Q2 2020 Mercury General Corp Earnings Call
Good morning, My name is Michelle and I'll be your conference operator today.
At this time I would like to welcome everyone to the Merck Regional quarterly conference call.
All I simply some mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session. If you like to ask a question. During this time simply press Star then the number one and your telephone keypad.
If you like to withdraw your question press the pound key.
This conference call may contain comment some forward looking statements based upon current plans expectations event and finance, one industry trend, which may affect Mercury General's future operating results and financial position.
Such statements involve risks and uncertainties, which cannot be predicted.
Quantified, which may cause future activities and results of operations to differ materially who those discussed here today.
Now, let's turn the call over to Mr. Gabriel Tirador. Please go ahead.
Thank you very much I would like to welcome everyone to locally second quarter conference call I'm gay Tirador, President and CEO.
The phone we have Mr. George you also 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.
Net income in the second quarter was 220.2 million or $4 in 12 cents per share, which includes 125.2 million of after tax gain on our investment portfolio.
The rebound in the market in the second quarter helped to partially offset first quarter after tax losses of 198.5 million on our investment portfolio.
Good day, net income was $89 million or Dollarssixty, one centsper share, which includes 73.4 million after tax losses on our investment portfolio.
Most of the year to date investment losses, our mark to market adjustments on securities that continued to be held by the company.
Our second quarter operating earnings were $1.86 cents per share compared to 74 cents per share in the second quarter 2019.
The improvement in operating earnings was primary due to a reduction in a combined ratio from 90.3% in a second quarter of 2019% to 88.2% in the second quarter of 2020.
Catastrophe losses in the quarter were $12 million compared to 9 million in a second quarter of 2019.
The company recorded $12 million and I'm favorable reserve development in the quarter compared to 9 million in the second quarter of 29 team.
The improvement in a combined ratio in the quarter was primary due to improved results in our private passenger auto line of business.
Nor frequency in the quarter as a result, that's driving from the Kobin 19 pandemic was the primary reason for the improved results.
The more frequency in the quarter was partially offset by an increase in severity and to get back up $100.3 million a premium to personal auto customers. As a result, that's driving from the cold in 19 pandemic.
Partially offsetting improved results in our private passenger auto line of business worst result in our commercial auto homeowners in commercial multi peril lines of business.
Although our commercial water line of business also saw a decline in frequency in the quarter increases in severity unfavorable reserve development of $7 million and they get back of $5.5 million of premiums to commercial auto customers negatively impacted our commercial auto results in the quarter.
In our homeowners line, both frequency and severity increase in the quarter.
In addition, $3 million of unfavorable reserve development negatively impacted our homeowners results this quarter.
To improve our homeowners results, a 6.99% rate increase in or California homeowners line went into effect in April.
In addition, a 6.99% rate increase was recently approved by the California Department of insurance.
We expect to implement the recently approved rate increase in October.
California, Homeowners' premiums earned represent about 87% of company wide direct homeowners' premiums earned and 15% of direct companywide premiums or.
Our commercial multi peril results in a quarter were negatively impacted by large 5 million dollar fire losses net of reinsurance.
In the second quarter, we launched two new programs in June we introduced our new personal auto usage based insurance product Merck We go in Texas.
Early adoption rates are encouraging and above our expectation.
We also introduced phase one of our new commercial multi peril product and system in California in the second quarter.
The new product and system have been what we see virage.
We recently completed or catastrophe reinsurance treaty renewal effective July 120 20.
The total reinsurance limit purchased increased from $600 million in the prior period to $717 million for the fourth of July 2020 through June 2021 period.
In addition, the new reinsurance program has wildfire covered and all layers.
Our retention remains the same at $40 million.
Total annual premiums on the new reinsurance program are approximately $50 million.
For the prior reinsurance Treaty total premiums were $38 million.
More details of the catastrophe reinsurance treaty renewal will be included in our second quarter teams you filing.
The expense ratio was 27.2% in the second quarter 2020, compared to 24.4% in the second quarter 2019.
The higher expense ratio in the quarter was primarily due to the reduction of premiums earned a $106 million due to premium refunds and credits to eligible policy holders for reduced driving and business activity as a result of the cold and 19 pandemic.
Excluding the premium refunds in credits the expense ratio would have been 24.1%.
Premiums written declined 12.5% in a quarter, primarily due to the $106 million in premium refunds in credit.
Excluding the $106 million in premium refunds in credits premiums written declined by 1.2%.
In addition, we plan on returning $22 million of July 2020 monthly premium to eligible policyholders in August.
Accordingly, we expect third quarter premiums written and earned to be reduced by approximately $22 million.
We will continue to monitor the extent integration of the economic impact they needed to Kobin 19, and make further adjustments as necessary.
We expect our underwriting and loss adjustment expense ratios to remain elevated in the third quarter as premiums declined from get back without a proportionate reduction in expenses.
With that brief background, we will now take questions.
As or as a reminder to ask a question you would need to press Star then one or your telephone to withdraw your question press the pound key.
Please standby, we compile the Q and a roster.
Our first question comes from Greg Peters of Raymond James Your line is open.
Well good morning to good afternoon to those listening on the East Coast [noise].
I first wanted to give everyone a heads up had some trouble getting access in the call. This this morning are this afternoon.
Depending on your time, so and we're asking for a conference I'd I don't know, if that's normal or not.
But oh, let's pivot back to the results and your announcement around the $22 million Oh Wow.
Can you talk about the mechanics and around that number and on.
If you're having favorable frequency continue in July and maybe it extends in August and September is it reasonable to assume thats its give back or refund is going to continue for the near term [noise].
Oh neglected and have Jeff talk about could get back Jeff.
[noise] Yeah. We saw continued frequency you know obviously.
Declines through the month of June and into the month of July Nancy.
Hi.
Give back Dave just talked about for July as far as that continuing into subsequent months, we're going to continuously evaluate that.
And.
Depending on how frequency moves over the next couple of months or we will.
Potentially make adjustments and to give back and extend that for those particular months, but it's a little early for us to tell at this point.
No I agree I will add that we did see an increase upward snowbird frequency as compared to where April and May and June and July So as Jeff mentioned, we'll just continue to monitor.
And no every month and well just based on the information that's coming in and severity is rising as well so offsetting some of the frequency benefits, but no. No question that there was an upward slope in frequency in the month of June and July as compared to <unk>.
Right.
The I just continuing on with that being in that concept what how is the.
How's the interaction been with the California Department of insurance, you know I know if I look at your second quarter combined ratio result, that's well below their mandated target. So I'm just curious how the the you know the regulatory authorities or.
Getting involved with your process at this point.
Well I'm not sure what you mean by its well below our mandated target I I don't think I agree with that.
Steve I'm, sorry, I thought I thought it I thought there was a 96 combined ratio sort of threshold, maybe a minimum is no no no no threshold of 96 that I'm aware of did they have a template that you have to file and not template has the maximum that you can take based on the template.
And I I'll remind you that before coal bed. We had they are pending we had in both companies something I think on one of five and another one afford or something like that.
Pending because of severity increases and I'll add that a template allowed for quite a bit more.
Rate increase so.
So yes prior to coal bed. There was no question that we needed rate and and a template an offer for quite a bit more rate than we were asking for.
Thank you for the clarification. So we can you just you know just does the final piece of that you know how how is your interaction with the California Department. Ben you know as you're announcing these programs are they just accepting it or are they getting involved or you know I think you'd characterize it before as they were just asking you to do some.
Thing and leaving it up to you.
Yeah, that's basically how it's been we are they basically.
Our line companies, who you know do whatever give back at you know they see fit and they're not ordering any kind of specific give back.
Got it and there's no no filing required.
Okay. That's it. Thank you for the clarification gave appreciate it shirahama problem on I can we pivot to the reinsurance so it more limit.
The retention is still $40 million is up $40 million per event or as an aggregate quarter or just help us and maybe you can give us an <unk>.
Can turn Crystal ball and tell us what you think the fire season is kind of look like in the third and fourth quarter.
Well, that's always hard to predict.
Ed has he wanted to talk about the reinsurance yeah, Hi, Greg.
So it's 40 million per event, we did buy more limit.
I would like to mention that Oh PGT came out of bankruptcy on July 1st.
And that put into place the the utility industry, Sobra, Geisha and fund, which will cover 40% of future.
Losses caused by.
Their equipment. So we see that is a favorable.
Towards cat losses in the third and fourth quarter. We've already started having some fires are here or there was a big one out in Riverside County, but.
So far I don't know if any structures have been burned and it seems to be going up into the into the mountains.
So we'll see what happens the rest of the.
Year normally the the wildfires or the worst when the Santa Anna Wintour wins come in which is.
Generally later in the fall.
Great can can you can can you just go back and walk us through that 40% how does that work, let's say if theres an event the cost you a $100 million.
His 40 of that Dan a on a gross basis 100 million on a gross basis.
40 that covered by some forget it to PG any or you know or.
I will walk us through how how that works obviously, there's got to be some blame involved with them but.
Well, let's see if the loss was caused by their equipment and that it's shown to be caused by their equipment. My understanding is yes and.
This fund it had been set up where did the insurers can submit their claims and and get the 40% reimbursements back from the fund.
Is that done before or after reinsurance.
So in that example, 100 million.
That would net down to 60, and then you would see in you would feed off or under our treaty, where our retention is a 40 you would see it off the amount above 40.
Up to the 60.
Speed on the 20 right perfect. Thank you for that color is how many how many.
How many events or do you have a first event second event, how many events are covered under under treaty.
Our limits or.
Yeah. We're we have one reinstatement got Oh, a and then once you exhaust the second reinstatement.
Your you don't have any coverage so you could have.
Yeah radically a dozen events that fall within the layer, but haven't exhausted the layer.
Okay. Thank you.
You know the I guess one other question just around operations you mentioned.
You know your concentration in California, but you also highlighted some initiatives that are going on outside of California.
Thank you mentioned, the Texas initiative in particular.
Do you expect one we get to the ended the year that you're not on California, New York premium will be higher or the same as it was last year or lower.
No we.
I'm not going to predict that they're just too much uncertainty going on right now.
Greg I I'd, rather not pretty bad all I can tell you that we're working on improving our segmentation outside of California, We have a new product that we launched Murphy advantage in quite a few states in the launching of that product has increased new business significantly in the states that we've launched and we plan to continue.
The launch it in most of the rest of the of the country.
Later, this year and into next year as well.
We've got the Murphy Gold program I as well the usage based program that is going well.
But there's just too much uncertainty for us to predict where premiums are going to land.
I will say that you know for the most part you know we now for the most but we are keeping our underwriting discipline. So.
No we're taking a long term view in all our states I would say that we are keeping our underwriting discipline.
Going forward, so I'm not going to predict but a lot of things emotion that I think that from a product standpoint that are positive.
Great. Thank you for the answers. The final question just would be to Chris regarding investments.
Just looking at the year over year.
In six months, both on a quarter on the six month basis, you know the average yield is down.
You know can you can you give us some perspective on you know how the new money rates compare compare with the existing portfolio yield and.
Given what's going on an interesting.
There.
Where where the new level will normalize out.
Yeah.
Well I mean, I think you probably know much of that answer and that is the new rates.
Compare quite favorably to.
Average race in where we were just.
Six months ago.
So.
You know catch rates are.
Yes.
Getting there there are approaching zero.
New money rates, you know the tenure Treasury 55 basis points AAA municipal bonds.
65 basis points.
So I put a set of a spread on that and you're looking at 1% 1.5% out on the curve.
With significant duration risk so how long are we going to be in this environment.
You know.
Big election, coming up I think that's part of the answer.
But I think we could expect to be.
At these as these low rates for some time to come.
And I'm.
So yeah, the comparisons are gonna be challenging.
We're evaluating.
Different options, certainly taking more risk say on equities is an option, but its we have a very conservative investment policy and.
We're actually getting up against those types of restriction.
A dividend yields are attractive compared to fixed income, but again the risk there as you know through certain tolerances that we don't want to have to.
Consider breaching.
So where it's going to keep pushing the best Mccann and.
[music].
I think you, which I think you kind of already understand that it's probably the most challenging environment we've ever been.
Right.
It certainly looks like Oh.
Well listen thank you everyone for your answers appreciate the time.
Thank you Greg.
[noise] again to ask the question. Please press Star then one.
Our next question comes from Ron Bobman of capital returns your line is open.
Hi, Thanks, a lot hope everyone as well I had a question about agent compensation.
My understanding is at the.
The carriers into sort of a uniform fashion.
Even in light of sort of the give back on.
Consumer premiums basically not not adjusted agent commissions and I assume that isn't changing.
But I'm wondering.
If you confirm that that'd be great, but what I was really wondering about sort of incentive compensation that some of the agents may have whether it's sort of be.
In particular sort of profitability based have there been any adjustments to the sort of profit based.
Compensation programs to incorporate the impact of Covidien and to give backs. Thanks.
Well to answer your first question on base commissions, you're correct base commissions have not been adjusted and for the give backs as far as contingent commissions.
We haven't made a determination on that yet.
Gotcha. Okay. In is would you say that your peer group is sort of largely in the same spot it's sort of to be determined.
Perhaps some declared positions to your knowledge.
I don't know about all our competitors I don't know I'm not sure. Okay. And then if you if you don't mind I remember I'm not too too long after the fires I remember you I think you sold your sub brigades certain rights to I guess, a third party.
For some of the I guess fire losses.
And I'm wondering if there if you have any other remaining sort of fire losses that are sort of either subject to subjugation from the the utilities or or potentially.
So I guess could be sold is there or is everything sort of baked as far as prior years fire losses as far as big as many your losses are sort of.
They are what they're going to be in there is not.
There's not a lot of uncertainty or variability to suffocation opportunities. Thanks.
Ted want to handle that.
Yes, so the.
You're right, we did sell desegregation rights to a third party, although we kept our sub regain rights to the 2017 fires which was the.
Generally known as the tubs Flyer and we received an initial payment from the PG any trust I think just last week.
Now that's separate geisha and in any any future segregation.
Came from fully reinsured losses, so all those moneys will be returned to our reinsurance partners. So there's really no debt reduction in losses for Mercury from that certification.
I will mention there was a small benefit to the company from a reduction in reinstatement premiums previously paid on those losses and that was a little under $2 million a that we did record in the second quarter numbers.
As far as a separate location we do have.
Wildfires from Q4 2019.
The saddle rich fire, which was in southern California.
The Kincaid fire, which was in northern California, those both of those were under our reinsurance retention.
And it hasn't been determined yet whether.
Those events.
Were caused by the utilities equipment, although there are some evidence that both of them were.
So there is the potential for some separate patient on on those two events.
Right now that's unclear.
Hey, Thanks for the color if there if there is deemed to be sort of culpability from the equipment. The earlier mentioned about the California reimbursement fund in the 40% that you mentioned wood with these Q4 19 fires and your losses.
Potentially be.
Eligible for reimbursement from that fund that you mentioned earlier.
I'm not exactly sure, but I believe that's correct and I also think that the the 40% kinda sets the benchmark for where those claims would.
To be paid out of anyway.
So I.
That's all I really know now I think our ultimate losses on those two claims.
We're in the 25 to 30 million dollar range.
Right now.
Okay. What do you mean by the benchmark of 40% <unk> I understand why you chose to word benchmark what's that mean.
Well I'll, let me find out is that a.
You know as easy as all these fire claims have come in over the years.
Theres been different varying levels of sub regain traction as a percentage of incur losses have been paid out.
And.
You know now you have this fund its essentially saying we're going to guarantee you a 40% pay out so what I meant by benchmark is if theres. Prior claims that are not eligible under the fund.
You know that probably look towards this 40%.
Rate is kind of the standard of what you pay.
Okay I can follow up if I still don't.
Thanks and be will.
Thank you.
Our next our next question comes from core you ran of P. Cotton Company. Your line is open.
Oh good.
Good morning, good afternoon from here the Midwest lay up.
Well a couple of questions. The person was given the low interest rates that you are seeing whoa.
Returns on invested on it doesn't seem machine give you recall your dividend or your.
Okay.
Repurchase policy at all.
It seems like the dividend yield is much higher than the dividend or they were trying to get on investment.
And then my second question isn't it [noise].
Obviously weve entered into a more technological world.
Yeah.
See the online sales numbers went from 18% to 20%.
Things like that and.
And you haven't upstart like a company called Lemonade.
So they can capture I dunno.
Who knows what the numbers are 100000 data points and log into their site like that.
Have you ever thought about how you can use.
Use technology more more in the business and.
Given that [noise].
Ill.
Does have an agency.
They are.
Model work in today's world. Thank you.
Let me first I guess answer the first question as far as the dividend. This is something that the board reviews on a quarterly basis and makes determination on a quarterly basis.
Yeah, you know based on our prospects in our earnings.
Coverage and a lot of factors and so it's something that.
We just review every every quarter, so I'm going to need that at that.
We just you know as you know announced a you know dividend this quarter as well 63 cents dividend.
You know as far as online.
Lemonade, Yeah, I mean, I I know loved them I mean.
100 data <unk> hundred thousand data points, which I think you're referring to is potentially you know the segmentation.
We obviously have a data warehouse and we segment our business as well.
We're continually trying to update our segmentation I'm I mentioned earlier that we launched our Murphy advantage program outside of California, which.
Significantly improves our segmentation and we've seen very positive results with respect to Murphy advantage.
In the state of California, which is our biggest market you're limited to what you can use so there's more limitations in California because of the regulatory constraints as far as what you can price on or where you can't price on including homeowners, which is what lemonade cells.
As far as technology goes we continue to advance our technology I mean, I can't tell you how many box that we're using right now we've improved our agency facing system, we're improving our online portal.
Where we're using technology to settle claims to underwrite our with so we continue to try to improve our technology to streamline our operations without sacrificing our underwriting or cleans accuracy and that's the key I mean, I I don't think it's very difficult in this.
Business to write a lot of business and maybe the M&A will provide a lot of business and.
Yeah, well, we'll see how they end up on the profitability and end of it but.
Lighting business not difficult.
Do you think the up.
You Havent damage with the agents upfront underwriting for you.
In this business, where you do you still together damage.
We think that are eight I'll put it this and we think that are agency partnerships are extremely important.
Remain important okay.
Well, thank you it and Stacey. Thank you okay. Thank you.
There are no further questions at this time.
Well, thank you for joining us today, thank you very much.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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