Mercury Insurance 2009 Annual Report Download - page 52

OVERVIEW
A. General
The operating results of property and casualty insurance companies are subject to significant
quarter-to-quarter and year-to-year fluctuations due to the effect of competition on pricing, the frequency and
severity of losses, natural disasters on losses, general economic conditions, the general regulatory environment in
those states in which an insurer operates, state regulation of premium rates, changes in fair value of investments,
and other factors such as changes in tax laws.
The Company is headquartered in Los Angeles, California and operates primarily as a personal automobile
insurer selling policies through a network of independent agents and brokers in thirteen states. The Company also
offers homeowners, mechanical breakdown, fire, umbrella, and commercial automobile and property
insurance. Private passenger automobile lines of insurance accounted for approximately 83.2% of the $2.6 billion
of the Company’s direct premiums written in 2009. Approximately 78.6% of the private passenger automobile
premiums were written in California. The Company operates primarily in the state of California, the only state in
which it operated prior to 1990. The Company has since expanded its operations into the following states:
Georgia and Illinois (1990), Oklahoma and Texas (1996), Florida (1998), Virginia and New York (2001), New
Jersey (2003), and Arizona, Pennsylvania, Michigan, and Nevada (2004).
The Company expects to continue its growth by expanding into new states in future years with the objective
of achieving greater geographic diversification. There are challenges and risks involved in entering each new
state, including establishing adequate rates without any operating history in the state, working with a new
regulatory regime, hiring and training competent personnel, building adequate systems, and finding qualified
agents to represent the Company. The Company does not expect to enter into any new states during 2010.
This section discusses some of the relevant factors that management considers in evaluating the Company’s
performance, prospects, and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety
of management’s discussion and analysis, the Company’s consolidated financial statements and notes thereto,
and all other items contained within this Annual Report on Form 10-K.
2009 Financial Performance Summary
The Company’s net income for the year ended December 31, 2009 increased to $403.1 million or $7.32 per
diluted share from a net loss of $(242.1) million, or $(4.42) per diluted share, for the same period in 2008. The
Company also generated income from its investment portfolio. Approximately $145 million in pre-tax
investment income was generated during 2009 on a portfolio of approximately $3.1 billion at fair value at
December 31, 2009, compared to $151 million pre-tax investment income during 2008 on a portfolio of
approximately $2.9 billion at fair value at December 31, 2008. Included in net income (loss) are net realized
investment gains of $346.4 million in 2009 compared with net realized investment losses of $550.5 million in
2008. Net realized investment gains include gains of $395.5 million in 2009 due to changes in the fair value
pursuant to election of the fair value accounting option compared with losses of $525.7 million in 2008.
During 2009, the Company continued its marketing efforts to enhance name recognition and lead
generation. The Company believes that its marketing efforts, combined with its ability to maintain relatively low
prices and a strong reputation, make the Company very competitive in California and in other states.
The Company believes that it has a thorough underwriting process that gives the Company an advantage
over its competitors. The Company views its agent relationships and underwriting process as one of its primary
competitive advantages because it allows the Company to charge lower rates yet realize better margins than
many competitors.
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