Apr 30, 2012
Executives
Gabriel Tirador – President and CEO George Joseph – Chairman Ted Stalick – Vice President and CFO Chris Graves – Vice President and Chief Investment Officer Robert Houlihan – Vice President and Chief Product Officer
Analysts
Alison Jacobowitz – Bank of America Vincent D'Agostino – Stifel Nicolaus Frank Lee – KBW
Operator
Good afternoon. My name is Kimberly, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Mercury General quarterly conference call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. (Operating Instructions) This conference call may contain comments and forward-looking statements based on current plans, expectations, events, and financial and industry trends which may affect Mercury General's future operating results and financial position.
Such statements involve risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed here today. Thank you.
I would now like to turn the conference over to Mr. Gabriel Tirador.
Please go ahead.
Gabriel Tirador
Thank you very much. I would like to welcome everyone to Mercury's first quarter conference call.
I am Gabe Tirador, President and CEO. In the room with me is Mr.
George Joseph, Chairman; Ted Stalick, Vice President and CFO; Chris Graves, 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 first quarter 2012 underwriting results improved as compared to the first quarter of 2011. Our combined ratio was 97.6% in the first quarter of 2012, compared to 98.2% in the first quarter of 2011.
In the first quarter of 2012, we recorded $6 million of unfavorable reserve development compared to $1 million in the first quarter of 2011. Excluding the impact of the reserve development in both years, the combined ratio was 96.7% in the first quarter of 2012 compared to 98% in the first quarter of 2011.
The combined ratio was aided during the quarter by our continued focus in reducing expenses. Consequently, our expense ratio declined to 26.8% from 28.3% in the first quarter of 2011.
Premiums written were essentially flat this quarter. However, there were some moving parts to the written premiums.
Primarily resulting from the California personal auto revenue neutral class plan that we implemented in December of 2011. The plan improved our risk segmentation, but also caused dislocation to some of our existing customers.
The refined pricing improved our competitive position for new business and our California new business private passenger auto sales increased year-over-year in the quarter by 16%. The rate dislocation caused our renewal rates to decrease, but at a rate lower that we had expected.
We are pleased to report that our operations outside of California posted a combine ratio under 100% in the quarter. We have made great strides in our operation outside of California, but we are not where we want to be and the environment in some states such as Florida are challenging.
We continue to aggressively make changes to our rating plans to improve our segmentation and overall pricing adequacy. After tax investment income decline by 10% to $28 million in the quarter.
As we mentioned in our annual report going forward, it will become increasingly difficult to maintain the current after tax yields as bonds with higher coupons mature or are called and the reinvestment of those proceeds will most likely be made at lower after tax yields. The after tax yield in the quarter was 3.8% compared to 4.1% in the first quarter of 2011.
With that brief background, we will now take questions.
Operator
(Operator Instructions) Your first question comes from the line of Alison Jacobowitz of Bank of America.
Alison Jacobowitz – Bank of America
Hi. Thanks.
So I guess couple of questions. It looks like the tax rate on net investment income has been drifting up, should we expect this to continue?
And then also on the expense ratio I think last quarter you suggested that a normalized expense ratio might be a little bit higher than 27%. I think it was the 28% range, this quarter came in a little lower, would you make an adjustment to that statement, do you still think the expense ratio might tick up a little bit?
George Joseph
Hi, Allison. The tax rate is slightly high on investments but I don't expect that to continue to trend up, come back down even, as far as the expense ratio going forward, we're still looking at around 27% as where we're expecting it to run.
Alison Jacobowitz – Bank of America
Thank you.
Operator
(Operator Instructions) We do have a follow-up question from the line of Alison Jacobowitz with Bank of America.
Alison Jacobowitz – Bank of America
Thanks, again. So on the combined ratio if you're now making money outside of California overall, but the overall combined ratio, I don't think it's really changed much over the past several years.
Does it mean that the California Combined ratio is deteriorating or am I missing something in the math there?
Gabriel Tirador
Well we have had some pressure in our California combined ratio it's still below 100% and we do have some rate increases that are pending. We both -- we have both the homeowner rates filing that we made a few years ago that just -- we finished up with the hearing there.
And expect the result from the judges over the next several months. And we have a California private passenger auto rate that we filed that we are in discussions with the department about and we have a meeting scheduled with them sometime in May.
And that's we're about [plus six]. So we do have some rates that we plan on implementing sometime in the future in California to help with the combined ratio in California.
Although, I will say that the combined ratio in California is still combined, but well below 100.
Alison Jacobowitz – Bank of America
And then just if there were any cat losses in the quarter, could you tell us any -- can you talk about frequency into vary trends maybe -- in general if any states or more problems than others. Someone brought up Florida again as being an issue, just talk about what you're seeing there?
George Joseph
You know, Florida continues to be an issue we're seeing the pressure on our loss cost, we have been taking quite a bit of rate increase there and generally though we're seeing slight increases in frequent [C-lo] single digits, as well as in severity. As far as cats go it was pretty quite quarter for Mercury at least, as far cats went.
Alison Jacobowitz – Bank of America
Thank you.
Operator
Your next question comes from the line of Vincent D'Agostino of Stifel Nicolaus.
Vincent D'Agostino – Stifel Nicolaus
Hi. Good morning.
Thank you. I was curious if you might be able to comment on the accident years that the adverse development in the first quarter of '12 happen to come from?
George Joseph
Primarily 2011 and 2010, and that was mostly in California auto. We did have a little bit of a positive development from some states outside of California offsetting that.
Vincent D'Agostino – Stifel Nicolaus
Got it, thank you. And then I guess just looking at your pending rate increase in California auto, and then just taking a look at some of the other insurers, it seems like the pending time that it takes to get a request through is somewhere in the neighborhood of maybe five to six and maybe even more months than that.
And I'm just curious if in your opinion, if there's been any change in the current administration in the California Department of Insurance compared to previous ones. Or if, you know say half a year is what it's always taking to get a rate request through it.
It seems like I guess maybe I'm wrong here but it seems like that's a long time to be able to get an approval when we're looking at you know, that being one plus policy period?
Gabriel Tirador
Well, it's longer than we would like, I'll put it that way and we're going to continue to work with the department and trying to get them implemented as quickly as possible. It is running longer than we would like, at this point.
Vincent D'Agostino – Stifel Nicolaus
Okay. Great.
Thank you so much.
Gabriel Tirador
Okay.
Operator
(Operator Instructions) Your next question comes from the line of Frank Lee of KBW.
Frank Lee – KBW
Hi guys. Did you guys experience any current year favorable development in the quarter, or any adverse?
George Joseph
Well, it was the first quarter so there wouldn't be any.
Frank Lee – KBW
In the current year, nothing.
George Joseph
Correct.
Frank Lee – KBW
I noticed also the debt came down a little bit, past two quarters, for the interest rate going forward, this is a good run rate we should be looking at?
Ted Stalick
Right. We refinanced all of our debt last fall, and our $120 million credit facility with one of the financial institutions is now at a LIBOR plus 40 basis point floating rate.
And that will vary based on what LIBOR does but it's significantly lower than it was last year.
Frank Lee – KBW
So we can say, pretty much is spotted LIBOR and - a pretty good run rate then.
Ted Stalick
Correct.
Frank Lee – KBW
Okay. Fine.
Okay. That's all I have.
Thank you.
Operator
And at this time there are no further questions.
Gabriel Tirador
Okay. Well, I'd like to thank everyone for joining us this quarter, and we look forward to talking to you again in the second quarter.
Thank you very much.
Operator
Ladies and gentlemen, this concludes today's conference. You may now disconnect.