Mercury General Corp

NYSE:MCY

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Deadra and I will be your conference operator today. At this time I would like to welcome everyone to the Mercury General, First Quarter 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 first 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.

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

[Gabriel Tirador, President, Chief Executive Officer]

Thank you very much. I would like to welcome everyone to Mercury’s first quarter conference call. I’m Gab Tirador, President and CEO. On the phone we have Mr. George Joseph, Chairman; Ted Stalick, Senior Vice President and CFO; and Chris Graves, Vice President and Chief Investment Officer.

Before we take questions, we will make a few comments regarding the quarter. Our first quarter operating earnings were $0.87 per share compared to $0.07 per share in the first quarter of 2018. The improvement in operating earnings was primarily due to a reduction in the combined ratio and an increase in after tax investment income.

The combined ratio was 97.3% in the first quarter of 2019 compared to 103.8% in the first quarter of 2018. The improvement in the combined ratio was primarily due to lower unfavorable reserve development in the quarter, compared to the first quarter of 2018.

Unfavorable reserve development was $1 million in the quarter compared to $43 million in the first quarter of 2018. Rain storms in California negatively impacted our homeowner results in the quarter, resulting in more than a 50% increase in homeowner claims reported compared to the first quarter of 2018.

Gross catastrophe losses primarily from the California rain storms where $11 million in the quarter compared to $9 million in the first quarter of 2018. Gross catastrophe losses of $11 million in the quarter were reduced to $5 million as we reported $6 million in sales of reserve development from prior year’s catastrophe losses.

Excluding the impact of unfavorable reserve development, catastrophe losses and ceded reinstatement premiums earned, the combined ratio was 95.2% in the first quarter of 2019 compared to 97% in the first quarter of 2018.

To improve our combined ratio we have been increasing rates in most states. In California a 6.9% personal auto rate increase for California Automobile Insurance Company was implemented in March 2019 and a 6.9% personnel auto rate increase for most of the insurance companies will be implemented in May of 2019.

Collectively these represent two thirds of companywide directly premium earned. In addition, a 6.9% rate increase in our California homeowners lines is pending approval from the California Department of Insurance. The California Homeowners Premiums represent about 13% of direct company-wide premiums earned.

The expense ratio was 24.8% in the first quarter compared to 25.5% in the first quarter of 2018. The lower expense ratio was primarily due to a decrease in acquisition costs, primarily from lower average conditions and cost efficiency savings.

Premiums written were 6.4% in the quarter, primarily due to higher average premiums per policy and an increase in home-owners policies written.

With that brief background, we will now take questions.

[Operator]

[Operator Instructions]. And you do have a question from the line of Christopher Campbell with KBW.

[Christopher Campbell, KBW]

Yes, hi good morning.

[Gabriel Tirador, President, Chief Executive Officer]

Good morning Chris.

[Christopher Campbell, KBW]

I guess my first question is, just I'm trying to understand all the math behind the subrogation sale of the fire receivables. So I guess could you just walk us through the math on that, like how much were the cats impacted this quarter, how much were the reserves and then premium growth, because I think it's just – I'm trying to make sure that I'm not double counting the parts of the $10 million pretax benefit within like the cats and reserves?

[Gabriel Tirador, President, Chief Executive Officer]

Sure, I’ll go ahead and ask Ted. Ted, why don’t you go ahead?

[Ted Stalick, Senior Vice President, Chief Financial Officer]

Okay Chris. So we had a $1 million of adverse development for the quarter. That includes $6 million of favorable development from the cats, from 2017 and 2018 cats. The $10 million benefit is reinstatement premiums, a reduction in reinstatement premiums and also includes the benefit from the favorable development on those cats.

[Christopher Campbell, KBW]

Okay, got it. So it’s really just – okay, so one way to think about it is it's $11 million in cats this quarter if we just you know factor in what's happening with the storms and then if we treat the adverse development or if we treat the subro sales as favorable development, then that gives you your $1 million adverse, because it would have been $7 million absent that benefit this quarter. It that the right way to think about it.

[Ted Stalick, Senior Vice President, Chief Financial Officer]

Yes, that’s correct.

[Christopher Campbell, KBW]

Okay, got it. And then there would be an additional $4 million pre-tax benefit from the benefit of lower reinstatement premiums, correct?

[Ted Stalick, Senior Vice President, Chief Financial Officer]

Correct.

[Christopher Campbell, KBW]

Okay, got it.

[Gabriel Tirador, President, Chief Executive Officer]

Well, I think the benefit this quarter was $1.9 million from the reinstatement premiums. We would have normally booked at $7.8 million in the quarter and I think we booked $5.8 million in the quarter. So the benefited in reinstatement premiums earned I believe was about $1.9 million.

[Christopher Campbell, KBW]

Okay, and then where would the balance of the, I guess it would be $2 million, because you have the $6 million to favorable reserve development, about $1.9 million around that, up to $2 million for the ROE reinstatement premium. So where does the other $2 million fall in the financial?

[Gabriel Tirador, President, Chief Executive Officer]

What do you mean, the other $2 million?

[Christopher Campbell, KBW]

I’m thinking in the press release you had the – there was a $10 million pretax benefit from the subrogation sales of the receivables.

[Gabriel Tirador, President, Chief Executive Officer]

Okay.

[Christopher Campbell, KBW]

Yeah, so if subtract out the $6 million of you know favorable reserve development that you got from selling those and then the $2 million of reinstatement premiums, there's a balance of $2 million.

[Gabriel Tirador, President, Chief Executive Officer]

Ted, do you know what the answer is to that.

[Ted Stalick, Senior Vice President, Chief Financial Officer]

We have the combination of the reinstatement and the favorable development is the $10 million.

[Christopher Campbell, KBW]

Okay. Got it, great and then just I guess you know kind of more big picture, California homeowners market after the recent fires. I guess just, you can how – it should like you got a 6.9% rate increase in the hopped. So I guess just beyond that do you have like additional rate increases you are thinking about, and is there any regulatory risk that you may not be able to achieve those planned rate increases, if the California DOI becomes concerned about homeowners insurance affordability out there?

[Gabriel Tirador, President, Chief Executive Officer]

Well, as a mention on the prepared remarks, we have a 6.9% that has been pending for some time now and you know we're expecting that to come to a closure soon. We do expect to probably be filing after that 6.9% is approved.

Now with respect to whether or not the Department of Insurance would approve that, they have a pretty formulaic process with a template that you insert your figures in that template and if those figures – you know if the output produces a rate increase then you can take a rate increase.

So you know at this point we basically take a look at our indications on a quarterly basis. We have not yet finished our first quarter indication; we’ll be meeting on that in the next couple of weeks and taking a look at it. So I do – I would expect that we would probably file again though after that probably indication meeting.

[Christopher Campbell, KBW]

Okay, got it. And then would you want to file immediately or I guess like how would the upcoming reinsurance renewals in any changes you might be making to the program or any potential rate increases that you could see. How would that, how the renewal of that reinsurance program factor into the timing that you would be looking at, filing for an additional?

[Gabriel Tirador, President, Chief Executive Officer]

It would not, really it would not. It would be independent. We would file independently of whatever happens with the reinsurance.

[Christopher Campbell, KBW]

Got it. And then I guess just what changes are you thinking about for the program, like as you're getting into you know closer to…?

[Gabriel Tirador, President, Chief Executive Officer]

Well, you know we think that the $300 million, extra $200 million that we are going to purchase you know more of that later for a certain – we are pretty sure we'll buy more of that later.

How much more? I don’t know. Actually Ted and our Chief Actuary, and our Chief Underwriter are in the process where they are going to be going out and meeting with the reinsurers pretty soon here. Ted do you have any other comments on that?

[Ted Stalick, Senior Vice President, Chief Financial Officer]

No, just that it will be – we are planning on buying more limit than we currently have, but we are just kind of just starting the process right now with the reinsurers.

[Christopher Campbell, KBW]

Okay, got it and then you know auto rate increases, you know you got a 6.9% in Cal Auto, 6.9% in Mercury. I guess at these get implemented, do you guys have any more rates that you are looking to take in those lines?

[Gabriel Tirador, President, Chief Executive Officer]

Yeah, I think yeah after these two I think we feel pretty good to be honest with you Chris, where we are at after these two. With the caveat that we take a look at our rates very quarter and we see that we need great need, we'll go ahead and take it. But we feel pretty good right now after the 6.9% that we discovered MYC and the 6.9% in Cal Auto as well. You know we are monitoring every quarter, but I will say at this point that I don’t anticipate like filing right away in those two lines. We feel pretty good with where we are at.

[Christopher Campbell, KBW]

Okay, that you feel good in just terms of the frequency, severity, pure premium trends you are seeing in auto. Should we expect it more to – you guys to more pivot towards growth at this stage?

[Gabriel Tirador, President, Chief Executive Officer]

Yes, I would say so, I would say so. There is there has been less rate action going on in the industry too more recently. So when you take a look at our underlying combined ratio in our auto, and prior tested auto in California, we feel pretty good where we're at, especially in light of the fact that we just got these two 6.9%. So yeah, more of growth chance.

[Christopher Campbell, KBW]

Okay, got it. Well, thanks for all the answers. Good luck in 2Q.

[Gabriel Tirador, President, Chief Executive Officer]

Okay, thank you.

[Operator]

[Operator Instructions]. And we do have a question from the line of Samir Khare.

[Samir Khare, Capital Markets]

Hi, good morning. Just a quick question about the Subrogation as well. What is the gross amount of Subrogation proceeds you received, and what were the total gross loss amounts for the three fires that the Subrogation was based off of?

[Gabriel Tirador, President, Chief Executive Officer]

Ted, can you handle that?

[Ted Stalick, Senior Vice President, Chief Financial Officer]

Well, I didn't get the first part of your question.

[Samir Khare, Capital Markets]

I was just asking about the gross amount of subrogation proceeds you received.

[Ted Stalick, Senior Vice President, Chief Financial Officer]

So the Subrogation is they signed an agreement, its confidential. So we're not at liberty to discuss the terms of the agreement. The majority of the Subrogation benefits went back to our reinsurers, I can tell you that.

[Samir Khare, Capital Markets]

Okay. And I just want to see where the balance of gross losses for the Campfire stands? Is that around $200 million or $201 million?

[Ted Stalick, Senior Vice President, Chief Financial Officer]

After the Subrogation?

[Samir Khare, Capital Markets]

Yes.

[Ted Stalick, Senior Vice President, Chief Financial Officer]

I think it’s between $140 million and $150 million.

[Samir Khare, Capital Markets]

Okay great, thanks.

[Operator]

[Operator Instructions]. And we have no further questions at this time.

[Gabriel Tirador, President, Chief Executive Officer]

Okay, thank you everyone for joining us this quarter, and we look forward to speaking to you next quarter. Thank you very much.

[Operator]

This does conclude today's conference call. Thank you for your participation. You may now disconnect.