Q3 2019 Earnings Call
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[noise]. Good morning, My name is Valerie and I'll be your conference operator today at this time or would like to welcome everyone to the Mercury General third quarter Conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session.
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This conference call May contain comments are forward looking statements based on current plans expectations events and financial industry trends, which may affect Mark we general's future operating results and financial positions.
Such statements involve risks and uncertainties, which can or cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from that discussed here today.
Well now I'm, just trying to call over to mitigate real Tirador. Sir. Please go ahead.
Thank you very much I would like to welcome everyone to go through third quarter Conference call I'm Gay Tirador, President and CEO .
With me this is George Joseph Chairman, Ted Stalick Senior Vice President fearful jumps Schrader, Vice President and Chief product Officer, and Chris Graves, Vice President and Chief Investment Officer.
Before we take questions, we'll make a few comments regarding the corridor.
Our third quarter operating earnings were 78 cents per share compared to $1.11 cents per share in the third quarter of 2018.
Do you do they should be operating earnings was primarily due to an increase in the combined ratio.
The combined ratio was 90.6 person in the third quarter, two government <unk> compared to 95.6% in the third quarter 2018.
No deterioration combined ratio in the quarter was primarily from would result in our play passenger auto business outside of California, and our California commercial auto business, which together added 2.8 points to the company wide combined ratio in the third quarter of 2019 compared to the third quarter.
2018.
So to speak outside of California, we posted in play passenger auto combined ratio problem and then one person in the third quarter of 2019 compared to 82 person in the third quarter 2018.
Those results include approximately $2 million of favorable prior year reserve development on $86 million earned premium compared to $12 million of favorable prior year reserve development on $88 million a room premium you know third quarter 2018.
Our California commercial auto business posted combined ratio of approximately 120% in the third quarter 2019, compared to 90% <unk> third quarter of 2018.
Those results include approximately $6 million of unfavorable prior year reserve development on $34 million, a blue premium compared to $1 million of unfavorable prior year reserve development on $29 million over premium in the third quarter 2018.
Or California, private passenger auto combined ratio deteriorated slightly to approximately 97.6 person in the third quarter of 2019 from 92.4% in the third quarter 2018.
Overall frequency was relatively flat and severity was up approximately 7% compared to the third quarter of 2018.
Partially offsetting the year over year, increasing loss severity in the quarter, where recent rate increases.
In California, a 6.9% personal auto rate increase for California automobile insurance company was implemented in March 2019, 26.9% personal auto reading. These for Mercury insurance company was implemented in May of 2019.
Collectively these represent two thirds of companywide direct premiums earned.
Approximately 81% of the California automobile insurance company Reading free was earned during the quarter in about 53% of the Mercury insurance company rate increase was earned during the quarter.
Our third quarter 2019, California, private passenger auto frequency and severity each increased by about 4% compared to the second quarter of 2019.
The sequential increase in frequency and severity was the primary reason, our California private passenger auto combined ratio deteriorated from approximately 96.7 versus the second quarter 2019, 97.6 person in the third quarter 2019.
The sequential increase in frequency in severity in the quarter was partially offset by our recent rate increases.
Our year to date accident year combined ratio for California personal auto is approximately 96.1 for soon.
Our California homeowners combined ratio was 19.5% in the third quarter 2019, compared to 101.2 person in the third quarter of 2018.
6.99% rate increase in our California homeowners line was approved by the California Department matures and was implemented in August 2019.
We also recently filed for another 6.9% lead increase in California homeowners line of business.
California, Homeowners' premiums represent about 13% of direct companywide premiums or.
Companywide, we recorded $1 million a favorable prior year reserve development in the quarter compared to $6 million of unfavorable reserve development in the third quarter 2018.
Catastrophe losses, primarily from Hurricane a mill down in Texas was $3 million in the quarter compared to $13 million in the third quarter 2018.
Primarily from the car wildfire in Redding, California.
The expense ratio was 24.2 person in the third quarter compared to 24% third quarter 2018.
Slightly higher expense ratio was primarily due to a 6 million dollar increase in accrued expense related to our previously announced settlement with the California departmental insurers.
Partially offset by decrease in profitability related accruals slightly lower acquisition costs and cost efficiency savings.
Premiums written grew 8.6% in the quarter, primarily due to higher average premiums for policy and an increase in homeowners policies written.
Several wattyl Fars earlier in October and wildfires curtain burning have caused damage in California.
At this time, it's too early to estimate our losses for me wildfires.
Our catastrophe reinsurance treaty provides coverage for wildfire catastrophe losses in excess of Mercury's 40 million dollar retention has a total wildfire limit of 508 508 million and allow for one full reinstatement.
Last occurs four wall part of it includes all losses again in 150 mile radius and within a 10 day period, both the radius point in the couldn't be window or at the choice of Mercury.
Nationally.
We generally expect a combined ratio for the fourth quarter, excluding capacities to be higher than the rest of the year increased loss frequency in higher severity caused by seasonal driving weather.
That said it is hard to predict was certainly whether the underlying combined ratio will be higher as are many factors currently unknown or beyond our control.
We've had the background, we will now take questions.
Thank you again to ask the question. Please press Star then one when you're Touchtone telephone.
One moment for questions.
Our first question comes from Greg Peters of Raymond James Your line is open.
Good morning, Ah Thanks for taking the questions.
I want to.
Go to a couple areas first for fall on.
You talked about your catastrophe program for wildfires and you talked about the one reinstatement have you have you perks have you affected that one reinstatement yet or is it still outstanding.
Oh still outstanding we've got not.
And and Okay and then.
And and then I'm going to the auto results in California.
With that the two rate increases one the Cal auto and what the other Mercury insurance.
I'm surprised that you're still seeing erosion I would've expected that the combined ratio would have started to proven I picked up her comments, Rob frequency and severity.
Have you filed for another round of rate increases yet for those two businesses, considering what's going on with frequency and severity and more importantly, I know we've talked about your longer term or combined ratio targets and I'm. Just curious you know based on these trends it doesn't look like that's it's a reasonable.
Target at least in the near term so.
A couple of questions in there or maybe you can answer yes, no. Thanks, Greg you know our quarterly results can be volatile. So we don't make made decisions just based on just one quarter.
With that data.
Our year to date and you take a look at probably pass it on California, our year to date accident year combined ratio is about a nine cents per cent.
And we do have some more rate to learn in you know, we we validate our renewed every quarter a I will say, Dave I think it's likely that we're going to file for some reason Cal auto by year end.
So that's what we're looking at right now.
Okay, and then the outside California piece it seems like that's been running.
At an elevated combined ratio for awhile, now and I know youve been working.
Working hard to address the profitability challenges there.
[noise], where where do you think you aren't a process are you closer to getting it fixed farther away from getting affects trade you know <unk> can you give us a sense.
Timeline on when the results might stop being a drag on your business.
Well I mean, I think it if you take a look at our 2018, a calendar year results I'll try to California, I think we posted in the 19, 94%. If you take a look at our 2018 accident year for outside of California as of today.
We're running like close to a 97, then you fix and change.
Combined ratio. So the 18 results were actually pretty decent outside of California. This year, they deteriorated a little bit.
And in Florida has been has been one other reasons and we're trying to address Florida.
So.
There's still obviously, what we're running at about 101% combined ratio outside of California, we want to get that more when you take a look at all or lines of business outside of California. I think we were in about 99% combined ratio for the quarter.
Definitely still some work to do we have some oh various plans or class plans that we kinda implementing Jeff do you want to comment anything we're doing a with respect to that in some of these shapes.
Got it in a number of these states, we do have rate or any nano rate moving in and they tend to coming months here certainly on a personal auto side.
And on the commercial side outside of California, So we've got.
Earning and not high single digit range and each of the major products outside of California. We're also making some segmentation improvements I think we have you were scheduled to make a change in Florida in September , but that's been delayed because of.
We see the pool, yet, but we're hoping to get that ended in Florida and sometime I believe in November .
November or December remember December okay.
Excellent. Thank you very much for that color I guess the final question I just.
The investment.
Income results you know the yield.
The yield on a year to date basis is is in line. It did pop up to 3.5% the third quarter or last year.
So I'm just curious what's causing the movement on a year over year basis for the quarter and maybe you can obviously, there's downward pressure on Yieldstar. Maybe you can just give us an updated perspective on that that's something that was that's my last question.
Yeah, sure well right you mentioned rates and that's obviously a big part of the.
Yeah, we've been through throughout this year, a one yield curve then I talked about this last quarter to you know we started reducing our duration on 'em, allowing more cash build.
Money market rates are actually very competitive versus some of the offering something out there on bonds do you know one to three years.
We have also been making Uh huh.
This year, a much bigger shifts towards taxables from time to exam.
Oh, the since Evertec feel go taxables.
Oh, there's more attractive, but you're still not getting them much.
So.
Hi, I'm somewhat optimistic now we're seeing some critics.
Interest rates.
You know there's been some weakness here recently.
There's certainly room for spreads to widen.
So I'm currently actually.
In the process of repositioning so some of our positions.
And if.
The current rate trend the picks up a little bit will be in a good position to take advantage and get a little yield.
There's lots of new offerings coming out for things that.
You know have yield, but trap you into a long duration situation, which.
I think would be on the stakes in front of would that and just to be patient and smart.
Excellent thanks for the color.
Sure.
Thank you. Our next question comes from Chris Campbell of KBW. Your line is open.
Hi, Good morning, everyone have you got to doing well.
Thanks, Craig since I.
I guess first question I'll, just probably kind of follow up on the the core loss ratio question I think and gave in your script. When you open up the sad about 280 bips of the year over year deterioration was you know private passenger auto outside of California, and then, California commercial auto So you know there.
You know you know the core loss ratio was about 490, bips worse year over year, So where is the other 110 bips of deterioration coming from.
[noise], you've heard about your year over year year over year, Yeah, that's correct.
Okay.
Yeah, I mean, California, P.P.A. as I mentioned in my prepared remarks deteriorated slightly as well.
Year over year, but most of it is coming from the from the what I mentioned earlier with respect to outside of California, and commercial auto was 2.8 points.
The combined ratio.
A year over year over year was what was a mask last quarter dead for one.
For 2018 compared to does any action when thinking.
So the difference between the two is 96 versus 95 six so that's about three points so 2.8 points.
Oh that is the business outside of California in commercial auto and then you've got the rest of it which is more potential the points if something from a California private passenger auto I think I said, there was 97 cents compared to 97 before there's or two tenants you got the 2.8, there's or three points.
Okay got it okay, yeah, 'cause I would like backing out the cat losses, and then the reserve development two year over year. So if I do that I have a 69.3% core loss ratio for you all in the third quarter of 18, and I've got 72.0, I'm, sorry, 74.2, this corner so that.
Delta.
I see I you know when I was far I was talking about calendar year results. When I talk you know when I was comparing the difference what we what businesses were delighted that movies a change year over year, that's driving that can only get resolved deterioration.
And that's when it when it is just not if the business outside of California, which by the way the third quarter 2018 outside of California had a really really good quarter right. So.
Had a 82% combined ratio compared to one on one this quarter. So I was comparing the calendar year results lumpy actually recorded.
ER, which I would.
2.8 points from a calendar year perspective, Chris.
Okay got it and then so I guess what is the game plan to fix like outside of California anywhere what exactly where exactly are you seeing the problems like which dates which lines of businesses in coverages and then kind of is it a rate. It I mean is at a rate game or you just filed rates and wait for those to earn in and then like how soon.
Should we be able to see that the benefits of of all your work out outside of California.
Well as I mentioned earlier I think in 2018, and we take a look at it even as of today outside of California. We were you know at a 98% 97% combined ratio.
Its deteriorated and a lot of that deterioration.
Has come from Florida, and Georgia, I think I mentioned that in our previous.
Oh, and you know, we're taking steps Jeff talked about majoring in yeah rate increases that are going in and in addition to that we're trying to improve our segmentation. So.
We were where we needed to be in 2018 or very close to it or 2019 deteriorated a little bit we're taking a me too aggressive and we're also trying to improve our segmentation.
Okay got it that's very helpful and I think you had mentioned a couple of like frequency and severity numbers in the the interest scrapped. So were you, saying they just to confirm these numbers quarter over quarter or frequency and severity were 80 in California audit aren't California private passenger auto each of those were up 4%.
Correct.
No.
Yeah, the dirt I I just goes a couple of frequency and severity one of them I can slow year over year.
I'm older year year over year, the frequency was relatively flat.
Okay very was up about sub severity was up about 7% year over year.
Okay and you take a look like when you take a look at it compared to this what we recorded in the second quarter of 19 compared to the third quarter, that's the 4% age.
Okay got it got he I saw that stayed on their side just trying to confirm that yeah, the year over year number and.
It was basically flat frequency.
7% increase in overall severity will be I feel very recording really about 10%. The ice severity is what we recorded in the quarter.
Any year to date for California, TD, California P.A.
Got it and do you have Mike Mauler figures for for for the on commercial Auto book.
I'm, sorry, I see that again Greg.
Yes, do you have a similar yeah do you have the similar frequency and severity trends for the commercial auto book in California as well.
I I don't have an handy, but there were there probably comparable or in commercial auto the.
The tort environment here, you know has been very challenging I think you've heard it from some other competitors as well very aggressive play this bar.
And what appears to me as more Liberal juries is driving up the severity and in commercial auto it's more challenging because the limits or higher.
You know the typical bodily injury limits for commercial auto is a million dollars. So it makes decisions on settlement offers a more difficult wouldn't have that that kind of limit.
Okay got it and then just one last one were the accident years are you seeing their favorable development emerged from.
Well, we didnt have a yeah, we reported I think a million dollars of a favorable so there's a few things that are kind of going both ways on that.
As Dave mentioned, we had a little bit of adverse and commercial auto that was offset by some favorable and some of our other lines of business, but.
I think we're seeing the last couple accident years are pretty stable.
As far as the ultimate picks.
Okay, great well, thanks for all the answers back to lock in the fourth quarter.
Thank you for this.
Thank you.
Our next question comes from Jay Cohen of Bank of America Merrill Lynch Aligners Okay.
Yes. Thank you.
Yes, as Chris pointed out the accident year loss ratio in the third quarter.
Well in.
In my model looks like a jumped up quite a bit from the first half of the year.
And then maybe some seasonality, but was there any kind of current year catch up in the third quarter, where are you reassess the first half loss ratio.
Hi, there was no there's really not anything that was material Jay.
Okay.
Yes.
As Dave mentioned, you know, our our third quarter, California personal auto frequency.
Was 4% higher than the second quarter and severity was 8% or also 4% higher than the second quarter. So you have basically 8% higher higher in total than Q2.
When you're looking at Q3.
And just is that partly seasonality does that happen every year with just a little bit unusual.
Second quarter tend to be our best corner.
I will say that second quarter, it seems to be our best quarter, but but this was a this was a little surprising.
Right.
When you have a a 4% sequentially increasing frequency and severity, though there was a little surprising to us.
Okay, but I mean, I mentioned earlier Jake quarterly results could be both you know the brick wall there can be volatile.
Right.
Right never read too much into one corner certain line.
Yeah.
Okay. Thanks, guys.
Thanks Jay.
Thank you.
Again, if you like asked a question. Please press Star then one on your Touchtone telephone.
Our next question custom coin ran up <unk>. Your line is open.
Good morning.
Yes, I had a question just in general about the severity trends I noticed that when travelers reported they talked about severity issues.
You guys have seen.
Cycles before just wondering how you would compare this cycle to previous cycles, we've had severity increases like machine right now.
Thank you.
<unk> previous cycles, I don't I I've been doing.
This for some time.
And.
From my perspective, you know I think from a just reported environment.
It's it's probably wouldn't you know if you're most challenging that I've seen personally.
Perhaps using more challenging, but I I view it as a.
Very aggressive I see a you know very aggressive claims this bar.
I mentioned earlier I'm trying to drive up the cost of claims settlements.
So I I kind of view this current environment as.
Yeah, Hi, severity B. I environment, and I think in fast track, if I'm not mistaken in California.
Thanks for the.
Second because fast track you know there do you made a corner.
And I believe with the ice severity.
Quarter over quarter was up like <unk>.
Or something like that and stuff was double digits, so fast track quarter over quarter into second quarter for California was up about 10%.
Just one corner you can't read a lot into that we'll see what happens in the third quarter year over year I think your top five six person.
Whether or not these you know trend stabilize we'll have to wait and see we're trying to get ahead of it ER as Ted mentioned, we really did not have.
Much development really actually we had positive development I believe in California, bypassing the auto in the quarter, we had a little bit <unk> positive elements from prior years away. It's fine. We're trying to stay ahead of it will take some severity trends that are obviously does the most recent accident years the most.
Difficult to pick right because it's not very it's very green. So we picked up a pretty high severity pick up 10%.
For bodily injury increased costs are in California higher than would be indicated by fast track, but something that we just want to want to make sure we set up.
Thank you [laughter].
Yeah that I haven't seen us in a long time, either or anything like this I guess.
Thanks.
Thank you.
Thank you I'm showing no further questions at this time.
Okay I'd like to thank everyone for joining us this quarter Wolf, we'll talk to you a nice quarter.
Ladies and having this concludes today's conference call. Thank you for participating you may now disconnect.