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Text: I'm Gabe Tirador, President and CEO.
On the phone, we have Mr. George Joseph, Chairman; Ted Stalick, Senior Vice President and CFO; Jeff Schroeder, 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.
Net income in the second quarter was $228.2 million or $4.12 per share, which includes a $125.2 million of after-tax gains on our investment portfolio.
The rebound in the markets in the second quarter, helped to partially offset first quarter after-tax losses of $198.5 million on our investment portfolio.
Year-to-date, net income was $89 million or $1.61 per share, which includes $73.4 million of after-tax losses on our investment portfolio.
Most of the year-to-date investment losses are mark-to-market adjustments on securities that continue to be held by the Company.
Our second quarter operating earnings were $1.86 per share compared to $0.74 per share in the second quarter of 2019.
The improvement in operating earnings was primarily due to a reduction in the combined ratio from 98.3% in the second quarter of 2019 to 88.2% in the second quarter of 2020.
Catastrophe losses in the quarter was $12 million compared to $9 million in the second quarter of 2019.
The Company recorded $12 million in unfavorable reserve development in the quarter compared to $9 million in the second quarter of 2019.
The improvement in the combined ratio in the quarter was primarily due to improved results in our private passenger auto line of business.
Lower frequency in the quarter as a result of less driving from the COVID-19 pandemic was the primary reason for the improved results.
The lower frequency in the quarter was partially offset by an increase in severity and the give back of $100.3 million of premiums to personal auto customers as a result of less driving from the COVID-19 pandemic.
Partially offsetting the improved results in our private passenger auto line of business were worst results in our commercial auto, homeowners and commercial multi-payer lines of business.
Although our commercial auto line of business also saw a decline in frequency in the quarter, increases in severity, unfavorable reserve development of $7 million and the give back of $5.5 million of premiums to commercial auto customers negatively impacted our commercial auto results in the quarter.
In our homeowners line, both frequency and severity increased in the quarter.
In addition, $3 million of unfavorable reserve development negatively impacted our homeowners results this quarter.
To improve our homeowners results, a 6.99% rate increase in our California homeowners line went into effect in April.
In addition, a 6.99% rate increase was recently approved by the California Department of Insurance.
We expect to implement the recently approved rate increase in October.
California homeowners premiums earned represent about 87% of companywide direct homeowners premiums earned and 15% of direct companywide premiums earned.
Our commercial multi-payer results in the quarter were negatively impacted by a large $5 million fire loss net of reinsurance.
In the second quarter, we launched two new programs.
In June, we introduced our new personal auto usage-based insurance product MercuryGO in Texas.
Early adoption rates are encouraging and above our expectations.
We also introduced Phase 1 of our new commercial multi payroll product and system in California in the second quarter.
The new product and system have been well received by our agents.
We recently completed our catastrophe reinsurance treaty renewal effective July 1, 2020.
The total reinsurance limit purchased increased from $600 million in the prior period to $717 million for the July 2020 through June 2021 period.
In addition, the new reinsurance program has wildfire coverage in all layers.
Our retention remains the same at $40 million.
Total annual premiums on a new reinsurance program are approximately $50 million.
For the prior reinsurance treaty, total premiums were $38 million.
More details of the catastrophe reinsurance treaty renewal will be included in our second quarter 10-Q filing.
The expense ratio was 27.2% in the second quarter of 2020 compared to 24.4% in the second quarter of 2019.
The higher expense ratio in the quarter was primarily due to the reduction of premiums earned of $106 million due to premium refunds and credits to eligible policyholders for reduced driving and business activities as a result of the COVID-19 pandemic.
Excluding the premium refunds and credits, the expense ratio would have been 24.1%.
Premiums written declined 12.5% in the quarter primarily due to the $106 million in premium refunds and credits.
Excluding the $106 million in premium refunds and credits, premiums written declined by 1.2%.
In addition, we plan on returning $22 million of July 2020 monthly premiums to eligible policyholders in August.
Accordingly, we expect third quarter premiums written and earned to be reduced by approximately $22 million.
We will continue to monitor the extend and duration of the economic impact related to COVID-19 and make further adjustments as necessary.
We expect our underwriting and loss adjustment expense ratios to remain elevated in the third quarter as premiums declined from give backs without a proportionate reduction in expenses.
With that brief background, we will now take questions.

user
qtrly earnings per share $4.12.
compname posts quarterly net income per diluted share $4.12.
qtrly net income per diluted share $4.12.
qtrly operating income per diluted share $1.86.

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