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.
<UNK> <UNK>, Chairman; Ted <UNK>, Senior Vice President, CFO; <UNK> <UNK>, 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.
I am pleased to report, our second quarter operating earnings of $0.68 per share improved significantly as compared to our second quarter 2016 operating earnings of $0.35 per share.
The improvement in operating earnings was primarily due to an improvement in the combined ratio from 101.7% in the second quarter of 2016 to 97.8% in the second quarter of 2017.
Our results in the quarter were negatively impacted by $10 million of catastrophe losses, primarily caused by severe Midwestern weather, including tornadoes in Oklahoma.
In addition, we recorded $10 million of unfavorable reserve development, which came primarily from our commercial lines of business.
This compares to second quarter of 2016, which had $11 million of catastrophe losses and $22 million of unfavorable reserve development.
Excluding the impact of catastrophe losses and the unfavorable reserve development, the combined ratio was 95.3% in the quarter.
The improvement in the combined ratio was primarily due to an improvement in our personal and commercial auto combined ratio.
Our second quarter auto combined ratio was 97.2% compared to 104.6% in the second quarter of 2016.
Partially offsetting the improvement in our auto combined ratio was a deterioration in our homeowners and California commercial property combined ratio.
Our homeowners combined ratio was 98.9% in the second quarter of 2017 compared to 91.4% in the second quarter of 2016.
In our California commercial property line of business, several large losses negatively impacted the results in that line.
We posted a combined ratio of 129.9% in the quarter compared to 84.9% in the second quarter of 2016.
Historically, our California commercial property line has produced favorable underwriting results.
The expense ratio was 24% in the second quarter compared to 25.4% in the second quarter of 2016.
The lower expense ratio was primarily due to a decrease in acquisition costs, a lower advertising spend and cost efficiency savings.
To help offset increasing loss trends, we have been increasing rates in most states.
In California, we implemented a 6.9% personal auto rate increase in California Automobile Insurance Company effective in May, and a 6.9% rate increase in our homeowners line is going into effect in August.
In addition, a 5% rate increase is pending approval with the Department of Insurance for Mercury 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 14% of our company-wide premiums earned.
California homeowners premiums represent about 11% of our company-wide premiums earned.
Premiums written grew 2% in the quarter, primarily due to higher average premiums per policy.
Company-wide, private passenger auto new business applications submitted to the company decreased approximately 9% in the quarter as we continue to focus on improving profitability in our private passenger auto line.
The 9% decline in new business application is an improvement over the 16% decline we experienced in the first quarter of 2017.
Company-wide, homeowners applications were relatively flat in the quarter.
With that brief background, we will now take questions.
Well, it's primarily a result of lower application.
It has an impact on our new business applications and it also has an impact on retention as well.
I will say that most of that is coming from outside of California.
I think, in the quarter, our California new business applications for private passenger auto were relatively flat but they were down quite a bit, over 30%, I believe, outside of California.
So when you combine it, the apps were down about 9% or so, but it's really just a function of less new business applications and renewal applications being written in total.
I think that the new business apps are going to continue to have an impact on the renewal business, for instance, in the next few quarters.
So I think, we mentioned at the end of last year that we were expecting relatively minor growth in 2017.
As far as 2018, we don't have any guidance for you on that yet.
Greg, it's Teddy here.
So the expense ratio was less favorable impact that Gabe mentioned earlier.
Q1 and Q3 are typically our higher advertising spend, and Q2 and Q4 are lower quarters for advertising spend.
So that lower advertising spend in Q2 definitely helped the expense ratio.
And then, we had slightly lower acquisition costs and some operating efficiencies that are also reflected in the 24%.
We do expect that third quarter expense ratio will take back up to be closer to the 25% range that it's been earlier.
It's down maybe a few million dollars year-over-year.
Well, the auto reserve liability has stabilized.
There's minimal development.
And if you remember, the numbers last year were quite large, I think, $80 million or something like that for the whole year.
There's quite of a bit of that, that happened in the first half of the year.
This year, it's pretty much isolated to some very large losses in our commercial property lines.
The development factors are much more stable when we take a look at historical factors.
Last year, they have jumped up quite a bit.
But now over the last several quarter, we've seen those development factors in our triangles to be much more stable.
Our target historically has been a 95% combined ratio.
That's everything.
Well, the commissions are adjusted periodically, and <UNK>, we've had a gradual downward trend in our average commission rates probably for the last several years.
And so that continues to get reflected in the results.
The second part of your question was around the ad spend.
Could you clarify the second part of your question.
Yes, let me see it.
While he's looking for that information, <UNK>, I will note that our commissions have been coming down over the last several years.
But in California, our average commission rate, ballpark, is around 16%, which is still above probably several points above industry average.
Outside of California, I would say it's closer to 13%, which is still a very competitive commission rate.
So although the commission rate has been helping us, it's been trending downward.
And California has been trending downward as a result of the fact that the profitability hasn't been there as well.
So our base rate commission has been trending downward.
It's still several points, as I mentioned earlier, above the competition.
And again, outside of California, we're at about 13%, and that's pretty close to where the competition is at.
And on the ad expense, the second quarter is more than a full point lower than the first quarter was on the expense ratio.
It is something that we have looked at and, in fact, have tested.
I've actually tested myself, I put the app on my phone and they say I'm not as good as a driver as I think I am.
But anyway, <UNK>, do you want to mention some of the stuff we're doing there.
Yes, we've certainly been monitoring the space.
We're looking at doing a test in commercial auto using a smartphone app for used space insurance.
On personal line side, it's an intriguing development, it helps lower the cost of UBI program relative to the older approach using a dongle and the on-board diagnostic port.
We still have some concerns in the independent agent channel, how this can be sold without just sort of cannibalizing business we would have otherwise sold at a higher rate.
And that's like we're intrigued by the technology and we're doing some testing in commercial auto.
But on personal lines, we're just continuing to monitor at this point.
And I will say, Greg, in our biggest market in California, you're not allowed to use these devices for how you drive.
The only way you can use these devices is for your annual miles, then you drive, and there are another means to get the annual mileage.
So in California, which is our biggest market.
.
We do have a program to verify mileage in California.
Yes, we have a verified mileage program in California.
So this would be really, right now, I think, something that we would do outside of California.
Thank you, Greg.
<UNK>, we don't forecast or we don't give any guidance, but that is definitely our goal.
Our goal is to hit a 95% combined ratio, although we don't provide guidance as to when we're going to think ---+ when we think we're going to hit that, but that is our goal.
Yes, that's ---+ we ---+ a lot of it depends on loss trends and what happens with loss trends, and we're trying to stay above ---+ on track with the loss trends, Wes.
But ---+ which is why we keep making lines for trend, right, to keep it with trend.
And if we're successful there and we keep ---+ there's a lot of things going on in the company right now, I will say this, Wes, to try and improve every aspect of the business, whether it's on the expense side or on the indemnity side, on the claims, underwriting, market segmentation, agent relationships.
Every facet of the business right now is focused on trying to improve the profitability of this company.
That is correct.
That's our objective.
Yes.
Okay.
Thank you for joining us this quarter.
We look forward to talking again next quarter.
Thank you very much, everyone.
