MERCURY GENERAL CORP Q2 FY2020 earnings call

• Net income in Q2 was $228.2 million or $4.12 per share, including $125.2 million after-tax gains on investment portfolio. Year-to-date net income was $89 million or $1.61 per share. • Operating earnings in Q2 were $1.86 per share vs $0.74 per share in Q2 2019. Combined ratio improved to 88.2% from 98.3% in Q2 2019. • Catastrophe losses in Q2 were $12M vs $9M in Q2 2019. Unfavorable reserve development was $12M vs $9M in Q2 2019. • Launched new products: MercuryGO in Texas in June and Phase 1 of commercial multi-peril product in California in Q2. • Completed catastrophe reinsurance treaty renewal with total reinsurance limit increased from $600M to $717M, effective July 1, 2020, with wildfire coverage in all layers. • Premiums written declined 12.5% in Q2 due to $106M premium refunds, but excluding refunds, declined 1.2%. Plan to return $22M of July 2020 monthly premiums to eligible policyholders in August.

Private Passenger Auto: Improved results due to lower frequency from COVID-19, but offset by increased severity and $100.3M premium givebacks. Commercial Auto: Worse results due to increased severity, $7M unfavorable reserve development, and $5.5M premium givebacks. Homeowners: Worse results due to increased frequency and severity, $3M unfavorable reserve development; 6.99% rate increase in CA homeowners went into effect in April, another approved for October. Commercial Multi-Peril: Negatively impacted by a large $5M fire loss. Revenue contributions: California homeowners premiums earned represent about 87% of company-wide direct homeowners premiums earned and 15% of direct company-wide premiums earned.

• Expect underwriting and loss adjustment expense ratios to remain elevated in Q3 as premiums declined from givebacks without proportionate reduction in expenses. • Will continue to monitor the extent and duration of COVID-19 economic impact and make further adjustments as necessary.

• Impact of COVID-19 on frequency, severity, and premiums leading to premium givebacks and potential effects on financial results. • Unfavorable reserve development in commercial auto, homeowners, and commercial multi-peril lines. • Regulatory uncertainty regarding rate increases and interaction with California Department of Insurance. • Low interest rate environment affecting investment returns and challenging comparisons for new money rates.

Q: Can you talk about the mechanics around the $22 million giveback and if the giveback will continue?

A: Jeff Schroeder said they saw continued frequency declines through June and July, will continuously evaluate and adjust based on frequency movement. Gabe Tirador added there was an upward slope in frequency in June and July compared to April and May.

Q: How is the interaction with the California Department of Insurance?

A: Gabriel Tirador said there's no threshold of 96 combined ratio, the template allows for rate increase and they were pending rate increases prior to COVID.

Q: Talk about reinsurance, fire seasons, and non-California premiums?

A: Ted Stalick discussed reinsurance limits, PG&E subrogation fund, and Gabriel Tirador said too uncertain to predict non-California premiums.

Q: Question about agent compensation and subrogation on fire losses?

A: Gabriel Tirador said base commissions not adjusted, contingent commissions not determined yet. Ted Stalick talked about subrogation on prior fires and potential subrogation on Q4 2019 fires.

Q: Questions about dividends, technology, and agency model?

A: Gabriel Tirador said dividend reviewed quarterly, company uses technology and has agency partnerships, continuing to advance technology while maintaining underwriting and claims accuracy.