Executive Summary

MCY delivered a stronger quarter operationally: Total revenues rose to $1.478B and GAAP diluted EPS reached $3.01, while non-GAAP operating EPS was $2.67; the GAAP combined ratio improved to 92.5% (vs 98.9% YoY; vs 119.2% in Q1) as catastrophe losses net of reinsurance fell to $13M in Q2 .
Versus Wall Street consensus (S&P Global), MCY posted a significant beat: Operating EPS $2.67 vs $1.30 estimate and revenue $1.478B vs $1.449B estimate; Q1 also exceeded estimates, indicating better underlying trends despite wildfire impacts*.
The Board maintained the quarterly dividend at $0.3175 per share (payable Sep 25, 2025), signaling capital confidence amid ongoing wildfire claims and reinsurance collections .
Strategic/regulatory positioning remains constructive: management is preparing a CA homeowners rate filing using the CDI-approved Verisk Wildfire Model and highlighted partnership opportunities to expand in California .
Key narrative drivers: subrogation materially reduced reported catastrophe losses; investment yield improved after portfolio repositioning; reinsurance utilization and reinstatement premiums ($101M) remain watch points .

What Went Well and What Went Wrong

What Went Well

Material operational rebound: combined ratio improved to 92.5% (loss ratio 68.8%, expense ratio 23.7%), aided by lower catastrophe losses and higher investment income; GAAP diluted EPS rose to $3.01, operating EPS to $2.67 .
Subrogation progress: Q2 catastrophe losses were reduced by about $50M, with ~$528M estimated recovery recorded against Eaton fire losses; Palisades subrogation rights sale added ~$47M of offsets .
Regulatory tailwinds: “This balanced, science-based initiative will unlock the ability for us to expand the areas where Mercury is able to offer homeowners insurance.” — CEO Gabriel Tirador on CDI’s Sustainable Insurance Strategy .

What Went Wrong

Wildfire-related drag persists: YTD catastrophe losses net of reinsurance reached $460M and the six-month combined ratio was 105.4% (accident-period basis 107.2%) despite Q2 improvement .
Reinsurance costs/structure uncertainty: full limits were exhausted on Palisades/Eaton, triggering $101M reinstatement premiums and accelerating expensing; reinsurance renewal costs are expected to increase from prior expectations .
Rating outlook pressure: AM Best revised MCY’s outlooks to negative due to uncertainty around net ultimate losses and future reinsurance costs after the January 2025 CA wildfires .

Financial Results

Metric	Q2 2024	Q1 2025	Q2 2025	Q2 2025 Consensus
Total Revenues ($USD Billions)	$1.305	$1.394	$1.478	$1.449*
GAAP Diluted EPS ($)	$1.13	$(1.96)	$3.01	—
Operating EPS (non-GAAP) ($)	$1.09	$(2.29)	$2.67	$1.30*
Loss Ratio (%)	75.8	95.1	68.8	—
Expense Ratio (%)	23.1	24.0	23.7	—
Combined Ratio (%)	98.9	119.2	92.5	—
Net Premiums Earned ($USD Billions)	$1.236	$1.283	$1.367	—
Net Premiums Written ($USD Billions)	$1.355	$1.314	$1.481	—
Net Investment Income (Pre-tax, $USD Millions)	$68.97	$81.48	$78.76	—
Avg Annual Yield (Pre-tax, %)	4.5	4.9	4.7	—
Catastrophe Losses Net of Reinsurance ($USD Millions)	$125	$447	$13	—

Notes: Consensus values marked with * retrieved from S&P Global.

Estimates comparison (Q2 2025):

Operating EPS: Actual $2.67 vs $1.30 estimate → beat of $1.37; bold positive surprise*.
Revenue: Actual $1.478B vs $1.449B estimate → beat of ~$28.5M (+2.0%)*.

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Dividend per share	Q3 2025 payout	$0.3175 per share	$0.3175 per share (payable Sep 25, 2025; record Sep 11, 2025)	Maintained
CA Homeowners Rate Action	Effective Mar 2025	N/A	12% CA homeowners rate increase approved, effective March 2025	Raised (pricing)
Reinsurance costs (exposure-adjusted)	FY 2025 renewal (7/1)	Expectation pre-wildfires: flat-to-down	Expect costs to rise moderately due to wildfires	Raised (cost outlook)
Wildfire modeling approach	Ongoing	N/A	Preparing CA homeowners rate filing using CDI-approved Verisk Wildfire Model	Change in methodology

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 2024)	Previous Mentions (Q1 2025 PR)	Current Period (Q2 2025 PR/8-K)	Trend
Wildfires & Subrogation	Estimated gross losses $1.6–$2.0B; likely recovery on Eaton; option to treat events separately; FAIR Plan coverage	Recorded ~$414M net pre-tax losses; ~$525M Eaton subrogation estimate; full reinsurance limits used, $101M reinstatement premiums	~$359M net wildfire losses YTD; ~$528M Eaton subrogation estimate; ~$47M Palisades subrogation sale; Q2 cat losses reduced by ~$50M	Improving loss visibility; subrogation offsets growing
Reinsurance Program	Contract allows event combination/separation; parametric $6.5M ineligible; expect moderate cost increase	Limits exhausted; reinstatement premiums charged $50M Q1 and $50M Q2	Full limits exhausted; $101M reinstatement premiums paid; accelerated expensing; detailed ceded premium impact	Elevated near-term costs; structure functioning as intended
Regulatory & Rates (CA)	Expect supportive CDI via Sustainable Insurance Strategy	CA homeowners +12% approved; effective March	Filing using Verisk Wildfire Model to broaden coverage availability	Constructive regulatory backdrop aiding pricing
Investment Portfolio/Yields	Cash >$1B; after-tax income $61.5M; added liquidity; yields discussed	Pre-tax NII $81.5M; portfolio repositioned to reduce volatility and raise yield	Pre-tax NII $78.76M; yield 4.7% pre-tax after selling low-yield assets and adding higher-yield long-term investments	Stable/high yields; optimized asset mix
Capital/Surplus & Leverage	Premium-to-surplus expected high-2s to low-3s; rebuilt via core earnings	Book value per share $32.87; NPW/surplus 2.88	Book value per share $35.56; NPW/surplus 2.74; Debt/total capital 22.6%	Gradual recovery as earnings normalize

Management Commentary

“This balanced, science-based initiative will unlock the ability for us to expand the areas where Mercury is able to offer homeowners insurance.” — CEO Gabriel Tirador (on CDI Sustainable Insurance Strategy) .
“We believe very strongly in California’s future… we’re excited to welcome Safeco customers into the Mercury family.” — CEO Gabriel Tirador (on partnership to transition Safeco customers) .
Q4 call tone signaled 2025 as an “earnings event” with core underlying results expected to rebuild surplus despite wildfire impacts; reinsurance renewal costs expected to increase moderately .

Q&A Highlights

Capital ratio/Surplus: Management targeted premium-to-surplus in high-2s to low-3s near term, with core earnings to rebuild surplus over 2025 .
Reinsurance renewal/pricing: Continuous dialogue with reinsurers; costs expected to rise moderately versus pre-wildfire expectations (which were flat-to-down) .
Auto frequency/severity: Frequency modestly declining in PD/collision; severity low-to-mid single digits for PD/collision; mid-teens for bodily injury .
FAIR Plan mechanics: FAIR Plan losses can attach to reinsurance; assessments partially recoupable via policyholder surcharges, reducing net impact .

Estimates Context

Q2 2025 operating EPS beat: $2.67 actual vs $1.30 estimate; Q1 2025 operating EPS also beat: $(2.29) actual vs $(4.00) estimate*.
Q2 2025 revenue beat: $1.478B actual vs $1.449B estimate; Q1 2025 revenue beat: $1.394B actual vs $1.364B estimate*.
Limited coverage: Only one estimate for EPS and revenue in both quarters; analysts likely to revise upward for operating EPS given combined ratio improvement and subrogation offsets*.

Notes: Values retrieved from S&P Global.

KPIs and Segment/Line Indicators

Policies-in-Force (company-wide)

KPI	Dec 31, 2024	Mar 31, 2025	Jun 30, 2025
Personal Auto PIF (000s)	1,019	1,024	1,030
Homeowners PIF (000s)	852	854	859
Commercial Auto PIF (000s)	39	37	36

Balance Sheet & Capital

KPI	Dec 31, 2024	Mar 31, 2025	Jun 30, 2025
Book Value/Share ($)	35.14	32.87	35.56
Statutory Surplus ($B)	2.03	1.88	2.02
NPW / Surplus (x)	2.65	2.88	2.74
Debt / Total Capital (%)	22.8	24.0	22.6
Portfolio Duration (yrs)	3.4	3.8	4.3

Catastrophes & Reinsurance

KPI	Q2 2024	Q1 2025	Q2 2025
Cat Losses Net of Reinsurance ($M)	125	447	13
Reinstatement Premiums Earned ($M)	—	50	51
Subrogation Offsets (Quarter, $M)	—	—	~50 reduction in Q2 losses

Cross-Period Margin Comparison

Metric	Q2 2024	Q1 2025	Q2 2025	Δ YoY	Δ QoQ
Combined Ratio (%)	98.9	119.2	92.5	-6.4 pts	-26.7 pts
Loss Ratio (%)	75.8	95.1	68.8	-7.0 pts	-26.3 pts
Expense Ratio (%)	23.1	24.0	23.7	+0.6 pts	-0.3 pts

Management’s Non-GAAP Framework

Operating income excludes realized investment gains/losses, net of tax; management uses it to assess underlying insurance profitability .
Combined ratio vs combined ratio-accident period basis helps separate prior accident-year development effects; MCY disclosed reconciliations in supplemental schedules .

Key Drivers of Q2 Performance

Combined ratio improvement driven by lower net cat losses ($13M vs $125M YoY; vs $447M in Q1), and favorable investment yield after portfolio repositioning from low-yield assets to higher-yield long-term investments .
Premium growth: net premiums earned up 10.6% YoY to $1.367B and net premiums written up 9.2% YoY to $1.481B, supported by rate actions and reinstatement premium accounting effects .
Subrogation materially reduced reported loss burden; Eaton recovery estimate increased to ~$528M; Palisades rights sale booked ~$47M .

Key Takeaways for Investors

The quarter marks an operational inflection: significant EPS and revenue beats versus consensus, with combined ratio reverting toward 90s despite elevated YTD catastrophe load; near-term estimate upward revisions are likely*.
Watch reinsurance dynamics: full limit usage and $101M reinstatement premiums imply higher renewal costs around 7/1, but structure provided robust protection; track ceded premium run-rate and any additional purchases .
Subrogation is a de-risking lever: $528M Eaton estimate and $47M Palisades monetization support offsets; monitor timing of cash recoveries and litigation progress .
Regulatory backdrop is improving: CDI Sustainable Insurance Strategy and adoption of Verisk Wildfire Model should enable more rational pricing and underwriting expansion in CA, supporting medium-term margin sustainability .
Capital trajectory: Book value/share recovered to $35.56; NPW/surplus moderated to 2.74; core earnings and stable investment yield should help rebuild surplus through 2025 .
Trading angle: strong beat and margin improvement are positive catalysts; overhangs include AM Best negative outlook and reinsurance cost uncertainty—focus on further clarity in the 10-Q and any call commentary .
Medium-term thesis: normalizing combined ratio, rate adequacy, and regulatory tailwinds in CA homeowners, augmented by improved investment yields, can sustain operating EPS recovery even as cat exposure remains an inherent risk .