Mercury Insurance 2015 Annual Report Download - page 51

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39
losses mostly due to severe storms outside of California, and rainstorm and wildfire losses in California. The 2014 loss ratio was
also negatively impacted by a total of $11 million of catastrophe losses mostly due to winter freeze events in the East Coast and
homeowners losses in California from severe rainstorms. Excluding the effect of estimated prior periods’ loss development and
catastrophe losses, the loss ratio was 71.5% and 70.7% for the years ended December 31, 2015 and 2014, respectively. The increase
in the adjusted loss ratio was primarily due to higher loss frequency and severity.
Expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses by net premiums
earned. Excluding the $27.6 million penalty assessed by the California DOI and accrued by the Company in 2014, the expense
ratio would have been 26.8% in 2014 comparable to the expense ratio in 2015. The 2015 expense ratio also included higher
advertising expenses and lower average commissions paid to agents.
Combined ratio is equal to loss ratio plus expense ratio and 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 (benefit) expense was $(3.9) million and $69.5 million for the years ended December 31, 2015 and 2014,
respectively. The $73.4 million decrease in income tax expense to an income tax benefit was primarily due to a $176.9 million
reduction in total pre-tax income, while tax-exempt investment income, a component of total pre-tax income, remained relatively
consistent compared to the same period in 2014. The decrease in pre-tax income was primarily due to a change in net realized
investment gains of $81.2 million in 2014 to net realized investment losses of $83.8 million in 2015.
Investments
The following table presents the investment results of the Company:
Year Ended December 31,
2015 2014
(Amounts in thousands)
Average invested assets at cost (1) $ 3,293,948 $ 3,204,592
Net investment income (2)
Before income taxes $ 126,299 $ 125,723
After income taxes $ 110,382 $ 111,456
Average annual yield on investments (2)
Before income taxes 3.8% 3.9%
After income taxes 3.4% 3.5%
Net realized investment (losses) gains $ (83,807) $ 81,184
__________
(1) Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average
invested assets at cost are based on the monthly amortized cost of the invested assets for each respective period.
(2) Net investment income before income taxes increased slightly due to higher average invested asset balances. Net investment
income and average annual yields on investments after income taxes decreased slightly primarily due to the maturity and
replacement of higher yielding investments purchased when market interest rates were higher, with lower yielding
investments purchased during low interest rate environments, and a higher effective tax rate on investment income due to
a greater proportion of taxable investments in 2015 compared to 2014.