Q4 2019 Earnings Call

Good afternoon. My name is the Colin I'll be your conference operator today.

At this time of flight welcome everyone to the Mercury General third quarter Conference call.

I wanted to placed on mute to prevent any background noise.

Speakers remarks, there will be a question and answer session.

You would like to ask a question during this time simply fresh start and the number one on your telephone keypad.

You would like to withdraw your question impressed punky.

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 risk and uncertainties, which cannot be predicted quantified in which may cause future activities and results of operations to differ materially from those disgust here today.

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

Thank you very much I would like to welcome everyone to Mercury's fourth quarter conference call I'm Gay Tirador, President CEO and the with me is Mr., George Joseph Chairman, Ted Stalick Senior Vice President CFO, Jeff Schrader, Vice President and Chief product Officer, and Chris Graves, Vice President and Chief.

Investment officer.

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

Our fourth quarter operating earnings were 21 cents per share compared to an operating loss of 26 cents per share in the fourth quarter of 2018.

The improvement in operating earnings was primarily due to an increase in previously unrecognized income tax benefit a reduction in the combined ratio and an increase in after tax investment income.

Included in the fourth quarter 2019 result was a 10 cents per share tax benefit related to the recognition of previously unrecognized federal tax benefits and a reduction in state tax accruals related to a California franchise tax audit.

Included in the fourth quarter of 2018 results would be seven cents per share tax benefit from the reversal <unk> IR school, we data to see frustration adjustment from the 2017 yeah.

The combined ratio was 103.2 pressure in the fourth quarter 2019, compared to 106.7% in the fourth quarter 2018.

The improvement in the combined ratio was primarily due to $1 million a positive reserve development in the quarter compared to $23 million of adverse reserve development in the fourth quarter 2018.

In addition, catastrophe losses of three $6 million in the quarter were lower than the $43 million catastrophe losses in the fourth quarter of 2018.

Excluding the impact of catastrophe losses are actually your reserve development and feeder reinstatement premiums are combined ratio was 99.3 per se the corridor and 97.3% for the 12 month period ended December 31, 2019 compared to 98.6%.

And 95.6% for the quarter and 12 month period ended December 31 2018.

Our California play passenger auto combined ratio was approximately 97.9% in the fourth quarter of 2019 compared to 103.2% in the fourth quarter 2018.

The improvement in the California part passenger auto combined ratio was primarily due to rate increases kick in during 2019 entry $10 million a favorable car actually your reserve redundancies in the quarter compared to $14 million of adverse part actually your reserve development in the fourth quarter.

2018.

Partially offsetting improvement in the combined ratio from reserve development and read increases was an increase in the frequency and severity.

California private passenger auto frequency increased by about 2% in the quarter as compared to the fourth quarter of 2018.

Primarily from the bodily injury coverages and severity increased by 5% in the quarter as compared to the fourth quarter of 2018.

If I presume personal auto rate increase for California automobile insurance companies pending approval with the California Department of insurance and a 4% personal auto rate increase was recently filed for Mercury insurance company.

Electively. These represent two thirds of companywide direct brands or.

Our California homeowners combined ratio was 123% in the fourth quarter 2019, compared to 125% the fourth quarter of 2018.

Catastrophe losses in our homeowners line, primarily from California, wildfires were $34 million into quarter compared to $38 million into fourth quarter 2018.

The 6.99% rate increase in California homeowners line was approved by the California Department of insurance and was implemented in August 2019.

In addition, a 6.99% rate increase into California homeowners line is sending approval the California Department of insurance.

California, Homeowners' premiums represent about 13% of direct companywide premiums or.

For states outside of California, we posted a personal lines homeowner in auto combined ratio of approximately 110% in the fourth quarter 2019, compared to 101 person in the fourth quarter 2018.

Those results include approximately $2 million of unfavorable prior year reserve development, another $3 million, Berkeley, and compared to no development on another $4 million apparently in the fourth quarter 2018.

Our year to date actually your personal lines combined ratio for Steve outside of California was 90% in 2019 compared to 97% in 2018.

Increases in severity in several states in private passenger auto were the primary reason for the increasing the combined ratio in 2019.

We have been increasing or private passenger auto rates in many screech outside of California to improve results.

We have also introduce improved segmentation with an updated product we have made murky advantage.

I agree advantage has increased production in the states right, where that's been deployed and to date the loss experience has been favorable.

Every advantage is scheduled to be released to all but one of our speech I'll try to California by the end up 2020.

Our homeowners results I outside of California saw double digit premium growth in 2019 with favorable underwriting results in total and on an underlying basis.

The expense ratio was 43.5% in the fourth quarter compared to 23.3% in the fourth quarter 2018.

Slightly higher expense ratio was primarily due to an increase in profitability related accruals, partially offset by lower acquisition costs.

Premiums written excluding reinsurance reinstatement premiums written mm, 3% in the quarter, primarily due to higher average premium for policy and an increase in homeowners policies with.

With that we background, we will now take questions.

At this time, if you would like asking audio question you may do so by pressing star and the number one on your telephone keypad again, not a star one well pause for just a moment.

The first question will come from lineup, Greg Peters with Raymond James.

Good morning, Thanks for the call a couple of questions for you on your results first of all I was listening with interest about your commentary about.

The results outside of California.

And with a combined ratio that <unk>, it seems to be deteriorating money year over year basis for auto and home.

Do you have an objective or do you have a timeframe in mind of when you might be able to get that auto home.

Combined ratio outside of California down to below 100.

Well, Greg it's good question as I mentioned earlier, our or 2018 actually your results for personal auto as an example, where in the 97.8 I think is what we posted nice and outside of California.

And our homeowners was a 93.2 and 19 94.6, making so 18 to actually was it a different your for our results outside of California, What we saw 19, well just increases in severity that really offset any kind of rate increases that were built.

Turning to our rate so severity increased much much higher than we expected.

Driven by a Florida as an example had some issues with Pip in Florida.

And no other large state taxes also saw some increases in severity. So are we were pretty much. There in 18, we had some unexpected I think developments with respect to severity in 2000, <unk>, making a that we didn't anticipate a but we are taking action as I mentioned a in our prepay.

Our remarks, we have.

Taking rate.

In addition to that we've introduced a well we believe is a is a much better segment that products.

And most of this nature, which is gonna be rolling out for the rest from 2020.

And so both Florida, Texas, some more of a file and you state a regulatory framework correct as it relates to rate or I guess, Florida is it homeowners that you're getting the prior approval on.

Well, we don't write homeowners in Florida, or so in in Florida, you can you can't volumes.

Same with Texas correct.

Yes.

So theoretically this should be a pretty.

The fixed shouldn't take very long because you're able to go after the rate you need to restore profitability to set a fair assumption well I mean, it takes a little while 'cause it you have.

Six month policies. It takes a little bit it you know to earn in yeah. So there's some <unk>, there's some rate, earning in but generally speaking.

I would agree with that imminent, we filed for enough rate you know to offset the increases in severity that you'll be situation resolves and we did that you know it back in 2018.

As I mentioned earlier right right. Thank you for the color you know one of the surprises last year, well I guess it wasn't a surprise, but with a change was.

How your reinsurance changed in your retention per event, especially as it relates to like property losses fires catastrophes was higher and.

Given the experience you had in 2019 can you give us a preview on how you think youre reinsurance structure might change in 2020.

And how we should think about your catastrophe exposure by a per event basis.

Sure I'll have to had answer that.

Yeah. So so on the current treaty, which goes from July one to June 30, So we're behind the worst of the fire season.

There were no reinsured losses that hit that that treaty. So were expecting the pricing Congress next July to be pretty rational when we go up for renewal.

As far as changing limits or retention at the renewal a lot of will depend on a risk tolerances and the pricing available in the market also the capacity in the market.

But as of now we expect the renewal limits and retention. So look similar to what we currently have and again, we'll probably know a lot more in the spring once we.

Finish our.

Our PML analysis and get those updated and then go start marketing reinsurance, but you you you said they there were no reinsured losses related to fire. So far I, obviously, the fire season, largely over with but so far on the.

The on the last on this current reinsurance treaty or correct.

That's correct our retention was 40 million in yeah out of the fires were large enough to get get into that.

Okay, great. Thank you. Thank you for those answers and then I guess the final question would be just on the California business.

No it if it feels like your.

It feels like you should be getting.

Rate did exceeds your loss cost trend, but I guess, we're just not seeing the improvement show up in your bottom line results.

You do you have a view right now how your rate compares to last try and do you think you know you're talking about these 5% rate increases the filed 6.9 per side et cetera.

How do you feel about where you are sort of in that rate cycle relative to the results.

Well.

I think I mentioned in the prior call last quarter, you know, we do indications every quarter.

And Ah right now with these latest to beat increases that we've applied for and that our pending we feel pretty good about where we wouldn't be both in am I see in Colorado.

When you take a look at our California private passenger auto results, we booked about a 97%.

Combined ratio for the entire year.

And there's a lot of rate that was not earning at 97%. So on an level basis, it's better than the 97%. So in addition, with these rate filings and hopefully we'll get approved in 2020.

We actually feel pretty good where we're at right now.

What do you when you look at the 2019 results. What do you think the combined ratio will look like for the homeowners only but portion of your business in California.

How much was it a in 19 or what do we have spent well well well.

It's a historical numbers just what what was just homeowners, California.

It was 100, 606% combined.

And how did that compare what 2018.

2018, do you actually here for 2018 was one all three and the fell under your words like a one or two.

And the window six that you gave us the calendar year correct yeah yeah.

Okay.

Thank you very much for your answers.

Sure.

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Oh, good wasn't short call this quarter or like you think everyone for joining us and ER positive again next quarter. Thank you very much.

This does conclude today's conference call. Thank you for your participation and I could you. Please disconnect your line.