Good afternoon. My name is Wes and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercury General fourth 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, then the number one 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 result of operations to differ materially from those discussed here today.
I would now like to turn the call over to Mr. Gabriel Tirador. Sir, please go ahead.
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, 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 2010 operating results deteriorated significantly as compared to the fourth quarter of 2009. Our combined ratio was 109.9% in the fourth quarter of 2010, compared to 98.1% in the fourth quarter of 2009. Our fourth quarter 2010 operating results were negatively impacted by severe weather in California and sinkhole losses in our Florida homeowners line of business. In California, severe rainstorms during the quarter impacted both our auto and homeowners results.
In December, areas of Southern California experienced over 10 inches of rain during a five-day period from December 18th to December 22nd. As a result, our California auto frequency was up approximately 7% as compared to the fourth quarter of 2009. In our California homeowners line, we experienced an increase of over 1,500 claims in December 2010 as compared to December 2009. We estimate that the pre-tax losses resulting from the California rainstorms were approximately $25 million in the quarter. Our Florida homeowners line continues to present significant challenges as a result of sinkhole claims. It produced a $19 million underwriting loss during the quarter. The underwriting loss includes the accrual of a premium deficiency reserve of $6 million. As reported, we are withdrawing from the Florida homeowners market and expect the withdrawal to be completed in the third quarter of 2012.
In addition, to mitigate future losses until our withdrawal from this line is completed, we implemented a 25% rate increase in January and are modifying our claims practices with regard to sinkhole claims. In addition to the severe weather in California and our Florida homeowners sinkhole losses, October hailstorms in Arizona and winter storms in the Northeast states also negatively affected our results in the quarter. We ended 2010 with $13 million of positive reserve development on prior years reserves compared to $58 million in 2009. During the quarter, we recorded approximately $5 million of negative reserve development on prior accident years compared to $18 million of positive reserve development in the fourth quarter of 2009. Last month, we implemented a new claims staffing model and made some changes to other administrative units. As a result of these changes, 160 positions were eliminated.
The net annual savings from this change is approximately $11 million per year. We will record approximately $4 million in severance related costs in the first quarter of 2011. In states outside of California, we continue to aggressively make changes to our rating plans to improve our segmentation and overall pricing adequacy. During the quarter, we implemented six rating changes in our auto line and one in our homeowners line. Currently, 12 private passenger auto rating changes and two homeowners rating changes are planned for the first quarter of 2011. The rate of decline in premiums written of three-tenths of 1% during the quarter was an improvement over the 3.5% rate of decline during the fourth quarter of 2009. 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. Once again, ladies and gentlemen, in order to ask a question, please press star then one on your telephone keypad. Your first question comes from Allison Jacobs with the Bank of America Merrill Lynch.
Hi. Thanks. Actually, two questions if I can. One, I was wondering, we saw the dividend up to the parent company. I was just wondering if you could share what the assets are at the parent company and the total amount of liquidity needed to be held there. Then I guess the second question, I don't know how comfortable you'll be doing it. If you can, if there's any way in the quarter to kind of maybe break out what total catastrophe losses were. I guess I'm trying to look at the Florida number. I assume that underwriting that $19 million is after-tax, the underwriting loss. If there's any way you can give what the total cat losses were in the quarter?
Ted, talk about the dividends.
Okay. Allison, the dividend up to the parent really takes care of all of our dividend needs for 2011. Our plan is we have some debt maturing in the parent company in August, $125 million. Our plan is to repay that debt using a portion of the proceeds from this intercompany dividend. The remainder of this intercompany dividend will be used to fund shareholder dividends in 2011. The upstreaming of that $270 million will take place over the course of 2011. It won't all be in one payment. Does that answer that question?
Yeah. Is that the total asset to the parent? Is there additional cash being held at the parent company level or invested assets?
The parent company does have some cash and invested assets. I don't have the number off the top of my head. It's usually in the $40 million range, but I can get that number for you if you need it.
Okay. No, that's close enough. Thank you.
As far as the underwriting loss, it was a pre-tax number. The $19 million is a pre-tax number for the Florida homeowners' sinkhole losses, and $25 million in the California storms that we estimate are also pre-tax numbers. When you combine both of those numbers, it's about $44 million, Allison. We also, as I mentioned earlier in my comments, had about $5 million of negative development in the quarter, even though for the whole year, we ended up with $13 million of positive. During this quarter, we had $5 million of negative. The fourth quarter, irrespective of the catastrophes, the fourth quarter is always a wetter quarter for us here in California.
Usually the frequency goes up in the fourth quarter for us, irrespective of these really monster claims that we had or the large number of claims that we had because of the California storms that were so severe this quarter. Irrespective of that, it's always a higher frequency quarter for us.
Okay. When we look at the Florida number, you said the $19 million was the total underwriting loss. We're just going to associate all that as being catastrophes.
However you want to characterize it. That was the underwriting loss, and really it's all driven by sinkhole claims.
All right. That's fair then.
Yeah.
All right, thank you.
Okay.
Your next question comes from Meyer Shields of Stifel Nicolaus.
Thanks. Hello, everyone. With regard to Florida again, are there specific regions of Florida that are most susceptible to these sinkholes? I guess what I'm wondering is why not just adjust rates where the sinkhole risk is most pronounced, if that even makes sense?
Well, there are two areas that are more successful to sinkhole claims, and that is the Pasco and Hernando counties, kind of like the Tampa area counties. We're starting to see some claims, not only us, but the industry pop up in other areas of the state. We felt it was the most prudent move for us to exit the line, the homeowners line. In addition to that, you obviously have the hurricane exposure in addition to the sinkhole claims. There are primarily two counties in Florida with most of the sinkhole claims. Unfortunately, they're starting to pop up in other areas.
Okay. It's just risk aversion, if I can-
Yeah.
-put it. Okay. Could you quantify the Florida homeowners' written premium for 2010?
Yeah. The written premium was $12.5 million.
Okay. I was hoping you could sort of take us through the GAAP accounting for the premium deficiency reserve.
The way that works is we evaluate our estimated future losses on the unearned premium that exists at year-end. To the extent that the estimated future losses on that unearned premium exceeds the unearned premium, we record a reserve for that was about $6 million at year-end.
Going forward, to the extent that losses are incurred on this $123,100 in premium, that will still show up as incurred losses in the next couple of income statements.
That's correct. One point of note, the $6 million is actually recorded in the expense ratio, not in the losses.
Okay. That's not available to be amortized down, so you'll have less expense ratio going forward.
Correct. Eventually, as the book runs off, that number will go to zero.
Okay. One last question, if I can. Do you have the accident year combined ratio for California auto for 2010?
We don't provide it. We do have it, but we're not providing that.
Okay, fair enough.
Okay.
Thanks much.
Your next question comes from Caroline Speirs of Macquarie.
Hi. Just a quick question. In terms of it looks like there was some adverse development this quarter. What years is that coming from?
That's primarily coming from several years. It's generally coming from Florida in the sinkhole and in the auto, 2009, 2008.
Just on the duration of the portfolio, it looks it's down year-over-year, versus last quarter, it went up a decent amount. Just wondering where you expect that to go going forward.
Well, the change in duration, of course, is more of a function of how it's calculated in the structure of our portfolio. We buy a lot of callable bonds. In the past 18 months or so, we've been structuring a more or less defensive portfolio, buying bonds priced to their calls. In the month of November, the first few weeks of November, the curve moved out about 50 basis points, now it's out about 100. Those bonds, in many cases, that were defensive with very short durations, are now being priced to their maturities. The curve is also very steep at this point, so having a longer duration may not be such a bad thing either at this point in time since we're at a historically steep yield curve. We're going to continue, of course, to shorten duration or get it back down.
There's probably some upside potential there as we see the curve either flatten again or spreads tighten.
Okay. When you're reinvesting your money, do you continue to put them in municipal bonds?
I think there's market opportunities out there right now. Yes.
Okay. Just last question. Outside California, where are you seeing the most opportunity? You're not expanding in Florida as much anymore. Is it the Northeast or are there other regions?
Well, we're seeing growth in quite a few areas outside of California. Actually, our Florida auto line in 2010 over 2009 grew. We've seen some growth in the Northeast as well. We've seen some growth in our Georgia auto line. It's seen some nice growth. Where we haven't seen as much growth has been in our Texas market, but we've made some recent changes there where we're now seeing a pickup there as well. We're seeing a decent amount of business pick up on new business in many of the states outside of California.
Okay, great. Thank you.
Thank you.
Once again, ladies and gentlemen, in order to ask a question, please press star one on your push button phone. Our next question comes from Tom Moritz of Crowell.
Chris Graves answered the question. Thanks.
Again, ladies and gentlemen, in order to ask a question, please press star, then the number one on your telephone keypad. At this time, I'm showing no further questions.
Okay. Well, thank you very much. I'd like to thank everyone for joining us on the fourth quarter conference call, and we look forward to talking to you next quarter. Thank you.
Ladies and gentlemen, that concludes