Mercury Insurance 2015 Annual Report Download - page 4

LETTER TO SHAREHOLDERS
However, our Homeowners combined ratio deteriorated to 99.0%
in 2015 from 95.6% in 2014, primarily the result of our California
Homeowners business. Our California Homeowners combined
ratio was 102.0% in 2015 compared to 99.4% in 2014. Adverse
development, Catastrophe losses and an increase in severity
negatively impacted our results in 2015. In addition to seeking a
rate increase, we plan on implementing new claims procedures
to improve our profitability in our California Homeowners line.
Historically, our Commercial lines have been a profitable line
of business for Mercury. In 2015 we grew our Commercial
Automobile line 13% to $154.5 million, but our combined ratio
deteriorated to 105% from 93% in 2014. The deterioration in the
combined ratio was primarily due to our Florida business as we
experienced an increase in severity and recorded $5.9 million of
adverse development. In 2015 our California Commercial Property
line posted a 12.6% increase in premiums written to $65.9 million
with a 93.9% combined ratio. We expect the profitability of our
Commercial lines to improve in 2016 as we implement necessary
rate changes. We plan on continuing to focus on growing our
Homeowners and Commercial lines of business as long as we
believe we can do so in a prudent manner.
Companywide net premiums written grew 5.6% to $3.0 billion in
2015. California continued to experience positive premium growth
as rate increases more than offset lower policy sales. In California,
we posted net premiums written growth of 5.4% in 2015. Outside
of California and excluding our Mechanical Breakdown product,
net premiums written increased 5.5% in 2015. For 2016, we
expect to grow our business in the low single digit range as our
primary focus will be improving our profitability.
We have taken several steps the past few years to improve our
cost structure outside of California. In 2013, we implemented the
consolidation of our claims and underwriting operations located
outside of California into hub locations in Florida, New Jersey
and Texas. In addition, other expense reduction measures were
taken, including a new commission structure. Although these
changes have positively impacted our cost structure and scale
outside of California, there is more work to do. Simply put, our
loss adjustment expense (LAE) and expense ratios are too high.
Accordingly, we expect to implement further changes in 2016
to drive down our LAE and expense ratios outside of California
to acceptable levels.
In 2015, we launched our first-ever national advertising campaign
and nearly doubled our advertising spend to $44 million from
$23 million in 2014. We continue to learn from our advertising
efforts and in 2015 we nearly reached our targeted cost per sale.
In 2016, our plan is to spend $42 million in advertising and reach
our overall targeted cost per sale. Although we cannot compete
with the much larger advertising budgets of some of our larger
competitors, we will continue to advertise if the economics work
for us. In addition, as a result of our increased advertising efforts,
our brand awareness increased significantly in 2015 as measured
by an independent media organization.
Last year we were hit with an unanticipated $27.6 million fine
by the California Insurance Commissioner. The fine was based
on a 2004 Notice of Non-Compliance matter and is related to
the Krumme v. Mercury lawsuit that was decided in 2003. It is
our strong belief that this decision is contrary to California’s rate
laws, due process, and basic notions of fairness. Accordingly,
we filed a Writ of Administrative Mandamus and Complaint for
Declaratory Relief in Superior Court seeking, among other things,
to require the California Insurance Commissioner to vacate the
Order and refund the penalty, with interest. A hearing on this
matter is scheduled for June 2016.
NET PREMIUMS WRITTEN
(in millions of dollars)
3,500
3,000
2,000
1,500
1,000
0
2014 20151996 1997 1998 1999 2000 2001 2002 2003
2,500
500
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013