MCY
#Thank you very much.
I would like to welcome everyone to Mercury's second quarter conference call.
I'm Gabe <UNK>, President and CEO.
In the room with me is Mr.
George Joseph, Chairman; and Robert Houlihan, Vice President and Chief Product Officer.
On the phone we have 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.
Our second quarter operating earnings were $0.35 per share compared to $0.64 per share in the second quarter of 2015.
The deterioration in operating earnings was primarily due to an increase in the combined ratio from 98.5% in the second quarter of 2015 to 101.7% in the second quarter of 2016.
Our results in the quarter were negatively impacted by $22 million of unfavorable reserve development on prior accident years, $11 million of catastrophe losses and $2 million in severance payments related to a previously announced reduction in force.
The majority of the unfavorable reserve development in the quarter came from our California bodily injury coverage.
The development occurred across multiple accident years with about $10 million relating to accident year 2015 and the remainder to older years.
Catastrophe losses in the quarter were primarily from severe storms in Texas.
Excluding the impact of unfavorable reserve development on prior accident years, catastrophe losses and severance payments, the combined ratio is 97.2% in the quarter.
In California, we recorded an increase in personal auto severity in the high single-digit range during the quarter as compared to the second quarter of 2015.
California private passenger auto frequency was up slightly in the quarter as compared to the second quarter of 2015.
This year for our personal auto business in California, we implemented a 5% rate increase in late March 2016 for Mercury Insurance Company and a 6.9% rate increase in June 2016 for California Automobile Insurance Company.
Personal auto premiums in Mercury Insurance Company represents about half of our company-wide premiums earned and California Automobile Insurance Company represents about 15% of our company-wide premiums earned.
Outside of California, our results were negatively impacted during the quarter by catastrophe losses primarily related to severe storms in Texas.
Increasing loss cost trends and higher loss ratios that come with an increase in new business also negatively impacted our results in the quarter.
To address possibility outside of California, we are increasing rates and tightening our underwriting.
Excluding the impact of catastrophe losses, the combined ratio outside of California was about 100.3% in the quarter compared to 99.8% in the second quarter of 2015.
The expense ratio in the quarter declined to 25.4% from 27.3% in the second quarter 2015.
The decrease in the expense ratio was primarily due to lower advertising expenses, lower average commission and a reduction in profitability-related accruals.
Net advertising expense in the quarter was $8.6 million compared to $12.1 million in the second quarter of 2015.
Premiums written grew 6.6% in the quarter primarily due to higher average premiums per policy.
Company-wide, private passenger auto new business applications submitted to the Company decreased 7.9% in the second quarter of 2016 as we focus on improving profitability in our private passenger auto line.
Company-wide, homeowners applications increased 1.4% in the second quarter 2016.
In California, we posted a premiums written growth of 7.8%.
Outside of California, premiums written grew 1.3% in the quarter.
With that brief background, we will now take questions.
We still haven't made a decision on Mercury Insurance Company.
We believe our rates, even after the second quarter, are in line.
But we're going to be following the trends very closely, and there is a possibility that we may be filing for a small rate increase in Mercury Insurance Company.
In Cal Auto we have filed for a 6.9% rate increase.
That's already been filed.
That's right.
And keep in mind that the 6.9% rate increase in Cal Auto has not earned in at all.
The MIC rate increase this quarter probably earned 25%-30%.
I expect about 75% earned in the third quarter and 100% in the fourth quarter for the MIT rate increase that went into effect in March.
That's correct.
No.
I don't recall what we said, but definitely it's high single digits now.
And if you take a look at the fast-track trends in California, as an example, for the 12-month period ending March, severity for bodily injury increased 7.2% in California for BI.
And pure premium, which is frequency and severity combined, increased 9.9%, almost 10%.
So we're definitely seeing it in the industry as well.
Property damage liability, severity up for the full-month period 6.3% for the industry, with pure premium up 8.1%.
On the collision side, you're seeing 3.8% severity increases in the industry, with pure premium up 7%.
So the industry is also seeing severity and some frequency increasing, so pure premium is going up quite a bit in California.
Well actually the $22 million ---+ we increased our 2015 tax, so that increased the development about $10 million for the 15-year, Company-wide.
About $3 million went to 2014 and about $4.5 million or so to 2013 and 2012.
And what we're seeing ---+ our data showing ---+ is that the speed of closing on our older liability claims has increased.
And we're also seeing some case reserve strengthening in our book of business.
But while some of this increase case reserve and [pain loss] development was undoubtedly due to the speed up in settlements, when we take a look at one of our models, which neutralizes these changes, it basically said that we were still short.
So we ended up increasing our ultimate estimate as a result.
Yes, they have.
They certainly have.
And that's why our 2016 accident year right now, when you take out ---+ hopefully there's no further development and you take out some of the noise, you're running at around 97% and change when you take that out.
But that's correct.
We have increased our picks for 2016 as well.
It has a domino effect.
When you increase an older accident year and you increase the next one, the next one, the next one, it has a pretty big impact in the quarter on the calendar year results.
I think that's our number one focus.
And I tell you, that's ---+ our combined ratio is going to improve.
And our target is 95% combined ratio, and the whole organization is focused on that right now.
And over the course of the next 12 to 24 months, you're going to see a big improvement.
You're welcome.
Well, I'd like to thank everyone for joining us this morning.
And we look forward to talking to you next quarter with better results.
Thank you very much.
