Good afternoon. My name is Jason. I will be your conference operator today. At this time, I would like to welcome everyone to the Mercury General quarterly 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 the session, simply press star, the number one 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 positioning. Such statements involve risks and uncertainties which cannot be predicted or quantified, 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 first quarter conference call. I'm Gabe Tirador, President and CEO. On the phone, we have 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. The impact COVID-19 is having on the world is unprecedented. Our hearts and prayers go out to everyone affected by this crisis. I'd like to thank our 4,000+ team members for their efforts and resilience during this time. Our investments in technology over the past few years allowed us to smoothly transition our team members to work from home. We are fully functional and serving our customers and agents well.
In the first quarter of 2020, the company lost $139.2 million, or $2.51 per share, which includes $198.5 million of after-tax losses on our investment portfolio. Pre-tax investment losses represent 6% of the portfolio value at December 2019. The majority of those investments are mark-to-market adjustments on securities that continue to be held by the company. Our first quarter operating earnings were $1.07 per share compared to $0.87 per share in the first quarter of 2019. The improvement in operating earnings was primarily due to a reduction in the combined ratio from 97.3% in the first quarter of 2019 to 95.9% in the first quarter of 2020. Catastrophe losses in the quarter were $2 million compared to $5 million in the first quarter of 2019. The company recorded $15 million in unfavorable reserve development in the quarter compared to $1 million in the first quarter of 2019.
Excluding the impact of catastrophe losses and unfavorable reserve development, the combined ratio was 93.8% in the quarter compared to 95.9% in the first quarter of 2019. Our Private Passenger Auto combined ratio was approximately 93.6% in the first quarter of 2020 compared to 96.8% in the first quarter of 2019. The improvement in the Private Passenger Auto combined ratio was primarily due to higher average premiums from rate increases taken during 2019, less unfavorable reserve development, and a reduction in frequency, partially offset by an increase in severity. The company recorded $3 million of unfavorable reserve development in our Private Passenger Auto line of business in the quarter compared to $10 million of unfavorable reserve development in the first quarter of 2019. Our Homeowners combined ratio was 101% in the first quarter of 2020 compared to 102% in the first quarter of 2019.
Our Homeowners' results were negatively impacted in the quarter by $6 million of unfavorable reserve development compared to $8 million of favorable reserve development in the first quarter of 2019. Homeowners' catastrophe losses in the quarter were less than $1 million compared to $3 million in the first quarter of 2019. Excluding the impact of reserve development and catastrophe losses, the Homeowners' combined ratio was 95.3% in the quarter compared to 100.6% in the first quarter of 2019. To improve our Homeowners results, a 6.99% rate increase in our California homeowners line went into effect on April 21. This rate increase is on top of a 6.99% California homeowners rate increase implemented in August of 2019. California homeowners' premiums earned represent about 87% of company-wide direct Homeowners' premiums earned and 14% of direct company-wide premiums earned.
Our commercial auto business posted a combined ratio of approximately 100% in the first quarter of 2020 compared to 102% in the first quarter of 2019. Those results include approximately $5 million of unfavorable prior year reserve development in both the first quarter of 2020 and 2019. Excluding the impact of reserve development, the combined ratio was 91% in both the first quarter of 2020 and 2019. The expense ratio was 25.3% in the first quarter of 2020 compared to 24.8% in the first quarter of 2019. The higher expense ratio is primarily due to a $7 million increase in the company's bad debt provision. The increase in the bad debt provision was made in anticipation of a higher number of premium balance write-offs as payment due dates are being extended to customers facing financial difficulties due to COVID-19.
Premiums written grew 4.1% in the quarter, primarily due to higher average premiums per policy and an increase in Homeowners' policies written. Private Passenger Auto and Homeowners' new business applications are down over 20% and 10%, respectively, as compared to the weeks prior to the coronavirus outbreak. As previously announced, we are giving back 15% of monthly auto insurance premiums to personal auto customers for two months, as less driving during the COVID-19 pandemic has resulted in fewer accidents and claims. Accordingly, we expect second quarter premiums written and earned to be reduced by approximately $70 million as a result of the giveback. We will continue to monitor the extent and duration of the economic impact related to COVID-19 and make further adjustments as necessary. We expect our underwriting and loss adjustment expense ratios to increase in future quarters as premiums decline without a proportionate reduction in expenses.
Agent compensation will not be reduced for the premiums we are giving back. With that brief background, we will now take questions.
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Greg Peters from Raymond James. Your line is open.
Good morning. My first question would be for you to explain what the difference is in your 15% of two-month refunds to Private Passenger customers. What's the difference between that plan and what the California Insurance Commissioner has ordered, if there is any difference?
Well, 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 type of specific giveback. He did say it was for a certain duration, starting in March and April as well, and that he would further update any order going forward as he felt necessary. I don't know, Jeff, do you want to add anything else to that?
No, Gabe, you said it correctly. I would just reiterate the point that we have been consistent with the timeframe that the commissioner set out.
Great. For your two months, none of the refunds were in effect for the March quarter. I assume you're going to retroactively refund for March and then also April in the next month or two?
Yes, that's correct. From March 18th, I think it is, to May 17th will impact the second quarter.
Got it.
That's the approximately $70 million that I mentioned in my prepared remarks.
Gabe, did you notify the Commissioner you're doing this? Did they sign off on it? Did they give you a seal of approval on it?
The order basically didn't require any kind of formal approval. His order did not require a formal approval.
Right.
He just asked companies to do it, there was no formal approval required.
Great. In your comments, you said that the underwriting expense, the ratio would go up because the underlying expense hadn't changed. I suppose there's some prevailing winds with the loss ratio, too, right? Lower accident frequency drives the loss ratio down, but you're getting a lower premium. Is that a net-net push, or what's your view on that?
Well, we're going to be giving back premium as a result of the lower frequency, as you mentioned. We're going to have to just evaluate going forward what that means with respect to how long this continues and make determinations at that time. There are some offsetting things going on. For example, severity could be going up for both BI and material damage.
Right.
It was going up before COVID. It was going up. There's evidence of increasing speeds associated with less congested roads and highways, which leads to more serious accidents. There's potential for cost pressures on parts due to potential supply chain issues. There's a lot of uncertainty right now, I would say. On the top line, our top line's going to go down. We have the premium giveback. We have a little bit lower new business volume as well. On the loss side, losses are down, but we also have higher bad debt provision. How this nets out, we're going to have to see in future months. We're basically monitoring it very closely.
Got it. Thank you for that answer. Actually, it's good color. Can you just update us? I think there was a couple of active rate filings in the pipeline. Have those been sidelined for the time being?
Yeah. I'll have Jeff answer that.
Yeah, Greg, prior to the pandemic, we were seeing severity increases in California personal auto still outpace the frequency declines and hence the rate filings that we had here in California. They remain outstanding with the California Department of Insurance, we don't expect the department to act on our applications during the state of emergency. You can say that they're on hold right now.
Got it. Can we pivot to just the reinsurance structure? Can you talk about your reinsurance structure for the Homeowners business for the 2020 calendar year, and how, if at all, it's going to change relative to the structure last year? I'm thinking about things like in terms of retentions, et cetera.
Ted, you want to go ahead and handle that?
Greg, just to remind the audience, our current treaty has a $600 million of limit in excess of our $40 million retention. There are some small slivers that exclude wildfire, but for the most part, wildfire's in there. We're currently in the process or getting into the process for the July 1 renewal. As a reminder, we paid around $38 million for our current coverage. We plan to buy a comparable amount this July 1. We're seeing how the market is, but we plan to buy a comparable amount. As far as rates, right now, I think our anticipation is some maybe modest increases, but that's our plan. We need to get into the process and meeting with the reinsurers before we can really know exactly where that's all going to shake out.
Got it. I guess that's going to happen virtually these days. Do you anticipate that your retention, the $40 million retention that you had last year, is going to stick through this year, or is it possible that could change?
It's possible it could change. Right now, our desire is to keep it right around where it was in the current treaty.
A lot of that'll depend, Greg, on pricing, right?
Yeah
A lot will depend on pricing. Our intention right now is to keep it where it's at, but with the caveat of what's the pricing look like at that lower level.
Great. My last question just will focus on the investment results. I realize that a portion of the realized investment gain was just a mark-to-market adjustment. I was hoping that we could get two things. First of all, how the investment yields are looking today versus they were before this crisis hit. Secondly, just to give us some idea within the realized investment, how much of that is the investment loss, how much of that is just a valuation versus actual sale?
Chris?
Hi, Greg. As far as reinvestment levels go, during March, when the height of the crisis unfolded, the levels that you could get, especially on municipal bonds, were just incredible. We pushed a lot of capital into the market at that point in time. Once the government stepped in and started with all of these different phases of the bailouts, all the markets really normalized quite quickly to a large degree. We still see bifurcation on the municipal side. Clearly, there are states or certain sectors of revenue bonds that are under pressure, like an airport bond or hospitals or certain states, Illinois particularly, would be under pressure. Those bonds still trade fairly cheaply.
Other bonds that have good support from either sales tax revenues or income tax revenues that are still holding up, those bonds are still trading at really good spreads or, well, very competitive spreads. It's surprising how quickly this market has looked through the current economic problems. As far as the mark-to-market levels go, we did take losses in the quarter. I think the amount is just something in the neighborhood of just $10 million. Most of it that you saw, because we pass everything through, most of what you saw is simply mark-to-market losses. Just like back in 2008, 2009, we were on the same methodology. Everything gets pushed through in 2008 with tremendous unrealized losses that we label as realized. In 2009, the market came back, and all of those unrealized shifts were labeled as realized on the income statement.
Thanks for the color. I guess considering the snapback in the market, we'll see a reversal of part of that mark-to-market adjustment in the second quarter. Thank you, everyone, for your answers.
Thank you, Greg.
There are no further questions at this time. I turn the call back to the presenters.
Well, I'd like to thank everyone for joining us this quarter. We look forward to joining you next quarter. Thank you very much.
That concludes today's conference call. Thank you everybody for joining today. You may now disconnect.