Mercury Insurance 2010 Annual Report Download

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2010 Annual Report
Customer Focused, Results Driven
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Table of contents

  • Page 1
    Customer Focused, Results Driven ing families since 1 962 P ect rot 2010 Annual Report

  • Page 2
    ... Automobile, Homeowners, Commercial Automobile, Commercial Packages, Mechanical Breakdown and Personal Umbrella insurance to almost 2,000,000 customers in thirteen states. Environmental Benefits Statement To minimize our environmental impact, the Mercury General Corporation 2010 Annual Report was...

  • Page 3
    ... Private Passenger Automobile Homeowners Commercial Automobile Commercial Packages Mechanical Breakdown Private Passenger Automobile Homeowners Mechanical Breakdown CALIFORNIA NEW JERSEY NEW YORK FLORIDA OKLAHOMA GEORGIA PENNSYLVANIA TEXAS ILLINOIS MICHIGAN VIRGINIA 2010 ANNUAL REPORT 1

  • Page 4
    ... auto line and 4 in our homeowners line. In the first quarter of 2011 alone, we implemented over 15 rating changes to our core products. Loss trends in a few states outside of California have been problematic for us and the industry. For example, industry loss trends for the Florida Personal Injury...

  • Page 5
    ... rate adequacy; • Introducing new homeowners products in Georgia, Oklahoma, Texas and Illinois; • Introducing a new commercial auto product in Texas; • Continuing to invest in our technology to make it easier for our agents and customers to transact business with us; • Increasing customer...

  • Page 6
    ... Year Summary All dollar figures in thousands, except per share data 2010 2009 2008 2007 Operating Results (GAAP Basis): Net premiums written Change in unearned premiums Earned premiums Losses and loss adjustment expenses Underwriting expenses Net investment income Net realized investment gains...

  • Page 7
    ...,424 1.32 50.30-33.50 $ $ 10.3% 54,314 54,362 1.20 51.15-37.25 $ $ 9.6% 54,182 54,277 1.06 44.50-32.00 2010 ANNUAL REPORT 5

  • Page 8
    ... Vice President and Chief Actuary Judy A. Walters Vice President - Corporate Affairs and Secretary This Annual Report document includes Mercury General Corporation's financial statements and supporting data, management's discussion and analysis of financial condition and results of operations...

  • Page 9
    ..., Los Angeles, California (Address of principal executive offices) 90010 (Zip Code) Registrant's telephone number, including area code: (323) 937-1060 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock New York...

  • Page 10
    MERCURY GENERAL CORPORATION INDEX TO FORM 10-K Page PART I. Business ...General ...Website Access to Information ...Organization ...Production and Servicing of Business ...Underwriting ...Claims ...Losses and Loss Adjustment Expenses Reserves and Reserve Development ...Statutory Accounting ...

  • Page 11
    .... The direct premiums written for the years ended December 31, 2010, 2009, and 2008 by state and line of business were: Year Ended December 31, 2010 (Amounts in thousands) Private Passenger Auto Homeowners Commercial Auto Other Lines Total Business California ...Florida ...Texas ...New Jersey...

  • Page 12
    ... in St. Petersburg, Florida and in Oklahoma City, Oklahoma, which house the Company's employees and several third party tenants. The Company maintains branch offices in a number of locations in California; Richmond, Virginia; Latham, New York; Bridgewater, New Jersey; Vernon Hills, Illinois; Atlanta...

  • Page 13
    ... Production and Servicing of Business The Company sells its policies through approximately 5,700 independent agents and brokers, of which over 1,100 are located in each of California and Florida. The remaining agents and brokers are located in Georgia, Illinois, Texas, Oklahoma, New York, New Jersey...

  • Page 14
    ...total private passenger automobile policies in force at December 31, 2010. In addition, the Company offers mechanical breakdown insurance in many states and homeowners insurance in Florida, Illinois, Oklahoma, New York, Georgia, Texas, New Jersey, Virginia, and Arizona. The Company is in the process...

  • Page 15
    ... reserves at December 31, 2010. In evaluating the cumulative development information in the table, it should be noted that each amount includes the effects of all changes in development amounts for prior periods. This table does not present accident or policy year development data. Conditions...

  • Page 16
    ... to an increase in the Company's prior accident years' loss estimates for personal automobile insurance in Florida and New Jersey. In addition, an increase in estimates for loss severity for the 2004 accident year reserves for California and New Jersey automobile lines of business contributed to...

  • Page 17
    ... Report U.S. Property/Casualty-Review & Preview, February 14, 2011" Premiums to Surplus Ratio The following table presents, for the periods indicated, the Insurance Companies' statutory ratios of net premiums written to policyholders' surplus. Widely recognized guidelines established by the National...

  • Page 18
    ... Statements. At December 31, 2010, 77.0% of the Company's total investment portfolio at fair value and 91.6% of its total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. For more detailed information including credit ratings, see "Liquidity and Capital...

  • Page 19
    ...value option with changes in fair value reflected in net realized investment gains or losses in the consolidated statements of operations. Competitive Conditions The Company operates in the highly competitive property and casualty industry subject to competition on pricing, claims handling, consumer...

  • Page 20
    ... provided by FHCF. The coverage is expected to change when new information is available in March 2011. For California homeowners policies, the Company has reduced its catastrophe exposure from earthquakes by placing earthquake risks with the California Earthquake Authority ("CEA"). However, the...

  • Page 21
    Insurance rates in Georgia, New York, New Jersey, Pennsylvania, and Nevada require prior approval from the state DOI, while insurance rates in Illinois, Texas, Virginia, Arizona, and Michigan must only be filed with the respective DOI before they are implemented. Oklahoma and Florida have a modified...

  • Page 22
    ... assessments in 2011. The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with its homeowner policy through the CEA. The Company receives a small fee...

  • Page 23
    ... of the Board President and Chief Executive Officer Senior Vice President and Chief Information Officer Senior Vice President and Chief Claims Officer Senior Vice President-Customer Service Vice President and Chief Investment Officer Vice President and Chief Product Officer Vice President and Chief...

  • Page 24
    ...1991, and named Chief Underwriting Officer in January 2010. Mr. Minnich, Vice President-Marketing, joined the Company as an underwriter in 1989. In 2007, he joined Superior Access Insurance Services as Director of Agency Operations and rejoined the Company as an Assistant Product Manager in 2008. In...

  • Page 25
    ...76.6% of its direct automobile insurance premiums written in California, 7.8% in Florida, 3.9% in New Jersey, and 3.2% in Texas. The Company's financial results are subject to prevailing regulatory, legal, economic, demographic, competitive, and other conditions in these states and changes in any of...

  • Page 26
    ...; changes in operating expenses; changing driving patterns; extra-contractual liability arising from bad faith claims; weather catastrophes; losses from sinkhole claims; unexpected medical inflation; and unanticipated inflation in auto repair costs, auto parts prices, and used car prices. Such...

  • Page 27
    ... time to time, the auto insurance industry comes under pressure from state regulators, legislators, and special interest groups to reduce, freeze, or set rates at levels that do not correspond with underlying costs, in the opinion of the Company's management. The homeowners insurance business faces...

  • Page 28
    ...'s released a closing rating of BBB+, and has informed the Company that it will continue the rating on an unsolicited basis until the senior notes mature on August 15, 2011. A lowering of the existing ratings could limit the Company's access to the capital markets or adversely affect pricing of new...

  • Page 29
    ...amount of covered losses, variations in claims settlement practices, the costs and uncertainty of litigation, and expanding theories of liability. While the Company believes that improved actuarial techniques and databases have assisted in estimating loss reserves, the Company's methods may prove to...

  • Page 30
    ... time. The Company sells its insurance policies through approximately 5,700 independent agents and brokers. The Company must compete with other insurance carriers for these agents' and brokers' business. Some competitors offer a larger variety of products, lower prices for insurance coverage, higher...

  • Page 31
    ..., it would be difficult to renew the Company's existing business or attract new business. State regulations may also limit the manner in which the Company's producers are compensated or incentivized. Such developments could negatively impact the Company's relationship with these parties and...

  • Page 32
    ... of its information technology systems. The Company relies on these information technology systems to effectively manage many aspects of its business, including underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, and to...

  • Page 33
    ... in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's management, including its Chief Executive Officer and Chief...

  • Page 34
    ... hires and trains new employees and retains current employees to handle the resulting increase in new inquiries, policies, customers, and claims. The failure to successfully hire and retain a sufficient number of skilled employees could result in the Company having to slow the growth of its business...

  • Page 35
    ... insurance products, issue policies, or handle claims. Some states impose restrictions or require prior regulatory approval of specific corporate actions, which may adversely affect the Company's ability to operate, innovate, obtain necessary rate adjustments in a timely manner or grow its business...

  • Page 36
    ... states in which the Company conducts business require insurance companies to file insurance rate schedules and insurance policy forms for review and approval. If, as permitted in some states, the Company begins using new rates before they are approved, it may be required to issue refunds or credits...

  • Page 37
    ... or injury which are funded by either assessments based on paid losses or premium surcharge mechanisms. In addition, as a condition to the ability to conduct business in various states, the insurance subsidiaries must participate in mandatory property and casualty shared market mechanisms or...

  • Page 38
    ...use of credit scoring in the pricing and underwriting of personal lines products could reduce the Company's future profitability. The Company uses credit scoring as a factor in pricing decisions where allowed by state law. Some consumer groups and regulators have questioned whether the use of credit...

  • Page 39
    ... by the Company at December 31, 2010 Location Purpose Brea, CA ...Folsom, CA ...Los Angeles, CA ...Rancho Cucamonga, CA ...St. Petersburg, FL ...Oklahoma, OK ...Item 3. Legal Proceedings Home office and I.T. facilities (2 buildings) Administrative and Data Center Executive offices Administrative...

  • Page 40
    ... Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information The following table presents the high and low sales price per share on the New York Stock Exchange (symbol: MCY) since January, 2009. 2010 High Low 1st Quarter ...2nd Quarter ...3rd Quarter ...4th...

  • Page 41
    ...The industry peer group consists of Ace Limited, Alleghany Corporation, Allstate Corporation, American Financial Group, Berkshire Hathaway, Chubb Corporation, Cincinnati Financial Corporation, CNA Financial Corporation, Erie Indemnity Company, Hanover Insurance Group, HCC Insurance Holdings, Markel...

  • Page 42
    ... Company's Board of Directors authorized a $200 million stock repurchase program on July 30, 2010, and the authorization will expire in June 2011. The Company may repurchase shares of its common stock under the program in open market transactions at the discretion of management. The Company will use...

  • Page 43
    ...regulators and governmental bodies, particularly in California; the Company's ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in states where the Company operates; the Company's reliance on independent agents and brokers to market and distribute...

  • Page 44
    ...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...

  • Page 45
    ... insurance companies pay claims after premiums are collected, the ultimate cost of an insurance policy is not known until well after the policy revenues are earned. Consequently, significant assumptions are made when establishing insurance rates and loss reserves. While insurance companies use...

  • Page 46
    ... loss application system which enhances the personal auto claims process including automated rental car reservations, repair services, and a new roadside assistance program. The Company also enhanced consumer web quoting capabilities and launched a new web page for tracking vehicle repairs...

  • Page 47
    ... by the consumer's insurance broker. The California DOI seeks to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee, which the California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the California DOI seeks...

  • Page 48
    ... claim, inflation trends, expected loss ratios, industry data, and other relevant information. The Company also engages independent actuarial consultants to review the Company's reserves and to provide the annual actuarial opinions required under state statutory accounting requirements. The Company...

  • Page 49
    ... by uninsured or underinsured motorists. BI payments are primarily for medical costs and general damages. The following table presents the typical closure patterns of BI claims in the California automobile insurance coverage: % of Total Claims Closed Dollars Paid BI claims closed in the accident...

  • Page 50
    ...of the total claims are small dollar value claims resulting from this practice, it has the effect of lowering the total average cost for all claims (severity) but increasing the total number of claims (frequency). Mercury has historically used this approach to handle its BI claims. Beginning late in...

  • Page 51
    ...catastrophe losses from heavy rainstorms in California in December 2010. The number of claims expected excludes those claims that were closed without any payment. (b) The change in the implied inflation rate in 2010 and 2009 is skewed by the change in claims handling process noted above. The Company...

  • Page 52
    ... the cost to adjust the claim. The Company estimates that the total sinkhole related loss and loss adjustment expenses were approximately $20 million, $9 million, and $4 million for accident years 2010, 2009, and 2008, respectively. During this time period, the Company's Florida homeowners policies...

  • Page 53
    ... of accident year 2009 California BI losses which have experienced both lower average severities and fewer late reported claims (claim count development) than were originally estimated at December 31, 2009. The Company also experienced favorable development on New Jersey personal auto reserves...

  • Page 54
    ...Taxes At December 31, 2010, the Company's deferred income taxes were in a net asset position materially due to unearned premiums, expense accruals, loss reserve discounting, tax credit carryforward, and deferred tax recognition of capital losses. The Company assesses the likelihood that its deferred...

  • Page 55
    ...2010, the fair value of the Company's reporting units exceeds their carrying value. Contingent Liabilities The Company has known, and may have unknown, potential liabilities which include claims, assessments, lawsuits, or regulatory fines and penalties relating to the Company's business. The Company...

  • Page 56
    ... due to catastrophe losses in California from heavy rainstorms in December 2010, and to sinkhole claims in Florida. Expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses by net premiums earned. The Company's expense ratio increased primarily due to...

  • Page 57
    ... and $395.5 million in 2010 and 2009, respectively, due to changes in the fair value of total investments pursuant to application of the fair value accounting option. The net gains during 2010 arise from $1.0 million and $45.7 million increases in the market value of the Company's fixed maturity and...

  • Page 58
    ..., 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. Combined ratio is the key measure of underwriting performance traditionally used in the property and...

  • Page 59
    ...for the Insurance Companies are premiums, sales and maturity of invested assets, and dividend and interest income from invested assets. The principal uses of funds for the Insurance Companies are the payment of claims and related expenses, operating expenses, dividends to Mercury General, payment of...

  • Page 60
    ... consideration of prevailing market conditions. The following table presents the composition of the total investment portfolio of the Company at December 31, 2010: Cost (1) Fair Value (Amounts in thousands) Fixed maturity securities: U.S. government bonds and agencies ...States, municipalities and...

  • Page 61
    ... investments at cost. At December 31, 2010, 77.0% of the Company's total investment portfolio at fair value and 91.6% of its total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. Equity holdings consist of non-redeemable preferred stocks and dividend...

  • Page 62
    ..., at fair value, was downgraded to below investment grade. AAA AA(2) December 31, 2010 A(2) BBB(2) Non-Rated/Other (Amounts in thousands) Total U.S. government bonds and agencies: Treasuries ...Government agency ...Total ...Municipal securities: Insured (1) ...Uninsured ...Total ...Mortgage-backed...

  • Page 63
    AAA AA(2) December 31, 2010 A(2) BBB(2) Non-Rated/Other (Amounts in thousands) Total Corporate securities: Communications ...Consumer-cyclical ...Energy ...Basic materials ...Financial ...Utilities ...Total ...Collateralized debt obligations: Corporate ...Total ... - - - - 5,438 - 5,438 5.7% - -...

  • Page 64
    ... with stronger credit profiles than sub-prime borrowers, but do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation. At December 31, 2010, the Company had no holdings in commercial mortgage-backed securities. The weighted-average rating of the...

  • Page 65
    ... a 7.25% annual coupon payable on August 15 and February 15 each year. These notes mature on August 15, 2011. On December 16, 2010, the California DOI notified the Company that MCC was authorized to pay a $270 million extraordinary dividend to Mercury General in 2011. Mercury General intends to use...

  • Page 66
    ...claims, including IBNR as of December 31, 2010. The Company has estimated the timing of these payments based on its historical experience and expectation of future payment patterns. However, the timing of these payments may vary significantly from the amounts shown above. The ultimate cost of losses...

  • Page 67
    ... order of holdings at fair value at December 31, 2010: States Amounts (Amounts in thousands) Average Rating Texas ...California ...Florida ...Illinois ...Washington ...Other states ...Total ... $ 360,273 265,871 200,182 146,397 141,155 1,321,335 $2,435,213 AAA+ A+ A+ AAA+ The portfolio is broadly...

  • Page 68
    ...hypothetical parallel increase of 100 basis or 200 basis points in interest rates, the fair value of the bond portfolio at December 31, 2010 would decrease by $125.5 million or $251.0 million, respectively. Interest rate swaps are used to manage interest rate risk associated with the Company's loans...

  • Page 69
    ... Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm ...Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2010 and 2009 ...Consolidated Statements of Operations for Each of the Years in the Three...

  • Page 70
    ... also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mercury General Corporation's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the...

  • Page 71
    ... standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and...

  • Page 72
    ... policy acquisition costs ...Fixed assets, net ...Current income taxes ...Deferred income taxes ...Goodwill ...Other intangible assets, net ...Other assets ...Total assets ...LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses ...Unearned premiums ...Notes payable ...Accounts...

  • Page 73
    ... per share data) 2010 Year Ended December 31, 2009 2008 Revenues: Net premiums earned ...Net investment income ...Net realized investment gains (losses) ...Other ...Total revenues ...Expenses: Losses and loss adjustment expenses ...Policy acquisition costs ...Other operating expenses ...Interest...

  • Page 74
    MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Amounts in thousands) Year Ended December 31, 2010 2009 2008 Net income (loss) ...Other comprehensive loss, before tax: Losses on hedging instrument ...Other comprehensive loss, before tax ...Income...

  • Page 75
    ... CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in thousands) 2010 Year Ended December 31, 2009 2008 Common stock, beginning of year ...Proceeds of stock options exercised ...Share-based compensation expense ...Tax benefit on sales of incentive stock options...

  • Page 76
    ... policy acquisition costs ...(Decrease) increase in unpaid losses and loss adjustment expenses ...Decrease in unearned premiums ...(Decrease) increase in accounts payable and accrued expenses ...Decrease in trading securities in nature, net of realized gains and losses ...Share-based compensation...

  • Page 77
    ...Company, Inc. American Mercury MGA, Inc. Concord Insurance Services, Inc. Mercury Insurance Services LLC Mercury Group, Inc. AIS Management LLC Auto Insurance Specialists LLC PoliSeek AIS Insurance Solutions, Inc. Mercury National Insurance Company American Mercury Insurance Company American Mercury...

  • Page 78
    .... If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security...

  • Page 79
    ...the unadjusted quoted price for similar notes in active markets. Further, see Note 3 for methods and assumptions used in estimating fair values of interest rate swap agreements, and equity contracts. Due to their short-term maturity, the carrying value of receivables and accounts payable approximate...

  • Page 80
    ... independent agent or broker accounted for more than 2% of the Company's direct premiums written during 2010 and 2009. However, AIS produced approximately 15% of the Company's direct premiums written during 2008 prior to the AIS acquisition. Losses and Loss Adjustment Expenses Unpaid losses and loss...

  • Page 81
    ...) Estimating loss reserves is a difficult process as many factors can ultimately affect the final settlement of a claim and, therefore, the reserve that is required. Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of repair materials, or labor rates...

  • Page 82
    ... that require separate disclosure as reportable operating segments for the periods presented. The annual direct premiums written attributable to private passenger automobile, commercial automobile, homeowners, and other lines of insurance were as follows: 2010 Year Ended December 31, 2009 2008...

  • Page 83
    ... of the Company's Board of Directors granted to Gabriel Tirador, the Company's Chief Executive Officer, 10,000 shares of restricted stock on March 23, 2010. On October 1, 2010, the Compensation Committee granted 45,000 restricted stock units to the Company's senior management and key employees under...

  • Page 84
    ...to as deferred acquisition costs. Deferred acquisition costs are amortized over time using amortization methods dependent upon the nature of the underlying insurance product. Other costs that do not vary with and are not primarily related to the acquisition of new and renewal insurance contracts are...

  • Page 85
    ... in net investment income in the Company's consolidated statements of operations. The following table presents gains and losses due to changes in fair value for items measured at fair value pursuant to application of the fair value option: Year Ended December 31, 2010 2009 2008 (Amounts in thousands...

  • Page 86
    ...inputs used to measure their fair value and the level of market price observability, as follows: Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Level 2 Pricing inputs are other than quoted prices in active markets, which...

  • Page 87
    ... or liabilities in active markets. Additional pricing services and closing exchange values are used as a comparison to ensure realistic fair values are used in pricing the investment portfolio. U.S. government bonds and agencies: Valued using unadjusted quoted market prices for identical assets in...

  • Page 88
    ... loans and valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades and broker/dealer quotes, for identical or similar assets in active markets. At December 31, 2010 and December 31, 2009, the Company had no holdings in commercial mortgage-backed...

  • Page 89
    ...: Common stock: Public utilities ...Banks, trusts and insurance companies ...Industrial and other ...Non-redeemable preferred stock ...Short-term bonds ...Money market instruments ...Interest rate swap agreements ...Total assets at fair value ...Liabilities Equity contracts ...Interest rate swap...

  • Page 90
    ...: Common stock: Public utilities ...Banks, trusts and insurance companies ...Industrial and other ...Non-redeemable preferred stock ...Short-term bonds ...Money market instruments ...Interest rate swap agreements ...Total assets at fair value ...Liabilities Equity contracts ...Interest rate swap...

  • Page 91
    ...to policies written prior to January 1, 2009, offset by corresponding deferred direct sales costs, reduced pre-tax income in the statement of operations by $15 million. (2) Includes an establishment of a premium deficiency reserve of $6 million for the Florida homeowners line of business during 2010...

  • Page 92
    ... debt issuance costs of approximately 7.44%. The aggregated maturities for notes payable are as follows: Year Maturity (Amounts in thousands) 2011 ...2012 ...2013 ... $125,000 $120,000 $ 18,000 On December 16, 2010, the California DOI notified the Company that MCC was authorized to pay a $270...

  • Page 93
    ... consolidated balance sheets with a corresponding increase in notes payable. The Company includes the gain or loss on the hedged item in the same line item, other revenue, as the offsetting loss or gain on the related interest rate swaps as follows: 2010 Gain (Loss) Gain (Loss) on Swap on Loan Year...

  • Page 94
    ...407) $4,240 The Effect of Derivative Instruments on the Statements of Operations Loss Recognized in Income Year Ended December 31, 2010 2009 2008 (Amounts in thousands) Derivatives Contracts for Fair Value Hedges Interest rate contracts-Interest expense ... $7,103 $ 7,022 $ 4,938 Derivatives...

  • Page 95
    ... the parent company of AIS and PoliSeek. AIS is a major producer of automobile insurance in the state of California and was the Company's largest independent broker. This preexisting relationship did not require measurement at the date of acquisition as there was no settlement of executory contracts...

  • Page 96
    ... with the Company's insurance subsidiaries. (2) Includes net premiums earned, net investment income, net realized investment gains/losses and commission revenues. (3) 2008 pro forma net income for the combined entity is not available as AIS was previously consolidated into its parent company and...

  • Page 97
    ... December 31, 2010: Year Ending December 31, Amortization Expense (Amounts in thousands) 2011 ...2012 ...2013 ...2014 ...2015 ...Thereafter ...Total ...10. Income Taxes Income tax provision $ 6,375 6,160 5,986 5,980 5,980 29,643 $60,124 The Company and its subsidiaries file a consolidated federal...

  • Page 98
    ...: Deferred acquisition costs ...Tax liability on net unrealized gain on securities carried at fair value ...Tax depreciation in excess of book depreciation ...Undistributed earnings of insurance subsidiaries ...Accounting method transition adjustments ...Other deferred tax liabilities ...Total gross...

  • Page 99
    ... uncertainties during 2010. The decrease was the result of a change in management's assessment of the technical merits of tax positions taken in an earlier period based on management's best judgment given the facts, circumstances, and information available at the reporting date. The Company does not...

  • Page 100
    ... re-estimate of accident year 2009 California BI losses which have experienced lower average severities and fewer late reported claims than were originally estimated at December 31, 2009. In addition, the Company experienced favorable development on New Jersey personal automobile reserves, resulting...

  • Page 101
    ... capacity guidelines established by their domiciliary states. The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations. For 2011, the direct insurance subsidiaries of the Company are permitted to pay approximately...

  • Page 102
    ... all employees. The Board of Directors authorized the Plan to purchase $1.2 million, $1.2 million, and $0 of the Company's common stock in the open market for allocation to the Plan participants in 2010, 2009, and 2008, respectively. Accordingly, the Company recognized compensation expense...

  • Page 103
    ... at the time of the grant. A summary of the stock option activity under the Company's plans as of December 31, 2010 and changes during the year then ended is presented below: WeightedAverage Remaining Contractual Term (Years) Shares WeightedAverage Exercise Price Aggregate Intrinsic Value (in 000...

  • Page 104
    ... of the Company's Board of Directors granted to Gabriel Tirador, the Company's Chief Executive Officer, 10,000 shares of restricted stock on March 23, 2010. On October 1, 2010, the Compensation Committee granted 45,000 restricted stock units to the Company's senior management and key employees under...

  • Page 105
    ...,000, and $12,002,000 for 2010, 2009, and 2008, respectively. The following table presents future minimum commitments for operating leases as of December 31, 2010: Year Ending December 31, Operating Leases (Amounts in thousands) 2011 ...2012 ...2013 ...2014 ...2015 ...Thereafter ...95 $14,902 12...

  • Page 106
    ... by the consumer's insurance broker. The California DOI seeks to impose a fine for each policy in which the Company allegedly permitted an agent to charge a broker fee, which the California DOI contends is the use of an unapproved rate, rating plan or rating system. Further, the California DOI seeks...

  • Page 107
    ... for the estimated cost to defend itself in the regulatory matters described above. Litigation The Company is, from time to time, named as a defendant in various lawsuits incidental to its insurance business. In most of these actions, plaintiffs assert claims for punitive damages, which are not...

  • Page 108
    ... of 2010 were declines in the fair value of the Company's municipal securities due to the overall decline in the municipal markets, catastrophe losses in California from heavy rainstorms, and increased losses and a premium deficiency reserve recorded in the Florida homeowners line of business. Net...

  • Page 109
    ... regions of the United States and brought blizzard conditions to much of the Country. Such events typically increase claims frequency and severity; however, they occasionally decrease frequency as automobile drivers stay off the road due to business closures. The Company is unable to determine...

  • Page 110
    ..., is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as...

  • Page 111
    ... Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services Information regarding executive officers of the Company is included in Part...

  • Page 112
    ... dated as of June 1, 2001. Officers' Certificate establishing the Company's 7.25% Senior Notes due 2011 as a series of securities under the Indenture dated as of June 1, 2001 between Mercury General Corporation and Bank One Trust Company, N.A. Form of Agency Contract. Profit Sharing Plan, as Amended...

  • Page 113
    ... Mutual Insurance Company) and Mercury Insurance Services, LLC (as successor in interest). Director Compensation Arrangements. Mercury General Corporation Senior Executive Incentive Bonus Plan. Amended and Restated Mercury General Corporation 2005 Equity Incentive Award Plan. Incentive Stock Option...

  • Page 114
    ...January 26, 2009, among Mercury Casualty Company, Mercury General Corporation, Bank of America, N.A., and the lenders party thereto. Subsidiaries of the Company. Consent of Independent Registered Public Accounting Firm. Certification of Registrant's Chief Executive Officer pursuant to Section 302 of...

  • Page 115
    ... October 5, 2010, and is incorporated herein by this reference. * Denotes management contract or compensatory plan or arrangement. ** Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be "filed" for purposes...

  • Page 116
    .../S/ GEORGE JOSEPH George Joseph Chairman of the Board February 14, 2011 /S/ GABRIEL TIRADOR Gabriel Tirador President and Chief Executive Officer and Director (Principal Executive Officer) Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer...

  • Page 117
    ...ACCOUNTING FIRM The Board of Directors and Shareholders Mercury General Corporation: Under date of February 14, 2011, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations...

  • Page 118
    ... U.S. government bonds and agencies ...Municipal securities ...Mortgage-backed securities ...Corporate securities ...Collateralized debt obligations ...Total fixed maturity securities ...Equity securities: Common stock: Public utilities ...Banks, trust and insurance companies ...Industrial and other...

  • Page 119
    ... U.S. government bonds and agencies ...Municipal securities ...Mortgage-backed securities ...Corporate securities ...Collateralized debt obligations ...Total fixed maturity securities ...Equity securities: Common stock: Public utilities ...Banks, trust and insurance companies ...Industrial and other...

  • Page 120
    SCHEDULE II MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS December 31, 2010 2009 (Amounts in thousands) ASSETS Investments, at fair value: Fixed maturities trading (amortized cost $0; $263) ...Equity securities trading (cost $18,285; $20,921) ...Short-term...

  • Page 121
    SCHEDULE II, Continued MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS Year Ended December 31, 2010 2009 2008 (Amounts in thousands) Revenues: Net investment income ...Net realized investment gains (losses) ...Total revenues ...Expenses: Other ...

  • Page 122
    SCHEDULE II, Continued MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS Year Ended December 31, 2010 2009 2008 (Amounts in thousands) Cash flows from operating activities: Net cash (used in) provided by operating activities ...Cash flows from ...

  • Page 123
    ... Group, Inc. AIS Management LLC Auto Insurance Specialists LLC PoliSeek AIS Insurance Solutions, Inc. The method of allocation between the companies is subject to agreement approved by the Board of Directors. Allocation is based upon separate return calculations with current credit for net losses...

  • Page 124
    SCHEDULE IV MERCURY GENERAL CORPORATION REINSURANCE THREE YEARS ENDED DECEMBER 31, Property and Liability Insurance Earned Premiums 2010 2009 (Amounts in thousands) 2008 Direct amounts ...Ceded to other companies ...Assumed ...Net amounts ... $2,569,942 (4,468) 1,211 $2,566,685 $2,628,507 (4,214) ...

  • Page 125
    ... Company, Inc. American Mercury MGA, Inc. Mercury Group, Inc. Auto Insurance Specialists LLC AIS Management LLC PoliSeek AIS Insurance Solutions, Inc. * Controlled by Mercury General Corporation TRANSFER AGENT & REGISTRAR BNY Mellon 480 Washington Blvd. Jersey City, NJ 07310-1900 Telephone number...

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