Mercury Insurance 2010 Annual Report Download - page 56

designed to determine production levels. Net premiums earned, the most directly comparable GAAP measure,
represents the portion of net premiums written that is recognized as revenue in the financial statements for the
period presented and earned on a pro-rata basis over the term of the policies. The following is a reconciliation of
total net premiums written to net premiums earned:
2010 2009
(Amounts in thousands)
Net premiums written ......................................... $2,555,481 $2,589,972
Change in unearned premium ................................... 11,204 35,161
Net premiums earned ..................................... $2,566,685 $2,625,133
Expenses
Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance
companies. The following table presents the Insurance Companies’ loss ratio, expense ratio, and combined ratio
determined in accordance with GAAP:
2010 2009
Loss ratio ............................................................. 71.1% 67.9%
Expense ratio .......................................................... 29.6% 29.0%
Combined ratio ........................................................ 100.7% 96.9%
Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The
Company’s loss ratio was affected by favorable development of approximately $13 million and $58 million on
prior accident years’ losses and loss adjustment expenses reserves for the year ended December 31, 2010 and
2009, respectively. The favorable development in 2010 is largely the result of re-estimates of accident year 2009
California BI losses which have experienced both lower average severities and fewer late reported claims (claim
count development) than were originally estimated at December 31, 2009. Excluding the effect of prior accident
years’ loss development, the loss ratios were 71.6% and 70.0% in 2010 and 2009, respectively. The increase is
primarily due to catastrophe losses in California from heavy rainstorms in December 2010, and to sinkhole
claims in Florida.
Expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses by
net premiums earned. The Company’s expense ratio increased primarily due to the decreased net premiums
earned, the Company’s financial contributions of $12.1 million related to Proposition 17, and a premium
deficiency reserve of $6.0 million recorded in the Florida homeowners line of business.
Combined ratio is the key measure of underwriting performance traditionally used in the property and
casualty insurance industry. A combined ratio under 100% generally reflects profitable underwriting results; and
a combined ratio over 100% generally reflects unprofitable underwriting results.
Income tax expenses were $30.2 million and $168.5 million for the years ended December 31, 2010 and
2009, respectively. The decrease in income tax expense resulted primarily from decreased net premium earned,
decreased gains on the fair value of the investment portfolio, and increased losses and loss adjustment expenses.
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