Mercury General's (MCY) CEO Gabriel Tirador on Q2 2014 Results - Earnings Call Transcript

Jul.28.14 | About: Mercury General (MCY)

Mercury General Corporation (NYSE:MCY)

Q2 2014 Results Earnings Conference Call

July 28, 2014, 01:00 PM ET

Executives

Gabriel Tirador - President and CEO

Analysts

Vincent DeAugustino – KBW

Operator

Good afternoon. My name is Laurel and I will be your conference operator today. At this time I would like to welcome everyone to the Mercury General Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (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. 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 from those discussed here today.

I would now like to turn the call over to Mr. Gabriel Tirador, President and CEO. Sir please go ahead.

Gabriel Tirador

Thank you very much. I would like to welcome everyone to Mercury's second quarter conference call. I am Gabe Tirador, President and CEO. In the room with me is Mr. George Joseph, Chairman; Robert Houlihan, Vice President and Chief Product Officer and Chris Graves, Vice President and Chief Investment Officer. Our Chief Financial Officer Ted Stalick is traveling and is therefore unable to be on the call.

Before we take questions we will make a few comments regarding the quarter. Company-wide we experienced our 14th consecutive quarter of positive premium growth. Premiums written grew 5% in the second quarter of 2014 and were driven primarily by higher average premiums from various rate increases in California.

Premiums written outside of California declined 6.7% in the quarter. Our second quarter operating earnings were $0.83 per share compared to $0.63 per share in the second quarter of 2013. The improvement in operating earnings was primarily due to improved results in our California private passenger auto business and lower levels of catastrophe losses, partially offset by worse results in our California homeowners business.

Excluding the impact of catastrophes and reserve development the combined ratio was 96.3% in the quarter compared to 96.8% in the second quarter of 2013. Higher average California premiums aided the results this quarter. In our California non-standard auto company a 6.9% rate increase that went into effect in July of ‘13 is now being fully earned. In addition, a 6% rate increase in our California preferred auto company went into effect in January 2014 and had a significant positive impact on earned premium in the quarter.

Slightly lower loss frequency in California also contributed to the positive results in the quarter while our California private passenger auto severity increased in the low single-digits. Although our California homeowners combined ratio deteriorated as compared to prior year the combined ratio was under 100% in the quarter and improved as compared to the first quarter of 2014. Our California home owners result this quarter were negatively impacted by 5.8% rate decrease that went into effect in May of 2013. However, as we previously reported we implemented 8.25% range increase in our California homeowners business in January 2014 which should continue to improve our results going forward.

Outside of California our combined ratio excluding catastrophes losses deteriorated as compared to prior year but were still under 100% for the quarter. We have taken various actions to improve our cost structure outside of California. Our pricing strategy is to price our products to expense targets that we have not yet achieved but expect to achieve over the next several years. Accordingly our expectation is that our combined ratio outside of California for private passenger auto will run above our 95% target for the next several years. However this pricing strategy will allow us to be more competitive than we otherwise would be.

With that brief background we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Vincent DeAugustino with KBW. Your line is open.

Vincent DeAugustino - KBW

Hey there guys. Good morning I am not sure what happened there but probably got through with star one.

Gabriel Tirador

Good morning Vincent.

Vincent DeAugustino - KBW

Just to, I guess start just with a topic from last quarter, I think we have talked about the [drought] providing a bit of a safer driving environment, I am just curious if we should be thinking a similar type of dynamic this quarter?

Gabriel Tirador

Well actually frequency on a sequential basis in California was actually up a little bit in the second quarter compared to the first quarter but when we compare it our frequency compared to the second quarter of ’13 it was actually down slightly. So frequency was down year-over-year slightly. There was good weather in the quarter. So that contributed to the positive results as well. Our severity as I mentioned earlier, going up in the low single digits we are also writing less new business in California which comes at -- new business comes at a higher frequency rate so we are writing less of that, less new business so that contributed to the results as well.

Vincent DeAugustino – KBW

Okay, as far as the new business impacting California, imagining that it’s coming the rate increases that are kind of running through both on the preferred and non-preferred books and so just thinking about the rate strategy, I mean my impression is in California as soon you start to implement one you should probably back to the well. And so to your point on the new business impact I am just wondering if what you are putting through now gets you do a point of comfort in California or if you think that you would be going back to the state to put [a question] for another freight increase if loss costs justify?

Gabriel Tirador

Well we actually have filed for additional rate in both our companies. We have 6.5% of rate increases that are pending with the California Department of Insurance for both our non-standard and our preferred company. We think the non-standard company will more likely be approved sooner than the preferred company as that filing was implemented or we filed through that earlier than the preferred company.

Vincent DeAugustino - KBW

Okay, great. And then just switching over I guess you would have expected to see the decision come through or at least the recommended decision from the ALG get passed over to the commissioner. I was just going off the 60 day window from the 430 record close but I mean we are not too far off that by about a month. But I was just curious am I right in saying that’s the way and if so I was just curious if you have any thoughts on what the delay might be from?

Gabriel Tirador

We don’t know what the delay is from. The judge, I believe, should have rendered his decision you know 60 days after then, or 30 days after that it becomes public but for whatever reason our understanding is that the judge has not rendered a decision. So we're just waiting at this point Vincent.

Vincent DeAugustino – KBW

Okay, good to know. And then one last one and then I'll let somebody else have a shot. This is kind of a theoretical question but if we look back to the last quarter you guys are taking your leverage up ever so slightly but thinking about the California regulatory environment and our discussion here on the rate increase dynamic and just thinking about if you can't quite hit the target returns that you want in California from a rate standpoint if that means that we should be thinking about maybe addressing that issue from a capital standpoint and whether or not maybe taking up your leverage a little bit more would make sense. And here I guess what I am primarily thinking about is if we pair that with your diversification plans outside of California I mean if you would ever have any appetite to pursue an acquisition outside of California. So I am just curious if that's a viable strategy or if it's just not a really viable? Thank you.

Gabriel Tirador

Well, with respect to the leverage I mean we feel comfortable where our leverage is right now. We had a 96% combined ratio that got us to about a 9% return on capital, return on equity and 95% will get us in the double-digits. We feel fairly comfortable right now that we believe that in California we can reach our 95% target at least in the foreseeable future, especially if we get these additional two 6.9% rate increases. We will get there. We're there in our homeowners result. So as of now I don't think that we have any plans with respect to any changes in our capital distribution or as far as buying back stock in any significant way or anything like that Vincent.

So we feel rather comfortable with the fact that today we feel that we could to that 95% target in California that I believe will allows us to achieve a return on capital in a double-digit range.

Vincent DeAugustino – KBW

Okay. All that color is very helpful guys. Thanks.

Gabriel Tirador

Okay.

Operator

(Operator Instructions). There are no further questions at this time.

Gabriel Tirador

Okay, well thank you for calling in and we will talk to you next quarter.

Operator

This concludes today's conference call. You may now disconnect.

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Mercury General (NYSE:MCY): Q2 EPS of $0.83 beats by $0.13. Revenue of $807.01M (+25.6% Y/Y) beats by $73.81M.