Good afternoon. My name is Kimberly, 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 speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then 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 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 conference over to Gabriel Tirador. 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. In the room with me is Mr. George Joseph, Chairman, Ted Stalick, Vice President and CFO, Chris Graves, Vice President and Chief Investment Officer, and Robert Houlihan, Vice President and Chief Product Officer. Before we take questions, we will make a few comments regarding the quarter. Our Q1 2012 underwriting results improved as compared to Q1 2011. Our combined ratio was 97.6% in Q1 2012, compared to 98.2% in Q1 2011. In Q1 2012, we recorded $6 million of unfavorable reserve development, compared to $1 million in Q1 2011.
Excluding the impact of reserve development in both years, the combined ratio was 96.7% in Q1 2012, compared to 98% in Q1 2011. The combined ratio was aided during the quarter by our continued focus in reducing expenses. Consequently, our expense ratio declined to 26.8% from 28.3% in Q1 2011. Premiums written were essentially flat this quarter. There were some moving parts to the written premiums, primarily resulting from the California personal auto revenue-neutral class plan that we implemented in December 2011. The plan improved our risk segmentation also caused dislocation to some of our existing customers. The refined pricing improved our competitive position for new business, our California new business private passenger auto sales increased year-over-year in the quarter by 16%.
The rate dislocation caused our renewal rates to decrease, but at a rate lower than we had expected. We are pleased to report that our operations outside of California posted a combined ratio under 100% in the quarter. We have made great strides in our operations outside of California. We are not where we want to be, and the environment in some states, such as Florida, are challenging. We continue to aggressively make changes to our rating plans to improve our segmentation and overall pricing adequacy. After-tax investment income declined by 10% to $28 million in the quarter. As we mentioned in our annual report, going forward, it will become increasingly difficult to maintain the current after-tax yields as bonds with higher coupons mature or are called, and the reinvestment of those proceeds will most likely be made at lower after-tax yields.
The after-tax yield in the quarter was 3.8%, compared to 4.1% in the first quarter of 2011. With that brief background, we will now take questions.
At this time, I would like to remind everyone, 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 Alison Jacobowitz of Bank of America.
Hi. Thanks. I guess a couple of questions. It looks like the tax rate on net investment income has been drifting up. Should we expect this to continue? Also on the expense ratio, I think last quarter, you suggested that a normalized expense ratio might be a little bit higher than 27. I think it was a 27%-28% range. This quarter came in a little lower. Would you make an adjustment to that statement, or do you still think the expense ratio might tick up a little bit?
Hi, Alison. I don't expect that to continue to trend up. It may come back down even. As far as the expense ratio going forward, we're still looking at around the 27%. It's where we're expecting it to run.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star, then 1 on your telephone keypad. We do have a follow-up question from the line of Jay Cohen with Bank of America.
Thanks again. On the combined ratio, if you're now making money outside of California overall, the overall combined ratio, I don't think it's really changed much over the past several years. Does it mean that the California combined ratio is deteriorating, or am I missing something in the math there?
Well, we have had some pressure in our California combined ratio. It's still below 100%. We do have some rate increases that are pending. We have both a homeowner rate filing that we made a few years ago that we finished up with a hearing there, and expect a result from the judge over the next several months. We have a California private passenger auto rate that we filed that we are in discussions with the department about, and we have a meeting scheduled with them sometime in May. That's for about a +6%. We do have some rates that we plan on implementing sometime in the future in California to help with the combined ratio in California. Although I will say that the combined ratio in California is still combined well below 100%.
Just if there were any cat losses in the quarter, could you tell us? Can you talk about frequency and severity trends maybe in general, if any states are more problems than others? Some have brought up Florida again as being an issue. Just talk about what you're seeing there.
Yeah. Florida continues to be an issue. We're seeing pressure on our loss costs. We have been taking quite a bit of rate increase there. Generally, though, we're seeing slight increases in frequency, low single digits, as well as in severity. As far as cats go, it was pretty quiet quarter for Mercury at least as far as cats went.
Thank you.
Your next question comes from the line of Vincent DeAugustino of Stifel Nicolaus.
Hi, good morning. Thank you. Good morning.
I was curious if you might be able to comment on the accident years that the adverse development in the first quarter of 2012 happened to come from.
Primarily, 2011 and 2010, That was mostly in California auto. We did have a little bit of positive development from some states outside of California offsetting that.
Okay. Thank you. I guess just looking at your pending rate increase in California auto, then just taking a look at some of the other insurers, it seems like the pending time that it takes to get a request through is somewhere in the neighborhood of maybe five to six and maybe even more months than that. I'm just curious if, in your opinion, if there's been any change in the current administration in the California Department of Insurance compared to previous ones. If, say half a year is what it's always taken to get a rate request through. It seems, I guess maybe I'm wrong here, but it seems like that's a long time to be able to get an approval when we're looking at that being one-plus policy period.
Well, it's longer than we would like. I'll put it that way. We're going to continue to work with the department in trying to get them implemented as quickly as possible. It is running longer than we would like at this point.
Okay, great. Thank you so much.
Okay.
once again, if you would like to ask a question, please press star one on your telephone keypad now. Your next question comes from the line of Meyer Shields of KBW.
Hi, guys. Did you guys experience any current year favorable development in the quarter or any adverse?
Well, it's only the first quarter, so there wouldn't be any.
In the current year, nothing?
Correct.
I noticed also that debt came down a little bit past two quarters for the interest rate going forward. Is this a good run rate we should be looking at?
Right. We refinanced all of our debt last fall, and our $120 million credit facility with one of the financial institutions is now at a LIBOR plus 40 basis point floating rate.
Okay.
That will vary based on what LIBOR does. It's significantly lower than it was last year.
We can say pretty much just follow the LIBOR and just be a pretty good run rate then?
Correct.
Okay. That's all I have. Thank you.
At this time, there are no further questions.
Okay. Well, I'd like to thank everyone for joining us this quarter, and we look forward to talking to you again in the second quarter. Thank you very much.
Ladies and gentlemen, this concludes today's conference. You may now disconnect.