Good afternoon. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercury General Second Quarter Results 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 that time, simply press star and the number one on your telephone keypad. 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 and which may cause future activities and results of operations to differ materially from those discussed here today. Thank you.
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, Ted Stalick, Vice President and CFO, Robert Houlihan, Vice President and Chief Product Officer, and John Sutton, Senior Vice President, Customer Service. Before we take questions, we will make a few comments regarding the quarter. I am pleased to report our second quarter operating results were much improved as compared to the second quarter of 2012. Our second quarter 2013 combined ratio was 98.7% compared to 104.5% in the second quarter of 2012. Our second quarter results were negatively impacted by $13 million of pre-tax catastrophe losses, primarily from Midwestern storms, including the Category F5 tornado that struck Moore, Oklahoma, on May 20.
Excluding catastrophe losses, our second quarter combined ratio was 96.8% compared to 103.2% in the second quarter of 2012. There was no prior year reserve development in the quarter. In California, the California Department of Insurance approved our 6.9% rate increase in our non-standard California company, which represents approximately 23% of our California private passenger auto business. The new rates went into effect on July 21. The California Department of Insurance is currently reviewing our 6% rate increase in our preferred auto California company. We expect to have an indication from the department on this pending filing in the next few weeks. As we previously reported, the California Insurance Commissioner accepted a decision from an administrative law judge to reduce our homeowners' rates by approximately 5.5%.
We strongly disagree with the administrative law judge's proposed decision. In fact, our most recent results clearly demonstrate that the judge's forecasted trend selections were significantly too low for our largest homeowners' form. We are contesting the proposed rate reduction in Superior Court, including our right to earn a fair rate of return. The case is expected to be heard in November. In connection with our challenge, the Superior Court judge recently denied our motion to stay the rate reduction pending the outcome of the case. Accordingly, we reduced our California homeowners' rates an average of 5.5% on May 11th. In addition to the Superior Court proceeding, we filed for a 6.9% rate increase that reflects our more recent results. The Insurance Commissioner has issued a notice of hearing on this rate filing, and a hearing is scheduled to commence in the fall.
Our results in the quarter were helped by the continued improvement of our underlying operations outside of California. Excluding the impact of our $13 million catastrophe charge, our operations outside of California posted a combined ratio under 100% for the second consecutive quarter. Over the past few years, we have taken significant rate action in most states outside of California, and the impact of those rate actions is having a positive impact on our results. Our premiums written growth slowed on a sequential basis from 4.9% in the first quarter of 2013 to 1.8% in the current quarter. Our expectation is our top line will be under pressure going forward as new business private passenger sales and retention levels outside of California have declined due to rate increases and the California market remains very competitive.
With that brief background, we will now take questions.
At this time, if you would like to ask a question, you can do so by pressing star and then the number 1 on your telephone keypad. Once again, that is star 1 to ask a question. We'll pause for just a moment. Your first question comes from the line of Vincent DeAugustino with KBW.
Hi, good afternoon and good morning for you guys out there in California.
Afternoon.
My first question would be on the heels of your non-standard auto approval, I'm just kind of curious if hopefully the approval there on the 6.9% rate increase would maybe give you some more confidence in getting approval on the preferred auto request, if that would make sense.
Robert, do you want to handle that question?
Obviously, the department agreed with or came up with an indication that they believe supported our rate request, our non-standard product, so that was a positive development. Each filing is separate and considered on its own, and we haven't had a meeting yet with the department to review their indication on the MIC filing. It's difficult at this time to assess what the department's outcome will be on that particular rate request.
Okay.
Yeah, I think I would agree with that assessment. Each filing stands on its own, and we're going to have to just wait and see, Vincent.
You guys, I know you've mentioned this quarter in the past about the California market on the auto side being competitive. I'm just curious if you think there are really any changes coming down the pipe, just with several comments coming from some competitors like Progressive or Travelers just making comments about ramping up their rate competition. Would that kind of imply that status quo competition levels remain, or do you think that we kind of ramp up the amount of just rate decreases coming from some of those guys and other competitors that would maybe challenge some retention levels?
Well, I think here in California, we haven't really seen any rate decreases. California is our largest market. We have seen some carriers tighten some underwriting here in California. Outside of California, I think by and large, we've seen more rate increases than we have rate reductions. I think you're referring to the comments that Travelers has made that they're going to try to become more competitive, and they're addressing their underlying cost structure to become more competitive. We're going to have to wait and see what comes of that. As far as our approach outside of California has been to improve our profitability, number one, and we've done that, and now we're trying to address the top-line growth outside of California.
As I mentioned in the previous call, in the first quarter of this year, we took steps to improve our cost structure, and we did the hub consolidation and also taking a look at other costs outside of California. It's important, obviously, to offer a competitive product. You have to have a competitive cost structure. That's what apparently Travelers has been mentioning in the previous call and something that I think all carriers are taking a look at.
That makes good sense to me. Just one last one, I'll re-queue. From an auto loss cost standpoint, it kind of looks like trends maybe haven't been as problematic more recently as kind of what they were in the previous year. I'm just curious if you guys are seeing that or if there's been any notable trends of acceleration or deceleration from what you're seeing. I guess also from a reserving standpoint, it looks like things may be developing kind of along what you guys have expected, which maybe points to just stable loss cost trends. Again, curious of any thoughts that you guys may be seeing.
Yeah, Vincent, this is Ted. We've basically experienced low single-digit frequency and severity in California, which is about what we've expected. As you remember, we took a 4% rate increase last October, that's kind of keeping up with the trend. Outside of California, it's varying quite a bit by state. If you take out the CATs, it's been a fairly benign loss cost environment, it's been within our expectations.
All right. Perfect. Thank you.
Once again, if you would like to ask a question, please press star and then one on your telephone keypad. Your next question comes from the line of Alison Jacobowitz with Bank of America.
Hi. Thanks. I guess two questions. One to follow up on Travelers. I think they were complaining about the impact on their auto business from agents using comparative raters. Are you seeing that? Is that a material impact for you? Also, if you could talk about just what the differences you're seeing between portfolio yield and the new money yield.
I think from the comparative rater standpoint, there's no question that the past five, 10 years more and more agents are using comparative raters, which leads to more price transparency. The internet leads to more price transparency. Price matters in this business. Does it have an impact? Yes, I think it does have an impact. It varies by state. The more the agents use these comparative raters, the more quotes they get from different carriers. Price is a big factor, so it does have an impact. I would say that the impact today is more than it was five to 10 years ago. Robert, do you want to add to that or?
No, I think it's been a gradual change over the last 10 years.
Yes.
We've seen that process. I'd agree. It's becoming a market where many customers view it as a commodity and price drives business, and the comparative raters make the price differences more transparent to consumers.
Yeah. The second question on the new money. Chris is not with us this morning, but I think rates in the second quarter, at the end of the second quarter backed up a little bit, and we were able to get actually yields and munis that were more attractive to our current book yield, slightly more attractive to the current book yields. The new money that we put into place in the second quarter, a lot of that new money was actually placed at a little bit higher yield than our book yields.
Thanks.
Okay.
Next you have a follow-up question from the line of Vincent DeAugustino with KBW.
Hi, thanks again. Just two quick ones. From the data that I'm looking at for California, it looks like the weather was pretty good this quarter versus 2012 and 2011. Obviously you guys have a much better feel for what actually happened than I would from the high-level data that I look at. I'm just kind of curious if you'd be able to comment on California weather-related frequency and whether that meaningfully impacted your loss ratio this quarter.
I don't think the weather was much different year-over-year on a quarter basis. I think the frequency in California was up slightly.
Yeah. Which is consistent with what the trend has been. I don't think weather was a big impact this quarter.
Yeah. Last year, you might want to recall, Vincent, that we booked a great deal of reserve development in the quarter. I forget the number off the top of my head, but it was-
Over $20 million.
Over $20 million in the second quarter of 2012. That was a large reason for the increase in the loss ratio back in the second quarter of 2012.
Okay. That's really helpful. I just look at the NOAA storm counts, which I'm always curious if those are actually telling me the right thing. I think with that, it was like a 67% reduction in California storm count, so always good to get the actual feet on the street kind of perspective.
It doesn't rain much in the second quarter here in California. It doesn't really rain much at all here.
67% of zero.
Yeah, 67% of zero is not a lot.
Got you. That's a very good point. The last one I have, and just some of your comments earlier in your prepared remarks about homeowners. The one thing I'm kind of wondering is if there's any risk to having your homeowners rates sort of bounce around and really kind of where I'm kind of coming from on that is I'm just curious if with below what you'd kind of want from a homeowner's rate, if that kind of puts you at risk for getting some unattractive business, which obviously once you kind of get your rates sorted out, you can deal with that. Do you think that's a real big concern or not something that we should worry about?
Not sure what you mean by unattractive business. I think we had to implement rates that we feel are too low for us to get an adequate return, which includes this 5.5% reduction. Before the 5.5% reduction, we had filed for a 6.9% rate increase because we felt that the line for us to get an accurate rate of return, we needed that rate increase. Now our application counts after the 5.5% rate reduction really haven't changed much in our homeowners line. It's not like we're getting to your question, potentially, are we getting unattractive business? However, you're defining that. I'm not sure how you're defining that, but the answer is, well, the volume hasn't really changed that much. We do feel that we need higher rates in this line of business.
Okay, perfect. That's really helpful.
Okay.
Thanks.
Sir, we have no further questions in the queue at this time.
Great. Well, I'd like to thank everyone for joining us.