Good afternoon. My name is Celeste, 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, 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 results of operations to differ materially from those discussed here today.
I would now like to turn today's conference over to Mr. Gabriel Tirador. Sir, please go ahead.
Thank you very much. I would like to welcome everyone to Mercury's second 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, and Chris Graves, Vice President and Chief Investment Officer. Before we take questions, we will make a few comments regarding the quarter. Excluding $12.1 million of costs associated with our support of Proposition 17 and $4.5 million of losses related to significant hailstorms in Oklahoma, our second quarter combined ratio was 96.4%. As we reported in previous quarters, we supported Proposition 17, the Continuous Coverage Insurance Discount Act. Proposition 17 would have provided for a portable persistency discount, allowing insurance companies to offer new customers discounts based on having continuous insurance coverage from any insurance company.
Although we are disappointed the initiative was narrowly defeated, we continue to offer a competitive product in California. In addition, we believe our pending rate filing in California, which introduces new discounts and roadside assistance coverage, will make us more competitive on new business. We have a meeting scheduled tomorrow with the California Department of Insurance to discuss the filing. We are hopeful that we will finalize the rate filing very soon. 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 eight rating changes in our auto line and two rating changes in our homeowner line. Currently, six rating changes are planned for the third quarter of 2010. The rate of decline in premiums written continued to improve during the quarter.
Although premiums written declined 1% during the quarter to $631.1 million, this was an improvement over the 2.7% decline in the first quarter of 2010, and the 3.5%, 4.7%, and 6.8% decline in the fourth, third, and second quarter of 2009 respectively. Our new Mercury First front-end sales system has now been deployed to all of our agents in California, and the utilization rate for the system is high. Feedback from our agents on the new system continues to be mostly positive. Ted Stalick will now provide you with information regarding our tax provision for this quarter.
During the quarter, the company adjusted our tax contingency reserves, resulting in an income tax benefit of approximately $3 million. This benefit is equal to $0.06 per share and is included in the operating income. Also affecting taxes in the quarter was the non-deductibility of Prop 17 related costs. The tax benefit loss due to Prop 17 costs in the quarter was approximately $4 million, or $0.08 per share. Without the impact of total expenditures of $12.1 million related to Prop 17 and the $3 million tax adjustment, the operating earnings would have been $0.81 per share for the quarter. 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 followed by the number 1 on your telephone keypad. Again, that's star 1 to ask a question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Dean Evans with KBW.
Yeah, thanks. I was wondering first if you could touch on the PIF growth in the quarter. It looks like the first quarter we've seen a positive PIF movement in quite a while. What's sort of underlying that growth?
Most of that PIF growth is coming in our homeowner line. Ted, do you want to elaborate?
Yeah. If you do year-over-year analysis from June of 2010 compared to June of 2009, total PIF growth's up a little under 1%, that's coming all from the homeowners line. We've expanded our homeowners. We're growing in California, but we've also expanded into some other states, including New Jersey and New York and Virginia. The only state that we're really curtailing our homeowners is in Florida.
Okay, great. Also, just wondering. I believe there was $2 million in reserve releases for prior years. Was there any movement in current year reserves? I guess, could you give a little more detail on reserve movements in general?
We don't really comment anymore on reserves within the accident period. The way we analyze it, we think that the accident year reserves are a little bit more stable to look at. In general, I can comment on frequency and severity, if that's helpful. We're seeing, this obviously changes a lot depending on which state and coverage you're looking at, but in general, in our larger states, frequency is trending up slightly. We're seeing some declines in material damage severity and some increases in bodily injury severity.
Okay. Thank you. That is helpful.
Yeah.
Once again, ladies and gentlemen, if you would like to ask a question, please press star one. Your next question comes from the line of Meyer Shields with Stifel Nicolaus.
Thanks. Hello, everyone. One quick question. The tax adjustment itself, was that about three million dollars, or is that just the net number because of the tax?
Well, there was a tax contingency reserve adjustment that was three million dollars.
Okay.
Benefit.
If you would separate. Well, I can probably do this on my own. I don't know if this is a question that you're still answering, but if we look at recent quarters, what we've seen is a sort of a swap-off where we've had significant immediately prior accident year with favorable development, that's been partly offset by adverse development on older accident years. I just wanted to get a sense of whether that continued in the second quarter.
Most of the development in the year to date and in the quarter was on the 2009 bodily injury losses in California. Severity from the initial picks is lower today than the picks at year-end, the claim count development is a little less than what we anticipated at year-end. To answer your question, are we taking more reserve takedowns in the 2009 year but seeing adverse development in prior periods? That's happened in the past. It's happening slightly to a less extent now, and primarily where that's happening is in New Jersey.
Okay. That's helpful. Thank you very much.
Your next question comes from the line of Alison Jacobowitz with Bank of America.
Hi. Thanks. A couple questions. The first question is, what is the new money yields you're getting, given what you're buying? The second question is, if you could tell us who the major opponents of Prop 17 were?
Okay, go ahead, Chris.
Yeah. Hi, Alison. It's Chris.
Hi.
Hi. Well, we're still trying to keep relatively short on the yield curve, so cash yields are not great. You're talking anywhere from 20-40 basis points. We remain focused on the tax-exempt part of the market for the bonds, those yields, depending on how short you are, anywhere from practically zero to 4%. If you get a higher yielding kicker bond out just a few years on the curve to yield to call, you can get about four. We're all over the map. I don't know exactly what you're trying to drive at other than perhaps tune in your model for-
on the income. All I can give you is what we're getting in the current market, and that's about the shape of it.
Thanks.
With respect to the organizations that were against Proposition 17, the major organization was Consumer Watchdog, was against Proposition 17.
Okay, thanks. Then one last question on the California changes that you've got filed. That includes that overall 2% rate increase, correct? That still hasn't come through yet.
Yeah. That's been filed for. That's included in that filing, and I think it was less than 2%. It was like one and a half is what we had filed for.
Okay. Thank you.
That's still under discussion, though, as I mentioned earlier, Alison, with the Department of Insurance. In fact, we have a meeting scheduled with them tomorrow.
Okay, thanks.
Okay.
Your next question comes from the line of Corey Wren with PICO Holdings, Inc..
Hello. Thank you for taking my call. My question is in regard to the current premium cycle, insurance cycle. Are you seeing any signs that I see policies in force have gone up slightly. Are you seeing any signs of the competitive pressures coming off? We see the advertisements, of course, everywhere. The other question I would have, I was in a meeting, I don't know, 10 years ago or something like that, and I remember somebody asking a question about, if you were not a public company, is there something you would be doing differently in the business as far as rating or pricing and things like that? I was wondering, George, if you had any color to add to that. Thank you.
You want me to take the first question, and I'll let you take the second question, Mr. Joseph?
Okay.
The competitive pressures, competition is still very fierce, although what we are noticing in some of the states, for example, where we take rate increases, we're seeing a lot more rate increases taken by our competitors in the auto line. We're seeing our rate increases stick.
We do make a rate increase. We are starting, it's not the same in every state. It's different by state. You have states where the pure premium trends are rising faster than other states. Generally speaking, I would say that it's still very competitive, but we are seeing more rate increases than rate reductions, and because of that, we're seeing that our rate increases are sticking more.
Do you think that's because of the interest rate environment? Low yields on investments?
Well, no, I think our rates are sticking more because overall rates are going up for everybody.
Okay. The reason they're raising the rates, though, is because they can't get the investment yield to offset lower rates, maybe?
That's possible, but I also think that they're not hitting their underwriting targets.
Okay. All right.
It's a combination of both, I would say.
Okay, thank you.
The second question, Mr. Joseph, if you want to.
I guess the second part of that question is would we do anything differently if the company was private? I guess in retrospect, if the company was private, of course, it was private for five years. I would say that perhaps the things that we did in the past, such as expanding too fast into some of the other states before we really were ready, we wouldn't do that. I'm not sure that I would change very much of what we are doing today even if we were private. It is a very tough environment. You've got states like New Jersey, which has been a problem state for us, and the industry loss ratio was something like 85% there last year. We're faced with a state where we got in too quick. We made some mistakes. We're trying to work our way out of it.
It is an extremely difficult state to set the proper reserves in, I think we're getting a better and better handle on it. In order to work our way out of it, we've probably still got another year or so of underwriting losses there.
Yeah.
I hope that answers your question.
Yeah. At what point would you say goodbye to a state? I don't recall you ever withdrawing from any of the states you've entered. Is there any point that you would get to where you would say, "I've had enough, and I want to focus on the other states?
Well, because you said that's never happened, we got to be realistic. I think that we're to the point now with maybe one of our states where we do have to begin to think, can we straighten this thing out in the next 12 months? I think we can. I think the things that we're doing in New Jersey are, in effect, the same things that we did in California at one time to become very competitive in the bodily injury line, that is to handle the bodily injury claims much more aggressively than the industry does. I think also we are experimenting, I think successfully so, but slowly, in doing things that the industry doesn't do in handling the PIP line, which is the real problem line in New Jersey. I think within 12 months, you're going to see some good results there.
We already know that if we look at this year, just on an accident year basis, the loss ratio in New Jersey is acceptable.
Okay.
It's acceptable, our big expenditures are on the loss adjustment expense. It's not on the other expenses. We've brought that down percentage-wise. As a percent of earned premium, it's come down comfortably the first six months this year, I think that trend will continue.
Okay. Well, thank you very much. I appreciate it.
Thank you.
Once again, ladies and gentlemen, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Again, that's star one. We do have a follow-up question from the line of Alison Jacobowitz with Bank of America.
Hi, thanks. I just wanted to make sure I fully get the tax adjustment and the $12 million. The $12 million of costs related to Prop 17, that added the 1.9 points to the expense ratio. Then was the tax benefit associated with that, or it was a separate issue entirely?
The $12.1 is non-deductible for tax.
Okay.
Then there's this completely separate $3 million tax benefit on an unrelated issue.
I think the important thing, Alison, to understand is that if there were no Prop 17 in the numbers at all.
Right.
If there was no adjustment to this tax contingency reserve at all, we would have been at an $0.81.
Perfect. Thank you.
I might add, if you add the fact that we had $4.5 million of Oklahoma losses related to the hail storms, which were very well-publicized, I know other companies took a hit from it, that's another $0.05. That would take you from an 81 to an 86, if that's what you're trying to do.
Yeah. As far as cat losses go, the only identifiable cat losses would be that $4.5 million.
Yes.
Okay. Thank you very much.
Okay.
Again, ladies and gentlemen, that's star one.
Are there any further questions?
Okay, we did have a question that just came in from the line of Bob Mann with Capital Return.
Okay.
There's a Ron in front of that Bob Mann. Hi, gentlemen. I had a question sort of related to the Proposition. Are there any California auto writers that are effectively offering discounts on new business that's associated or linked to continuing insurance in force, so to speak, effectively providing a persistency discount, but on new business?
Not that we're aware of. That would be illegal.
Okay. Thanks a lot for helping me. Appreciate it.
Okay.
You have no further questions at this time.
Well, thank you very much, everyone, for joining us. We look forward to talking to you next quarter. Thank you.
Ladies and gentlemen, this concludes today's Mercury General second quarter conference call.