Mercury General Earnings Call Insights: Non-Standard Products and Comparative Rater Details

Mercury General Corporation (NYSE:MCY) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Non-Standard Products

Vincent DeAugustino – KBW: My first question would be on the kind of the – on the heels of your non-standard auto approval. I’m just kind of curious, as hopefully the approval there on the 6.9% rate increase would maybe give you some more confidence in getting approval on the preferred auto request if that would make sense?

Gabriel Tirador – President and CEO: Bob, do you want to answer that question?

Robert Houlihan – VP and Chief Product Officer: Obviously the Department agreed with or came up with an indication that I believe supported our rate request on our non-standard products that was a positive development. But, each filing is separate and considered on its own and we haven’t had a meeting, yet with the Department to review their indication on the MIC filings. So, it’s difficult at this time to assess what the Department’s outcome will be on that particular rate refresh.

Gabriel Tirador – President and CEO: I think I would agree with that assessment each filing stands on its own and we’re going to have to just wait and see Vincent.

Vincent DeAugustino – KBW: You guys, I know you have mentioned this quarter and the past about the California market on the auto side being competitive, and so I’m just curious if you think, there are really any changes coming down the pipe just with several comments coming from some competitors like Progressive or Travelers, just making comments about ramping up the rate competition. So, would that kind of imply that status quo competition levels remain or do you think that we kind of ramp up the amount of just rate decreases coming from some of those guys, now they are competitors that would maybe challenge some retention levels…

Gabriel Tirador – President and CEO: While, I think here in California, we haven’t really seen any rate decreases. California is our largest market. We have seen some carriers tighten some underwriting here in California. Outside of California, I think by and large we see more rate increase than we have rate reductions. I think you are referring to the comments that Travelers has made that they are going to try to become more competitive and they are addressing their own underlying cost structure to become more competitive. We’re going to wait and see what comes of that. But it’s large – our approach outside of California has been to improve our profitability number one, and we’ve done that and now we’re trying to address the top line growth outside of California. As I mentioned in the previous call, in the quarter of this year, we took steps to improve our cost structure and we did the Hub consolidation and also taking look at other costs outside of California. So, it’s important obviously to offer a competitive product, you have to have a competitive cost structure. And that’s what apparently Travelers has been mentioning in the previous call, and something that I think all carriers are taking a look at.

Vincent DeAugustino – KBW: Just one last one and I’ll re-queue. So, from an auto loss cost standpoint, it kinds of looks like trends maybe haven’t been as problematic more recently as kind of what they were in the previous year. And so, I’m just curious if you guys are seeing that or if there has been any notable trends of acceleration or deceleration from what you are seeing? I guess also from a reserving standpoint, it looks like things maybe developing kind of along what you guys have expected, which maybe points to just stable loss cost trends, so again, curious, if any thoughts that you guys maybe seeing?

Theodore R. Stalick – VP and CFO: We basically experienced low single digit frequency in severity in California, which is about what we’d expected and as you remember, we took a 4% rate increase last October, so that’s kind of keeping up with the trend. Outside of California, it’s varying quite a bit by state, but if you take out the cash, it’s been a fairly benign lost cost environment and it’s been within our expectations.

Comparative Rater Details

Alison Jacobowitz – Bank of America Merrill Lynch: I guess two questions. I want to follow-up on Travelers. I think they were complaining about the impact on their auto business from agents using comparative raters. Are you seeing that? Is that a material impact for you? Then also if you could talk about, just what the differences you are seeing between portfolio yield and the new money yield?

Gabriel Tirador – President and CEO: Well, I mean I think from the comparative rater standpoint, there is no question that the past five, 10 years, more and more agents are using comparative raters, which leads to more price transparency. The Internet leads to more price transparency and price matters in this business, so does it have an impact, yes, I think it does have an impact. It varies by state, but more the agents use these comparative raters, the more quotes they get from different carriers, so – and price is a big factor, so it does have an impact and I would say that the impact today is more than it was 5 or 10 years ago. Robert, do you want to add to that?

Robert Houlihan – VP and Chief Product Officer: I think it’s fair. A gradual change over the last 10 years, you’ve seen that process, I’d agree here. It’s becoming a market where many customers view as a commodity price drives business and the comparative raters make the price differences more transparent to consumers.

Gabriel Tirador – President and CEO: The second question on the new money. Chris is not with us this morning, but I think rates in the second quarter – at the end of the second quarter backed up a little bit and we were able to get actually yields and munis that were more attractive to our current book yield, slightly more attractive to the current book yields. So, the new money that we put into place in the second quarter, a lot of that new money was actually placed at a little bit higher yield than our book yield.