Mercury General's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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

Good morning, my name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to the Mercury General Corporation Second 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. (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 operation to differ materially from those discussed here today.

I would now like to turn the call over to Mr. Gabriel Tirador. Sir, please go ahead.

Gabriel Tirador

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

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.

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