Oct 30, 2017
Executives
Gabriel Tirador - President & CEO Ted Stalick - Senior Vice President and CFO Chris Graves - VP and CIO
Analysts
Greg Peters - Raymond James Alison Jacobowitz - Bank of America
Operator
Good morning, afternoon. My name is Amie, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Mercury General Third Quarter 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. [Operator 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.
I would now like to turn the call over to Mr. Gabriel Tirador.
Sir, please go ahead.
Gabriel Tirador
Thank you very much. I would like to welcome everyone to Mercury’s third quarter conference call.
I’m Gabe Tirador, President and CEO. In the room with me is, Mr.
George Joseph, Chairman; Ted Stalick, 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 third quarter operating earnings were $0.60 per share compared to $0.67 per share in the third quarter of 2016. The deterioration in operating earnings was primarily due for an increase in the combined ratio from 90.1% in the third quarter of 2016 to 99.3% in the third quarter of 2017.
Our results in the quarter were negatively impacted by $19 million of catastrophe losses, primarily caused by Hurricane Harvey and Irma. In addition, we recorded $4 million of unfavorable reserve development.
This compares to the third quarter 2016, which had $4 million of catastrophe losses and $7 million of unfavorable reserve development. Excluding the impact of catastrophe losses and unfavorable reserve development, the combined ratio was 96.5% in the quarter compared to 96.7% in the third quarter of 2016.
The expense ratio was 25% in the third quarter compared to 25.2% in the third quarter of 2016. The lower expense ratio was primarily due to a decrease in acquisition cost and cost efficiency savings offset by higher advertising spend.
Net advertising expense in the quarter was $12 million compared to $10 million in the third quarter of 2016. 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 in August. In addition, a 5% rate increase for Mercury Insurance Company and a 6.9% rate increase for California Automobile Company are pending approval with the Department of Insurance.
Personal auto premiums and Mercury Insurance Company represent about half of our companywide premiums earned and California Automobile Insurance represents about 14% of our companywide premiums earned. California homeowner premiums represent about 12% of our companywide premiums earned.
Premiums rendered 2.4% in the quarter, primarily due to higher average premiums for policy. Companywide private passenger auto new business application submitted to the company increased approximately 1% in the quarter.
Companywide homeowners' applications increased 5.5% in the quarter. Lastly, we generally expect our accident quarter combined ratio for the fourth excluding catastrophes to be higher than the rest of the year due to increased loss frequency and higher severities caused by seasonal driving and weather.
That said, it is hard to predict with certainty whether the underlying combined ratio will be higher as there are many factors currently unknown or beyond our control. With that brief background, we will now take questions.
Operator
[Operator Instructions]. Your first question comes from the line of Greg Peters with Raymond James.
Greg your line is open.
Greg Peters
Good morning. This is Greg Peters not Peppers.
Thank you for the call and for taking the questions. Gabe, I was wondering if you could circle back and provide more color around new business trends of both inside California and outside California.
I think last quarter you talked about some headwinds outside of the state of California weighing down on the consolidated results. I am curious if you could provide an update?
Gabriel Tirador
Yeah, I think when you take a look at outside of California, our new business private passenger auto [also] are down quite bit. We have done about 19% quarter-over-quarter and that’s the result of us who is taking action on rates Greg and trying to improve the profitability.
If you take a look at our results outside of California excluding cash and excluding some positive developments, we actually had some positive development outside of California, the combined ratio was under 100. It was I think in the high 90s, 97% or 98% or so outside of California.
But honestly, we paid a lot of bit of a price, we are paying a little bit of price with respect to growth, the outcomes are down 19%. However, in California, I pay attention our auto assets grew up about 7.5% in California for private passenger auto.
So combined total assets were up 1% which is what I said in my prepared remarks.
Q – Greg Peters
And what was the California only combined ratio, you gave us what it was running for outside California, what was the California fees?
Unidentified Company Representative
It's for personal auto or for everything?
Q – Greg Peters
Well I think Gabe just said 97%, 98% for outside California, in auto only.
Gabriel Tirador
California for private passenger auto, we booked about 96.5% for private passenger auto and about 98.5% for homeowners.
Q – Greg Peters
Okay, thanks for the color. With the 19% outside, I guess what I am -- I’ll just cut to the chase.
What I’m trying to get to is trying to sort of figure out when the drag from outside of California will dwindle down and possibly stabilize and respectively grow. Is there an inflection point, is it middle next year, is it end of next year, if you have any updated perspective that would be helpful?
Gabriel Tirador
Yeah, there are something that we think have leveled out, other states I think have a little bit more to go, assuming that the add count stay at this current level. So various assumptions with respect to what’s happening in the market or other people taking the rate as well, we’ve been pretty aggressive but there is a lot of rate activity going on right now as well with the competitors.
So, there is a lot of factors but I would say that there’s still ways to go for some stage and other stage, I believe its reached a plateau.
Greg Peters
Okay. And then just on the California piece for the auto business.
Would you characterize the -- I am trying to sort of read into your fourth quarter commentary about a deterioration in the underline, and I guess with all the rate activity that you’ve applied in California, I would expect -- I would have expected that the trend would be positive or a little bit positive growing but I’m not sure we have it yet or may be some color on that would be helpful?
Gabriel Tirador
Well the only thing we want to comment on is that generally speaking the fourth quarter has higher frequency and severity here in California for -- and if you take -- go back many, many years, our fourth quarter here in California primarily has been higher than the rest of the quarters from frequency and severity standpoint. So that’s really the only thing that we’re trying to say that generally speaking there’s some seasonality and we feel that the fourth quarter here in California, and California being such a large market for us we just thought it was prudent to let folks know that generally speaking right after Thanksgiving you got the holidays and typically you have some weather that contributes to the higher fourth quarter frequency and severity.
Sometimes it may not occur, we don’t know, that are things that we just can’t foresee. But that’s why I made that comment.
Greg Peters
Okay, that’s fair. Two other questions and then I will re-queue.
First, I appreciate your color around the wild fire potential losses. And I am just curious if you have a perspective on what kind of changes might happen to your reinsurance cost next year considering that it looks like there’s a pretty big gross loss for the company this year?
Ted Stalick
Well the reinsurers are -- this is Ted, the reinsurers in general are assuming a lot of losses from the storms, the hurricanes in the south east and then the fire. So, pricing in general may go up depending on the capacity of reinsurers.
We are not sure that we -- we think that take a long-term view and we may see some increases next renewal but at this point we are not really sure.
Gabriel Tirador
It’s really too early to tell right now Greg.
Greg Peters
When is the renewal period again, I am sorry I forgot that one.
Ted Stalick
July 1 to June 30.
Greg Peters
Okay, perfect. Thank you.
And the last question and Chris, I -- it will be remised if I didn’t ask you a question, I noticed the after-tax yield is down year-over-year and down in the third quarter relative to year-to-date results. Is there something going on there that’s driving a lower yield or on an after-tax basis or is it just -- well I will let you answer.
Chris Graves
Hi Greg. Yes, it’s -- [so let me brief] 0:11:35.2 where are they, they have come down a lot from year end.
Actually, allowed our cash to build up some, much less activity, on fixed income investing through the third quarter. So, there is some dilution there.
But this recent reversal in the tenure treasury and rates in general is making me a little more optimistic. We are putting money back to use.
Spreads has also been very tight and that's been the primary problem really at least the way I look at it. So, with this recent reversal in rates, I'm optimistic that I'll get a lot more money to use at better levels through the fourth quarter and should help present you a list in those yields.
Operator
[Operator Instructions]. Your next question comes from the line of Alison Jacobowitz with Bank of America.
Alison, your line is open.
Alison Jacobowitz
Hi, thanks. Two numbers questions actually.
Other revenue looks like it was up a lot year-over-year, I was just wondering what was in there. And also, the acquisition expense ratio was the lowest we've seen in a while.
I just was wondering if you can give more color on what's driving that number down and if it's sustainable going forward.
Ted Stalick
Hi, Alison it's Ted. So, on the other revenue, other income, the company realized that $3.3 million gain on the sale of lands, we had some land in [Brads] that we have been holding for about 10 years that we sold.
So that’s sort of a onetime impact to that line item. And on the question on the acquisition expenses, I think we've said on the calls before, but we kind a of had a long-term decrease in our acquisition expenses primarily due to lower commissions or commissions have been gone down gradually.
The July 1 is when we do our annual agent commission adjustment and so there were some decreases in the third quarter and it does flow through the bulk acquisition expense ratio.
Operator
Your next question comes from the line of Greg Peters with Raymond James. Greg, your line is open.
Greg Peters
Thanks, just one other follow up sort of building on Alison's question. The ad spend I think you said is up to $12 million in the third quarter from $10 million a year ago.
I know your big expenses are on the first and third quarter. As we think about 2018, do you have any perspective on whether the budget is going to be flat up or down for our models?
Gabriel Tirador
I think, right now we believe it will be slightly up in 2018.
Greg Peters
Okay, perfect. Thanks for the answers.
Operator
There are no further questions at this time. I will turn the call back over the presenters.
Gabriel Tirador
Well, thank you for joining us today. And we look forward to speaking with you next quarter.
Thank you very much.
Operator
This concludes today's conference call. You may now disconnect.