MCY
#Thank you very much.
I would like to welcome everyone to Mercury's fourth-quarter conference call.
I'm Gabe <UNK>, President and CEO.
In the room with me is <UNK> <UNK>, Senior Vice President and CFO; <UNK> <UNK>, Vice President and Chief Investment Officer, and Robert Houlihan, Vice President and Chief Product Officer.
Before we take questions, we will make a few comments regarding the quarter.
Our fourth-quarter operating earnings were $0.58 per share compared to $0.52 per share in the fourth-quarter of 2015.
The improvement in operating earnings was primarily due to an improvement in the combined ratio from 100.2% in the fourth-quarter of 2015 to 99.2% in the fourth-quarter of 2016.
In California, we recorded an increase in personal auto severity in the mid single-digit range for the 2016 accident year and an increase in frequency in the low single-digits.
To help offset the increase in loss trends, we have been increasing rates in California.
Last year in 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.
In addition, a 6.9% rate increase is pending approval with the Department of Insurance for California Automobile Insurance Company.
Personal auto premiums in Mercury Insurance Company represents about half of our Companywide premiums earned and California Automobile Insurance Company represents about 15% of our Companywide premiums earned.
We have observed a significant number of our competitors also file for rate increases in California.
Outside of California, increasing loss cost trends have negatively impacted our results.
To address profitability outside of California, we have been increasing rates and tightening our underwriting.
The expense ratio in the quarter declined to 24.9% from 25.9% in the fourth quarter of 2015.
The decrease in the expense ratio was primarily due to lower profitability related accruals.
Net advertising expense in the quarter was $5.5 million compared to $5 million in the fourth quarter of 2015.
Premiums written grew 2.9% in the quarter, primarily due to higher average premiums for policy.
Companywide, [five] passenger auto new business applications submitted to the Company decreased approximately 8% in the fourth-quarter of 2016 as we focused on improving profitability in our five passenger auto line.
Companywide, homeowners applications increased about 7% in the fourth-quarter of 2016.
In California, we posted premiums-written growth of 5.4%.
Outside of California, premiums-written decreased by 8.1% in the quarter.
With that brief background, we will now take questions.
I think that we're getting close to filing that, I would say within the next probably 30 to 60 days we plan on making that filing and I anticipate that the class plan filing will come with about low single-digit rate increase.
Anywhere from ---+ up to 5%, let's say, is what we're expecting right now.
I think that's going to vary by company depending on how early they are in the cycle with respect to getting their rate approvals.
We started increasing rates, both inside and outside of California, quite some time ago so we feel that from a rate perspective 2017 is going to be much better year for us, depending on what the loss trends continue to do, so I think it's going to vary by company.
There's some companies that maybe were behind a little bit and may take a little longer for the rate to catch up to the loss cost trends.
So I do think it's going to be company specific, depending on where they're at in the cycle but there's no question that there's pressure, that severity trends are definitely up, really in bodily injury, severity, material damage, severity is up as well.
So there's no question that there's increased loss-cost pressure.
If that stabilizes though, I think that the rate action we've taken is really going to help profitability in 2017.
It's pretty comparable mid ---+ high mid single-digits on severity and low single-digits on frequency.
We just saw the latest Fast Track in California, pure premiums running close to 10%, frequency about 5%, severity about 5%, so I think we're a little under Fast Track industry, but it's still mid to upper single-digits for us.
And as for the 12-month period, I think---+
Annualized.
Ending in September because they are a quarter behind.
Yes, <UNK>.
We mark-to-market the entire portfolio, so we did ---+ what most of that is just market changes in the quarter, particularly with fixed income having sold off.
But there is a small ---+ of that we took about $12 million in losses that we realized against capital gains from prior periods, so there's that in there as well.
And that was part of tax planning, utilizing expiring capital gains.
Our portfolio is classified as trading, so everything that flows through the income statement has a realized gain or loss, changes in market value, as well.
Dating back to 2008.
It's generally for the year ---+ it's generally California and Florida personal auto and commercial auto and about half of it is from the 2015 accident year and the rest is kind of spread across the proceeding couple ---+ two/three years.
Yes, so we've taken substantial rate beginning in 2015 and into 2016, so our belief is that the rates that we're earning in at 2016 have out paced or at least equaled the loss trends.
I want to say the accident year combined ratio is at a 98% and we are, for 2016, it varies by state, but overall we are anticipating and have recorded higher severity.
In 2016 on an accident-year basis versus 2015, there's no question about that.
We really evaluate it on a year-to-date basis, so we prefer to comment on the year-to-date numbers more the intra-quarter numbers, as far as development goes.
Correct.
No, no there was not.
We think that the premiums to surplus in 2017 will be relatively flat to what it was depending on what happens with our dividends and ---+
We expect our operating earnings in 2017 to be quite a bit better than 2016 and we don't really anticipate 2017 to have a lot of top line growth.
So if those two things are achieved, I don't think you're going to see much movement in the premiums-to-surplus ratio in 2017.
That is certainly the objective.
Yes.
Well, I think El Nino has come a year late, in my opinion.
The forecasters have said that El Nino was coming last year and, in my opinion, they got it a year late because we've had a significant amount of rain.
It took me two and a half hours to get into the office this morning because of the rain.
So there's definitely a lot of rain, and it's going to impact our homeowners results in the first quarter as an example.
We received a lot of rain-related claims in the first quarter.
As far as the fourth quarter goes, <UNK>, do you have any comments on that.
It was a typical fourth quarter, a little bit elevated frequency, but pretty typical.
Well, one, yes, it is and I think 2017.
I don't think we're going to get there probably all the way down there in 2017, but I certainly would expect our objective to be there in 2018.
As far as the bonus accrual for 2017, we expect to pay a bonus.
What that will be is hard to say at this point, but it was zero ---+ bonus accrual was zero for 2016.
In 2017, the anticipation is that there will be some bonus accrual in 2017.
What was the second part of the question.
Advertising is going to be similar, about $40 million or so, 2016 and 2017, we anticipate the advertising spend to be similar.
I think it varies obviously by state and California and we have rain-related events and we follow ISO when they name a cat we follow that definition of a cat and historically ---+ it varies about over the last five years something in the neighborhood of about $24 million, $23 million, something in that neighborhood in cat losses.
This last year, in 2017, was a little higher.
I think it was $27 million in 2016, so we obviously price in for that amount of cat when we make our estimates.
But in California, you're looking at primarily rain-related events.
Outside of California, you have wind events in homeowners that are primarily your biggest exposure in Texas and in the northeast states you have hurricane exposure.
You have fire following earthquake as an exposure here in California.
Wildfires as an exposure here in California, so it does vary a little bit by state.
I don't know, does that answer your question.
Okay.
Well, I'd like to thank everyone for joining us this morning and we look forward to talking to you next quarter.
Thank you very much.
