Mercury Insurance 2010 Annual Report Download - page 66

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F. Regulatory Capital Requirement
The Insurance Companies must comply with minimum capital requirements under applicable state laws and
regulations, and must have adequate reserves for claims. The minimum statutory capital requirements differ by
state and are generally based on balances established by statute, a percentage of annualized premiums, a
percentage of annualized loss, or RBC requirements. The RBC requirements are based on guidelines established
by the NAIC. The RBC formula was designed to capture the widely varying elements of risks undertaken by
writers of different lines of insurance having differing risk characteristics, as well as writers of similar lines
where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements,
and a number of other factors. At December 31, 2010, the Insurance Companies had sufficient capital to exceed
the highest level of minimum required capital.
Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer’s annual net
premiums written to statutory policyholders’ surplus should not exceed 3.0 to 1. Based on the combined surplus
of all the Insurance Companies of $1.3 billion at December 31, 2010, and net premiums written of $2.6 billion,
the ratio of premiums written to surplus was 1.9 to 1.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2010, the Company had no off-balance sheet arrangements as defined under Regulation
S-K 303(a)(4) and the instructions thereto.
CONTRACTUAL OBLIGATIONS
The Company’s significant contractual obligations at December 31, 2010 are summarized as follows:
Contractual Obligations Total 2011 2012 2013 2014 2015 Thereafter
(Amounts in thousands)
Debt (including interest)(1) .... $ 274,108 $135,217 $120,765 $ 18,126 $ — $ — $ —
Lease obligations(2) ......... 41,837 14,902 12,692 7,219 3,303 1,581 2,140
Losses and loss adjustment
expenses(3) .............. 1,034,205 620,081 247,373 104,884 37,838 24,029 —
Total Contractual
Obligations ......... $1,350,150 $770,200 $380,830 $130,229 $41,141 $25,610 $2,140
(1) The Company’s debt contains various terms, conditions and covenants which, if violated by the Company,
would result in a default and could result in the acceleration of the Company’s payment obligations.
Amounts differ from the balance presented on the consolidated balance sheets as of December 31, 2010
because the debt amounts above include interest.
(2) The Company is obligated under various non-cancellable lease agreements providing for office space and
equipment rental that expire at various dates through the year 2019.
(3) Reserve for losses and loss adjustment expenses is an estimate of amounts necessary to settle all outstanding
claims, including IBNR as of December 31, 2010. The Company has estimated the timing of these payments
based on its historical experience and expectation of future payment patterns. However, the timing of these
payments may vary significantly from the amounts shown above. The ultimate cost of losses may vary
materially from recorded amounts which are the Company’s best estimates.
(4) The table excludes liabilities of $3 million related to uncertainty in tax settlements as the Company is unable
to reasonably estimate the timing of related future payments.
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