Good afternoon. My name is Christy, and 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 that time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I will now turn the conference over to Gabriel Tirador.
Thank you very much. I would like to welcome everyone to Mercury's fourth 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, and Chris Graves, Vice President and Chief Investment Officer. Before we take questions, we will make a few comments regarding the quarter. Our fourth quarter 2011 operating results improved significantly as compared to the fourth quarter of 2010. Our combined ratio was 99.4% in the fourth quarter of 2011 compared to 109.9% in the fourth quarter of 2010. On a sequential basis, the combined ratio deteriorated slightly as severe windstorms in California during the quarter negatively impacted our results by $10 million.
In addition, the fourth quarter tends to have higher loss costs from increased usage as well as more wet weather. The fourth quarter results were aided by a decline in the expense ratio. The expense ratio in the quarter was 25.7%. The expense ratio in the quarter was unusually low, primarily due to reductions in profitability-related accruals, including contingent commission and employee underwriting bonus accruals. Going forward, our current expectation is for the expense ratio to be in the 27%-28% range. Premiums written in the quarter increased by 0.2%, and for the year, premiums increased by 0.8%. 2011 marks the first year since 2006 that company-wide premiums written increased. In December, we implemented a new automobile class plan in California. The revenue-neutral plan improves our segmentation and results in more refined pricing.
Although still early, our new business sales have increased year-over-year in the mid-single digits, and our retention has not experienced significant deterioration. It has now been over six months since we sold our first policy online in the state of Georgia. We are pleased by the technology we have developed that allows for the sale of new business online and also includes our agency partners in the transaction. Our plans are to expand this capability to other states, and we expect to have another state selling online by the end of 2012. With that brief background, we will now take questions.
As a reminder, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Meyer Shields of Stifel Nicolaus.
Thank you. Good morning, everyone.
Morning.
Gabe, can I ask you first to quantify what you see as California auto loss cost inflation right now? I guess the overall trend.
Andy, you want to?
Hi, Meyer. We're seeing some single-digit increases in frequency and generally flat to small increases in severity.
I guess no conclusive updates from your communications with the departments about your rate increase or the file rate increase?
No, there's been some correspondence going back and forth. Robert, do you want to add anything to that?
No, there's really not much to add on our auto rate filing at this point. It's still under review by the Department of Insurance.
Okay. Last question, if I can. I appreciate the update with regard to the Georgia direct auto sales. Can you talk about whether the loss experience is matching your expectations or how well that's performing?
I'll let Robert answer that question.
Yeah. Because it's just new business. We've only been doing it for six months. We really don't have a credible amount of premium at this point, but we've been tracking our frequency, and that's been in line with our expectations.
Yes, that's great. Thank you very much, all.
Thank you.
Your next question comes from the line of Alison Jacobowitz of Bank of America Merrill Lynch.
Hi. Thanks. Can you just first confirm in the quarter was the adverse development, was it $7 million? I just want to make sure that I'm tracking the quarters correct. I know you gave the year-to-date number in the release. I didn't see the quarter. Then the second part of that is, can you just talk about what drove the adverse development in the quarter?
Yeah, we report the $18 million year-to-date, which is on 2010 and prior accident reserves. If you want the amount for the quarter, you subtract last quarter's year-to-date, and you get the $7 that you just referred to. You're correct there. There's really several moving parts in the development. Year-to-date, most of it's coming from California BI increases in severity from the 2009 and 2010 accident years. Does that answer your question?
Yes. Thank you.
Okay.
Your next question comes from the line of Matt Rohman of KBW.
Gentlemen, good morning. Any other weather-related losses outside of the windstorms that weren't mentioned? Then just in terms of the state mix, any pockets of strength or weakness in terms of pricing outside of California?
On the weather side, there was nothing that we would consider significant or unusual.
Other than the California-
Other than the $10 million from California.
Robert, do you want to talk about the pricing outside of California?
We've been increasing rates to address profitability sort of across the board, there aren't really any pockets of profitability that needs to be addressed further at this point.
Okay, great. Thank you.
Once again, to ask a question, please press star one on your telephone keypad. There are no further questions at this time. I apologize. We do have a question from the line of Corey Wren of The Cotton Company.
For 2012, what is the competitive environment you're dealing with right now? I see all these ads from GEICO and Esurance and all these people, I was just wondering how you're holding up around that. Thank you.
We missed the first part of your question, sir. Can you repeat the question?
Oh, I'm sorry. Yeah. What is your outlook for 2012? I see your premium volume is starting to go back up. I was wondering what your outlook is, especially in California. Thank you.
Well, as I mentioned in my prepared remarks, we were glad to see positive premium growth for the first year since 2006. However, it does continue to be a very competitive environment. The increased advertising spend that you just mentioned, for example, in GEICO, and Esurance space today, as compared to five or 10 years ago, is pretty dramatic. Our goal is for us to increase the number of quotes being presented to our potential customers. We do believe we have competitive rates, but getting more looks helps. We also believe that our closing ratio can be improved upon with better segmentation. The class plan filing that we just implemented in December in California that I mentioned earlier is helping with new policy sales. It's early on. We need to give it a few more months.
As I mentioned in my prepared remarks, new policy sales are up year-over-year in the mid-single digits. We're looking forward to a good 2012. We don't forecast premium growth. We are excited about what we are seeing with respect to Rate Level 38. We're encouraged by it. We're also encouraged by the fact that the retention has not deteriorated as much as we would have otherwise have expected when you make such a big change with respect to your class plan. Those two things have been a positive.
Okay. Thank you.
You're welcome.
There are no further questions at this time. I apologize. We do have a question from the line of Meyer Shields of Stifel, Nicolaus & Company, Incorporated.
Sorry, just one small question. I was wondering if you could explain why the written premium growth slowed a little bit in the fourth quarter versus third. Is that one state? Is that more widespread?
There's some seasonality with respect to I think our biggest quarters, if I'm not mistaken, are the first and third quarter. Ted, anything else?
Well, we stopped renewing the Florida homeowners book starting in September, so that affected the out-of-state.
Oh, okay. Got it. That's going to be over 4 quarters, right?
Yes. That'll go through September next year.
Okay.
Yeah. September next year, we'll be out of the Florida homeowners business, Meyer.
Okay, great. Thanks very much.
There are no further questions at this time.
Okay. Thank you for joining us this quarter. We look forward to speaking with you next quarter. Thank you.
This concludes today's conference call.