Mercury Insurance 2009 Annual Report Download - page 63

RESULTS OF OPERATIONS
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
Net premiums earned and net premiums written in 2009 decreased approximately 6.5% and 5.8%,
respectively, from 2008. Net premiums written by the Company’s California operations were approximately $2
billion in 2009, a 6.9% decrease from 2008. Net premiums written by the Company’s non-California operations
were approximately $578 million in 2009, a 1.9% decrease from 2008. The decrease in net premiums written is
primarily due to a decrease in the number of policies written and slightly lower average premiums per policy
reflecting the continuing soft market conditions.
Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies
issued during a fiscal period less any applicable reinsurance. Net premiums written is a statutory measure
designed to determine production levels. Net premiums earned, the most directly comparable GAAP measure,
represents the portion of net premiums written that is recognized as income in the financial statements for the
period presented and earned on a pro-rata basis over the term of the policies. The following is a reconciliation of
total net premiums written to net premiums earned:
2009 2008
(Amounts in thousands)
Net premiums written ......................................... $2,589,972 $2,750,226
Decrease in unearned premium .................................. 35,161 58,613
Net premiums earned ..................................... $2,625,133 $2,808,839
Expenses
The loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The
loss ratios were 67.9% and 73.3% in 2009 and 2008, respectively. The loss ratio decreased primarily due to
favorable development of approximately $58 million in 2009 compared to unfavorable development of
approximately $89 million in 2008 coupled with lower loss frequency in 2009. Partially offsetting this are higher
loss severities recorded in 2009, as well as lower average premiums earned per policy.
The expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses
by net premiums earned. The expense ratio was 29.0% and 28.5% in 2009 and 2008, respectively. The expense
ratio slightly increased primarily due to the impact of the amortization of AIS deferred commissions paid prior to
the acquisition and severance payments related to a reduction in workforce during 2009, offset by other cost
reduction programs. Prior to the acquisition of AIS, the Company deferred the recognition of commissions paid
to AIS to match the earnings of the related premiums. Now that AIS is a wholly-owned subsidiary, commissions
are no longer paid or deferred, and direct expenses are reflected in the expense ratio. Further, to improve
profitability, the Company implemented several cost reduction programs including a salary freeze, a suspension
of the employee 401(k) matching program, and a workforce reduction primarily located in California.
The combined ratio 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. The Company’s combined ratio
was 96.9% and 101.8% in 2009 and 2008, respectively.
The income tax expense (benefit) for 2009 and 2008 was $168.5 million and $(208.7) million, respectively.
The increase in expense resulted primarily from changes in the fair value of the investment portfolio.
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