Mercury Insurance 2010 Annual Report Download - page 4

2MERCURY GENERAL CORPORATION
The competitive environment for personal
automobile insurance remained challenging
during 2010 making growth difficult to achieve.
Premiums written declined 1.3% in 2010. The
good news is the rate of decline continued to
slow as compared to the 5.8% and 7.8% rate of decline in
2009 and 2008, respectively. Our prediction that there was
a good possibility of returning to positive premium growth
sometime in 2010 was nearly achieved during the 4th quar-
ter of 2010, when our premiums written declined by only
three tenths of one percent. In addition, for the first time in
four years, our total polices in-force for all lines of business
increased from 1,897,000 policies in-force at December 31,
2009 to 1,908,000 policies in-force at December 31, 2010.
Although the environment remains extremely competitive,
we believe the recent trends will continue and we will end
2011 with positive premium growth.
We were disappointed with our operating earnings in
2010. We posted operating earnings, which exclude realized
gains and losses, of $115.1 million in 2010 compared to
$177.9 million in 2009, a decline of 35.3%. The reduction
in operating earnings was primarily due to the deterioration
of the combined ratio from 96.9% in 2009 to 100.7%
in 2010. The increase in the combined ratio was primarily
the result of $9 million of increased expenses incurred to
support California’s Proposition 17, $25 million related to
severe rainstorms in California during the fourth quarter,
$18 million in increased underwriting losses from our
Florida homeowners line of business as a result of sinkhole
claims, and to a lesser extent, October hailstorms in Arizona
and winter storms in the Northeast states. In addition, we
recorded $45 million less in positive reserve development in
2010 compared to 2009. We ended 2010 with $13 million
of positive reserve development on prior years reserves
compared to $58 million in 2009.
In December of 2010 we implemented a new private
passenger rating plan in California that reduced our overall
rates, improved our segmentation and introduced new
discounts and roadside assistance coverage. Our new rates
improved our competitive position and as a result our new
business sales increased on a sequential basis, but our year
over year new business sales in January and February of
2011 were still down as compared to 2010, reflecting the
continued competitive environment.
To further improve our competitive position in California,
we filed a new class plan in the first quarter of 2011 that we
believe will improve our segmentation significantly. In other
words, our rating plan was overpricing and underpricing
many risks. In addition, we will be filing for a small overall
rate increase.
In states outside of California, we continue to aggres-
sively make changes to our rating plans to improve our
segmentation and overall pricing adequacy. During 2010
we implemented 19 rating changes in our auto line and 4 in
our homeowners line. In the first quarter of 2011 alone, we
implemented over 15 rating changes to our core products.
Loss trends in a few states outside of California have been
problematic for us and the industry. For example, industry
loss trends for the Florida Personal Injury Protection coverage
increased by about 25% in 2010. Consequently, our past
rate changes, although aggressive, have not been sufficient
to keep up with these loss cost trends. However, we believe
that by the fourth quarter of 2011 our aggressive approach
to return these states to profitability should have us running
at a combined ratio under 100% for private passenger auto
in most of our states outside of California.
Our Florida homeowners line continued to present signifi-
cant challenges as a result of sinkhole claims. It produced
a $30 million underwriting loss during 2010. We have not
written new Florida homeowners business since 2005.
Although the industry’s sinkhole losses have received the
attention of Florida regulators and legislators, which has
increased the likelihood of legislative changes passing in
2011 to address sinkhole claims, we are withdrawing from
the Florida homeowners market. We expect the withdrawal
to be completed in the third quarter of 2012. In addition,
to mitigate future losses until our withdrawal is completed,
we implemented a 25% rate increase in January and are
modifying our sinkhole claims practices.
In 2010, we plan on continuing our“Mercury Moments”
advertising campaign. Inspired by actual experiences from
some of our customers, this upbeat campaign highlights
the breadth of Mercury’s coverage across various lines of
business as well as our core value proposition—offering
low rates, providing stability and security and ensuring
personalized service. We plan on continuing with Mercury
Moments campaign in 2011 in addition to utilizing direct
response advertising.
In 2011, we intend to implement various growth and
profitability initiatives to help grow our business and improve
Letter to Shareholders