MCY - Earnings call transcript Q4 2017 | Mercury General Corporation

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Operator

Good afternoon. My name is James and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercury General Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. [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. those and may cannot results cause to materially risks quantified predicted of involve differ which today. and future from statements uncertainties, be which or operations Such here discussed activities and would like to turn call the I over now Mr. to Tirador. Gabriel ahead. go please Sir,

Gabriel Tirador

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

Before a few we make will quarter. questions, take comments regarding we the

quarter California net million in to losses was quarter fourth per and earned. only impacted XXXX in in were in to catastrophe $X.XX deterioration by XX.X% the new in operating due $X.XX operating combined by tax of share to earnings of was of fourth losses quarter tax million benefit was per compares The combined development due an reserve fourth fourth the of quarter earnings quarter a $XX reinsurance of quarter losses XXXX. reinstatement compared the XXXX. the to ratio negatively $X of due catastrophe of $X.XX increase the The in from law. primarily the wildfires The to Our offset fourth partially to This unfavorable compared XXX.X% plus share ratio federal catastrophe premiums $X million in adjustments XXXX.

$XX Adverse million of two development to of from legal quarter. development $XX million XXXX. periods the unfavorable XXXX $XX unfavorable accident year for the large of in prior quarter reserve fourth year of recorded claims million development accident reserve the from prior of of quarter in reserve fourth million XXXX we accounted addition, accident outcomes unfavorable In compared to $XX in the prior

reserve reinstatement fourth in catastrophe the premiums and losses, of XX.X% was on development XXXX. unfavorable unfavorable lines losses. our earned, the primarily of came for reserve quarter quarter company loss historical estimating impact ratio the ceded of Auto the XX.X% coverage in line of ultimate quarter development combined The the bodily business. uses to development fourth patterns the of injury Excluding compared The in California XXXX from

reserve Over the actual development historical past company’s loss the XXXX, loss this have the into At selections. end few factored exceed year years, tended paid case to ultimate development and company loss patterns. has tendency the company’s

our $XXX ultimate years, for XXXX, catastrophes adjustment established excluding $X.XX The accident incurred company increased loss best estimate cost reserves the adjustment During losses December of of billion XX, expenses the for gross current reserves and loss XXXX. and to-date. and expense by reserves our prior by loss million represent to at

maybe increasing offset provisions upon of was efficiency going is in Insurance lower In are the the ratio since primarily was compared liability However, to quarter ultimate The ratio estimates, fourth fourth or necessarily XX.X% in less the due provisions. more to than such in based expense the expense XX.X% lower increasing XXXX. quarter The effect in states. profitability-related Mercury have rates costs, March. increase into personal savings rate X% in most decrease Company help a To trends, loss a and cost auto acquisition we in accruals. been California,

XX% brief Insurance. is XX% business private applications in Companywide the premiums about Company X% the applications that In the passenger Personal of approval per pending California will homeowners’ in earned new background, of the Insurance our Insurance excluding policy. now Automobile increase premiums direct quarter. Premiums earned. premiums ceded companywide due represents California reinstatement our auto to Insurance addition, represents in auto X.X% take rate approximately Mercury With Company questions. company and written average about premiums Company we companywide a half premiums grew Automobile primarily in for to increased direct quarter with submitted Companywide decreased the of Department X% quarter. higher

Operator

Raymond [Operator the first James. ahead Go from Instructions] of question line please. Your Greg Peters comes from

Your open. line is

Greg Peters

Coast, Thank and you all. say From will the good questions. morning I our to East taking the you call for

So, therefore let’s a just looking you changed shouldn’t I specifically just press your prepared of through reserve comments sort years end affected for couple we year the your methodology the future points the talk years go through the and more you me in process there, your walk development. about remarks. on I color should so me or of And what’s in release, please? the the reserve to you couple the was charge that in of affect presume factor last appreciate in for

Ted Stalick

is this Greg, Ted. Hey,

analysis – couple trends We our we emergence coming through we have the than look what incorporates development that expect as that the based and historical we that that therefore been doing our and on And each have developing incorporate you expected your consistently end, methodology more start trends into are data. past the incurreds analysis year at so trends our years we a over have that and At position the quarterly have our expected to of quarter. factoring current data, we been into see is to took that and continue. was exceeding

fix we that for our end. factored year ultimate So, into

Greg Peters

raised should So, we clarify have point, presume you expectations future you one recast... of sort that just if bar, the for that or on to will,

Gabriel Tirador

have taken weighted would factors mean doesn’t recent factors. recent characterize more than – That those and the development it can’t they we the can’t be larger development that as it heavily. most more I

Greg Peters

Right.

Gabriel Tirador

longer we time. of saying is average are are not But all of period taking an look that we

this more recent project be doesn’t can’t factors weighted time. That those more that the factors. development factors to more mean our the higher have development loss even than We much reserves recent

Greg Peters

there? your more was assume the calculus would have a posture your tax come Did is looking was part considerations of Right. that reserves you play? adopted into tax at this of cautious I and –

Ted Stalick

the as we Gabe have We factors And development, available. felt we we consider as – weight we or putting expected in the was in recent the exceed more sorry actual thing are development to our expected development mentioned don’t am best make exceed like data tax do. based seen We the have try prudent I on to analysis. estimate

Greg Peters

Right, right.

Okay, great.

And reinsurance catastrophe to etcetera? your XXXX curious of in catastrophe is a premium industry is through flowed other fourth results. of year for retention about the quarterly let’s questions, number quarter and was in going for am I what performance. be there basis, XXXX So that reinstatement any the XXXX for busy your you the into perspective change the a context but Mercury and on segue obviously highlighted your if And costs

Gabriel Tirador

cat of treaty on X, that’s still expires when the in all, reinsurance reinsurance market. that of loss a first lot after think cat July renews. it remains the capacity there Well, large season, We our even

be expecting increases go time to to are this are going the at capacity that July based We abundance on X up as pricing believe market. of in the do on know, we we muted but the

it’s So, tell. early to

X the July July know. mentioned will get we we I X, to closer As

to We a to slight in X into our have our closer wait have are are built reinsurance increase getting estimates we we July cost, going till date. our but to

Greg Peters

retention at to might have And color. want this the comment don’t you what the... about any that it’s either point, or be appreciate for events I

Gabriel Tirador

that July And that same remain million that we today expectation at X. our X we have retention ‘XX. lowered to as to remain was right retention on you retention And as is anticipate prior our at of $XXX July now sit know million. to for $XX I to here my the retention million $XX

Greg Peters

million a event retention? per $XX retention is the So,

Gabriel Tirador

Yes.

Greg Peters

and the helpful. That guess clarification. Okay, know been I in and you business to think up thank go quarter like – I challenging new in new fourth fine, will about trends business? non-California some but it bit homeowners XXXX go little Do was your is XXXX. through, statistics can got for guess in that counts production versus of XXXX you both business you through doing commented I a and you looks be have or business you California

Gabriel Tirador

California application private business homeowners counts And outside like we is California and California. quarter in and had auto was XX% in this X%. our Well, the in – in growth growth of fourth passenger for

of flat for PPA in from count XX% about California, that was private homeowner it’s and passenger about of X% homeowners like auto our down for PPA, outside relatively improving up private passenger the Now, overall for auto X%, business, will but quarter. XX% resulted lines that and the say applications down previous app down so I

fourth you quarter. they look down as Outside a year at in the for California, they were up XX% If quarter. fourth they X% grew take are our California, of but the the year-to-date in in and XX% X% the mentioned, whole down were I numbers – year,

growth, in that a you anticipation when low California. improve as other competitors look and single-digit both application our rate – top outside at line line count now growth to are the right we increases. California take top you is expecting So, continues will My take

Greg Peters

Okay.

is the talk what So another I XXXX? ‘XX end original you it versus And area past maybe the to know you you could advertising and are thinking process. your year what ‘XX intentions on go advertising through how that total budgeting compared your was about in spend. you have spend for commented And and

Gabriel Tirador

that that In about $XX ‘XX, $XX million. right anticipation for it about expense $XX million our to and in compares ‘XX million our was advertising was total around ‘XX

Greg Peters

a Okay. am others chance. of and just have a I have number to requeue questions. going other I let

Gabriel Tirador

Okay. Thanks, Greg.

Greg Peters

Alright.

Operator

ahead of from please. comes Bank [Operator Alison America. Instructions] from Your line question of Go the next Jacobowitz

Your open. is line

Alison Jacobowitz

Hi.

I losses missed or Was the development it. in in fourth in the if the Sorry rather? year current reserve any there change quarter

Ted Stalick

Alison. really basis. reserves We Yes, year-to-date a our hi, on look at

current don’t year we current accident disclose development So, or within quarter. consider

Alison Jacobowitz

Okay, thank you.

Operator

of your Dowling & question from line Partners. the ahead comes And Gary Go next Ransom from please.

is Your open. line

Gary Ransom

about Thank with in the wanted you of that bit. wondering all X%, did just little in first the for ask California you XX% for to I approval got And the a you. taxes tax for have approval? that rates refile rate I the was to

Gabriel Tirador

No.

Gary Ransom

No.

with with it sit XX%. that’s Is to is Do have the the got X.X%? you you re-file to for one one So pending the the that XX%? –

Gabriel Tirador

That filing has made. that was been made filing Robert? When

Robert Houlihan

Months back.

Gabriel Tirador

changes having Yes. to to any don’t anticipate We it. make

Gary Ransom

Commissioner a lot on of Okay. this point. noise Well, Jones made obviously has

that So the it I long run? matter? you or just to in it thinking wondered Is opinion what your about Does overall important is.

Gabriel Tirador

Robert, you why Yes. don’t that? address

Robert Houlihan

or Sure. California, it’s a return a yields to are is note, by max formula on yield on it return, one an but range. the formula important minimum, after-tax and a rates determined formula in based Well, surplus doesn’t number the the

years our on still within range tax lower several So, we our at would be by of and that shifted the Cal and But last filings both slightly have we downward even rates. the have the rate filings over the for the in all Auto tax MIC both after and change gone in range adjusting those be back requested and will all looked laws. approved rates

Gary Ransom

at shift the of you top and that the rough Great. what and a bottom at Do of bottom? top is it have shift much How range? estimate that does

Robert Houlihan

It on circumstances. varies depending

at filing we was filings, it As it alter – can looked direct from filing. to

Gary Ransom

more on new of Right, okay. anything a law? theme, then munis, tax strategy your the change you a I tell wondered maybe another the And on with if investment under lot the you us about thinking corporates XX% attractive. could have rate, one in have you tax

Chris Graves

Sure. is Yes, hey, this Chris. Gary,

my So, that after-tax one drivers main yield, the always the decision to calculation has been income field. investment levels of process playing

would to law losers its on to tax least income is applied companies net-neutral a exempt tax net low winners, rate. then income is taxed new apply are at at the and Insurance exempt no income. universe real recipients tax to for and there albeit investment neutral my So,

enjoy income not does after-tax XX%. Holders So, there. taxable me, XX% of and tax bonds every and about dividends. new change $X. the the from corporate tax like does change winners reduction taxable investment new Consequently, from our earning we excuse income The income still law now are law of sources retain to higher after-tax sources yields income $X.XX – from

So, $X.XX we us income. $X.XX about Dividends that taxable more net about pickup means in us to that more.

will investment many rate. classes law. bonds the change makes are the tax tax sense new clearly to taxable still So, more though attractive, however due mix of asset new our Municipal because

will am to the conference adding have share call. on but that I more taxable next So I income, more at

Gary Ransom

if that as money to new would are related or flows assumption of making of be changes, investments? Is it to sales current cash you any wholesale Okay. reasonable it a more turnover making opposed

Chris Graves

be That do new be say would swaps on yield what to at other rating account. the shift expectation am the tax within for would take guess example, and after-tax I to I I natural But taxable. mean, portfolio calculations to depends exempt I say, from it’s into certainly, in looking once I really general, going from, and duration and factors money. the

Gary Ransom

you. thank Okay,

more bit I a little changing Just loss wanted a trends. gears to little into go the bit,

being severity seeing those issue. you BI are that’s I there higher? currently in to trends an talking is are adverse development, it mean, the move causing You about we something see but

Gabriel Tirador

my referrals for just the environment lot the seeing just I MRIs medical inflation more that and little say aggressive willing in get plaintiffs more would plaintiff a I my aggressive least to go that more medical a like under is doctors, take people from and view have a to lot see been and knife bar, lot just the it’s inflation opinion you and bit, claims and just in see bar but what at as in a well. I more

Gary Ransom

better. generally like getting wasn’t off doing that numbers are from was better. you getting that leveling of any even better, showed Is trend seeing what the frequency severity this your looked maybe the book business? getting Track feel California the I property in things in with Fast or but were that memory, I like damage either was consistent It only BI

Gabriel Tirador

think I bit lag There it a latest there better. it In a quarter bit time Fast Fast better recollection which double-digit in latest is a this in the was there Track, is been. Track, actually was in where little in Track. had severity my a quarter, little Well, was Fast was than increases

We pure in mid the are in single-digit I – think about that increase, is Ted, recording the right? premium

Ted Stalick

Xish.

Gabriel Tirador

development this includes and the quarter. that that booked basically we Xish

at about it an mid are year look a basis severity booking increases. take and we ultimate single-digit So, accident from we

Gary Ransom

two a events do that’s third cover? now just subject available reinsurance, the One just you last the on after Okay, have follow-up penetrated a on limit helpful. that, full

Gabriel Tirador

we reinstated we the limit. have reinstated full Northern So, major fires, Cal about after

event, limit. $XX million There second and the $XX reinstatement that – event was not up On California we available used of million. the is which was $XX a used Southern fires, for million a it up that we

coverage be the then if at million. and a $XX we third above $XX million retention there have our will is So, event, the will

Gary Ransom

hopefully Right, the is by over okay, although season wildfire now.

Gabriel Tirador

Yes.

Gary Ransom

Thank very much. Okay, you that’s it me. for

Gabriel Tirador

you. Thank

Operator

line the next from question Returns Capital comes Your Management. please. Khare from ahead Go of Samir

Your line is open.

Samir Khare

reserve Hi. was reserves, loss I ask last that midpoint to year? about estimate, your of just others and reserves how booked the your what to does that wanted currently metric actuarial you compare

Ted Stalick

we come the We up Our up point our book estimate. come actuaries with point the don’t range. and with estimate

Samir Khare

Okay. last that year? And same was as

Ted Stalick

We booked. estimate Yes. point with this and last which a point estimate up year, which year, we came a we booked

Samir Khare

think a many Okay. loss dynamic and shortening? when speak on adequacy approved, auto, rate you get you before to And the compounded Department of Is is that to the then need Insurance, considering can filings if get there time rate just to how trend, guess that backlog still of is increases – backlog? you length I at the is

Gabriel Tirador

Yes.

X% most what our of trends think loss just on the some MIC. for recent that up that filing I depends being got approved end we

gets us Robert, shape, we pretty Insurance Mercury believe think I in good Company? for

Robert Houlihan

correct. That’s

Gabriel Tirador

well. had close may which Auto, as Auto Cal possibly. We us pending, X In a gets need more Cal X X,

want comment you approvals, do the Robert, on to as rate far As for timeline that?

Robert Houlihan

amount slow time We this in I see a any a process in the same certainly the backlog about delays California. mean, at it’s taking past. just point. from It’s don’t of

Gabriel Tirador

months I know, I Yes. mean, that took, right? filing Is our I don’t ballparkish. think MIC maybe about X

Robert Houlihan

Yes.

Samir Khare

you. Okay, great. Thank

Operator

Your next of ahead Greg comes James. from question Peters Raymond please. the from line Go

Your line open. is

Greg Peters

a Thank you to ask couple Great. me of allowing follow-ups.

clarification one. Just of two or points actually

federal that you state report component in taxes, premium tax you and in what state tax tax include and – premium your that or expense? the the expense, for GAAP is GAAP premium just financials tax For do income

Gabriel Tirador

cost. state premium It are income tax, our taxes acquisition but includes in

Greg Peters

puzzle another investment portfolio. bit talk started company pieces big gains that passed. But I question to little a regarding am notice and – about glad that to being realized was And harvested changing of for the have prior I asked Chris of did then a of know question then. Okay, the done the you in XXXX – lot and you was a I chunk law that tax I

and mindset expect into we is XXXX? I going So perspective the the curious am what that something that that was in just should

Chris Graves

we it’s wrong? so So, mark-to-market portfolio me, XXX, whole correct as the if FASB I’m Greg,

Gabriel Tirador

XXX.

Chris Graves

XXX.

losses. what took realized periods. losses from year, of So actually had change because offset capital net we gains market prior in and you tax is gains to We of and see the

where to from advantageous We tax a more XXXX. ourselves take now it’s gains have perspective in positioned

will is that, So, to are I able market part up, everything the just if portfolio seeing do holds you value be this most changes. but for market

Greg Peters

in color. business, be Thanks be probably California, approach color growth to non-California – know any about for I a growing that opportunities color an out questions. wanted states for states which with guys outside conversely, to little what in this you most your I and footprint, around talk the the But opportunity will answered you your I think some appreciate just of growing And California just for biggest your it. and to sort you is about will bit of of your parts the earlier and of you then of close posture do pieces, XXXX shrinking outside additional appreciated? just

Gabriel Tirador

think of I in is to Well, single-digit that outside grow we our low probably earlier the mentioned I range. going I that mean, anticipation are California,

states far to have that As want go, individual that share? do you color Robert, you on any

Robert Houlihan

state. months, taxes. by are helped I other the course we rate of production other carriers, think we to competitors a the X took business there. large last than our is over We new turnaround have took some and one which lot that lot it state has We seen which of boost earlier X applications rate of to a clearly increases see starting in

Gabriel Tirador

growth significant in declines states growth anticipating we we is think bit are little significant that state anticipating in in. there that a I and Florida. think don’t are any I anticipating are that of And Yes. we Florida, really other

growth states. Florida we which in small Our those I is anticipating are and Texas, two states, some think biggest

Greg Peters

my again for Thanks taking Perfect. questions.

Gabriel Tirador

Sure.

Operator

of of the Go please. ahead from line comes question Jacobowitz next from Alison America/Merrill Your Bank Lynch.

line Your open. is

Jay Cohen

mid Hey, seem couple other When just words improve increases. single-digit to follow-up relative it’s tell a severity kind not that’s much you to of questions. other voice Jay exceeding in to they have Are you can actions chasing loss talk ratio? don’t it’s that try of I price increases, actually mid taking that underwriting these by I to Alison, increases the be got claims Cohen. single-digit simplistic. trends know you about

Gabriel Tirador

try of Yes, that process from to a leakage. area we claims the to to the a internal our claims quite any mean, try initiatives to lot have yes, has to leakage there in mitigate initiatives Well, is company improve few to adjustment mitigate try I that standpoint. ongoing

that on what X% the future You to X% bit inflation, rate are increase inflation to increase water. are right lower, with claims we depending pretty have are the hold in and happens taking are If a you you you do in going comes severity, if a much better. claims going little

also the at development, out the any color large For back about when to add do catastrophe are you year, so to XX% and combined that? ratio companywide. other want we losses or our Robert, have running you you

Robert Houlihan

think that Yes, also has from at some to helped point an agency tightening well of losses. management underwriting as I there sale been offset some

Gabriel Tirador

Yes, that’s good a point.

also to ratio. other loss help have been some have We taking we that actions underwriting the

Jay Cohen

it. helpful. That’s Got

surprisingly Can overhead quantify down, bonus helped much on that The the quarter? fourth you accruals suggested profitability. the other that not your question essentially how you quarter that given in expenses the were

Gabriel Tirador

the we off better expense maybe think think don’t you? where will Ted, be talking are XXXX. just about I we why in ratio Well,

Ted Stalick

Sure.

our seasonality ratio. we expense have in that So you know

ad spend then to ad lowest weighted our heavily QX is QX and spend. and is Our QX

the next higher that we we year, ratio XXXX. slightly expecting Part year. will next be to expense for incentive amount be of to of that posted accrue employee plans we all think higher for the able a is are than XX.X For

Gabriel Tirador

ratio the employee And hit of LAE expense are mind incentive and keep plans too both in ratio. Half our employees the the claims.

LAE it about the a the should are hits and hits I The the So, the probably when we say. talking bonus we or majority it, expense ratio that just chunk big of talking about expense ratio, accruals of ratio. are portion

Ted Stalick

Half of it.

Gabriel Tirador

Half of it, probably.

Jay Cohen

your accruals little bonus was as well? ratio aided by loss a So bit lower

Gabriel Tirador

Yes.

Jay Cohen

answer. the for Thanks helpful. Very it. Got

Gabriel Tirador

Sure.

Operator

over no And at to questions there presenters. the time. are I this callback our further turn

Gabriel Tirador

everyone look you Well, us next to thank I for would quarter we to and joining much. very like talking to you forward quarter. this Thank

Operator

concludes today’s This conference.

disconnect. now may You

Mercury General (MCY) 7 Feb 182017 Q4 Earnings call transcript