Mercury Insurance 2010 Annual Report Download - page 44

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OVERVIEW
A. General
The operating results of property and casualty insurance companies are subject to significant
quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and
severity of losses, the effect of natural disasters on losses, general economic conditions, the general regulatory
environment in those states in which an insurer operates, state regulation of premium rates, changes in fair value
of investments, and other factors such as changes in tax laws.
The Company is headquartered in Los Angeles, California and operates primarily as a personal automobile
insurer selling policies through a network of independent agents and brokers in thirteen states. The Company also
offers homeowners, mechanical breakdown, fire, umbrella, and commercial automobile and property
insurance. Private passenger automobile lines of insurance accounted for 82.7% of the $2.6 billion of the
Company’s direct premiums written in 2010. 76.9% of the private passenger automobile premiums were written
in California. The Company operates primarily in the state of California, the only state in which it operated prior
to 1990. The Company has since expanded its operations into the following states: Georgia and Illinois (1990),
Oklahoma and Texas (1996), Florida (1998), Virginia and New York (2001), New Jersey (2003), and Arizona,
Pennsylvania, Michigan, and Nevada (2004).
The Company expects to continue its growth by expanding into new states in future years with the objective
of achieving greater geographic diversification. There are challenges and risks involved in entering each new
state, including establishing adequate rates without any operating history in the state, working with a new
regulatory regime, hiring and training competent personnel, building adequate systems, and finding qualified
agents to represent the Company. The Company does not expect to enter into any new states during 2011.
This section discusses some of the relevant factors that management considers in evaluating the Company’s
performance, prospects, and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety
of management’s discussion and analysis, the Company’s consolidated financial statements and notes thereto,
and all other items contained within this Annual Report on Form 10-K.
2010 Financial Performance Summary
The Company’s net income for the year ended December 31, 2010 decreased to $152.2 million, or $2.78 per
diluted share, from $403.1 million, or $7.32 per diluted share, for the same period in 2009. Approximately $144
million in pre-tax investment income was generated during 2010 on a portfolio of approximately $3.2 billion at
fair value at December 31, 2010, compared to $145 million pre-tax investment income during 2009 on a portfolio
of approximately $3.1 billion at fair value at December 31, 2009. Included in net income are net realized
investment gains of $57.1 million and $346.4 million in 2010 and 2009, respectively. Net realized investment
gains include gains of $46.6 million and $395.5 million in 2010 and 2009, respectively, due to changes in the fair
value of total investments pursuant to application of the fair value accounting option.
The Company’s net income for the year ended December 31, 2010 was negatively impacted by catastrophic
rainstorms in California and homeowners losses in Florida as a result of sinkhole claims. The Company estimates
that losses resulting from the California rainstorms were approximately $25 million. The Florida homeowners
line of business incurred an underwriting loss of approximately $19 million in the fourth quarter, which includes
a premium deficiency reserve of $6 million. The Company is in the process of withdrawing from the Florida
homeowners market and expects to complete the withdrawal in 2012.
During 2010, the Company continued its marketing efforts to enhance name recognition and lead
generation. The Company believes that its marketing efforts, combined with its ability to maintain relatively low
prices and a strong reputation, make the Company very competitive in California and in other states.
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