Mercury General Corporation ( MCY)

Q3 2011 Earnings Call

October 31, 2011 01:00 pm ET

Executives

Gabriel Tirador - President, CEO & Director

Chris Graves - VP & CIO

Ted Stalick - VP, CFO

Robert Houlihan - VP & CPO

Analysts

Meyer Shields - Stifel Nicolaus

Dean Evans - KBW

Alison Jacobowitz - Bank of America

Presentation

Operator

Good afternoon. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to Mercury General’s third quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). This conference call may contain comments and forward-looking statements based on current plans, expectations, events and financial and industry trends which may affect Mercury General’s future operating results and financial position. Such statements involve risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed here today.

Thank you. I would now like to turn the conference over to Mr. Gabriel Tirador. Sir, you may begin.

Gabriel Tirador

Thank you very much. I would like to welcome everyone to Mercury's third quarter conference call. I am Gabe Tirador, President and CEO. In the room with me is Mr. George Joseph, Chairman; Ted Stalick, Vice President and CFO; Chris Graves, Vice President and Chief Investment Officer; John Sutton, Senior Vice President, Customer Service and Robert Houlihan, Vice President and Chief Product Officer.

Before we take questions, we will make a few comments regarding the quarter. For the third consecutive quarter, our premiums written increased over the prior year. In the third quarter premiums written grew by 1.2% and year-to-date it increased by 1%.

In addition for the first time since the third quarter of 2007, California private passenger auto premiums written increased while the rate of increase in California was only 3/10 ths of 1%. It is a good sign you see Californian premiums return to the black. California growth is benefitting from higher levels of new personal auto business sales as compared to prior year. Furthermore our retention rates remain near historic highs. With a combined ratio of 98.3% our operating results continue to be steady and were aided by our continued focus on expense reduction.

Lower profitability based agent commissions, lower spending on information technology and consulting plus reduced advertising expenditures have led to improvement in the expense ration. Year-to-date we reported $11 million of unfavorable reserve development compared to $18 million of favorable development in the first nine months of 2010.

Excluding the impacts from development, the loss ratio was 69.9% in first nine months of 2011 compared to 69% in the first nine months of 2010. The third quarter and nine months of 2011 were negatively impacted by losses from Hurricane Irene totaling $4 million on pre-tax basis.

An automobile class claim we filed for our Californian companies has been approved by the Department of Insurance.

The revenue neutral plan improves our segmentation and results in a more refined pricing. The plan will be implemented in December and is expected to make the company more competitive in attracting new business, but will cause some dislocation to our existing book of business.

Our Board of Directors approved an increase in our quarterly dividend to $0.61 per share marking the 26th consecutive year that Mercury has increased our shareholder dividend.

On that brief background, we’ll now take questions.

Question- a nd-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Meyer Shields with Stifel Nicolaus.

Meyer Shields - Stifel Nicolaus

Let me start on the investment portfolio. The duration have come down pretty sharply over the past couple of quarters. And I am wondering if you could give some guidance in terms of what we should expect from both yields and maybe these tax rates applicable to investment income?

Chris Graves

Hi, Meyer. This is Chris. Well, the duration has come down for two basic reasons. One is market related and the other is the fact that we have been buying bonds with shorter calls for a number of years now. So, and we’ve purposefully been trying to bring the duration back down from when it had its marked increase in 2008. So I think where it is now is actually at a pretty good level, and the month of October has been a little soft on munies. So, we’ve probably seen that durations back out just a smidge in here during the month.

Going forward, I mean, this is kind of where I am targeting where I would like it to be, so I am pretty comfortable with that idea.

Meyer Shields - Stifel Nicolaus

Okay. So, that’s helpful. Rest assured, is there a significant difference between the targeted and combined ratio for auto and home?

Chris Graves

Yes, there is a difference between the targeted, primarily because of catastrophes.

Meyer Shields - Stifel Nicolaus

So we should expect -- I am just looking at cost accounting, the mix is shifting a little bit towards home. That’s traffic into lower commodities, if I am reading it, right?

Chris Graves

Absent any catastrophes.

Operator

(Operator Instructions) Our next question comes from the line of Dean Evans with KBW.

Dean Evans - KBW

Yeah. Thanks. You did mention little bit of commentary with respect to expenses, and it seems that the expense ratio has showed some improvement this quarter. What I was wondering if maybe you could just give a little bit more detail on how the expense savings plans are going through and sort of what the progress you are making there has been, if you have any numbers to talk about, that would be great?

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