MERCURY GENERAL CORP Q1 FY2020 earnings call

• The impact of COVID-19 was unprecedented, with the team transitioning to work from home smoothly due to prior technology investments. - In Q1 2020, the company lost $139.2 million or $2.51 per share, including $198.5 million after-tax investment losses. Operating earnings were $1.07 per share vs $0.87 per share in Q1 2019. - Combined ratio improved from 97.3% in Q1 2019 to 95.9% in Q1 2020. - A 6.99% rate increase in California homeowners line went into effect on April 21, on top of a previous 6.99% increase in August 2019. - The company is giving back 15% of monthly auto insurance premiums to personal auto customers for two months, affecting Q2 premiums.

In the first quarter of 2020, Mercury General's private passenger auto combined ratio was approximately 93.6% (vs 96.8% in Q1 2019), with $3M unfavorable reserve development (vs $10M in Q1 2019). Homeowners combined ratio was 101% (vs 102% in Q1 2019), with $6M unfavorable reserve development (vs $8M favorable in Q1 2019) and <$1M catastrophe losses (vs $3M in Q1 2019). California homeowners premiums earned represent about 87% of company-wide direct homeowners premiums earned and 14% of direct company-wide premiums earned. Commercial auto combined ratio was approximately 100% (vs 102% in Q1 2019), with ~$5M unfavorable prior-year reserve development in both periods. Expense ratio was 25.3% in Q1 2020 (vs 24.8% in Q1 2019) due to a $7M increase in bad debt provision. Premiums written grew 4.1% in Q1 2020, but private passenger auto and homeowners new business applications were down over 20% and 10% respectively. The 15% monthly auto insurance premium giveback for two months is expected to reduce Q2 premiums written and earned by approximately $70 million.

• Expect second quarter premiums written and earned to be reduced by approximately $70 million due to the 15% premium giveback. - Anticipate underwriting and loss adjustment expense ratios to increase in future quarters as premiums decline without proportionate expense reduction. - Will continue to monitor the economic impact of COVID-19 and make further adjustments as necessary.

• Economic impact of COVID-19: Uncertainty regarding the duration and extent of the impact, affecting premiums and expenses. - Reinsurance structure: Potential changes in retention depending on pricing. - Investment market volatility: Mark-to-market adjustments and uncertainties in reinvestment yields.

Q: What's the difference is in your 15% of two-month refunds to private passenger customers compared to what the California Insurance Commissioner has ordered?

A: The California Commissioner did not order any specific type of percentage giveback. He just ordered companies to give back premium but did not order any specific giveback. Mercury's timeframe aligns with the commissioner's.

Q: Timing of the 15% refunds?

A: From March 18 to May 17, which will impact the second quarter, approximately $70 million reduction.

Q: Did you get approval from the Commissioner for the refunds?

A: The order did not require a formal approval.

Q: Impact of premium giveback on underwriting and loss ratio?

A: Uncertainties due to potential severity increase in accidents and supply chain issues affecting costs.

Q: Reinsurance retention for homeowners?

A: Possible change depending on pricing, but current desire is to keep it around $40 million as in the current treaty.

Q: Reinvestment yields and mark-to-market investment losses?

A: Reinvestment levels were high in March during the crisis, market normalized quickly; mark-to-market losses in the quarter were ~$10 million.