Mercury Insurance 2009 Annual Report Download - page 21

in Georgia, Illinois, Texas, Oklahoma, New York, New Jersey, Virginia, Pennsylvania, Arizona, Nevada, and
Michigan. Over half of the Company’s agents in California have represented the Company for more than ten
years. The agents, most of whom also represent one or more competing insurance companies, are independent
contractors selected and contracted by the Company. No independent agent or broker accounted for more than
2% of the Company’s direct premiums written during 2009. However, AIS produced approximately 15% and
14% of the Company’s direct premiums written during 2008 and 2007, respectively, prior to the AIS acquisition.
The Company believes that it compensates its agents and brokers above the industry average. During 2009,
total commissions incurred were approximately 17% of net premiums written.
The Company’s advertising budget is allocated among television, radio, newspaper, internet, and direct
mailing media to provide the best coverage available within targeted media markets. While the majority of these
advertising costs are borne by the Company, a portion of these costs are reimbursed by the Company’s
independent agents based upon the number of account leads generated by the advertising. The Company believes
that its advertising program is important to create brand awareness and to remain competitive in the current
insurance climate. During 2009, net advertising expenditures were $27 million.
Underwriting
The Company sets its own automobile insurance premium rates, subject to rating regulations issued by the
Departments of Insurance (“DOI”) or similar governmental agencies of the applicable states. Each state has
different rate approval requirements. See “Regulation—Department of Insurance Oversight.”
The Company offers standard, non-standard, and preferred private passenger automobile insurance. Private
passenger automobile policies in force for non-California operations represented approximately 21% of total
private passenger automobile policies in force at December 31, 2009. In addition, the Company offers
mechanical breakdown insurance in many states and homeowners insurance in Florida, Illinois, Oklahoma, New
York, Georgia, Texas, and Arizona.
In California, “good drivers” (as defined by the California Insurance Code) accounted for approximately
81% of all voluntary private passenger automobile policies in force at December 31, 2009, while higher risk
categories accounted for approximately 19%. The private passenger automobile renewal rate in California (the
rate of acceptance of offers to renew) averages approximately 95%. The Company also offers homeowners,
mechanical breakdown, and commercial automobile and property insurance in California.
Claims
The Company conducts the majority of claims processing without the assistance of outside adjusters. The
claims staff administer all claims and direct all legal and adjustment aspects of claims processing.
Losses and Loss Adjustment Expenses Reserves and Reserve Development
The Company maintains losses and loss adjustment expenses reserves for both reported and unreported
claims. Losses and loss adjustment expenses reserves for reported claims are estimated based upon a
case-by-case evaluation of the type of claim involved and the expected development of such claim. Losses and
loss adjustment expenses reserves for unreported claims are determined on the basis of historical information by
line of insurance. Inflation is reflected in the reserving process through analysis of cost trends and review of
historical reserves.
The Company’s ultimate liability may be greater or less than reported losses and loss adjustment expenses
reserves. Reserves are closely monitored and are analyzed quarterly by the Company’s actuarial consultants
using current information on reported claims and a variety of statistical techniques. The Company does not
discount to a present value that portion of losses and loss adjustment expenses reserves expected to be paid in
future periods. The Tax Reform Act of 1986, however, requires the Company to discount losses and loss
adjustment expenses reserves for federal income tax purposes.
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