Mercury Insurance 2010 Annual Report Download - page 58

Download and view the complete annual report

Please find page 58 of the 2010 Mercury Insurance annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126

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:
2009 2008
Loss ratio ............................................................. 67.9% 73.3%
Expense ratio .......................................................... 29.0% 28.5%
Combined ratio ........................................................ 96.9% 101.8%
The Company’s loss ratio decreased primarily due to favorable development of approximately $58 million
in 2009 compared to unfavorable development of approximately $89 million in 2008 coupled with lower loss
frequency in 2009. Partially offsetting this are higher loss severities recorded in 2009, as well as lower average
premiums earned per policy.
The Company’s expense ratio was affected by the impact of the amortization of AIS deferred commissions
paid prior to the acquisition and severance payments related to a reduction in workforce during 2009, offset by
other cost reduction programs. Prior to the acquisition of AIS, the Company deferred the recognition of
commissions paid to AIS to match the earnings of the related premiums. Now that AIS is a wholly-owned
subsidiary, commissions are no longer paid or deferred, and direct expenses are reflected in the expense ratio.
Further, to improve profitability, the Company implemented several cost reduction programs including a salary
freeze, a suspension of the employee 401(k) matching program, and a workforce reduction primarily located in
California.
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 expense (benefit) for 2009 and 2008 was $168.5 million and $(208.7) million, respectively. The
increase in expense resulted primarily from changes in the fair value of the investment portfolio.
Investments
The following table presents the investment results of the Company:
2009 2008
(Amounts in thousands)
Average invested assets at cost (1) .......................................... $3,196,944 $3,452,803
Net investment income:
Before income taxes ................................................ $ 144,949 $ 151,280
After income taxes ................................................. $ 130,070 $ 133,721
Average annual yield on investments:
Before income taxes ................................................ 4.5% 4.4%
After income taxes ................................................. 4.1% 3.9%
Net realized investment gains (losses) ...................................... $ 346,444 $ (550,520)
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at
cost.
The slight increase in after-tax yield is due to an increase in tax exempt allocations relative to taxable issues.
48