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. Good afternoon. My name is Brittany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercury General second quarter 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 followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.
Thank you. I would now like to turn the conference over to your host, Mr. Gabriel Tirador, CEO. Sir, you may begin.
Thank you very much. I would like to welcome everyone to Mercury's second quarter conference call. In the room with me is Mr. George Joseph, Chairman, Theodore Stalick, Vice President, CFO, Christopher Graves, Vice President and Chief Investment Officer, John Sutton, Senior Vice President, Customer Service, and Robert Houlihan, Vice President and Chief Product Officer. Before we take questions, we will make a few comments regarding the quarter. I am pleased to report that for the second consecutive quarter, premiums written increased over the prior year. Although premiums written increased by a modest eight-tenths of 1% in the quarter, it marked the second consecutive quarter of positive premium growth since the first quarter of 2007. In addition, California private passenger auto new business sales during the quarter grew modestly on a year-over-year basis for the first time since 2006. Our operating results also improved on a sequential basis.
The 98% second quarter combined ratio was slightly better than the 98.2% combined ratio posted in the first quarter of 2011. The combined ratio was aided during the quarter by our continued focus in reducing expenses. In 2010, the expense ratio was negatively impacted by our support of Proposition 17. Excluding the cost associated with our support of Proposition 17 in 2010, our expense ratio declined from 28.7% in the second quarter of 2010 to 27.7% in the second quarter of 2011. We were fortunate not to have been significantly impacted by severe weather in many states during the quarter that not only caused a significant amount of property loss but took the lives of some of our fellow citizens. Our catastrophe losses in the quarter were approximately $3 million, most of which was from the state of Georgia.
Year-to-date, we recorded $10 million of unfavorable reserve development compared to $22 million of favorable development in the first half of 2010. Excluding the impact from development, the loss ratio was 69.3% in the first half of 2011, compared to 69.5% in the first half of 2010. During the quarter, we sold our first policy online in the state of Georgia. Although early in the pilot, we are encouraged by the technology we have developed that allows for the sale of new business online and also includes our agency partners in the transaction. We will evaluate the Georgia pilot over the next several months and evaluate potential next steps, including the deployment of the online capabilities to other states. As we mentioned in last quarter's conference call, we filed a class plan in our California companies to improve our segmentation.
Based on our analysis, we believe there are significant opportunities to improve our segmentation. In other words, our current rating plan is overpricing and underpricing many risks. We have been working with the California Department of Insurance to finalize the filing. Since these class plans are revenue neutral, we expect the approval process to be relatively smooth with an implementation date sometime later this year. With that brief background, we will now take questions.
Once again, if you would like to ask a question, please press star one on your telephone keypad. Again, that is star followed by the number one to ask a question. We'll pause for just a moment to compile the Q&A roster. Again, that is star one to ask a question. Your first question does come from Alison Jacobowitz with Bank of America.
Thanks. I was just wondering if you could talk a little bit about maybe more broadly frequency and severity trends and maybe margins inside California and out. Also for the growth, if you could give a little bit more color, maybe where that's coming from, what you're seeing there, and your outlook for that in the quarters to come.
We're talking about the-.
On the loss side, Alison, this is Ted. Possibly be attributable to the high gas prices in the quarter. We're not positive. I'm not sure if that's a trend or just some benefit we received in the second quarter. As we said before, outside of California, it varies a lot by state. In general, costs are going up, again, it varies a lot by state. Some are going down, several are going up.
On the growth side, in California, Alison, we're relatively flat, maybe down slightly in California, offset by some growth outside of California, although it's a mix. There are some states outside of California that are growing more rapidly than others, and there are some states outside of California that are declining. It is somewhat of a mix. Looking forward to this quarter, it's hard to anticipate what's going to happen all three months, we are continuing to see, at least in July in California, the continued trend of new business sales being above where they were a year ago. That trend has continued through July. Whether or not that continues for the remaining months in the quarter is yet to be seen. That's kind of where we're at on the growth aspects.
Thanks.
Your next question comes from Meyer Shields of Stifel Nicolaus.
Thank you. Let me start. On the revenue side, the other revenue line picked up fairly dramatically again year-over-year. Can you talk a little bit about what's driving that?
Meyer, this is Ted again. Our other income includes a lot of items such as gains on fixed asset sales, premium finance fees, changes in the market value of swaps not designated as hedges, and commission income earned by AIS on policies written for other carriers. There's a lot of different components in there. The increase this quarter was largely due to the gains on disposition of some older fixed assets that we liquidated during the quarter.
Okay. Pardon me, if I understand that correctly, we should assume that'll come down to where it did in the previous quarters?
Could you repeat the question, please?
I guess what I'm asking is, the prior two quarters was in the $3 million run rate. Is that a decent number for future quarters?
Yeah, that's more typical.
Okay. Can we just get, I guess, some discussion on your California muni holdings?
Well, we maintain a very low exposure to Cal GO debt. We've got bonds throughout the state. I'm not sure I have our Cal exposure right here in front of me, but bear with me a minute here. Yeah, it's about 11% of the municipal bond portfolio with an average rating of A+. I'm not sure what else you'd like to know about the.
No, just the 11% was what I was looking for. That's all.
Okay.
Thank you very much.
Sure.
Once again, ladies and gentlemen, if you would like to ask a question, please press star one. Your next question comes from Dean Evans of KBW.
Yeah, thanks. I was wondering if we could get maybe a little more detail on the reserve additions in the quarter. From the text, it looks like it was largely from the 2010 accident year. I'm not sure if that's correct. Just any other color you have on that would be helpful.
Hi, Dean. Actually, it's from the 2009 accident year, and a little bit from the 2010 accident year in California. We did have some offset. We have some loss adjustment expense redundancies in some areas that partially offset that.
Is there anything, I guess, kind of major happening with the reserves? It seems like you had maybe two years there where you were seeing favorable development every quarter. Now for the last couple, three or four quarters, we've seen some minor additions. Anything changed in the overall reserving philosophy? Anything we should be thinking about from that perspective? Is it just sort of what you mentioned, that the claims trends a little bit worse than expected?
We evaluate our reserves every quarter and do our best to make the most accurate estimate of what we think the losses will be. As you know, it's an inexact science, and sometimes we're a little over, sometimes we're a little under.
Okay, nothing has really major changed in the way you look at it? No change in philosophy at all?
No.
Okay. I guess, lastly, could you give us an update on how the Florida homeowners withdrawal is progressing?
It's continuing to progress well. We started sending out the notices in March, policies are starting to non-renew in, I believe, September. By September 2012, we should be out of the Florida homeowners market.
Okay, the non-renewals don't start till September?
Yeah, because you're required in Florida to provide a six-month notice. We started that six-month notice, I believe, in early March.
Okay. All right. That's all I have. Thank you.
Great.
Once again, that is star one for any questions at this time. Your next question comes from Brian Pere of Sansone Partners.
Good morning, thanks for taking my question.
Sure.
It was in the papers last week that GEICO was forced to cut rates almost 11% in California. I was wondering if you could discuss the risks to your business in two regards. One is just a greater competitive threat from GEICO's lower prices, two, just the risk of greater advocacy from the regulators and consumer advocacy groups. Thank you.
Good question. With respect to GEICO, we run competitive analysis internally here among all of our major competitors. We still feel that, with respect to GEICO, that we still have very competitive rates today. We still believe that our rates are very competitive. We also feel that with the new rate level that we anticipate putting into effect sometime later this year, that I discussed in my prepared remarks, that is going to actually provide us with a more competitive rate on new business as well. From that standpoint, we feel fairly comfortable with our competitive position in the marketplace right now.
Your second part of the question regarding regulatory actions from either the interveners or the DOI itself, it's something that we have had to deal with really for the past, I don't know how many years, many years. It's something that not only us but the whole industry has to deal with. I believe GEICO had originally filed for a small increase and ended up refiling it for a small decrease in the neighborhood of lower single digits but ended up with a -11. At least that's my recollection. We deal with it. We feel that when we make a rate filing for an increase, which we actually anticipate making a rate filing for an increase here in California shortly, I would say probably by the end of September, we will make a rate filing for a small increase here in California.
We feel that we can substantiate our rates.
Okay. It's pretty remarkable for one company to file for a slight increase and end up with a massive decrease. It sounds like you're saying, hey, that's a GEICO specific problem. That may be something specific to the way they were calculating the rate increase that was appropriate.
I can say that in our latest filing that we filed back in December, we had filed for a small increase and ended up with a decrease. The spread we had was not as broad as the spread that GEICO had. They had come up with a plus something and had a negative 11. Our spread was not nearly that wide. In our last filing that we had back in December where we had filed for, I think, a one and a half and ended up with a negative four.
Right.
Those are ballpark figures.
Great. Thanks for taking my questions.
Your next question comes from Alison Jacobowitz with Bank of America.
Thanks. I know you mentioned the expense ratio in your opening remarks, but I just want to make sure I'm not missing anything. Was there anything unusual that helped it? How do you see the run rate there going forward?
Hi, Alison. Probably the year-to-date run rate is pretty close to where we see it going. We're a little under 28 for the quarter. There's not a lot of unusual items in there, but we've done a really good job this year of reining in expenses. We've reduced our technology spend. Our ad spend is a little lower this year than it's been in previous years, and we're just watching the expenses closely.
Okay, thanks.
We have no further questions at this time.
Okay. Well, I would like to thank everyone for joining us this quarter. We look forward to speaking with all of you next quarter. Thank you.
This does conclude today's conference call. You may now disconnect.