MCY
#Thank you very much.
I would like to welcome everyone to Mercury's first quarter conference call.
I'm Gabe <UNK>, President and CEO.
In the room with me is Mr.
George Joseph, Chairman; Ted <UNK>, Senior Vice President and CFO; <UNK> <UNK>, Vice President and Chief Product Officer; and Chris <UNK>, Vice President and Chief Investment Officer.
Before we take questions, we will make a few comments regarding the quarter.
Our first quarter operating earnings were $0.20 per share compared to $0.13 per share in the first quarter of 2016.
The improvement in operating earnings was primarily due to an improvement in the combined ratio from 103.9% in the first quarter of 2016 to 103.1% in the first quarter of 2017.
Our results in the quarter were negatively impacted by $30 million of catastrophe losses and $4 million of unfavorable reserve development, the majority of which was attributable to higher-than-estimated development of property losses from storms in December 2016.
This compares to the first quarter of 2016, which had $8 million of catastrophe losses and $40 million of adverse reserve development.
Rainstorms in California accounted for $23 million of the $30 million of catastrophe losses in the quarter.
Storms in Georgia and Texas made up the majority of the remainder of the catastrophe losses in the quarter.
Excluding the impact of catastrophe losses and unfavorable reserve development, the combined ratio was 98.8% in the quarter.
Our homeowners results were significantly impacted by the record rainfall in California during the quarter.
Our calendar year homeowners combined ratio was 129.6% in the quarter compared to 99.8% in the first quarter of 2016.
Our calendar year auto combined ratio was 98.5% in the quarter compared to 105% in the first quarter of 2016.
To help offset increasing loss trends, we have been increasing rates.
In California, we received approval for 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 effective 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 1.7% 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 16% in the quarter as we focused on improving profitability in our private passenger auto line.
Company-wide homeowners applications increased about 2% in the quarter.
With that brief background, we will now take questions.
Ted, do you want to handle that.
Yes, the overall frequency was obviously elevated due to the cat losses, but when you strip out the cat losses, the trends vary a lot by state.
We try to sort of focus on California because that's our largest state.
So California personal auto, frequency's up slightly in the quarter, and we're seeing severity increases in the mid- to upper single digits, so pure premium kind of the mid-upper single digits.
I think the latest Fast Track had annual pure premium at about 10% for California.
And that's reasonably comparable to the trend we've been seeing for the last few quarters.
Yes, they've been getting many of them, and from what we can tell, many are getting increases, including us, so the department had been approving rate increases.
We've been seeing that in the marketplace.
And I will note that in this quarter, our private passenger auto results actually were ---+ in California, we booked a 97.2% combined ratio in the quarter with pretty heavy weather, as Ted was mentioning.
So we feel that with a 6.9% rate increase that we got coming here in Cal Auto, that's going to continue to improve the results we have of 5% pending that will probably come later in the year, and we have a 6.9% in our homeowners book that we got approved that is going to go into effect in August.
So obviously, the heavy rains in California definitely had a very big impact on our homeowners line this quarter.
Yes, outside of California is definitely having a much bigger impact than California.
If you take a look at our new business volume this quarter, our app counts for California, they were down 3% ---+ 3.4%, but outside of California, they were down like 38%.
And that is a result of us just taking aggressive action in some of these states outside of California to improve the combined ratio, which we are seeing quite a bit of an improvement in the combined ratio in some of these states outside of California as a result.
But it's obviously having an impact on our top line.
In our case, and I think we said at the end of last quarter, at the end of the fourth quarter, we basically told everyone that we thought that the growth was going to be relatively flat, we felt, in 2017.
So we refinanced all of our short-term bank loans, and we closed that transaction at the early part of March with a 10-year senior debt offering.
And the short-term loans were a spread over LIBOR, so we're being priced off of short-term rates.
We were in the process of renegotiating that debt.
Those rates were going to go up due to higher spreads required by the banks as well as LIBOR rates have been going up as well.
So we thought that we would lock in some long-term rates over a 10-year period with these senior notes.
And because of that, you are going to see higher interest expense.
It's fairly easy to calculate now.
It's 4.4% times $375 million of outstanding debt.
Yes, Greg.
Last year was one of those periods where there was ---+ we were at kind of at a pivot point.
And where rates started the year, it certainly was at a rate or at a level that would be accretive, but we've ---+ rates have come back down.
So I'm kind of tempering my excitement for the year, but I think that we'll definitely grow income over last year.
But I do have an internal goal, and I think it may be challenging, but I think we may still get there.
So I'm cautiously optimistic.
I mean, I think the after-tax yield this quarter was the same, if I ---+ 3.1, is that right, Ted.
So the after-tax yield has stabilized, and it had been declining for, as you know, Greg, for some time now.
But this latest quarter compared to the quarter in 2016, the average annual yield on investments after income tax was steady at 3.1.
We're hopeful that that stays at that level or possibly higher, depending on what interest rates do.
We do expect, at some point, to ---+ for interest rates to rise.
They backed up here a while ago, but now they've come back down a little bit, so we'll have to wait and see what happens with the interest rates.
Do you want to talk about that, <UNK>.
Yes.
This is <UNK> <UNK>.
It varies from state to state.
I think we're ---+ we've taken rate maybe in advance of the market in a number of these states, so we've seen our conversion rate generally lower, but we're again cautiously optimistic as the market catches up, and we're seeing other carriers taking rate action that will move back to more normal levels.
Quote volume, I think, has been fairly steady, fairly even.
I don't think we've seen a big uptick in shopping at this point.
Well, we just got it approved.
Yes, and what I was going to say is like what we did in MIC is we just got MIC approved not too long ago.
And right after we got that approved, we ---+ a few months later, we filed for a 5%.
So we're going to evaluate basically this quarter.
We do quarterly indications, and based on that quarterly indication, we'll make an evaluation.
But it ---+ let me just put it this way, it would not surprise me if we filed, within the next 90 days, another rate increase in Cal Auto.
Well, I think if loss costs don't continue to go up at these high rates that we've seen, absolutely.
I mean, as I mentioned earlier, our combined ratio in California was a 97% ---+ 97.2% this quarter with a lot of weather.
So ---+ and we still have the 6.9% that's going to be coming into effect for Cal Auto, and we got the MIC one coming on the heels of that hopefully later this year.
So if trend continues at 10% a year, then we're going to ---+ 8% to 10% a year, then we're just going to hold steady, right.
But at some point, we don't think that trend's going to continue at these elevated levels, and you'll see the combined ratio go down even further.
We'd like to thank everyone for joining us this quarter.
We look forward to speaking with you again next quarter.
Thank you very much.
