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Executives

Gabriel Tirador - President, CEO & Director

George Joseph - Chairman

Chris Graves - VP & CIO

Ted Stalick - VP, CFO

Robert Houlihan - VP & CPO

John Sutton – SVP Customer Service

Analysts

Meyer Shields - Stifel Nicolaus

Alison Jacobowitz - Bank of America/Merrill Lynch

Matt Warman – KBW

Cory Wren

Mercury General Corporation (MCY) Q4 2011 Earnings Call February 6, 2012 1:00 PM ET

Operator

Good afternoon. My name is Misty, and I will be your conference operator today. At this time, I would like to welcome everyone to Mercury General quarterly 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).

Thank you. I would now like to turn the conference over to Mr. Gabriel Tirador.

Gabriel Tirador

Thank you very much. I would like to welcome everyone to Mercury's fourth 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; Robert Houlihan, Vice President and Chief Product Officer; John Sutton, Senior Vice President, Customer Service; and Chris Graves, Vice President and Chief Investment Officer.

Before we take questions, we will make a few comments regarding the quarter. The fourth quarter 2011 operating results improved significantly as compared to the fourth quarter of 2010. Our combined ratio was 99.4% in the fourth quarter of 2011, compared to 109.9% in the fourth quarter of 2010.

On a sequential basis, the combined ratio deteriorated slightly as severe windstorms in California during the quarter negatively impacted our results by $10 million. In addition, the fourth quarter tends to have higher loss costs from increased usage as well as more wet weather.

The fourth quarter results were aided by a decline in the expense ratio. The expense ratio in the quarter was 25.7%. The expense ratio in the quarter was unusually low, primarily due to reduction in profitability-related accruals, including contingent commission and employee underwriting bonus accruals.

Going forward, our current expectation is for the expense ratio to be in the 27 to 28% range. Premiums written in the quarter increased by 1/10ths of 1%, and for the year, premiums increased by 8/10ths of 1%.

2011 marks the first year since 2006 that companywide premiums were increased.

In December, we implemented a new automobile fast plan in California. The revenue-neutral plan improves our segmentation, and results in more refined pricing. Although still early, our new business sales have increased year-over-year in the mid-single digits, and our retention has not experienced significant deterioration.

It has now been over six months since we sold our first policy online in the state of Georgia. We are pleased by the technology we have developed that allows for the sale of new business online, and also includes our agency partners in the transaction. Our plans are to expand this capability to other states, and we expect to have another state selling online by the end of 2012.

With that brief background, we will now take questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Meyer Shields of Stifel Nicolaus.

Meyer Shields - Stifel Nicolaus

Thank you. Good morning, everyone.

Gabriel Tirador

Good morning.

Meyer Shields - Stifel Nicolaus

Gabe, can I ask you first to quantify what you see as California Auto Loss Cost Inflation right, now? I guess, the overall trend?

Gabriel Tirador

Ted, do you want to…

Ted Stalick

Hi, Meyer. We’re seeing some single-digit increases in frequency and general flat to small increases in severity.

Meyer Shields - Stifel Nicolaus

And I guess no conclusive updates from your communications with the departments about your rate increase or the filed rate increase?

Gabriel Tirador

No, there’s been some correspondence going back and forth. Robert, do you want to add anything to that?

Robert Houlihan

No, there’s really not much to add on our auto rate filing at this point. It’s still under review by the Department of Insurance.

Meyer Shields - Stifel Nicolaus

Okay, and then last question if I can, I appreciate the update with regard to the Georgia Direct Auto Sales. Can you talk about whether the loss experience is matching your expectations or how well that’s performing?

Gabriel Tirador

I’ll let Robert answer that question.

Robert Houlihan

Yes, because it’s just new business for six months, we really don’t have a credible amount of premium at this point, but we’ve been tracking our frequency and that’s been in line with our expectations.

Meyer Shields - Stifel Nicolaus

That’s great. Thank you very much.

Gabriel Tirador

Thank you.

Operator

Your next question comes from the line of Alison Jacobowitz of Bank of America/Merrill Lynch.

Alison Jacobowitz - Bank of America/Merrill Lynch

Hi. Thanks. Can you just first confirm in the quarter, was the adverse development, was it 7 million? I just want to make sure that I’m tracking the quarters correct. I know you gave the year-to-date number in the release. I didn’t see the quarter.

And then the second part of that is, can you just talk about what drove the adverse development in the quarter?

Gabriel Tirador

Sure. Yeah, we report the 18 million year to date, which is on 2010 and prior accident reserves. So if you want the amount for the quarter, you subtract last quarter’s year to date and get the 7 that you just referred to. So you’re correct there.

There’s really several moving parts in the development. Year to date, most of it’s coming from California, BI, increases in severity from the 2009 and 2010 accident years. Does that answer your question?

Alison Jacobowitz - Bank of America/Merrill Lynch

Yes. Thank you.

Gabriel Tirador

Okay.

Operator

Your next question comes from the line of Matt Warman of KBW.

Matt Warman – KBW

Gentlemen, good morning. Any other weather-related losses outside of the windstorms that weren’t mentioned? And then just in terms of the state mix, any pockets of strengths or weakness in terms of pricing outside of California?

Gabriel Tirador

On the weather side, there was nothing that we would consider significant or unusual other than the price mix in California.

Robert, do you want to talk about the pricing outside of California?

Robert Houlihan

We’ve been increasing rates to address profitability sort of across the boards. There aren’t really any pockets of profitability that need to be addressed further at this point.

Matt Warman – KBW

Okay, great. Thank you.

Operator

(Operator instructions). There are no further questions at this time. I apologize, we do have a question from the line of Cory Wren of [Inaudible] and Company.

Cory Wren

For 2012, and then also what is the competitive environment you’re dealing with right now? You know, you see all these ads from GEICO and Esurance and all these people and I was just wondering how you’re holding up on that. Thank you.

Gabriel Tirador

We missed the first part of your question, sir. Can you repeat the question?

Cory Wren

I'm sorry. What is your outlook for 2012 as far as – I see your premium volume is starting to go back up, I was wondering what your outlook is, especially in California. Thank you.

Gabriel Tirador

Well, as I mentioned in my prepared remarks, we were glad to see positive premium growth for the first year since 2006. However, it does continue to be a very competitive environment and the increased advertising span that you just mentioned, for example in GEICO, and the insurance base today as compared to five or ten years ago it pretty dramatic. Our goal is to – for us to increase the number of quotes being presented to our potential customers. We do believe we have competitive rates, but getting more looks helps. We also believe that we can improve our closing ratio, it can be improved upon with better segmentation. And the class plan that I find that we just implemented in December in California that I mentioned earlier is helping with new policy sales. It’s early on, we need to give it a few more months, but as I mentioned in my prepared remarks, new policy sales are up year over year in the mid-single digits.

So we’re looking forward to a good 2012. We don’t forecast premium growth, but we are excited about what we are seeing with respect to Reg Level 38 and we’re encouraged by it. We’re also encouraged by the fact that the retention has not deteriorated as much as we would have otherwise have expected when you make such a big change with respect to your class plan. So those two things have been a positive.

Cory Wren

Okay, thank you.

Gabriel Tirador

You’re welcome.

Operator

There are no further questions at this time. I apologize, we do have a question from the line of Meyer Shields of Stifel Nicolaus.

Meyer Shields – Stifel Nicolaus

Sorry, just one small question. I was wondering if you could explain why the written premium growth slowed a little bit in the fourth quarter versus third. Is that one state or is that more wide spread?

Gabriel Tirador

Well, there’s some seasonality with respect to – I think our biggest quarters, if I’m not mistaken, are the first and third quarters. And Ted, anything else?

Ted Stalick

Well, we stopped renewing the Florida homeowner’s book starting in September, so that’s affected the out-of-state.

Meyer Shields – Stifel Nicolaus

Okay, and that’s going to be over four quarters, right?

Ted Stalick

Yes. That will go through September of next year.

Meyer Shields – Stifel Nicolaus

Okay.

Gabriel Tirador

Yes, September of next year, we’ll be out of the Florida Homeowner’s business, Meyer.

Meyer Shields – Stifel Nicolaus

Okay. Great. Thanks very much.

Operator

There are no further questions at this time.

Gabriel Tirador

Okay, thank you for joining us this quarter. We look forward to speaking with you next quarter. Thank you.

Operator

This concludes today’s conference call and you may now disconnect.

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