Mercury Insurance 2010 Annual Report Download - page 55

Company has an established history of generating capital gain premiums earned through its common stock call
option program. Based on the continued existence of the options market, the substantial amount of capital
committed to supporting the call option program, and the Company’s favorable track record in generating net
capital gains from this program in both upward and downward markets, management believes it will be able to
generate sufficient amounts of capital gains from this program, if necessary, to recover recorded capital deferred
tax assets.
The Company has the capability to implement tax planning strategies as it has a steady history of generating
positive cash flow from operations, as well as the reasonable expectation that its cash flow needs can be met in
future periods without the forced sale of its investments. This capability will enable management to use its
discretion in controlling the timing and amount of realized losses it generates during future periods. By prudent
utilization of some or all of these actions, management believes that it has the ability and intent to generate
capital gains, and minimize tax losses, in a manner sufficient to avoid losing the benefits of its deferred tax
assets. Management will continue to assess the need for a valuation allowance on a quarterly basis. Although
realization is not assured, management believes it is more likely than not that the Company’s deferred tax assets
will be realized.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise as a result of business acquisitions and consist of the excess of the
cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed and identifiable
intangible assets acquired. The Company annually evaluates goodwill for impairment using widely accepted
valuation techniques to estimate the fair value of its reporting units. The Company also reviews its goodwill and
other intangible assets for impairment whenever events or changes in circumstances indicate that it is more likely
than not that the carrying amount of goodwill and other intangible assets may exceed the implied fair value. As
of December 31, 2010, the fair value of the Company’s reporting units exceeds their carrying value.
Contingent Liabilities
The Company has known, and may have unknown, potential liabilities which include claims, assessments,
lawsuits, or regulatory fines and penalties relating to the Company’s business. The Company continually
evaluates these potential liabilities and accrues for them and/or discloses them in the notes to the consolidated
financial statements where required. While it is not possible to know with certainty the ultimate outcome of
contingent liabilities, an unfavorable result may have a material impact on the Company’s quarterly results of
operations in the period of such determination; however, it is not expected to be material to the Company’s
financial condition. See also “Regulatory and Legal Matters” and Note 17 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Revenues
Net premiums earned and net premiums written in 2010 decreased 2.2% and 1.3%, respectively, from
2009. Net premiums written by the Company’s California operations were approximately $2 billion in 2010, a
3.0% decrease from 2009. Net premiums written by the Company’s non-California operations were
approximately $605 million in 2010, a 4.6% increase from 2009. The decrease in net premiums written in
California is primarily due to a decrease in the number of policies written and slightly lower average premiums
per policy. Growth outside of California has come as a result of improved product offerings and higher average
premiums per policy.
Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies
issued during a fiscal period less any applicable reinsurance. Net premiums written is a statutory measure
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