Aug 1, 2016
Executives
Gabriel Tirador - President and CEO George Joseph - Chairman Robert Houlihan - VP and Chief Product Officer Chris Graves - VP and Chief Investment Officer
Analysts
Greg Peters - Raymond James
Operator
Good afternoon. My name is Maria, and 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. [Operator Instructions] 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. Please go ahead, sir.
Gabriel Tirador
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, and Robert Houlihan, Vice President and Chief Product Officer. On the phone we have Chris Graves, Vice President and Chief Investment Officer.
Our Chief Financial Officer, Ted Stalick is traveling and is therefore unable to be on the call. Before we take questions, we will a few comments regarding the quarter.
Our second quarter operating earnings were $0.35 per share, compared to $0.64 in the second quarter of 2015. The deterioration in operating earnings was primarily due to an increase in the combined ratio, from 98.5% in the second quarter of 2015, to 101.7% in the second quarter of 2016.
Our results in the quarter were negatively impacted by $22 million of unfavorable reserve development on prior accident years, $11 million of catastrophe losses, and $2 million in severance payments related to a previously announced reduction in force. The majority of the unfavorable reserve development in the quarter came from our California bodily injury coverage.
The development occurred across multiple accident years with about $10 million relating to accident year 2015 and the remainder to older years. Catastrophe losses in the quarter were primarily from severe storms in Texas.
Excluding the impact of unfavorable reserve development on prior accident years, catastrophe losses, insurance payments, the combined ratio was 97.2% in the quarter. In California, we recorded an increase in personal auto severity in the high single-digit range during the quarter as compared to the second quarter of 2015.
California private passenger auto frequency was up slightly in the quarter as compared to the second quarter of 2015. This year for our personal auto business in California, we implemented a 5% rate increase in late March 2016 for Mercury Insurance Company and a 6.9% rate increase in June 2016 for California Automobile Insurance Company.
Personal auto premium in Mercury Insurance Company represents about half of our companywide premiums earned, and California Automobile Insurance Company represents about 15% of our companywide premiums earned. Outside of California, our results were negatively impacted during the quarter by catastrophe losses, primarily related to severe storms in Texas.
Increasing loss cost trends and higher loss ratio that come with an increasing new business also negatively impacted our results during the quarter. To address profitability outside of California, we are increasing rates and signing our underwriting.
Excluding the impacts of catastrophe losses, the combined ratio outside of California was about 100.3% in the quarter compared to 99.8% in the second quarter of 2015. The expense ratio in the quarter declined to 25.4% from 27.3% in the second quarter of 2015.
The decrease in the expense ratio was primarily due to lower advertising expenses, lower average commissions, and a reduction in profitability-related accruals. Net advertising expense in the quarter was 8.6 million compared to 12.1 million in the second quarter of 2015.
Premiums written grew 6.6% in the quarter, primarily due to higher average premiums per policy. Companywide private passenger auto new business applications submitted to the company decreased 7.9% in the second quarter of 2016, as we focused on improving profitability in our private passenger auto line.
Companywide homeowners' applications increased to 1.4% in the second quarter of 2016. In California, we posted premium written growth of 7.8%.
Outside of California, premiums written grew 1.3% in the quarter. With that brief background, we will now take questions.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Greg Peters of Raymond James.
Greg Peters
Good morning, everyone. Thank you for hosting the call and taking these questions.
I think in your first quarter call, you mentioned the possibility of getting or looking for more rate in the California auto insurance company, I am curious with the second quarter results if it's changed your perspective on Mercury Insurance Company in California?
Gabriel Tirador
We still haven't made a decision on Mercury Insurance Company. We believe our rates even after the second quarter are in line, but we are going to be following the trends very closely, and it is -- there is a possibility that we may be filing for a small rate increase in Mercury Insurance Company.
In Cal Auto, we have filed for a 6.9% rate increase. That's already been filed.
Greg Peters
Right. And that's on top of what you've already achieved or what you announced in this call, correct?
Gabriel Tirador
Yes, that's right. And keep in mind that the 6.9% rate increase in Cal Auto has not earned [ph] at all.
The MIC rate increase this quarter probably earned 25%-30%. I expect about 75% earned in the third quarter and 100% in the fourth quarter for the MIC rate increase that went into effect in March.
Greg Peters
Right, Gabe. I think you did say that most of the rate increases would be back-end loaded in the second half of the year before.
Gabriel Tirador
That's Correct.
Greg Peters
So I was listening to your brief comments, and you mentioned high single-digit severity. I don't have your transcript available from the first quarter, but I find you said in the first quarter that was mid single-digit.
Has there been a change, or am I making something up?
Gabriel Tirador
No, I don't recall what we said, but definitely it's high single digits now, and when we take a look at the fast track trends in California as an example, for the 12-month period ending March, severity for bodily injury increased 7.2% in California for the VI. And pure premium, which is frequency and severity combined, increased about 10% -- 9.9% almost 10%.
So, we are definitely seeing it in the industry as well; property damage liability, severity up for the full month period 6.3% for the industry with pure premium up 8.1%. On the collision side, you're seeing 3.8% severity increases in the industry with pure premium up 7%.
So the industry is also seeing severity and some frequency increase here. So, pure premium is up, going up quite a bit in California.
Greg Peters
Right. And just getting back to the 22 million of unfavorable development, if I recall correctly in the first quarter you said, most of the 40 million in the first quarter was allocated to 2014 year and then lesser amounts years previous to that.
And would I assume that the 22 million is the same in terms of allocation by accident year?
Gabriel Tirador
No, the increase for 2015 picked. So that increased development about 10 million for the 15 year companywide, about 3 million went for 2014 and about 4.5 million or so to '13 and '12.
And what we're seeing -- our data showing is that, the speed of closing on our older liability claims has increased, and we are also seeing some cases reserve strengthening in our book of business, but while some of this increase case reserve and paid losses element was undoubtedly due to the speed up in settlements, when we take a look one of our mottos which neutralized these changes, it basically said that we were still so short. So we ended up increasing our ultimate estimates as a result.
Greg Peters
Okay. So, was a higher accident year loss picked for 2015?
I assume that's going to bleed over into your assumptions for '16 as well, correct?
Gabriel Tirador
Yes, they have. They certainly have.
And that's why -- I mean, our '16 accident right now when you take out hopefully, there is no further development and you take out some of the noise, you're running at around 97 unchanged. When you take that out, but that's correct, we have increased our picks for '16 as well.
Greg Peters
Yes, and so this is…
Gabriel Tirador
That has a dominant effect. When you increase an older accident year and you increase the next one to next one to next one; that has a pretty big impact in the quarter on the calendar year results.
Greg Peters
Indeed. Thank you for that clarification.
And so just to wrap up and then I'll re-queue, as we think about your longer term objective in terms of your combined ratio results, given where you've taken your accident year loss picks for '15 and '16, what should we be thinking about in terms of your ability to get a lower combined ratio sale over the next 24 months?
Gabriel Tirador
I think that's our number one focus, and I'd tell you that's -- our combined ratio is going to improve. And our target is a 95% combined ratio, and the whole organization is focused on that right now.
And over the course of the next 12 to 24 months, you're going to see a big improvement.
Greg Peters
Perfect. Thank you for the answers, Gabe.
Gabriel Tirador
You're welcome.
Operator
[Operator Instructions] I'm showing no further questions at this time, sir.
Gabriel Tirador
Well, I like to thank everyone for joining us this morning, and we look forward to talking to you next quarter with better results. Thank you very much.
Operator
Thank you. Ladies and gentlemen, this does conclude today's conference call.
You may now disconnect.