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Mercury General Corp (NYSE:MCY)
Q4 2019 Earnings Call
Feb 10, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, my name is Nicole, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mercury General Third [Phonetic] Quarter Conference Call. [Operator Instructions] 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 & Chief Executive Officer

Thank you very much. I would like to welcome everyone to Mercury's Fourth 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; Jeff Schroeder, 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 fourth quarter operating earnings were $0.21 per share compared to an operating loss of $0.26 per share in the fourth quarter of 2018. The improvement in operating earnings was primarily due to an increase in previously unrecognized income tax benefits, a reduction in the combined ratio, and an increase in after-tax investment income. Included in the fourth quarter of 2019 results was a $0.10 per share tax benefit related to the recognition of previously unrecognized federal tax benefits and a reduction in state tax accruals related to a California franchise tax audit. Included in the fourth quarter of 2018 results was a $0.07 per share tax benefit from the reversal of an IRS rule related to sequestration adjustments from the 2017 Tax Act.

The combined ratio was 103.2% in the fourth quarter 2019, compared to 106.7% in the fourth quarter of 2018. The improvement in the combined ratio was primarily due to $1 million of positive reserve development in the quarter compared to $23 million of adverse reserve development in the fourth quarter of 2018. In addition, catastrophe losses of $36 million in the quarter were lower than the $43 million of catastrophe losses in the fourth quarter of 2018. Excluding the impact of catastrophe losses, prior accident year reserve development and ceded reinstatement premiums earned, the combined ratio was 99.3% in the quarter and 97.3% for the 12-month period ended December 31, 2019, compared to 98.6% and 95.6% for the quarter and 12-month period ended December 31, 2018.

Our California private passenger auto combined ratio was approximately 97.9% in the fourth quarter of 2019, compared to 103.2% in the fourth quarter of 2018. The improvement in the California private passenger auto combined ratio was primarily due to rate increases taken during 2019 and to $10 million of favorable prior accident year reserve redundancies in the quarter, compared to $14 million of adverse prior accident year reserve development in the fourth quarter of 2018. Partially offsetting the improvement in the combined ratio from reserve development and rate increases was an increase in frequency and severity.

California private passenger auto frequency increased by about 2% in the quarter as compared to the fourth quarter of 2018, primarily from the bodily injury coverage, and severity increased by 5% in the quarter as compared to the fourth quarter of 2018. A 5% personal auto rate increase for California Automobile Insurance Company's pending approval with the California Department of Insurance and a 4% personal auto rate increase was recently filed for Mercury Insurance Company. Collectively, these represent two-thirds of Companywide direct premiums earned.

Our California homeowners combined ratio was 123% in the fourth quarter of 2019, compared to 125% in the fourth quarter of 2018. Catastrophe losses in our homeowners' line primarily from California wildfires were $34 million in the quarter, compared to $38 million in the fourth quarter of 2018. A 6.99% rate increase in our California homeowners' line was approved by the California Department of Insurance and was implemented in August 2019. In addition, a 6.99% rate increase in our California homeowners' line is pending approval with the California Department of Insurance. California homeowners premiums represent about 13% of direct Companywide premiums earned.

For States outside of California, we posted a personal lines, homeowner and auto combined ratio of approximately 110% in the fourth quarter of 2019, compared to 101% in the fourth quarter of 2018. Those results include approximately $2 million of unfavorable prior year reserve development on a $103 million of earned premium compared to no development on a $104 million of earned premium in the fourth quarter of 2018.

Our year-to-date accident year personal lines combined ratio for States outside of California was 103% in 2019, compared to 97% in 2018. Increases in severity in several States in private passenger auto were the primary reason for the increase in the combined ratio in 2019. We have been increasing our private passenger auto rates in many States outside of California to improve results. We have also introduced improved segmentation with an updated product we have named Mercury Advantage. [Phonetic] Mercury Advantage has increased protection in the States where it has been deployed and to date, the loss experience has been favorable. Mercury Advantage is scheduled to be released to all, but one of our States outside of California by the end of 2020.

Our homeowners' results outside of California saw a double-digit premium growth in 2019 with favorable underwriting results in total and on an underlying basis. The expense ratio was 23.5% in the fourth quarter compared to 23.3% in the fourth quarter of 2018. The slightly higher expense ratio was primarily due to an increase in profitability-related accruals partially offset by lower acquisition costs. Premiums written, excluding reinsurance reinstatement premiums written, grew 3% 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] The first question will come from the line of Greg Peters with Raymond James.

Greg Peters -- Raymond James -- Analyst

Good morning. Thanks for the call. Couple of questions for you on your results. First of all, I was listening with interest about your commentary about the results outside of California and with a combined ratio that apparent -- it seems to be deteriorating on a year-over-year basis for auto and home. Do you have an objective or do you have a time frame in mind of when you might be able to get that auto home combined ratio outside of California down to below 100%?

Gabriel Tirador -- President & Chief Executive Officer

Well, Greg, it's a good question. As I mentioned earlier, our 2018 accident year results for personal auto, as an example, were in the 97.8%, I think is what we posted in outside of California and our homeowners was 93.2% in '19 and a 94.6% in '18. So, '18 actually was a decent year for our results outside of California. What we saw in' '19 was just increases in severity that really offset any kind of rate increases that were built in into our rates. So severity increased much higher than we expected, driven by Florida, as an example, had some issues with PIP in Florida. And our other large State, Texas also saw some increases in severity.

So, we were pretty much there in '18. We had some unexpected, I think, developments with respect to severity in 2019 that we didn't anticipate. But we are taking actions. As I mentioned in our prepared remarks, we have taken rate. In addition to that, we've introduced what we believe is a much better segmented product in most of the States, which States, which is going to be rolling out for the rest of 2020.

Greg Peters -- Raymond James -- Analyst

And so, both Florida and Texas are more of a file-and-use State of regulatory framework. Correct, as it relates to rate? Or I guess Florida, is it homeowners that you're getting -- you need prior approval on?

Gabriel Tirador -- President & Chief Executive Officer

Well, we don't write homeowners in Florida. So, in Florida, you can file and use.

Greg Peters -- Raymond James -- Analyst

And same with Texas, correct?

Gabriel Tirador -- President & Chief Executive Officer

Yes.

Greg Peters -- Raymond James -- Analyst

So theoretically, this should be a pretty -- defection [Phonetic] take very long because you're able to go after the rate you need to restore profitability. Is that a fair assumption?

Gabriel Tirador -- President & Chief Executive Officer

Well, I mean, it takes a little while, because if you have six-month policies, it takes a little bit to earn in.

Greg Peters -- Raymond James -- Analyst

Yeah.

Gabriel Tirador -- President & Chief Executive Officer

So there is some rate earning in. But generally speaking, I would agree with that statement, if we file for enough rate to offset the increases in severity that we should see improved results. And we did that back in 2018, as I mentioned earlier.

Greg Peters -- Raymond James -- Analyst

Right, right. Thank you for the color. One of the surprises last year -- well, I guess it wasn't a surprise, but with the change was how your reinsurance changed and your retention per event, especially as it relates to like property losses, fires, catastrophes, was higher. And given the experience you had in 2019, can you give us a preview on how you think your reinsurance structure might change in 2020 and how we should think about your catastrophe exposure by a per event basis?

Gabriel Tirador -- President & Chief Executive Officer

Sure. I'll have Ted answer that.

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

Yeah. So on the current treaty, which goes from July 1 to June 30. So we're behind the worst of the fire season. There were no reinsured losses that hit that treaty. So, we're expecting the pricing come this next July to be pretty rational, when we go up for renewal.

As far as changing limits or retention at the renewal, a lot of that will depend on our risk tolerances and the pricing available in the market, also the capacity in the market, but as of now, we expect the renewal limits and retention to look similar to what we currently have. And again, we'll probably know a lot more in the spring, once we finish our PML analysis and get those updated and then go start marketing reinsurance.

Greg Peters -- Raymond James -- Analyst

But you said there were no reinsured losses related to fire so far. Obviously, the fire season is largely over with, but so far on the last -- on this current reinsurance treaty year. Correct?

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

That's correct. Our retention was $40 million, and none of the fires were large enough to get into that.

Greg Peters -- Raymond James -- Analyst

Okay, great. Thank you for those answers. And then, I guess the final question would be just on the California business. It feels like you're -- it feels like you should be getting rate that exceeds your loss cost trend, but I guess we're just not seeing the improvement show up in your bottom line results. What -- do you have a view right now of how you're rate compares to loss trend? Do you think when you're talking about these 5% rate increases filed 6.9%, etc., how do you feel about where you are sort of in that rate cycle relative to the results?

Gabriel Tirador -- President & Chief Executive Officer

Well, I think I mentioned in the prior call, last quarter, we do indications every quarter. And right now with these latest two rate increases that we have applied for and that are pending, we feel pretty good about where we would be both in MIC and Cal Auto.

When you take a look at our California private passenger auto results, we booked about 97% combined ratio for the entire year. And there is a lot of rate that was not earned in that 97%. So -- on an unearned [Phonetic] basis, it's better than the 97%. So in addition with these rate filings that hopefully will get approved in 2020, we actually feel pretty good where we're at right now.

Greg Peters -- Raymond James -- Analyst

When you look at the 2019 results, what do you think the combined ratio will look like for the homeowners-only portion of your business in California?

Gabriel Tirador -- President & Chief Executive Officer

How much was it in '19 or how much -- what do we expect?

Greg Peters -- Raymond James -- Analyst

What will -- it's a historical number. Just what was just homeowners California?

Gabriel Tirador -- President & Chief Executive Officer

It was 106% combined.

Greg Peters -- Raymond James -- Analyst

And how did that compare with 2018?

Gabriel Tirador -- President & Chief Executive Officer

2018, the accident year for 2018 was 103%, and the calendar year was like a 102%.

Greg Peters -- Raymond James -- Analyst

And the 106% that you gave as a calendar year, correct?

Gabriel Tirador -- President & Chief Executive Officer

Yeah, yeah.

Greg Peters -- Raymond James -- Analyst

Okay. Thank you very much for your answers.

Gabriel Tirador -- President & Chief Executive Officer

Sure.

Operator

[Operator Instructions] We show no further audio questions at this time.

Gabriel Tirador -- President & Chief Executive Officer

Okay. We have a short call this quarter. I'd like to thank everyone for joining us, and we'll talk again next quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 16 minutes

Call participants:

Gabriel Tirador -- President & Chief Executive Officer

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

Greg Peters -- Raymond James -- Analyst

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