Mercury General Corporation's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.31.11 | About: Mercury General (MCY)

Mercury General Corporation (NYSE:MCY)

Q3 2011 Earnings Call

October 31, 2011 01:00 pm ET

Executives

Gabriel Tirador - President, CEO & Director

Chris Graves - VP & CIO

Ted Stalick - VP, CFO

Robert Houlihan - VP & CPO

Analysts

Meyer Shields - Stifel Nicolaus

Dean Evans - KBW

Alison Jacobowitz - Bank of America

Operator

Good afternoon. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to Mercury General’s third quarter results 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.

Thank you. I would now like to turn the conference over to Mr. Gabriel Tirador. Sir, you may begin.

Gabriel Tirador

Thank you very much. I would like to welcome everyone to Mercury's third quarter conference call. I am Gabe Tirador, President and CEO. In the room with me is Mr. George Joseph, Chairman; Ted Stalick, Vice President and CFO; Chris Graves, Vice President and Chief Investment Officer; John Sutton, Senior Vice President, Customer Service and Robert Houlihan, Vice President and Chief Product Officer.

Before we take questions, we will make a few comments regarding the quarter. For the third consecutive quarter, our premiums written increased over the prior year. In the third quarter premiums written grew by 1.2% and year-to-date it increased by 1%.

In addition for the first time since the third quarter of 2007, California private passenger auto premiums written increased while the rate of increase in California was only 3/10ths of 1%. It is a good sign you see Californian premiums return to the black. California growth is benefitting from higher levels of new personal auto business sales as compared to prior year. Furthermore our retention rates remain near historic highs. With a combined ratio of 98.3% our operating results continue to be steady and were aided by our continued focus on expense reduction.

Lower profitability based agent commissions, lower spending on information technology and consulting plus reduced advertising expenditures have led to improvement in the expense ration. Year-to-date we reported $11 million of unfavorable reserve development compared to $18 million of favorable development in the first nine months of 2010.

Excluding the impacts from development, the loss ratio was 69.9% in first nine months of 2011 compared to 69% in the first nine months of 2010. The third quarter and nine months of 2011 were negatively impacted by losses from Hurricane Irene totaling $4 million on pre-tax basis.

An automobile class claim we filed for our Californian companies has been approved by the Department of Insurance.

The revenue neutral plan improves our segmentation and results in a more refined pricing. The plan will be implemented in December and is expected to make the company more competitive in attracting new business, but will cause some dislocation to our existing book of business.

Our Board of Directors approved an increase in our quarterly dividend to $0.61 per share marking the 26th consecutive year that Mercury has increased our shareholder dividend.

On that brief background, we’ll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Meyer Shields with Stifel Nicolaus.

Meyer Shields - Stifel Nicolaus

Let me start on the investment portfolio. The duration have come down pretty sharply over the past couple of quarters. And I am wondering if you could give some guidance in terms of what we should expect from both yields and maybe these tax rates applicable to investment income?

Chris Graves

Hi, Meyer. This is Chris. Well, the duration has come down for two basic reasons. One is market related and the other is the fact that we have been buying bonds with shorter calls for a number of years now. So, and we’ve purposefully been trying to bring the duration back down from when it had its marked increase in 2008. So I think where it is now is actually at a pretty good level, and the month of October has been a little soft on munies. So, we’ve probably seen that durations back out just a smidge in here during the month.

Going forward, I mean, this is kind of where I am targeting where I would like it to be, so I am pretty comfortable with that idea.

Meyer Shields - Stifel Nicolaus

Okay. So, that’s helpful. Rest assured, is there a significant difference between the targeted and combined ratio for auto and home?

Chris Graves

Yes, there is a difference between the targeted, primarily because of catastrophes.

Meyer Shields - Stifel Nicolaus

So we should expect -- I am just looking at cost accounting, the mix is shifting a little bit towards home. That’s traffic into lower commodities, if I am reading it, right?

Chris Graves

Absent any catastrophes.

Operator

(Operator Instructions) Our next question comes from the line of Dean Evans with KBW.

Dean Evans - KBW

Yeah. Thanks. You did mention little bit of commentary with respect to expenses, and it seems that the expense ratio has showed some improvement this quarter. What I was wondering if maybe you could just give a little bit more detail on how the expense savings plans are going through and sort of what the progress you are making there has been, if you have any numbers to talk about, that would be great?

Ted Stalick

This is Ted. We really started this year with timing our expense control through tier budgeting processes, but we took some expenses out in the IT area primarily in the consulting area. We refined our agent contingent commission calculations which allow agents profitability bonuses based on profit and growth and we’ll see where else – advertising, we’ve cut our advertising expenses down somewhat this year as well.

I think it’s hard to compare all of last year to this year, because there was some one-time expenses last year related to 17 which skewed last year upwards. But we’re probably going to see expense ratios in the 27 to 28 range going forward.

Dean Evans - KBW

Okay. So this quarter it seems to be may be a low watermark for may not be repeatable at the 27 flat, it could tick up a bit?

Ted Stalick

Well, we hope it’s repeatable but I will say that we will repeat it.

Dean Evans - KBW

Okay. Second question, I believe you had about $125 million of debt mature in August and it looks like you’ve got another 120 million coming up early next year. May be if you could give your sort of thoughts on are you going to replace that on the capital side of the equation, how we’re thinking about that now?

Ted Stalick

The 125 million senior notes were paid off on August 15th. The 120 million which was originally used to purchase AIS a couple of years ago, we have extended the maturity on that with the bank out three years and those will be maturing in 2015.

Dean Evans - KBW

Okay. So no plans to add more after the recent August that it matured; no plans to kind of add any additional debt to the balance sheet structure?

Ted Stalick

We’re not adding any new financial leverage right now.

Operator

Our next question is a follow-up from the line of Meyer Shields with Stifel Nicolaus.

Meyer Shields - Stifel Nicolaus

I was wondering if you could summarize, if it is possible the changes in the upcoming [client] plan, is there are particular like a sub-cycle that stands out as everything in improvement?

Gabriel Tirador

I’ll let Robert Houlihan talk about that.

Robert Houlihan

With these changes we have introduced a new proprietary symbol set and we have adjusted all of our relativities for all of our rating factors. So there is substantial number of changes. I don't think there was any one particular segment that sort of jumped out through that analysis.

Operator

Our next question comes from the line of Alison Jacobowitz with Bank of America

Alison Jacobowitz - Bank of America

Hi, thanks two questions. One, I was wondering if you could talk a little bit about the competitive environment in California may be in a little more detail? And then the second was on the reserve development. I don't know if there is anything else you can share, but I guess it’s been unfavorable now to some degree for five quarters; you know how you are looking at that, how you are building that into the pricing changes going forward and may be I don't know if you can share anything else what you are thinking there?

Gabriel Tirador

As far as the competitive environment Alison, it continue to be a very competitive environment; as I mentioned in my prepared remarks, we were very glad to see positive premium growth for the third consecutive quarter. But the increase in advertising spend and the insurance space today as compared to let's say five to 10 years ago is pretty dramatic.

So our goal has been for us to increase a number of quotes being presented to potential customers and we believe that we have competitive rates, but we need more luck. And we also believe that our closing ratio can be approved upon with better segmentation and the class when it – I mentioned earlier that buying that we just going to be implementing in December should help us with our new policy sales as well.

Now I do think that generally speaking that you’re going to start to see I think more finds plus some rate increases with loss cost going up in the future. That’s just my personal opinion I think severity on BI is going to be higher than it has been running, but we have to wait and see for that.

Operator

(Operator Instructions) And there are no further questions.

Gabriel Tirador

No further questions? Okay, we’ll thank you very much for joining us today and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you all participating and you may now disconnect.

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