MCY
#Thank you very much.
I'd 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; <UNK> <UNK>, Senior Vice President and CFO; Robert Houlihan, 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 quarter.
Our second quarter operating earnings were $0.64 per share, compared to $0.83 per share in the second quarter of 2014.
The deterioration in operating earnings was primarily due to higher catastrophe losses, increased advertising expenses, the result of the recently acquired Workmen's Auto, and net favorable reserve development as compared to prior year.
Excluding the impact of catastrophes and favorable reserve development, the combined ratio was 97.9% in the second quarter, compared to 96.3% in the second quarter of 2014.
Workmen's Auto added [0.2] points to the second-quarter combined ratio.
Premiums written grew 5% in the quarter, primarily due to higher average premiums per policy, the acquisition of Workmen's Auto, and an increase in new business policy sales.
Workmen's Auto premiums written of $5.3 million added 0.8 points to the quarter's premium growth.
In the second quarter of 2015, California private passenger auto frequency and severity increased in the low single digits.
On a sequential basis, frequency and severity was relatively flat from the first quarter.
Higher average premiums from rate increases taken in 2014 partially offset the year-over-year increase in the frequency and severity in the quarter.
To further address the increase in loss cost, a 6.4% rate increase was implemented in late May for Mercury Insurance Company, representing about half of our Company-wide premiums written.
In addition, a 6.9% rate increase for California Automobile Insurance Company, representing about 15% of our Company-wide premiums, was implemented on August 2.
Results outside of California were negatively impacted by $7 million of catastrophe losses, primarily in Texas and Oklahoma, and our private passenger auto business in New York.
Excluding catastrophe losses, the combined ratio was about 100% outside of California.
In New York, we continue to revalue reserves as the impact of changes in claims procedures, which includes the speeding up of claims settlement and case reserving, have added an element of uncertainty to the estimates.
In New York we implemented a 3% rate increase in January of 2015 and a 9% rate increase in July of 2015.
Our expense ratio in quarter increased to 27.3% from 26.8% in the second quarter of 2014.
The increase in expense ratio was primarily due to higher advertising expenses, partially offset by lower average commissions.
Net advertising expense in the quarter was $12.1 million, compared to $5.5 million in the second quarter of 2014.
Our 2015 advertising budget is heavily weighted toward the first half spend.
The advertising spend will be lower for the remaining two quarters of 2015.
Company-wide, private passenger auto and new business applications submitted to the Company increased 11% in the second quarter 2015, and homeowners new business submissions were up 32%.
In California, we posted premiums written growth of 5.6%.
Outside of California and excluding our mechanical break down product, premiums written increased 5.5% in the quarter.
This compares to negative growth of 3.9% and 7.6% for the years 2014 and 2013, respectively.
With that brief background, we will now take questions.
Yes, <UNK>.
No, there's nothing unique.
We get a tax benefit on our realized losses on our investment portfolio, which is primarily due to mark-to-market adjustments as we flow all our investment changes through the P&L.
And you can know from the P&L, we had an investment loss for the quarter.
So that would have positively impacted the [bigger] tax accruals.
No.
I would say about 2.5 times.
Yes.
Well the dividend pay out ratio [probably] this quarter was what, close to about 100% or little ---+ just a little bit under 100%.
There's a lot of factors that go into the dividend pay-out ratio.
We take a look at our earnings, our prospects, and it's something that the Board decides every quarter.
We feel that, today, we have a pretty good capital position, where in years that we haven't really earned the dividend, we've been able to pay out a dividend.
So it's something for the Board to evaluate every quarter.
But at this point, with the amount of capital position that we have, we feel pretty comfortable where we're at.
Now to your question, if we get up to 2.5 times leverage and we are using more of our capital to write more business, I think your question is what happens to the dividend at that point.
We obviously don't expect, though, to have earnings at this level for long periods of time.
A combined ratio was 98.5% in this quarter.
We don't expect that 98.5% to continue for a long period of time.
So we do anticipate that our margins are going to improve.
I'll let Chris talk, but as we mark our securities to market, they're sensitive to changes in market interest rates.
Because as you know, most of our portfolio is primarily fixed income, and we flow those changes through the P&L.
So we get the negatives when interest rates go up, but the positive when interest rates go back down as far as our P&L adjustment.
The entire portfolio is trading.
When the new pronouncement came out, I think it was [FAS-159] a few years ago, we evaluated the accounting.
And we felt that the true measure of earnings is really our core operating earnings.
But we had found that when you were having to write down securities due to temporary market gyrations, you weren't able to get the benefit of when the market bounced back.
And so we just felt like it was better for the Company to flow all the changes through the P&L and mark everything to market as a trading portfolio.
And there is always discussion with the auditors every quarter with respect to what was permanently impaired, what was other than temporary.
And the fact of the matter is that whether you run it through your balance sheet or your income statement, the numbers are there.
So to us, it's simpler, and if you back out the realized gains and losses, you get to your operating earnings.
Well in California, we have a very large book.
So the new business probably represents about 10% of our premiums written.
And you have 90% coming in from renewals.
So new business, although it has an impact, it's obviously not as big an impact as renewal business.
And our California private passenger auto new business sales were up something like 9%.
And they were up 11% Company-wide, so we are seeing some nice new business sales growth, which should help our renewals in future years.
Now in 2014, my recollection is that in 2014, our new business sales were down quite a bit over 2013, which had an impact this year on renewals.
So we feel relatively comfortable in our Mercury Insurance Company where we just implemented the 6.4% rate increase.
Our retention did go down slightly, but it actually went down less than we had anticipated.
So that was good news so far.
It has only been one month into that rate increase, but we were anticipating a larger reduction in retention than we have seen so far.
Most of the advertising, honestly, is coming in in California.
Now the TV advertising it's a national cable ad, and it's national.
In addition to that, we get leads from lead aggregators.
We buy leads.
We do online advertising as well.
So it encompasses a whole lot of avenues for us to try to get new business.
And outside of California our PPA account new business was up something like 15%.
So it's having a positive impact.
And when we take a look at how effective our advertising is overall, we take a look at the lifetime value of the premium that we expect from all these new business sales from the advertising.
And we deduct the cost of the advertising, obviously.
We deduct the cost of the commissions, which are lower, much lower than our stated commissions because we pay much less commission on this type of business that we get through our advertising.
We deduct lead fees that we get from our agents.
So we take a look at the lifetime value of that premium, deducting all the expenses, including advertising.
And right now we're not recovering quite all the dollars.
We're recovering pretty much most of the dollars.
But I will say when you add back the anticipated underwriting income from the sales generator or the premium sales, we're definitely in the black.
So overall, we need to improve.
But overall, I would say it's been a decent investment in the advertising.
Sure.
Okay.
Well, I'd like to thank everyone for joining us this quarter, and we'll talk again next quarter.
