Mercury General Corporation (MCY) Q2 2012 Earnings Call July 30, 2012 1:00 p.m. ET Executives Gabriel Tirador - President and Chief Executive Officer George Joseph - Chairman Ted Stalick - Vice President and Chief Financial Officer Chris Graves - Vice President and Chief Investment Officer Robert Houlihan - Vice President and Chief Product Officer John Sutton - Senior Vice President of Customer Service Analysts Meyer Shields - Stifel Nicolaus Alison Jacobowitz - Bank of America Ron Bobman - Capital Returns Presentation Operator
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» Mercury General's CEO Discusses Q2 2011 Results - Earnings Call Transcript
Before we take questions, we will make a few comments regarding the quarter. Our second quarter results were negatively impacted by unfavorable reserve development, severe weather outside of California and a general increase in severity trends. Our combined ratio was 104.5% in the second quarter of 2012 compared to 98% in the second quarter of 2011. We recorded $23 million of unfavorable reserve development on prior accident years in the quarter and $29 million for the first quarter of 2012. Most of the development came from California’s bodily injury coverage.Losses for the most recent accident years for California bodily injury developed at a rate quite a bit higher than historical averages. Accordingly, we felt it was prudent to weigh the more recent trends more heavily and increase our estimate for future loss development. This had the effect of increasing our severity takes for the most recent accident years. Outside of California, catastrophe losses were approximately $8 million in the quarter, primarily as a result or severe Midwestern storms. Excluding the impact of reserve development and catastrophe losses, the combined ratio was 99.6% in the second quarter of 2012 and 98.2% for the first six months of 2012. In California we have a 6% private passenger auto rate increase pending with the California Department of Insurance. We expect to have final resolution of the pending auto rate filing within the next month or so. Our hearing on our California homeowner rate filing has concluded, and we expect a decision from the administrative law judge in the next few months. Our combined ratio was aided during the quarter by our continued focus in reducing expenses. Consequently, our expense ratio declined to 26.5% from 27.7% in the second quarter of 2011. On a more positive note, premiums written increased for the sixth consecutive quarter. The growth was 2.7%, the highest it had been since we started growing in 2011. Our revenue neutral California rating plan we implemented in December 2011 caused dislocation to some of our existing customers, but improved our competitive position for new business. Consequently, our California new business, private passenger auto sales increased year-over-year in the quarter by 17%.
In addition, the company began writing annual policies in the largest California personal auto company. The number of annual policies written was approximately 4% of the total California auto policies written. A portion of the company written premium increase is attributable to the introduction of annual policies. However, we estimate that was mostly offset by the temporary decline and retention from the dislocation caused by the rating plan we implemented in December 2011.The rate dislocation caused our renewal rates to decrease but at a rate lower than we had expected. After-tax investment income decline by 12% to $28 million in the quarter. As we mentioned last quarter, 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 3.7% compared to 4.3% in the second quarter of 2011. With that brief background, we will now take questions. Question-and-Answer Session Operator (Operator Instructions) Our first question will come from the line of [Ray Ardello] with Macquarie. Unidentified Analyst Just a couple of quick questions and then I will get back in the queue. I guess first, I guess you talked about the new business trends in California from the rate plan in December. I mean do you guys expect that to continue in the third quarter or have we kind of gone through a complete cycle of new business? Gabriel Tirador Well, our expectation right now, if you take a look at what's happened in July, it’s continued. The new business has continued to be strong in July. It’s hard to say what's going to happen in August and going forward, but what I can tell you is that July was a relatively strong month for new business. Read the rest of this transcript for free on seekingalpha.com