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 quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 risk 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.
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 the 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. 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 is pending approval with the California Department of Insurance. A 4% personal auto rate increase was recently filed for Mercury Insurance Company. Collectively, these represent two-thirds of company-wide 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. 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 company-wide 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 $103 million of earned premium, compared to no development on $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. Mercury Advantage has increased production 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 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.
At this time, if you would like to ask an audio question, you may do so by pressing star and the number 1 on your telephone keypad. Again, that is star 1. We'll pause for just a moment. The first question will come from the line of Greg Peters with Raymond James.
Good morning. Thanks for the call. Couple questions for you on your results. First of all, I was listening with interest about your commentary about the results outside of California. With a combined ratio that seems to be deteriorating on a year-over-year basis for auto and home, do you have an objective, or do you have a timeframe in mind of when you might be able to get that auto home combined ratio outside of California down to below 100?
Well, Greg, it's a good question. As I mentioned earlier, our 2018 action year results for personal auto, as an example, were in the 97.8, I think is what we posted outside of California. Our homeowners was 93.2 in 2019 and a 94.6 in 2018. 2018 actually was a decent year for our results outside of California. What we saw in 2019 was just increases in severity that really offset any kind of rate increases that were built into our rates. Severity increased much higher than we expected, driven by Florida, as an example, had some issues with PIP in Florida. Our other large state, Texas, also saw some increases in severity. We were pretty much there in 2018. We had some unexpected, I think, developments with respect to severity in 2019 that we didn't anticipate. We are taking action.
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 it's going to be rolling out for the rest of 2020.
Both Florida and Texas are more of a file and use state, a regulatory framework, correct, as it relates to rate? I guess Florida, is it homeowners that you need prior approval on?
Well, we don't write homeowners in Florida. In Florida, you can file and use.
Same with Texas, correct?
Yes.
Theoretically, this should be the fix shouldn't take very long because you're able to go after the rate you need to restore profitability. Is that a fair assumption?
Well, it takes a little while because if you have six-month policies, it takes a little bit to earn in.
Yeah.
There's 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, we should see improved results. We did that back in 2018, as I mentioned earlier.
Right. Thank you for the color. One of the surprises last year, well, I guess it wasn't a surprise, but was a change, was how your reinsurance changed and your retention per event, especially as it relates to property losses, fires, catastrophes, was higher. 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?
Sure. I'll have Ted answer that.
On the current treaty, which goes from July 1 to June 30, we're behind the worst of the fire season. There were no reinsured losses that hit that treaty. 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 it will depend on our risk tolerances and the pricing available in the market, also the capacity in the market. As of now, we expect the renewal limits and retention to look similar to what we currently have. Again, we'll probably know a lot more in the spring once we finish our
Our PML analysis and get those updated and then go start marketing the reinsurance.
You said that there were no reinsured losses related to fire so far. Obviously, the fire season's largely over with, so far on this current reinsurance treaty year, correct?
That's correct. Our retention was $40 million, and none of the fires were large enough to get into that.
Okay, great. Thank you for those answers. Then, I guess the final question would be just on the California business. 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. Do you have a view right now of how your rate compares to loss trend? You talk about these 5% rate increases, filed 6.9%, et cetera. How do you feel about where you are sort of in that rate cycle relative to the results?
Well, I think I mentioned in the prior call last quarter, we do indications every quarter. Right now with these latest two rate increases that we 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 personal auto results, we booked about a 97% combined ratio for the entire year. There was a lot of rate that was not earned in that 97%. On an on-level basis, it's better than the 97%. In addition with these rate filings that hopefully will get approved in 2020, we actually feel pretty good where we're at right now.
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?
How much was it in 2019, or what do we expect?
It's a historical number. Just homeowners California.
It was 106% combined.
How did that compare with 2018?
2018, the accident year for 2018 was 103, the calendar year was like a 102.
The 106 that you gave is the calendar year, correct?
Yeah.
Okay. Thank you very much for your answers.
Sure.
Again, to ask an audio question, please press star one. We show no further audio questions at this time.
Okay. Well, it was a short call this quarter. I'd like to thank everyone for joining us. We'll talk to you again next quarter. Thank you very much.
This does conclude today's conference call. Thank you for your participation and ask that you please disconnect your line.