Good afternoon. My name is Maria. 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 this time, simply press star, then 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 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. Please go ahead, sir.
Thank you very much. I would like to welcome everyone to Mercury's second quarter conference call. I'm Gabe Tirador, President and CEO. In the room with me is Mr. George Joseph, Chairman. Robert Houlihan, Vice President and Chief Product Officer. On the phone, we have Chris Graves, Vice President and Chief Investment Officer. Our Chief Financial Officer, Ted Staal, is traveling. He is therefore unable to be on the call. Before we take questions, we will make a few comments regarding the quarter. Our second quarter operating earnings were $0.35 per share, compared to $0.64 per share in the second quarter of 2015. The deterioration in operating earnings was primarily due to an increase in the combined ratio from 98.5% in the second quarter of 2015 to 101.7% in the second quarter of 2016.
Our results in the quarter were negatively impacted by $22 million of unfavorable reserve development on prior accident years, $11 million of catastrophe losses. $2 million in severance payments related to a previously announced reduction in force. The majority of the unfavorable reserve development in the quarter came from our California bodily injury coverage. The development occurred across multiple accident years, with about $10 million relating to accident year 2015 and the remainder to older years. Catastrophe losses in the quarter were primarily from severe storms in Texas. Excluding the impact of unfavorable reserve development on prior accident years, catastrophe losses, and severance payments, the combined ratio was 97.2% in the quarter. In California, we recorded an increase in personal auto severity in the high single-digit range during the quarter as compared to the second quarter of 2015.
California private passenger auto frequency was up slightly in the quarter as compared to the second quarter of 2015. This year, for our personal auto business in California, we implemented a 5% rate increase in late March 2016 for Mercury Insurance Company and a 6.9% rate increase in June 2016 for California Automobile Insurance Company. Personal auto premiums in Mercury Insurance Company represents about half of our company-wide premiums earned, and California Automobile Insurance Company represents about 15% of our company-wide premiums earned. Outside of California, our results were negatively impacted during the quarter by catastrophe losses, primarily related to severe storms in Texas. Increasing loss cost trends and higher loss ratios that come with an increase in new business also negatively impacted our results during the quarter. To address profitability outside of California, we are increasing rates and tightening our underwriting.
Excluding the impact of catastrophe losses, the combined ratio outside of California was about 100.3% in the quarter, compared to 99.8% in the second quarter of 2015. The expense ratio in the quarter declined to 25.4% from 27.3% in the second quarter of 2015. The decrease in the expense ratio was primarily due to lower advertising expenses, lower average commissions, and a reduction in profitability-related accruals. Net advertising expense in the quarter was $8.6 million, compared to $12.1 million in the second quarter of 2015. Premiums written grew 6.6% in the quarter, primarily due to higher average premiums per policy. Company-wide, private passenger auto new business applications submitted to the company decreased 7.9% in the second quarter of 2016 as we focused on improving profitability in our private passenger auto line. Company-wide homeowners applications increased 1.4% in the second quarter of 2016.
In California, we posted a premiums written growth of 7.8%. Outside of California, premiums written grew 1.2% in the quarter. With that brief background, we will now take questions.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, simply press star, then the number 1 on your telephone keypad. Our first question comes from the line of Greg Peters of Raymond James.
Good morning, everyone. Thank you for hosting the call and taking these questions. I think in your first quarter call, you mentioned the possibility of getting or looking for more rate in the California Automobile Insurance Company. I'm curious with the second quarter results, if it's changed your perspective on Mercury Insurance Company in California.
We still haven't made a decision on Mercury Insurance Company. We believe our rates, even after the second quarter, are in line. We're going to be following the trends very closely, and there is a possibility that we may be filing for a small rate increase in Mercury Insurance Company.
Okay.
In Cal Auto, we have filed for a 6.9% rate increase. That's already been filed.
Right. That's on top of what you've already achieved or what you announced in this call, correct?
That's right. Keep in mind that the 6.9% rate increase in Cal Auto has not earned in at all. The MIC rate increase this quarter probably earned 25%, 30%. I expect about 75% earned in the third quarter and 100% in the fourth quarter for the MIC rate increase that went into effect in March.
Right. Gabe, I think you did say that most of the rate increases would be back-end loaded in the second half of the year before.
That's correct.
I was listening to your brief comments, and you mentioned high single-digit severity. I don't have your transcript available from the first quarter, but I thought you said in the first quarter that it was mid-single digits. Has there been a change, or am I making something up?
No, I don't recall what we said, but definitely it's high single digits now. If you take a look at the fast track trends in California as an example, for the 12-month period ending March, severity for bodily injury increased 7.2% in California for BI. Pure premium, which is frequency and severity combined, increased about 10%, 9.9%, almost 10%. We're definitely seeing it in the industry as well. Property damage liability, severity up for the 12-month period, 6.3% for the industry, with pure premium up 8.1%. On the collision side, you're seeing 3.8% severity increases in the industry with pure premium up 7%. The industry is also seeing severity and some frequency increases. Pure premium is going up quite a bit in California.
Right. Just getting back to the $22 million of unfavorable development. If I recall correctly, in the first quarter, you said most of the $40 million in the first quarter was allocated to 2014 year, then lesser amounts to years previous to that. Would I assume that the $22 million is the same in terms of allocation by accident year?
We increased our 2015 pick, so that increased the development about $10 million for the '15 year.
Right.
Company-wide, about $3 million went to '14 and about $4.5 million or so to '13 and '12. What we're seeing, our data showing is that the speed of closing on our older liability claims has increased, and we're also seeing some case reserve strengthening in our book of business. While some of this increased case reserve and paid loss development was undoubtedly due to the speed-up in settlements, when we take a look at one of our models which neutralizes these changes, it basically said that we were still short. We ended up increasing our ultimate estimates as a result.
Okay. With a higher accident year loss pick for 2015, I assume that's going to bleed over into your assumptions for 2016 as well, correct?
Yes, they have. They certainly have.
Yeah.
That's why our 2016 accident year right now, when you take out, hopefully, there's no further development, and you take out some of the noise, you're running at around 97 and change when you take that out. That's correct. We have increased our picks for 2016 as well.
Yeah.
It has a domino effect. When you increase an older accident year and you increase the next one, the next one, the next one, it has a pretty big impact in the quarter on the calendar year results.
Indeed. Thank you for that clarification. Just to wrap up, and then I'll re-queue. As we think about your longer-term objective in terms of your combined ratio results, given where you've taken your accident year loss picks for 2015 and 2016, what should we be thinking about in terms of your ability to get a lower combined ratio, say, over the next 24 months?
I think that's our number one focus, I tell you, our combined ratio is going to improve. Our target is a 95% combined ratio, and the whole organization is focused on that right now. Over the course of the next 12-24 months, you're going to see a big improvement.
Perfect. Thank you for the answers, Gabe.
You're welcome.
Ladies and gentlemen, if you wish to ask a question, simply press star, then the number 1 on your telephone keypad. I'm showing no further questions at this time, sir.
I'd like to thank everyone for joining us this morning, and we look forward to talking to you next quarter with better results. Thank you very much.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.