Mercury Insurance 2009 Annual Report Download - page 24

Download and view the complete annual report

Please find page 24 of the 2009 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 132

  • 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
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132

portions of deferred tax assets. Under GAAP, a valuation allowance may be recorded against the
deferred tax assets and reflected as an expense.
• Certain assessments paid to regulatory agencies that are recoverable from policy holders in future
periods are expensed whereas these amounts are recorded as receivables under SAP.
Operating Ratios (SAP basis)
Loss and Expense Ratios
Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance
companies. Under SAP, losses and loss adjustment expenses are stated as a percentage of premiums earned
because losses occur over the life of a policy, while underwriting expenses are stated as a percentage of
premiums written rather than premiums earned because most underwriting expenses are incurred when policies
are written and are not spread over the policy period. The statutory underwriting profit margin is the extent to
which the combined loss and expense ratios are less than 100%. The Insurance Companies’ loss ratio, expense
ratio, combined ratio, and the private passenger automobile industry combined ratio, on a statutory basis, are
shown in the following table. The Insurance Companies’ ratios include lines of insurance other than private
passenger automobile. Since these other lines represent only 16.8% of premiums written, the Company believes
its ratios can be compared to the industry ratios included in the following table.
Year Ended December 31,
2009 2008 2007 2006 2005
Loss Ratio .............................................. 67.8% 73.3% 68.0% 67.4% 65.4%
Expense Ratio ........................................... 28.6% 28.5% 27.1% 27.1% 26.5%
Combined Ratio ......................................... 96.4% 101.8% 95.1% 94.5% 91.9%
Industry combined ratio (all writers)(1) ........................ 99.3%(2) 99.8% 98.3% 95.5% 95.1%
Industry combined ratio (excluding direct writers)(1) ............. N/A 100.8% 96.2% 94.7% 94.5%
(1) Source: A.M. Best, Aggregates & Averages (2006 through 2009), for all property and casualty insurance
companies (private passenger automobile line only, after policyholder dividends).
(2) Source: A.M. Best, “2010 Special Report U.S. Property/Casualty-Review & Preview, February 8, 2010”
Premiums to Surplus Ratio
The following table reflects, for the periods indicated, the Insurance Companies’ statutory ratios of net
premiums written to policyholders’ surplus. Widely recognized guidelines established by the National
Association of Insurance Commissioners (the “NAIC”) indicate that this ratio should be no greater than 3 to 1.
Year Ended December 31,
2009 2008 2007 2006 2005
(Amounts in thousands, except ratios)
Net premiums written .................. $2,589,972 $2,750,226 $2,982,024 $3,044,774 $2,950,523
Policyholders’ surplus .................. $1,517,864 $1,371,095 $1,721,827 $1,579,248 $1,487,574
Ratio ............................... 1.7to1 2.0to1 1.7to1 1.9to1 2.0to1
Investments
The Company’s investments are directed by the Chief Investment Officer under the supervision of the Board
of Directors. The Company’s investment strategy emphasizes safety of principal and consistent income
generation, within a total return framework. The investment strategy has historically focused on maximizing
after-tax yield with a primary emphasis on maintaining a well diversified, investment grade, fixed income
portfolio to support the underlying liabilities and achieve a return on capital and profitable growth. The Company
6