Good afternoon. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to 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 positions. 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 will now introduce and turn the call over to Mr. Gabriel Tirador, President and CEO. You may begin your conference, sir.
Thank you very much. I would like to welcome everyone to Mercury's first 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. John Sutton, Senior Vice President, Customer Service. Chris Graves, Vice President and Chief Investment Officer. Before we take questions, we will make a few comments regarding the quarter. I am pleased to report we started 2013 much better than we ended 2012. Our first quarter 2013 combined ratio was 97.9% compared to 97.6% in the first quarter of 2012.
Our first quarter results were negatively impacted by $10 million of pre-tax charges related to our previously announced consolidation of our operations outside of California and $1 million in catastrophe losses related to weather-related events in Georgia. This was partially offset by $3 million of favorable reserve development coming primarily from operations outside of California. Our California auto loss frequency trend is essentially flat compared to the first quarter of 2012. In addition, our results in the quarter were helped by the continued improvement of our financial results outside of California. Last quarter, we reported on our decision to increase our estimates for California bodily injury severity as the more recent accident years are developing at a higher rate than historical averages. Our first quarter 2013 losses were consistent with the recent development trends we have observed.
We believe the increase in severity we are seeing is in part due to more severe accidents and increases in medical procedures. In California, we increased our private passenger auto rates approximately 4% effective October 26, 2012. Although the 4% rate increase will aid our results in 2013, we don't believe it is sufficient for us to reach our profitability target. Accordingly, we filed for a 6.9% rate increase in our non-standard California company and 6% in our preferred auto California company. The filings are currently being reviewed by the California Department of Insurance. In our California homeowners line, the insurance commissioner accepted a decision from the 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 actual results clearly demonstrate that the judge's forecasted trend selections were significantly too low for our largest homeowners form. Accordingly, we are contesting a proposed rate reduction in Superior Court. We expect the Superior Court to render a decision in late summer. 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 the hearing is expected to commence in early September. We will continue to pursue rates that allow a fair rate of return in our homeowners line. Offsetting some of the regulatory challenges we are experiencing in California are our results outside of California. Excluding the impact of our $10 million consolidation charge, our operations outside of California posted a combined ratio well under 100%.
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. Lastly, premiums written continue to grow due to the combination of rate increases and increases in policies in force. Premiums written grew by 4.9% in the quarter. However, as expected, new business private passenger sales and retention levels outside of California have declined due to rate increases. In addition, the California market remains very competitive. With that brief background, we will now take questions.
Ladies and gentlemen, at this time, 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 Vincent D'Agostino with KBW. Your line is now open.
Hi, and good morning, guys. Thanks for taking the questions. In the press release, you mentioned Florida and New Jersey reserves developing favorably, and you just touched on it a couple of minutes ago. I was just curious, how did California do in the quarter, and would it basically be flat on reserve development just based on your comments about trends being consistent lately?
That's
California was pretty much flat.
Okay, perfect. I know this is kind of hard to do, but as far as the rate filings that you have for non-standard auto and the preferred, do you have any sense of how that's going through with the department? Is last time just with the, I think it was about one year, maybe, that it took to get approval. Should we expect something like that this time around or do things seem to be expedited a little bit faster this time?
Hi, this is Robert Houlihan. We've had some preliminary discussions with our Cal Auto filing for personal auto, and as you may know, there's an intervener on that filing. We're having a three-way discussion between the department, the intervener, and ourselves in about two weeks. I would think at that point in time, we would know a lot better the timing of resolution on that. We're making progress, but because we don't control all aspects of this, we really can't predict an exact date. We have made some significant progress on the first rate filing.
Okay.
That's the Cal Auto, the non-standard company.
Okay, perfect. Then if you can track it at all, just because we're hearing in the industry there's been a lot of benefit from unusually favorable non-cat weather, such thing exists. Is there anything that you could quantify as far as just a benefit from unusually favorable weather, either inside of California or maybe to the point about the lines outside of California doing pretty well this quarter, if there was any sort of one-off benefits there?
Well, a year ago, I think, we didn't have any cats. In this quarter, this was about $1 million in Georgia, so it was a very light cat quarter. In California, I think the weather was probably comparable to a year ago. We did have rain in California in the first quarter. Our biggest market here in California, I don't think that we benefited.
Our frequency was essentially flat.
Yeah
in California compared to a year ago. I guess in general, the weather tended to be fairly favorable this quarter.
Okay. I guess, just to be clear, I was looking at more of the non-catastrophe weather. I know in Georgia there was obviously some cat activity, but broadly speaking so far, if I'm looking at NOAA storm counts or just other comments, it seems to be more of the benefits coming from the non-catastrophe losses. Just to be clear, would the-
Okay. Well, I think in California, as we mentioned, we think that the frequency was relatively the same as a year ago. The weather, I would say was comparable. I would say no to that. Outside of California, there was probably some benefit with respect to lighter weather, we haven't quantified that.
Okay, great. All right, well, thanks for all the answers and congrats on the nice-looking quarter.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Allison Jacobowitz with Bank of America Merrill Lynch. Your line is open.
Thanks. I was wondering if you could talk about investment income a little bit. I know we always have these quarters where it goes up a little bit or down a little bit, but it does seem that the first quarter versus the fourth quarter, there's a notable drop-off. Also, the tax rate, if I'm doing this right, went down a bit. I was just wondering if you could talk about that and how it might trend going forward.
Well, as far as trends going forward, that's hard to make a call on because a lot of it's dependent upon interest rates since we're so fixed income sensitive. We do continue to see redemptions on our callable municipal bonds and then reinvesting those at market rates, which are below where they were held. It does continue to put forward pressure on the investment income. We did have a lot of cash last year, and we've been soaking that up with other investments, such as taxable corporate, which is one of the reasons you're seeing the tax rate creep. We've also pushed a lot more into equities over the past 12 months. As far as forward-looking trends, I can tell you we're just trying to maximize what is available to us.
I think in the fourth quarter, we may have had some special dividends.
We did pick up special dividends in the fourth quarter.
We did pick up some special dividends. If you're looking at it on a sequential basis, maybe that's why, Allison.
Thanks.
Your next question comes from the line of Tom Moritz with Corral. Your line is open.
Hello. Allison got to most of it. I guess, maybe Chris, can you give us an update where you are, equities versus bonds, and maybe where that target might go?
The equities, as I just stated, we have increased that investment over the past 12 months. Currently, basically it's maxed out. It's as far as I'm going to take it. We are now making more or less trades within that portfolio to further increase the investment income that it's providing.
The growth of the equity assets will now basically be determined by the growth of the portfolio in general. Does that get to what you're looking for, Tom?
That's fine, thanks.
All right.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Ray Iardella with Macquarie. Your line is open.
Thanks. Good morning to you guys. I just had a couple questions. I guess first, Gabe, in your prepared remarks, you mentioned non-California combined ratio below 100, even assuming the $10 million charge. Just curious, can you give us, I guess, the sort of year-over-year improvement in the combined ratio for California and then ex-California?
We don't disclose that. We don't separate that between California and non-California in our disclosures. I can say that there was marked improvement outside of California, and it was pretty significant.
Okay. In terms of California, was that roughly flat or did it move adversely, or did that improve as well?
Relatively flat.
Okay. Maybe, can you talk a little bit about the homeowners business? Obviously, you've been adding to the top line. Is there sort of a different way you think about the combined ratio that you want to get the adequate return on that business relative to the auto business, or maybe can you talk about that a little bit more broadly?
Well, yeah, in our homeowners line, certainly it's subject to catastrophes. There's a big, usually in states where there's a lot of catastrophes, there's a large catastrophe charge. In quarters and years where there are no catastrophes, you should be running at a very healthy combined ratio in those quarters. Yes, our expectation for the homeowners line is to, in non-heavy cat quarters or years, is to run combined ratios well below our auto combined ratio.
Okay, adding the homeowners business will help you guys get to that 95% target that you guys have talked about in the past.
Absent any catastrophe.
Yeah. Yes.
Absent any, yes.
Okay. I just want to try to figure out how you guys are going to get to the 95 just with all the moving pieces. I appreciate the color.
Well to get to the 95 we need rate relief in California.
Understood. Thanks again.
Thanks.
Your next question comes from the line of Norman Turner with Morgan Stanley. Your line is now open.
To what extent, if any, does the activities of Harvey Rosenfield and like-minded parties poison the regulatory environment for you?
Well, in California, there's an intervener process, and one of the largest interveners is Consumer Watchdog, probably the only intervener. I would say it certainly adds significant delay to the process. That's what we're seeing today, is that it certainly adds quite a bit of delay to the process, Norm.
Thank you.
There are no further questions in queue at this time. I turn the call back over to the presenters.
Well, thank you, everyone, for joining us this quarter, and we hope to bring good results next quarter as well. Thank you very much.
Ladies and gentlemen, thank you for joining. This concludes today's conference call. You may now disconnect.