Good afternoon. My name is Ashley, 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 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 and 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 the call over to Mr. Gabriel Tirador. Sir, please go ahead.
Thank you. 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, John Sutton, Senior Vice President, Customer Service, and Robert Houlahan, 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 our first quarter results continued our trend of improving operating results. Year-over-year, our combined ratio improved from 96.9% in the first quarter of 2009 to 96.3% in the first quarter of 2010. We recorded $20 million of positive reserve development on prior accident years during the quarter, compared to $21 million in 2009.
The first quarter 2010 results were negatively impacted by severe weather in the Northeast, as well as a significant amount of rainfall in California during the month of January. We estimate the combined dollar impact for these events at about $5 million. As previously reported, the results for the first quarter of 2009 were negatively impacted by $8 million in severance related expenses and $12 million in accelerated amortization of deferred policy acquisition costs related to the AIS acquisition. As we have reported in previous quarters, we have an auto rate filing pending approval in California. The pending filing includes a small rate increase, and it introduces, among other things, new discounts and roadside assistance coverage. The approval of the rate filing has taken longer than we anticipated.
The Department of Insurance's most recent update is that their actuary is expected to complete the review within the next three to four weeks. In other states, we continue to aggressively make changes to our rating plans to improve our segmentation and overall pricing adequacy. The competitive environment continues to be challenging. Although premiums written declined 2.7% during the quarter to $652.5 million, this was an improvement over the 3.5%, 4.7%, and 6.8% decline in the fourth, third, and second quarter of 2009 respectively. In addition, personal auto policies in force increased on a sequential basis for the first time in over 14 quarters.
Personal auto policies in force increased from 1,279,000 policies at December 31st, 2009, to 1,284,000 policies at March 31st, 2010. It is difficult to predict if this trend will continue, but it certainly was a positive development during the quarter. We are continuing our support of Proposition 17, the Continuous Coverage Auto Insurance Discount Act. Proposition 17 is a California ballot initiative which will be on the June 8th, 2010 ballot. If passed, the initiative will provide for a portable persistency discount, allowing insurance companies to offer new customers discounts based on having continuous insurance coverage from any insurance company. The initiative is pro-consumer and will provide for a more competitive insurance marketplace and will allow us to better compete for new customers.
We expect increased expenditures in the second quarter of 2010 from our continued support of the initiative. Our new Mercury First front-end sales system has been deployed to three states, and we recently launched the rollout of the system in California. We have deployed Mercury First to 465 agents in California with a goal of full deployment by June 2010. Feedback from our agents on the new system continues to be positive. With that brief background, we will now take questions.
At this time, ladies and gentlemen, if you would like to ask a question, please press star and the number 1 on your telephone keypad. Again, if you would like to ask a question at this time, please press star and the number 1 on your telephone keypad. We'll pause for just a moment to compile the attendee roster. Our first question comes on the line of Michael Phillips with Stifel, Nicolaus. Please go ahead with your question.
Thank you. Good morning or good afternoon, everybody. How much of this development that you've seen for accident years 2008 and 2009 you've been talking about and seeing recently, how much of that do you attribute to just the overall state of your state's economy versus anything else? Whatever else that might be. Is it more the recession related or is it other things?
Well, Michael, it's probably two components. We're seeing less late reported claims than we have over the past several years, and that's definitely helping. As far as why our average severities have been California, we've been very aggressive in managing our claims and putting some of the processes we have in California into those other states. Within California, we continue to strongly defend our claims. We're seeing a pretty benign trend there as well.
Is that last piece of strongly defending the claims, is that something that's been a change in the past couple of years?
No, that really hasn't been a change in the last couple of years. What it really comes down to is that our estimate last year was just for severity, which I think we were recording in the high single digits.
Low double digits.
Low double digits. Just proved to be too high.
Okay. I guess if you had to think about whether it's kind of the severity or that late reported, it sounds like it's more of the severity issue, if you had to rank the two, than the late reported. Chris, is that true?
This quarter, they're fairly equal.
Okay. How much, on that second issue then, on the late reported, for a given accident year , how many claims do you typically see reported after an accident year is closed?
For PI, we have a table in the 10-K, it's typically, in California, 5-7% in the year after. For example, last year it was in the low single digits, I think 2% or 3%.
Two or three relative to that five to seven. That's kind of typical, I guess.
Yeah.
Yep. Okay. Okay. I have a couple other random ones, I'll pop off and come back on if I can. Thank you.
Our next question comes from the line of Caroline Steers with Macquarie. Please go ahead with your question.
Hi, yes. I might have missed this, what were the costs on the expense ratio related to Prop 17 in the first quarter?
They were nil.
Oh, nothing. Okay. If you could just comment on your non-California business, the profitability there, and if you could just talk about both homeowners and auto, that would be great. Thanks.
We're making improvements in the auto line outside of California. As I mentioned in my prepared remarks, we continue to take significant steps to improve the profitability outside of California. We're seeing some very positive results as a result of that in some of our larger states, for example, in New Jersey. That trend continues to improve outside of California and we're going to continue to be aggressive both from an overall pricing adequacy standpoint and also improving our segmentation. That trend is very positive. On the homeowners front, we're also taking rate action where necessary outside of California. Inside of California, the results were still very good in the quarter. We did have year-over-year, the combined ratio was up a little bit in California. Homeowners as a result of the rains that I mentioned in my prepared remarks.
Overall, we're seeing some positive trends. The one area that we continue to have some issues with is the Florida sinkhole issues in Florida homeowners, which we're in the process of determining what next steps we need to take there.
Thanks. That's it.
Our next question comes from the line of Tom Moritz with Crowell Weedon. Please go ahead with your question.
Morning. Two-part question. On Proposition 17, can you give us any kind of handicapping or thoughts about the ballot and passage? Also, on the investment portfolio, any outlook in terms of investment income and after-tax yield going forward on the portfolio?
Well, on the Proposition 17, we believe this is very much a pro-consumer bill. It's going to allow 80% of customers to qualify for a discount when they switch insurers, and really have no impact on the other 20%. We feel strongly about the proposition. We feel it's such a pro-consumer bill that we feel good about it overall. I'm not going to try to handicap it, but we think it's a very good bill. Or I should say proposition. On the investment side, Chris, you want to take that?
Hey, Tom. I think the run rate is around $137 million on investment income, and it's probably about where it comes out for the year. Then after-tax yield, hopefully higher from here. I don't know what Ted has got calculated. My calculation is around a 4.30. That's my own internal number. I'd hate to give something that's different from Ted.
Well, the after-tax yield's a 4.1.
Yeah, 4.1. Okay.
4.1.
4.1.
Thank you.
Once again, if you would like to ask a question at this time, please press star and the number 1 on your telephone keypad. We do have a question on the line of Michael Phillips with Stifel Nicolaus. Please go ahead with your question.
Yeah, just to follow up to that last one. On the Prop 17, you said 80% of customers would qualify for a discount when they switch insurers. You benefit when they switch to you, I guess. Is there any reason why you would expect more customers to switch to you versus switch to competitors?
Yeah, we believe we have a very competitive product.
Okay.
When we had this discount that was allowed back in from really, we had a portable persistency from 1995 through 2005. We grew the company fairly well during that period. We just feel that we like to compete for new business, and it just makes it much more difficult today when other carriers can offer a discount and we can't. It keeps that insured locked into that carrier. We're willing to compete on a level playing field with anybody.
Okay. Thank you.
There are no further questions. Thank you at this time.
Okay. Well, I'd like to thank everybody for joining us on the call today, and we look forward to talking to you next quarter. Thank you very much.
This does conclude today's conference call. You may now disconnect.