Q1 2020 Earnings Call

The conference operator today.

This time I would like to welcome everyone to be Mercury General quarterly conference call Orange I've been pushed on mute to prevent any backgrounds mortgage after the speaker's remarks, there will be a question and answer session.

I would like to ask your question during much rather than simply press Star then one number one on your telephone keypad. If you would like to withdraw your question first the columns key.

This conference call May contain Commons and forward looking statements based on current plans expectations about.

I'm, sorry, I joined industry trends, which may affect Mercury general's future operator.

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 for most discussed here today.

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

Thank you very much.

I would like to welcome everyone to Mercury's first quarter conference call I'm gay Tirador, President and CEO on the phone we have 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'll make a few comments regarding the corridor.

The impact Kobin 19 is having on the world is unprecedented.

Our hearts and players go out to everyone affected by this crisis.

I like your bank, our boys Dolphin plus team members for their efforts and resilience during this time.

Our investments in technology over the past few years allowed us to smoothly transition our team members to work from home.

We are fully functional and serving our customers and agents well.

In the first quarter 2020, the company lost 139.2, $9 or $2.51 per share which include $198.5 million after tax losses on our investment portfolio.

Pretax investment losses represents 6% of the portfolio value at December 2019.

The majority of those investments our mark to market adjustments on securities that continue to be held by the company.

Our first quarter operating earnings were a dollar seven cents per share compared to 87 cents per share in the first quarter of 29 team.

<unk> operating earnings was primarily due to a reduction in a combined ratio from 97.3% in the first quarter appointee 19, 95.9% in the first quarter appointing 20 <unk>.

Catastrophe losses in the quarter were $2 million compared to $5 million in the first quarter of 2019.

The company recorded $15 million and unfavorable reserve development in the quarter compared to 1 million in the first quarter of 29 team.

Excluding the impact of catastrophe losses, and unfavorable reserve development. The combined ratio was 93.8% in the quarter compared to 95.9% in the first quarter of 29 team.

I, probably passenger auto combined ratio was approximately 93.6% in the first quarter of 2020 compared to 96.8% in the first quarter 29 team.

The improvement in the play passenger auto combined ratio was primarily due to higher average premium from rate increases taken during 2019 net unfavorable reserve development any reduction in frequency.

Partially offset by an increase in severity.

The company recorded $3 million of unfavorable reserve development in our pride passenger although one of business in the quarter compared to 10 million of unfavorable reserve development in the first quarter 2019.

Our homeowners combined ratio, 101% in the first quarter 2020 compared to 102% in the first quarter 2019.

Our homeowners results were negatively impacted in the quarter by $6 million of unfavorable reserve development compared to $8 million a favorable reserve development in the first quarter plenty 19.

Homeowners catastrophe losses in the quarter, well less than a million dollars compared to $3 million in the first quarter 2019.

Excluding the impact of reserve development and catastrophe losses. The homeowners combined ratio was 95.3 per se in the quarter compared to 100.6% in the first quarter putting anything.

When people are homeowners results these 6.99% leading free.

California homers line went into effect on April 21.

This rate increase is on top of 86.99%, California Homeward rate increases implemented in August of 2019.

California, Homeowners' premiums are represent about 87% of companywide direct homeowners' premiums earned and 14% of direct companywide reserve.

Our commercial auto business posted a combined ratio of approximately 100% in the first quarter. Please when compared to 102% in the first quarter 29 team.

Well results include approximately $5 million of unfavorable prior year reserve development in both the first quarter 2020 in 2019.

Excluding the impact of reserve development. The combined ratio was 91% in both the first quarter 2020 and 29 team.

The expense ratio was 25.3% in the first quarter twentyth when compared to 24.8% in the first quarter 2019.

The higher expense ratio is primarily due to the 7 million dollar increase in the company's bad debt provision.

The increase in a bad debt provision was made in anticipation of a higher number of premium balance white off that's payment due dates are being extended to customer facing financial difficulties due to call. The 19.

Premiums written grew 4.1 person in the quarter, primarily due to higher average brings the policy and an increase in homeowners policies written.

Hi, passenger auto and homeowners new business applications are down over 20% in 10%, respectively as compared to the weeks prior to the colder virus outbreak.

As previously announced we're getting back 15% of must be auto insurance premiums to personal auto customers for two months, that's driving during the cold in 19 pandemic has resulted in fewer accidents and clean.

Accordingly, we expect second quarter premiums written in her to be reduced by approximately $70 million as a result, the give back.

We will continue to monitor the extent integration of the economic impact related to covert 19, and make further adjustments as necessary.

We expect our underwriting and loss adjustment expense ratios to increase in future quarters as premium decline without a proportionate reduction in expenses.

Agent compensation will not be reviews put a premium we are giving back.

With that these background well now take questions.

The strong I would like to remind everyone in order to ask your question. Please press Star then the number one on your telephone keypad, we will pause for just a moment chicken barbecue and thereafter.

Again, if you would like to ask a question. Please press Star then one number one on your telephone keypad.

Your first question comes from a line of Greg Peters from Raymond James Your line is open.

Good morning, <unk> My first question.

It would be.

For you to explain what's the difference is in near 15%.

Oh, two month refinanced private passenger customers with the difference between that plan and what the California Insurance Commissioner has ordered.

There is any different.

Well there that the California Commissioner did not Warner order any specific type of percentage give back.

You know he just ordered.

Companies to get back.

Premium, but did not ordering any type of specific I'll get back yeah. He did say, but you know fortson duration starting in March.

And [laughter] and April as well.

Oh and that he would further update any order going forward as he felt necessary I didn't know, Jeff do you want to add anything else to that.

Hi.

No gave you said it correctly I would just reiterate the point that we have been consistent with the timeframe, but the commissioner set out.

Great and and you are for your two months apart your and your so none of the the refunds were a sucked into effect for the March quarter. So.

I assume you're gonna have sort of retroactively refund for March and then also April in the next two next month or two.

Yes, that's correct from March 18th I think it is who may 17th will impact the second quarter.

And that's not approximately $70 million that I mentioned in my prepared remarks.

And gave did you did you guys go did you.

Do you get approval from <unk> did you notified the commission you're doing this did they sign off on it did they give us seal of approval on it.

The order basically gave didn't require any kind of formal approval that his order did not require a form or pool.

Right you just as companies to do it and there was no formal approval required.

Great and so you never comments, you said that the.

Underwriting expense one is the ratio would go up because the underlying expense hadn't changed I suppose.

There are some prevailing winds with the loss ratio to write lower accident frequency drives, though so loss ratio down, but you're getting a lower premium.

So is that an no harsher ohas, what's your view on that.

Well, yeah, we're gonna be giving back premium.

The resolve the Lord frequency as you mentioned, we're gonna have to get to evaluate going forward you know what that means with respect to how long does it continues.

And make no determinations at that time. So you know there are some offsetting things going on as you.

For example, severity could be going up for both the I immaterial damage. It was going up you know before peep cold weather it was going up and there is evidence of increasing speed.

Associated with the with Mets congested roads, and highways, which you know leads to more serious accidents, there's potential for cost pressure pressures on parts.

No that's easy to potential supply chain is issued so there's there's a lot of a uncertainty right now I would say no on the on the topline our top lines going to go down we have the premium get back we have a little bit more new business volume as well.

On the law side, but your losses are down, but we also have higher bad debt provision.

You know harvest nets out you know, we're gonna have to see a in feature mines and we're basically monitoring it very closely.

Got it thank you for that answer those that actually it's good color.

Ken can you just update us I think there was a couple of.

Active rate filings in the pipeline had those Dan.

Line for the time being.

I've, Jeff answer that.

Yeah, Greg Pardy, the pandemic that we were seen severity increases in California personal auto they are still outpace the frequency declines in it.

Hence the rate filings that we had here in California, They remain outstanding with the California Department of insurance, but we don't expect that Department to act on our applications. During the state of emergency. So you can say that they're on hold right now.

Got it.

Ken can we have to just the reinsurance structure.

Can you talk about you know your reinsurance structure for the homeowners business for the 2020.

Our calendar year and how if at all it's going to change relative to the structure last year and I'm thinking about things like in terms of Retentions et cetera.

[noise] Ted you want to go ahead and handle that.

Yeah, Greg So just to remind the audience.

Our current treaty has that 600 million of limit in excess of our $40 million retention and nursing small sliver is that exclude wildfire, but the most part wildfires in there.

We're currently in the process are getting into the process for the July one renewal as a reminder, we paid around 38 million for our current.

Average.

We plan to buy a comparable Amelle. This July one.

We're seeing how the market is good we plan to buy a comparable mill as far as rates.

Yeah, right now I think our anticipation is set up some maybe modest increases but.

Third we're not that's our plan we need to get into the.

Processing and meeting with the reinsurers before we can really.

No exactly where that's all going to shake out.

Got it I guess, that's going to happen virtually these days.

Do you anticipate that your your retention.

The 40 million dollar retention that you had last year is going to stick through this year or is it possible that could change.

Its possible it could change right now are.

Desire is to keep it or right around where it was a in the current treaty.

I love that will depend Greg on pricing right I mean, it depends I don't depend on pricing, so, but our intention right now is to keep it whereas hat, but with a call. The out of you know what what's the pricing look like at the at that lower level.

Great. My last question just will focus on.

The investment results.

And I, you know I realize that a portion of the realized investment gain was just a mark to market adjustment.

I was hoping that we've had two things first of all how reinvestment yields are looking today versus they work you know.

For this crisis it and then secondly, just to give us some idea within.

The real be realized investment how much of the that is the investment loss how much of that is just a valuation for sexual sale.

Yeah, Hi, Greg.

Yes, so far is.

Reimbursement levels go let me during March.

When the hated that the crisis unfolded the levels that you could you could get especially on municipal bonds.

We're just incredible and we pushed a lot of capital into the market at that point in time.

But once the government stepped in and started.

Oh, yeah with all of these different phases.

Of the bailouts.

All the markets really a normalized quite quickly to a large degree we still see bifurcation on the municipal side.

You know clearly there are state or certain sectors of revenue bonds that are under pressure you know like an airport bond or hospitals or certain states.

Illinois, particularly.

It would be under pressure those bonds still trade fairly cheap but.

Other bonds that.

Have good support for our either sales tax revenues or income tax revenues that are still still holding up those bonds are still trading it really good spreads are well we're in competitive spreads so.

It's surprising how quickly this market has looked through.

The current economic problems.

As.

As far as the Mark to market levels go.

We did take losses in the quarter I think the amounted to something a neighborhood just 10 million. So most of it that you saw because we pass everything through most of what you saw is simply mark to market losses.

Just like second Oh wait O nine a week.

Same.

Same methodology everything gets pushed through in a way with tremendous unrealized losses that we label is realized.

Then in 2009, the market came back and all of those unrealized.

[noise] shifts.

We're label is realized on the income statement.

Thanks for the color I guess, the b the given considering the snap back in the market, we'll see a reversal part of that mark to market adjustment in the second quarter.

Thank you everyone for your your answers.

Thank you Greg.

There are no further questions at this time I turn the call back to the passengers.

I'd like to thank everyone.

Joining us this quarter and we look forward to join you next quarter. Thank you very much.

That concludes today's conference call. Thank you everybody for joining today you may now disconnect.

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