income per diluted share (1)

$

1.23



$

0.78



$

0.45



57.7



$

4.16



$

2.39



$

1.77



74.1


Catastrophe losses net of reinsurance (4)

$

29,000



$

3,000



$

26,000



866.7



$

43,000



$

17,000



$

26,000



152.9


Combined ratio (5)

94.3

%


98.6

%




(4.3) pts



93.0

%


98.1

%




(5.1) 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 Company's net premiums earned and written were reduced by approximately $21 million and $128 million for the three and nine months ended September 30, 2020, respectively, due to premium refunds and credits to its eligible policyholders for reduced driving and business activities following the outbreak of the COVID-19 pandemic.

(3)

Net realized investment gains (losses) before tax were $64 million and $33 million for the three months ended September 30, 2020 and 2019, respectively, and $(28) million and $198 million for the nine months ended September 30, 2020 and 2019, respectively. The changes in fair value of the Company's investments are recorded as part of net realized investment gains or losses in its consolidated statements of operations due to the adoption of the fair value option for its investments as permitted under GAAP. The fair value of the Company's investments substantially declined in the first quarter of 2020, primarily due to the overall market disruptions and dislocations following the outbreak of the COVID-19 pandemic, and has significantly recovered in the second and third quarters of 2020.

(4)

Catastrophe losses due to the events that occurred during the nine months ended September 30, 2020 totaled approximately $48 million, with no reinsurance benefits used for these losses, resulting primarily from wildfires and windstorms in California and extreme weather events outside of California. These losses were partially offset by favorable development of approximately $5 million on prior years' catastrophe losses. Catastrophe losses due to the events that occurred during the nine months ended September 30, 2019 totaled approximately $20 million, with no reinsurance benefits used for these losses, resulting primarily from winter storms in California, a hurricane in Texas, and tornadoes and wind and hail storms in the Midwest. These losses were partially offset by favorable development of approximately $3 million on prior years' catastrophe losses.

(5)

The Company experienced favorable development of approximately $2 million and $1 million on prior accident years' loss and loss adjustment expense reserves for the three months ended September 30, 2020 and 2019, respectively, and unfavorable development of approximately $26 million and $10 million on prior accident years' loss and loss adjustment expense reserves for the nine months ended September 30, 2020 and 2019, respectively. The year-to-date unfavorable development in 2020 was primarily attributable to higher than estimated losses and loss adjustment expenses in the homeowners and commercial automobile lines of insurance business, partially offset by favorable development in the California private passenger automobile line of insurance business. The year-to-date unfavorable development in 2019 was primarily attributable to higher than estimated defense and cost containment expenses in the California automobile line of insurance business, partially offset by favorable development in certain of the Company's other lines of insurance business.

Investment Results



Three Months Ended September 30,


Nine Months Ended September 30,


2020


2019


2020


2019

(000's except average annual yield)








Average invested assets at cost (1)

$

4,328,804



$

4,048,498



$

4,256,759



$

3,976,582


Net investment income (2)








Before income taxes

$

32,140



$

36,356



$

100,801



$

105,562


After income taxes

$

28,789



$

32,186



$

89,757



$

93,844


Average annual yield on investments - after income taxes (2)

2.7

%


3.2

%


2.8

%


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)

Lower net investment income before and after income taxes for the three and nine months ended September 30, 2020 compared to the corresponding periods in 2019 resulted largely from a lower average yield on investments, partially offset by higher average invested assets. Average annual yield on investments after income taxes for the three and nine months ended September 30, 2020 decreased compared to the corresponding periods in 2019, primarily due to the maturity and replacement of higher yielding investments purchased when market interest rates were higher with lower yielding investments, as a result of decreasing market interest rates.

The Board of Directors declared a quarterly dividend of $0.6325 per share. The dividend will be paid on December 30, 2020 to shareholders of record on December 16, 2020.

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.

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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 the states where it 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; pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases; court decisions and trends in litigation and health care and auto repair costs; and legal, cybersecurity, 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 12, 2020.

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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,


2020


2019


2020


2019

Revenues:








Net premiums earned

$

899,304



$

915,012



$

2,633,775



$

2,674,034


Net investment income

32,140



36,356



100,801



105,562


Net realized investment gains (losses)

64,436



33,324



(28,458)



197,726


Other

2,894



2,603



6,810



7,203


Total revenues

998,774



987,295



2,712,928



2,984,525


Expenses:








Losses and loss adjustment expenses

618,657



680,928



1,765,627



1,967,921


Policy acquisition costs

157,365



150,929



463,604



447,971


Other operating expenses

71,859



70,341



219,519



206,250


Interest

4,262



4,257



12,786



12,779


Total expenses

852,143



906,455



2,461,536



2,634,921


Income before income taxes

146,631



80,840



251,392



349,604


Income tax expense

27,774



11,558



43,528



61,205


Net income

$

118,857



$

69,282



$

207,864



$

288,399










Basic average shares outstanding

55,358



55,355



55,358



55,349


Diluted average shares outstanding

55,358



55,366



55,358



55,360










Basic Per Share Data








Net income

$

2.15



$

1.25



$

3.75



$

5.21


Net realized investment gains (losses), net of tax

$

0.92



$

0.47



$

(0.41)



$

2.82










Diluted Per Share Data








Net income

$

2.15



$

1.25



$

3.75



$

5.21


Net realized investment gains (losses), net of tax

$

0.92



$

0.47



$

(0.41)



$

2.82










Operating Ratios-GAAP Basis








Loss ratio

68.8

%


74.4

%


67.0

%


73.6

%

Expense ratio

25.5

%


24.2

%


25.9

%


24.5

%

Combined ratio (1)

94.3

%


98.6

%


93.0

%


98.1

%









(1)

Combined ratio for the nine months ended September 30, 2020 does 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, 2020


December 31, 2019


(unaudited)



ASSETS




Investments, at fair value:




Fixed maturity securities (amortized cost $3,344,014; $2,973,276)

$

3,485,363



$

3,093,275


Equity securities (cost $769,821; $648,282)

809,591



724,751


Short-term investments (cost $253,785; $494,060)

253,842



494,135


Total investments

4,548,796



4,312,161


Cash

322,129



294,398


Receivables:




Premiums

631,091



606,316


Allowance for credit losses on premiums receivable

(10,000)



(1,445)


Premiums receivable, net of allowance for credit losses

621,091



604,871


Accrued investment income

43,356



40,107


Other

10,014



6,464


Total receivables

674,461



651,442


Reinsurance recoverables

41,432



78,774


Allowance for credit losses on reinsurance recoverables

(58)




Reinsurance recoverables, net of allowance for credit losses

41,374



78,774


Deferred policy acquisition costs

251,462



233,166


Fixed assets, net

174,924



168,986


Operating lease right-of-use assets

41,075



44,909


Current income taxes



7,642


Goodwill

42,796



42,796


Other intangible assets, net

9,939



10,636


Other assets

38,832



44,247


Total assets

$

6,145,788



$

5,889,157


LIABILITIES AND SHAREHOLDERS' EQUITY




Loss and loss adjustment expense reserves

$

1,941,986



$

1,921,255


Unearned premiums

1,432,549



1,355,547


Notes payable

372,432



372,133


Accounts payable and accrued expenses

180,312



143,318


Operating lease liabilities

44,558



47,996


Current income taxes

6,401




Deferred income taxes

19,996



27,964


Other liabilities

246,722



221,442


Shareholders' equity

1,900,832



1,799,502


Total liabilities and shareholders' equity

$

6,145,788



$

5,889,157






OTHER INFORMATION




Common stock shares outstanding

55,358



55,358


Book value per share

$

34.34



$

32.51


Statutory surplus (a)

$1.64 billion



$1.54 billion


Net premiums written to surplus ratio (a)

2.21



2.42


Debt to total capital ratio (b)

16.5

%


17.2

%

Portfolio duration (including all short-term instruments) (a) (c)

3.2 years



3.2 years


Policies-in-force (company-wide "PIF") (a)




Personal Auto PIF

1,107



1,139


Homeowners PIF

667



646


Commercial Auto PIF

37



36




(a)

Unaudited.

(b)

Debt to Debt plus Shareholders' Equity (Debt at face value).

(c)

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,


2020


2019


2020


2019









Reconciliations of Comparable GAAP Measures to Operating Measures (a)













Net premiums earned

$

899,304



$

915,012



$

2,633,775



$

2,674,034


Change in net unearned premiums

43,584



68,044



82,241



161,549


Net premiums written

$

942,888



$

983,056



$

2,716,016



$

2,835,583










Incurred losses and loss adjustment expenses

$

618,657



$

680,928



$

1,765,627



$

1,967,921


Change in net loss and loss adjustment expense reserves

(71,769)



(74,558)



(42,074)



(102,811)


Paid losses and loss adjustment expenses

$

546,888



$

606,370



$

1,723,553



$

1,865,110










Net income

$

118,857



$

69,282



$

207,864



$

288,399


Less: Net realized investment gains (losses)

64,436



33,324



(28,458)



197,726


Tax on net realized investment gains (losses) (b)

13,532



6,998



(5,976)



41,522


Net realized investment gains (losses), net of tax

50,904



26,326



(22,482)



156,204


Operating income

$

67,953



$

42,956



$

230,346



$

132,195










Per diluted share:








Net income

$

2.15



$

1.25



$

3.75



$

5.21


Less: Net realized investment gains (losses), net of tax

0.92



0.47



(0.41)



2.82


Operating income

$

1.23



$

0.78



$

4.16



$

2.39










Combined ratio





93.0

%


98.1

%

Effect of estimated prior periods' loss development





(1.0)

%


(0.4)

%

Combined ratio-accident period basis





92.0

%


97.7

%



(a)

See "Information Regarding GAAP and Non-GAAP Measures" on page 7.

(b)

Federal statutory rate of 21%.

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,


2020


2019


2020


2019

Revenues:








Net premiums earned

$

899,304



$

915,012



$

2,633,775



$

2,674,034


Net investment income

32,140



36,356



100,801



105,562


Net realized investment gains (losses)

64,436



33,324



(28,458)



197,726


Other

2,894



2,603



6,810



7,203


Total revenues

998,774



987,295



2,712,928



2,984,525


Expenses:








Losses and loss adjustment expenses

618,657



680,928



1,765,627



1,967,921


Policy acquisition costs

157,365



150,929



463,604



447,971


Other operating expenses

71,859



70,341



219,519



206,250


Interest

4,262



4,257



12,786



12,779


Total expenses

852,143



906,455



2,461,536



2,634,921


Income before income taxes

146,631



80,840



251,392



349,604


Income tax expense

27,774



11,558



43,528



61,205


Net income

$

118,857



$

69,282



$

207,864



$

288,399










Basic average shares outstanding

55,358



55,355



55,358



55,349


Diluted average shares outstanding

55,358



55,366



55,358



55,360










Basic Per Share Data








Net income

$

2.15



$

1.25



$

3.75



$

5.21


Net realized investment gains (losses), net of tax

$

0.92



$

0.47



$

(0.41)



$

2.82










Diluted Per Share Data








Net income

$

2.15



$

1.25



$

3.75



$

5.21


Net realized investment gains (losses), net of tax

$

0.92



$

0.47



$

(0.41)



$

2.82










Operating Ratios-GAAP Basis








Loss ratio

68.8

%


74.4

%


67.0

%


73.6

%

Expense ratio

25.5

%


24.2

%


25.9

%


24.5

%

Combined ratio (1)

94.3

%


98.6

%


93.0

%


98.1

%









(1)

Combined ratio for the nine months ended September 30, 2020 does 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, 2020


December 31, 2019


(unaudited)



ASSETS




Investments, at fair value:




Fixed maturity securities (amortized cost $3,344,014; $2,973,276)

$

3,485,363



$

3,093,275


Equity securities (cost $769,821; $648,282)

809,591



724,751


Short-term investments (cost $253,785; $494,060)

253,842



494,135


Total investments

4,548,796



4,312,161


Cash

322,129



294,398


Receivables:




Premiums

631,091



606,316


Allowance for credit losses on premiums receivable

(10,000)



(1,445)


Premiums receivable, net of allowance for credit losses

621,091



604,871


Accrued investment income

43,356



40,107


Other

10,014



6,464


Total receivables

674,461



651,442


Reinsurance recoverables

41,432



78,774


Allowance for credit losses on reinsurance recoverables

(58)




Reinsurance recoverables, net of allowance for credit losses

41,374



78,774


Deferred policy acquisition costs

251,462



233,166


Fixed assets, net

174,924



168,986


Operating lease right-of-use assets

41,075



44,909


Current income taxes



7,642


Goodwill

42,796



42,796


Other intangible assets, net

9,939



10,636


Other assets

38,832



44,247


Total assets

$

6,145,788



$

5,889,157


LIABILITIES AND SHAREHOLDERS' EQUITY




Loss and loss adjustment expense reserves

$

1,941,986



$

1,921,255


Unearned premiums

1,432,549



1,355,547


Notes payable

372,432



372,133


Accounts payable and accrued expenses

180,312



143,318


Operating lease liabilities

44,558



47,996


Current income taxes

6,401




Deferred income taxes

19,996



27,964


Other liabilities

246,722



221,442


Shareholders' equity

1,900,832



1,799,502


Total liabilities and shareholders' equity

$

6,145,788



$

5,889,157






OTHER INFORMATION




Common stock shares outstanding

55,358



55,358


Book value per share

$

34.34



$

32.51


Statutory surplus (a)

$1.64 billion



$1.54 billion


Net premiums written to surplus ratio (a)

2.21



2.42


Debt to total capital ratio (b)

16.5

%


17.2

%

Portfolio duration (including all short-term instruments) (a) (c)

3.2 years



3.2 years


Policies-in-force (company-wide "PIF") (a)




Personal Auto PIF

1,107



1,139


Homeowners PIF

667



646


Commercial Auto PIF

37



36




(a)

Unaudited.

(b)

Debt to Debt plus Shareholders' Equity (Debt at face value).

(c)

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,


2020


2019


2020


2019









Reconciliations of Comparable GAAP Measures to Operating Measures (a)













Net premiums earned

$

899,304



$

915,012



$

2,633,775



$

2,674,034


Change in net unearned premiums

43,584



68,044



82,241



161,549


Net premiums written

$

942,888



$

983,056



$

2,716,016



$

2,835,583










Incurred losses and loss adjustment expenses

$

618,657



$

680,928



$

1,765,627



$

1,967,921


Change in net loss and loss adjustment expense reserves

(71,769)



(74,558)



(42,074)



(102,811)


Paid losses and loss adjustment expenses

$

546,888



$

606,370



$

1,723,553



$

1,865,110










Net income

$

118,857



$

69,282



$

207,864



$

288,399


Less: Net realized investment gains (losses)

64,436



33,324



(28,458)



197,726


Tax on net realized investment gains (losses) (b)

13,532



6,998



(5,976)



41,522


Net realized investment gains (losses), net of tax

50,904



26,326



(22,482)



156,204


Operating income

$

67,953



$

42,956



$

230,346



$

132,195










Per diluted share:








Net income

$

2.15



$

1.25



$

3.75



$

5.21


Less: Net realized investment gains (losses), net of tax

0.92



0.47



(0.41)



2.82


Operating income

$

1.23



$

0.78



$

4.16



$

2.39










Combined ratio





93.0

%


98.1

%

Effect of estimated prior periods' loss development





(1.0)

%


(0.4)

%

Combined ratio-accident period basis





92.0

%


97.7

%



(a)

See "Information Regarding GAAP and Non-GAAP Measures" on page 7.

(b)

Federal statutory rate of 21%.

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.

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SOURCE Mercury General Corporation