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Mercury General Corp  (NYSE:MCY)
Q1 2019 Earnings Call
April 29, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Deidre, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercury General First 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 -- President and Chief Executive Officer

Thank you very much. I would like to welcome everyone to Mercury's first quarter conference call. I'm Gabe Tirador, President and CEO. On the phone we have Mr. George Joseph, Chairman; Ted Stalick, Senior Vice President and CFO; and Chris Graves, 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 $0.87 per share compared to $0.07 per share in the first quarter of 2018. The improvement in operating earnings was primarily due to a reduction in the combined ratio and an increase in after tax investment income. The combined ratio was 97.3% in the first quarter of 2019 compared to 103.8% in the first quarter of 2018. The improvement in the combined ratio was primarily due to lower unfavorable reserve development in the quarter compared to the first quarter of 2018. Unfavorable reserve development was $1 million in the quarter compared to $43 million in the first quarter of 2018.

Rainstorms in California negatively impacted our homeowner results in the quarter, resulting in more than a 50% increase in homeowner claims reported compared to the first quarter of 2018. Growth catastrophe losses, primarily from the California rainstorms, were $11 million in the quarter compared to $9 million in the first quarter of 2018. Growth catastrophe losses of $11 million in the quarter were reduced to $5 million as we recorded $6 million in favorable reserve development from prior years' catastrophe losses. Excluding the impact of unfavorable reserve development, catastrophe losses and ceded reinstatement premiums earned, the combined ratio was 95.2% in the first quarter of 2019, compared to 97% in the first quarter of 2018.

To improve our combined ratio, we have been increasing rates in most states. In California, a 6.9% personal auto rate increase for California Automobile Insurance Company was implemented in March 2019 and a 6.9% personal auto rate increase for Mercury Insurance Company will be implemented in May of 2019. Collectively, these represent two-thirds of Companywide direct premiums earned. In addition, a 6.9% rate increase in our California homeowners line is pending approval from the California Department of Insurance.

The California homeowners premiums represent about 13% of direct Companywide premiums earned. The expense ratio was 24.8% in the first quarter compared to 25.5% in the first quarter of 2018. The lower expense ratio was primarily due to a decrease in acquisition cost, primarily from lower average commissions and cost efficiency savings. Premiums written grew 6.4% in the quarter, primarily due to higher average premiums per policy and an increase in homeowners policies written.

With that brief background, we will now take questions.

Questions and Answers:

Operator

(Operator Instructions) And you do have a question from the line of Christopher Campbell with KBW.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Yes. Hi, good morning.

Gabriel Tirador -- President and Chief Executive Officer

Good morning, Chris.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

I guess my first question is just, I'm trying to understand all the math behind this abrogation sale of the fire receivables. So I guess could you just walk us through the math on that, like how much were the cats impacted this quarter, how much were the reserves and then premium growth because I think it's just -- I'm trying to make sure that I'm not double counting the parts of the $10 million pre-tax benefit within like the cats and reserves?

Gabriel Tirador -- President and Chief Executive Officer

Sure. I'll go ahead and ask Ted. Ted, why don't you go ahead?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

Okay, Chris. So, we had $1 million of adverse development for the quarter. That includes $6 million of favorable development from the cats from 2017 and 2018 cats. The $10 million benefit is reinstatement premiums, reduction and reinstatement premiums, and also includes the benefit from the favorable (ph) development on those cats.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. Got it. So it's really, just -- OK. So one way to think about it is it's $11 million in cats this quarter if we just factor in what's happening with the storms. And then if we treat the adverse development or if we treat the subro sale as favorable development, then that gets to your $1 million adverse, because it would have been $7 million absent that benefit this quarter. Is that the right way to think about it?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

That's correct.

Gabriel Tirador -- President and Chief Executive Officer

Yeah.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. Got it. And then the -- and then there would be an additional $4 million pre-tax benefit from the benefit of lower reinstatement premiums. Correct?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

Correct.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. Got it.

Gabriel Tirador -- President and Chief Executive Officer

Well, I think the benefit this quarter was $1.9 million from the reinstatement premiums. You would have normally booked $7.8 million in the quarter and I think we booked $5.8 million in the quarter. So, the benefit in reinstatement premiums earned, I believe, was about $1.9 million.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. And then where would the balance of the -- I guess it would be $2 million, because you have the $6 million to favorable reserve development, about $1.9 million, round that up to $2 million, for the lower reinstatement premium. So, where does the other $2 million fall in the financials?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

What do you mean the other $2 million?

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Well, I'm thinking in the press release you have the -- there was a $10 million pre-tax benefit from the subrogation sale of the receivables.

Gabriel Tirador -- President and Chief Executive Officer

Okay.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Yeah. So if I subtract out the $6 million of favorable reserve development that you got from selling those and then the $2 million of reinstatement premiums, there is a balance of $2 million.

Gabriel Tirador -- President and Chief Executive Officer

Ted, do you know what the answer is?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

Yeah. We have -- we have -- the combination of the reinstatement and the favorable development is the $10 million.

Gabriel Tirador -- President and Chief Executive Officer

Okay.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Got it. Great. And then just I guess kind of more big picture, California homeowners market after the recent fires. I guess just how -- it sounds like you've got a 6.9% rate increase in the hopper. So I guess just beyond that, do you have like additional rate increases you're thinking about? And is there any regulatory risk that you may not be able to achieve those planned rate increases if the California DOI becomes concerned about homeowners insurance affordability out there?

Gabriel Tirador -- President and Chief Executive Officer

Well, as I mentioned in the prepared remarks, we have a 6.9% that has been pending for some time now and we're expecting that to come to a closure soon. We do expect to probably be filing after that 6.9% is approved. With respect to whether or not the Department of Insurance would approve that, they have a pretty formulaic process with a template that you insert your figures in that template and if those figures -- if the output produces a rate increase, then you can take a rate increase.

So at this point, we basically take a look at our indications on a quarterly basis. We have not yet finished our first quarter indications. We'll be meeting on that in the next couple of weeks and taking a look at it. So I do -- I would expect that we would probably file again though, after that, according the indication meeting.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. Got it. And then would you want to file immediately or I guess like how would the upcoming reinsurance renewals and any changes you might be making to the program or any potential rate increases that you could see, how would that -- how would the renewal that reinsurance program factor into the timing that you would be looking at filing for an additional...

Gabriel Tirador -- President and Chief Executive Officer

It would not, really, it would not -- it would be independent. We would file independently of whatever happens with the reinsurance.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Got it. And then I guess just what changes are you thinking about for the program, like as you're getting into --closer to...

Gabriel Tirador -- President and Chief Executive Officer

Well, we think that the $300 million excess (ph) the $200 million that we're going to purchase, more of that later for certain. We're pretty sure we'll be buying more of that later. How much more I don't know. Actually Ted and our Chief Actuary and our Chief Underwriter are in the process. They're going to be going out, meeting with reinsurers pretty soon here.

Ted, do you have any other comments on that?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

No, just that we'll be -- we are planning on buying more limit than we currently have. But we're kind of just starting the process right now with the reinsurers.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. Got it. And then auto rate increases, you got a 6.9% in Cal Auto and 6.9% in Mercury. I guess as these get implemented, do you guys have any more rates that you're looking to take in those lines?

Gabriel Tirador -- President and Chief Executive Officer

I think, after these two, I think we feel pretty good, to be honest with you Chris, where we're at after these two. With the caveat that we take a look at our rates every quarter. And if we see that we need rate need, we'll go ahead and take it. But we feel pretty good right now after the 6.9% that we just got with MIC and the 6.9% in Cal Auto as well. We're monitoring every quarter, but I would say at this point, that I don't anticipate like filing right away in those two lines, because we feel pretty good where we're at.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. That you feel good in just terms of the frequency, severity, pure premium trends you're seeing in auto? Should we expect it more to -- you got to more pivot toward growth at this stage?

Gabriel Tirador -- President and Chief Executive Officer

Yes, I would say so. I would say so. There has been less rate action going on in the industry, too, more recently. So when you take a look at our underlying combined ratio in our auto and prior past year auto in California, we feel pretty good where we're at, especially in light of the fact that we just got these two 6.9%s, so, yeah, more of a growth stance.

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Okay. Got it. Well, thanks for all the answers. Good luck in 2Q.

Gabriel Tirador -- President and Chief Executive Officer

Okay. Thank you.

Operator

(Operator Instructions) And we do have a question from the line of Samir Khare.

Samir Khare -- Capital Returns Management -- Analyst

Hi. Good morning. Just a quick question about the subrogation as well. What is the gross amount of subrogation proceeds you received? And what were the total gross loss amount for the three fires that the subrogation was based off of?

Gabriel Tirador -- President and Chief Executive Officer

Ted, can you handle that?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

I didn't get the first part of your question.

Samir Khare -- Capital Returns Management -- Analyst

I was just asking about the gross amount of subrogation proceeds you received?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

Oh, so the subrogation is -- the assignment agreement is confidential. So we're not at liberty to discuss the terms of the agreement. The majority of this subrogation benefits went back to our reinsurers, I can tell you that.

Samir Khare -- Capital Returns Management -- Analyst

Okay. And I just want to see where the balance of the -- balance of gross losses for the campfire standing? Is that around $200 million or $201 million?

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

After the subrogation?

Samir Khare -- Capital Returns Management -- Analyst

Yes.

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

I think it's between $140 million and $150 million.

Samir Khare -- Capital Returns Management -- Analyst

Okay. Great. Thanks.

Operator

(Operator Instructions) And we have no further questions at this time.

Gabriel Tirador -- President and Chief Executive Officer

Okay. Thank you everyone for joining us this quarter and we look forward to speaking to you next quarter. Thank you very much.

Operator

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

Duration: 18 minutes

Call participants:

Gabriel Tirador -- President and Chief Executive Officer

Christopher Campbell -- Keefe, Bruyette, & Woods -- Analyst

Theodore Robert Stalick -- Chief Financial Officer, Senior Vice President

Samir Khare -- Capital Returns Management -- Analyst

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