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MG

MERCURY GENERAL CORP (MCY)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 underwriting was strong: combined ratio improved to 91.4% (vs. 93.6% in Q3 and 98.6% in Q4 2023) on earned premium growth and pricing, with operating EPS of $2.78; GAAP EPS was $1.82 as equity/fair value marks swung to a loss versus a gain last year .
  • Net premiums earned rose 18.1% year over year to $1.35B; net premiums written rose 16.1% as rate actions flowed through, and investment income after tax increased to $61.5M (+14.6% YoY) on higher invested asset balances .
  • Post-quarter, California wildfires (January 2025) are the key overhang: gross losses estimated at $1.6–$2.0B and pre-tax net losses at $155–$325M, with $80–$101M of reinstatement premium split between Q1–Q2 2025; liquidity is solid (> $1B cash/STI) and $531M reinsurance cash collected by the call date .
  • Regulatory and pricing backdrop improving: a 12% California homeowners rate increase was approved in January and is effective March 2025; management expects 2025 investment income near 2024 levels and targets combined ratio “over time” near ~96% .
  • Ratings implications and catalysts: Fitch affirmed A- FSR/BBB- senior debt with negative outlook; Moody’s downgraded FSR to A3/Baa3 with negative outlook; next catalysts include clarity on wildfire loss netting (subrogation 40–70% potential), reinsurance renewal (7/1), and further rate approvals .

What Went Well and What Went Wrong

  • What Went Well

    • Underwriting improvement: combined ratio fell to 91.4% in Q4 (vs. 93.6% Q3; 98.9% Q2), with loss ratio at 68.4% and expense ratio stable at 22.9% .
    • Pricing and growth: net premiums earned +18.1% YoY to $1.35B; net premiums written +16.1% YoY to $1.31B, reflecting higher average premium per policy from rate increases .
    • Management tone and outlook: “2024 was a year for the record books… Our core underlying business… is poised to deliver good results” and 2025 investment income expected near 2024 levels; CA homeowners 12% rate increase effective March 2025 .

  • What Went Wrong

    • GAAP earnings pressure from markets and cats: net realized investment swung to a $(66.9)M loss vs. +$161.8M prior year; catastrophe losses were $41M vs. $16M in Q4 2023, driving GAAP EPS to $1.82 (vs. $3.46) .
    • Reserve development: ~$8M unfavorable development on prior accident years in Q4 2024 (vs. ~$4M favorable in Q4 2023) .
    • Post-quarter wildfire overhang: gross losses $1.6–$2.0B; pre-tax net $155–$325M; reinstatement premium $80–$101M; agencies placed negative outlook/downgraded, and reinsurance costs at 7/1 are expected to rise moderately .

Financial Results

Sequential and Trend (oldest → newest)

MetricQ2 2024Q3 2024Q4 2024
Net Premiums Earned ($USD Millions)$1,236.0 $1,320.7 $1,352.1
Total Revenues ($USD Millions)$1,305.0 $1,530.4 $1,366.2
Net Income ($USD Millions)$62.6 $230.9 $101.1
Diluted EPS ($)$1.13 $4.17 $1.82
Operating Income ($USD Millions)$60.3 $140.4 $153.9
Operating EPS ($)$1.09 $2.54 $2.78

Underwriting Ratios and Catastrophes (oldest → newest)

MetricQ2 2024Q3 2024Q4 2024
Loss Ratio (%)75.8% 69.5% 68.4%
Expense Ratio (%)23.1% 24.0% 22.9%
Combined Ratio (%)98.9% 93.6% 91.4%
Catastrophe Losses, Net of Reinsurance ($USD Millions)$125 $39 $41

YoY Comparison (Q4 2023 → Q4 2024)

MetricQ4 2023Q4 2024
Net Premiums Earned ($USD Millions)$1,144.9 $1,352.1
Total Revenues ($USD Millions)$1,374.6 $1,366.2
Net Income ($USD Millions)$191.4 $101.1
Diluted EPS ($)$3.46 $1.82
Combined Ratio (%)98.6% 91.4%
Operating EPS ($)$1.15 $2.78

KPIs: Policies-in-Force (Period-End; oldest → newest)

KPIQ2 2024Q3 2024Q4 2024
Personal Auto PIF1,023 1,016 1,019
Homeowners PIF806 829 852
Commercial Auto PIF42 40 39

Actual vs. Wall Street Consensus (S&P Global)

MetricQ4 2024 ActualQ4 2024 Consensus
Diluted EPS ($)$1.82 N/A (S&P Global consensus unavailable due to access limits)
Total Revenues ($USD Millions)$1,366.2 N/A (S&P Global consensus unavailable due to access limits)

Note: S&P Global/CapIQ consensus data were unavailable at time of analysis due to service limits; therefore, beat/miss versus Street could not be assessed.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Wildfires Net Cat Loss (pre-tax)Q1 2025N/A$155–$325M New
Reinstatement Premium1H 2025N/A$80–$101M (evenly split Q1–Q2) New
CA Homeowners RateEffective Mar 2025N/A+12% approved (Jan 2025) Raised (approved)
Reinsurance Renewal Outlook7/1/2025N/ACosts to rise moderately Higher
Investment IncomeFY 2025N/ANear 2024 levels Maintained (qualitative)
DividendQ1 2025$0.3175 prior$0.3175 payable Mar 27, 2025 Maintained

Additional program details: Cat reinsurance limits $1,290M per occurrence after $150M retention; option to treat two events with reinstated limits (~$1,238M for the second) and 8% co-participation above $650M in the second-event band; $6.5M parametric slice not recoverable .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q4 2024)Trend
Underwriting and PricingCombined ratio improved to 98.9% in Q2; to 93.6% in Q3; NPE growth 19–21% YoY; pricing gains flowing through .Combined ratio 91.4% with loss ratio 68.4%; operating EPS $2.78; continued benefit from rate increases .Improving underlying profitability.
Catastrophe ExposureQ2 cats $125M; Q3 cats $39M; Hurricane Milton expected ≤$5M in Q4 .Q4 cats $41M; January wildfires gross $1.6–$2.0B; net $155–$325M; reinstatement $80–$101M .Elevated cat focus; near-term earnings overhang.
Reinsurance Program/Costs—$1.29B per-occurrence; considering one vs. two events; expect moderate reinsurance cost increase at 7/1 .Anticipated cost headwind.
Regulatory/Rates (CA)—12% CA homeowners rate increase effective March 2025; supportive “sustainable insurance strategy” enabling reinsurance inclusion and models .Rate environment improving in CA.
Capital & LiquidityStat surplus: $1.71B (Q2) → $1.88B (Q3) .Premium-to-surplus to be high-2s/low-3s temporarily; >$1B cash/STI; $531M reinsurance receipts as of call .Liquidity solid; capital rebuild via 2025 earnings.
FAIR Plan—Expect ~$50M assessment (5% share), 50% recoupable up to first $1B and protected under reinsurance; FAIR exposures clarified .Manageable via reinsurance/recoupment.
Subrogation—Eaton fire subrogation recovery estimated at 40–70%; considering sale of rights; strong evidence of utility cause .Potential positive offset to net losses.
Frequency/Severity Trends—Auto frequencies slightly down PD/collision; flat BI; severities low–mid single digits PD/collision; mid-teens BI .Mixed but moderating inflation narrative continues.

Management Commentary

  • “2024 was a year for the record books… The combination of rate increases and moderating inflation helped drive down our combined ratio in the quarter to 91.4%… Excluding catastrophe losses, the combined ratio was 88.3% in the quarter and 90.5% for the full year.”
  • “Our core underlying business… is poised to deliver good results… we expect 2025 investment income to be near 2024 levels.”
  • On reinsurance and events: “PCS has designated [Palisades and Eaton] as separate events… we have not yet determined if we will consider the Wildfires as two separate events.”
  • On CA rates and regulation: “We recently received approval on a 12% increase on our homeowners book in California… we expect [reinsurance] costs to go up, at least moderately… the commissioner’s sustainable insurance strategy… allowing reinsurance in cost and allowing models.”
  • On capital: “Premium to surplus ratio… high 2s, maybe low 3s… 2025 underlying earnings to build back surplus and drive that ratio down.”

Q&A Highlights

  • Capital and leverage: Premium-to-surplus expected “high 2s to low 3s,” with core earnings intended to rebuild capital in 2025; liquidity not an issue .
  • Reinsurance renewal: Expect “moderate” cost increase at 7/1; outlook pre-wildfire had been flat-to-down; will update closer to renewal .
  • California FAIR Plan: Anticipate ~$50M assessment (5% share), 50% recoupable up to first $1B and reinsurance-attachable; FAIR plan has own reinsurance .
  • Subrogation: Eaton fire subrogation recovery range estimated at 40–70%; active interest in purchasing rights; decision pending .
  • Claims snapshot: ~2,700 wildfire claims reported; ~650 homeowners total losses; ~150 other totals (landlord, renters, condo, commercial); significant advances already paid .
  • Frequency/severity: Auto frequency modestly down (PD/collision) and flat (BI); severities low–mid single digits (PD/collision) and mid-teens (BI) .

Estimates Context

  • S&P Global/CapIQ consensus for Q4 2024 EPS and revenues was unavailable at time of analysis due to access limits; as such, we cannot formally assess beat/miss versus Street. Future updates should anchor to S&P Global for investor communications.

Key Takeaways for Investors

  • Core profitability momentum continued in Q4: combined ratio improved to 91.4% and operating EPS reached $2.78; sequential underwriting trends remain favorable as pricing flows through .
  • The primary near-term overhang is the January 2025 wildfires; however, net loss range ($155–$325M pre-tax) and strong liquidity (> $1B cash/STI; $531M reinsurance collected by call) should mitigate solvency/liquidity concerns .
  • Positive regulatory backdrop: 12% CA homeowners rate increase effective March 2025, and a policy framework supportive of incorporating reinsurance costs and modeling augur well for rate adequacy and capacity .
  • Reinsurance renewal (7/1) is a key watch item; management expects moderate cost increases—investors should monitor potential margin headwinds and any adjustments in retention/limit structure .
  • Subrogation represents a potential upside lever (40–70% recovery estimate for Eaton), which could narrow net wildfire losses relative to the initial range .
  • Investment income set to be “near 2024” in 2025 provides earnings ballast amid catastrophe noise; average invested assets have been rising .
  • Tactical focus: watch forthcoming FAIR Plan assessments/recoupment mechanics, management’s decision on one vs. two event classification, additional CA rate filings, and any updates on capital/surplus ratios through 1H 2025 .

Appendix: Additional Data Points

  • Dividend: $0.3175 per share payable March 27, 2025 (record March 13, 2025) .
  • Balance sheet snapshot (12/31/24): total assets $8.31B; shareholders’ equity $1.95B; book value per share $35.14; debt-to-total capital 22.8% .
  • Investment income after-tax: Q4 $61.5M; average invested assets at cost $6.02B; after-tax yield 3.7% .
  • Prior-year reserve development in Q4: unfavorable ~$8M (vs. favorable ~$4M Q4 2023) .