Mercury General's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Mercury General Corporation (MCY)

Q1 2012 Results Earnings Call

April 30, 2012, 1:00 PM ET


Gabriel Tirador – President and CEO

George Joseph – Chairman

Ted Stalick – Vice President and CFO

Chris Graves – Vice President and Chief Investment Officer

Robert Houlihan – Vice President and Chief Product Officer


Alison Jacobowitz – Bank of America

Vincent D'Agostino – Stifel Nicolaus

Frank Lee – KBW



Good afternoon. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercury General quarterly 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. (Operating 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. Please go ahead.

Gabriel Tirador

Thank you very much. I would like to welcome everyone to Mercury's first 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; and Robert Houlihan, Vice President and Chief Product Officer.

Before we take questions, we will make a few comments regarding the quarter. Our first quarter 2012 underwriting results improved as compared to the first quarter of 2011. Our combined ratio was 97.6% in the first quarter of 2012, compared to 98.2% in the first quarter of 2011.

In the first quarter of 2012, we recorded $6 million of unfavorable reserve development compared to $1 million in the first quarter of 2011. Excluding the impact of the reserve development in both years, the combined ratio was 96.7% in the first quarter of 2012 compared to 98% in the first quarter of 2011.

The combined ratio was aided during the quarter by our continued focus in reducing expenses. Consequently, our expense ratio declined to 26.8% from 28.3% in the first quarter of 2011.

Premiums written were essentially flat this quarter. However, there were some moving parts to the written premiums. Primarily resulting from the California personal auto revenue neutral class plan that we implemented in December of 2011. The plan improved our risk segmentation, but also caused dislocation to some of our existing customers. The refined pricing improved our competitive position for new business and our California new business private passenger auto sales increased year-over-year in the quarter by 16%. The rate dislocation caused our renewal rates to decrease, but at a rate lower that we had expected.

We are pleased to report that our operations outside of California posted a combine ratio under 100% in the quarter. We have made great strides in our operation outside of California, but we are not where we want to be and the environment in some states such as Florida are challenging. We continue to aggressively make changes to our rating plans to improve our segmentation and overall pricing adequacy.

After tax investment income decline by 10% to $28 million in the quarter. As we mentioned in our annual report going forward, it will become increasingly difficult to maintain the current after tax yields as bonds with higher coupons mature or are called and the reinvestment of those proceeds will most likely be made at lower after tax yields. The after tax yield in the quarter was 3.8% compared to 4.1% in the first quarter of 2011.

With that brief background, we will now take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Alison Jacobowitz of Bank of America.

Alison Jacobowitz – Bank of America

Hi. Thanks. So I guess couple of questions. It looks like the tax rate on net investment income has been drifting up, should we expect this to continue? And then also on the expense ratio I think last quarter you suggested that a normalized expense ratio might be a little bit higher than 27%. I think it was the 28% range, this quarter came in a little lower, would you make an adjustment to that statement, do you still think the expense ratio might tick up a little bit?

George Joseph

Hi, Allison. The tax rate is slightly high on investments but I don't expect that to continue to trend up, come back down even, as far as the expense ratio going forward, we're still looking at around 27% as where we're expecting it to run.

Alison Jacobowitz – Bank of America

Thank you.


(Operator Instructions) We do have a follow-up question from the line of Alison Jacobowitz with Bank of America.

Alison Jacobowitz – Bank of America

Thanks, again. So on the combined ratio if you're now making money outside of California overall, but the overall combined ratio, I don't think it's really changed much over the past several years. Does it mean that the California Combined ratio is deteriorating or am I missing something in the math there?

Gabriel Tirador

Well we have had some pressure in our California combined ratio it's still below 100% and we do have some rate increases that are pending. We both -- we have both the homeowner rates filing that we made a few years ago that just -- we finished up with the hearing there. And expect the result from the judges over the next several months.

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