Mercury Insurance 2011 Annual Report Download

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AUTO
HOME
B U S I N E SS
GAME ON!
Mercury General Corporation 2011 Annual Report

Table of contents

  • Page 1
    AUTO BUSinESS HOME GAME On! Mercury General Corporation 2011 Annual Report

  • Page 2
    ... second annual Mercury Insurance Open in Carlsbad, California. As part of the Summer US Open Series of tournaments, the Mercury Insurance Open featured world-class tennis players who competed for $740,000 in prize money. Mercury's sponsorship of this successful event elevates our national visibility...

  • Page 3
    2011 AnnUAL REPORT 1

  • Page 4
    ... 96% California personal auto renewal rate, Mercury customers know we will be there when they need us most. Auto Insurance Since its founding in 1962, Mercury has grown to become a leader in the auto insurance industry, providing drivers comprehensive coverage and exceptional service at competitive...

  • Page 5
    2011 AnnUAL REPORT 3

  • Page 6
    ... its coverage to include homeowners, condo-owners and renters, all of whom can receive the same comprehensive coverage, personalized service and low rates that drivers have come to expect. Using the same one-policy-does-not-fit-all approach, Mercury offers customized protection plans to cover all...

  • Page 7
    2011 AnnUAL REPORT 5

  • Page 8
    ...game. Mercury is rated A+ "Excellent" by A.M. Best and has more than $4 billion in assets. In addition to auto and home policies, Mercury offers comprehensive protection plans that address the very specific needs of business owners, including customized policies for commercial property and liability...

  • Page 9
    2011 AnnUAL REPORT 7

  • Page 10
    ... more customers are transacting business over the Internet. A 2011 auto insurance buying study showed that 32% of private passenger auto new business sales were transacted on-line. This compares to 3% for those that purchased a policy on-line 10 years ago. Although we 8 MERCURY GEnERAL CORPORATiOn

  • Page 11
    ... able to keep up with loss trends in some states outside of California. For example, in Florida, industry loss trends for personal insurance protection coverage increased by about 9% in the first three quarters of 2011 and that was on top of a 25% increase in industry loss trends for 2010. Long term...

  • Page 12
    ...2012 include: • Continuing to implement improved pricing segmentation and overall rate adequacy; • Introducing new Commercial auto products in California, Georgia, Oklahoma, and Arizona; • Introducing new Private Passenger products in Nevada and Michigan; • Introducing an improved Homeowners...

  • Page 13
    ... agents and customers to transact business with us; • Increasing the number of relationships with qualified agents; • Managing expenses prudently; • Continuing our Service Excellence program; and • Completing our withdrawal from the Florida Homeowners market. Despite a very low interest rate...

  • Page 14
    ... Year Summary All dollar figures in thousands, except per share data 2011 2010 2009 2008 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 15
    ... 1.48 $ $ 60.26-46.29 15.0% 54,402 54,424 1.32 $ $ $ 50.30-33.50 10.3% 54,314 54,362 1.20 51.15-37.25 2011 AnnUAL REPORT 13

  • Page 16
    ... 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 and quantitative and qualitative disclosures about market risks from the Company's Form 10-K filed with...

  • Page 17
    ... Automobile Homeowners Commercial Automobile Commercial Packages Mechanical Breakdown Personal Umbrella Private Passenger Automobile Homeowners Mechanical Breakdown CALiFORniA nEW JERSEY nEW YORK FLORiDA OKLAHOMA G EORGiA PEnnSYLVAniA iLLinOiS TEXAS MiCHiGAn ViRGiniA 2011 AnnUAL REPORT...

  • Page 18
    Don't Text and Drive At this year's Mercury Insurance Open, the company launched a "Don't Text and Drive" campaign. As one of the nation's largest auto insurance providers, we felt compelled to take the lead in raising public awareness about the dangers of texting while driving, asking players and ...

  • Page 19
    ..., 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 20
    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 21
    ...the "Insurance Companies") in a number of states, principally California. The Company also writes homeowners, commercial automobile and property, mechanical breakdown, fire, and umbrella insurance. The direct premiums written for the years ended December 31, 2011, 2010, and 2009 by state and line of...

  • Page 22
    ... accident for property damage. The principal executive offices of Mercury General are located in Los Angeles, California. The home office of the Company's California insurance subsidiaries and the Information Technology center are located in Brea, California. The Company also owns office buildings...

  • Page 23
    ... by George Joseph, the Company's Chairman of the Board of Directors. Including MCC, Mercury General has 21 subsidiaries. The Company's operations are conducted through the following subsidiaries: Insurance Companies Date Formed or Acquired A.M. Best Ratings Primary States Mercury Casualty Company...

  • Page 24
    ... Company offers mechanical breakdown insurance in many states and homeowners insurance in Illinois, Oklahoma, New York, Georgia, Texas, New Jersey, Virginia, and Arizona. The Company expects to complete its withdrawal from the Florida homeowners market by September 2012. In California, "good drivers...

  • Page 25
    ... or less than management estimates of reported losses and loss adjustment expenses reserves. Reserves 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...

  • Page 26
    ... California BI coverage as well as increases in the provision for losses in New Jersey and Florida. For 2004, the unfavorable development relates 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...

  • Page 27
    ....2% (1) Source: A.M. Best, Aggregates & Averages (2008 through 2011), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends). (2) Source: A.M. Best, "Best's Special Report U.S. Property/Casualty-Review & Preview, February 6, 2012." 7

  • Page 28
    ... indicated, the Insurance Companies' statutory ratios of net premiums written to policyholders' surplus. Guidelines established by the National Association of Insurance Commissioners (the "NAIC") indicate that this ratio should be no greater than 3 to 1. 2011 Year Ended December 31, 2010 2009 2008...

  • Page 29
    ... Statements. At December 31, 2011, 74.0% of the Company's total investment portfolio at fair value and 92.6% 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 30
    ... on pricing, claims handling, consumer recognition, coverage offered and other product features, customer service, and geographic coverage. Some of the Company's competitors are larger and well-capitalized national companies which have broad distribution networks of employed or captive agents...

  • Page 31
    ... the Company more competitive in attracting new personal automobile insurance business. 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...

  • Page 32
    ... 2011. During 2011, the Company paid $1.8 million in assessments to the New Jersey Unsatisfied Claim and Judgment Fund and the New Jersey Property-Liability Insurance Guaranty Association for assessments relating to its personal automobile line of insurance. As permitted by state law, the New Jersey...

  • Page 33
    ... Company Act. Assigned Risks Automobile liability insurers in California are required to sell BI liability, property damage liability, medical expense, and uninsured motorist coverage to a proportionate number (based on the insurer's share of the California automobile casualty insurance market...

  • Page 34
    ... in 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...

  • Page 35
    ... from time to time. Risks Related to the Company's Business The Company remains highly dependent upon California and several other key states to produce revenues and operating profits. For the year ended December 31, 2011, the Company generated 76.2% of its direct automobile insurance premiums...

  • Page 36
    ... from bad faith claims; weather catastrophes, including those which may be related to climate change; losses from sinkhole claims; unexpected medical inflation; and unanticipated inflation in auto repair costs, auto parts prices, and used car prices. Such risks may result in the Company's pricing...

  • Page 37
    ...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 and underwriting decisions where allowed by state law. Some consumer groups and regulators have questioned whether the use of credit scoring...

  • Page 38
    ...the banking industry, many lenders and institutional investors have ceased funding even the most credit-worthy borrowers. In addition, financial strength and claims-paying ability ratings have become an increasingly important factor in the Company's ability to access capital markets. Rating agencies...

  • Page 39
    ... credit of the bond issuer. Several financial guaranty insurers that have issued insurance policies covering bonds held by the Company have experienced financial strength rating downgrades due to risk exposures on insurance policies that guarantee mortgage debt and related structured products...

  • Page 40
    ..., its business and financial position could be harmed. The process of establishing property and liability loss reserves is inherently uncertain due to a number of factors, including underwriting quality, the frequency and amount of covered losses, variations in claims settlement practices, the...

  • Page 41
    ... sales of its policies at any time. The Company sells its insurance policies through approximately 6,700 independent agents. The Company must compete with other insurance carriers for these agents' business. Some competitors offer a larger variety of products, lower prices for insurance coverage...

  • Page 42
    ... 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 43
    ...amended, 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 Financial Officer, believe that any disclosure controls...

  • Page 44
    ...the Insurance Companies' statutory surplus. Challenging economic conditions also may impair the ability of the Company's customers to pay premiums as they fall due, and as a result, the Company's bad debt reserves and write-offs could increase. It is also possible that claims fraud may increase. The...

  • Page 45
    cost driver and has expressed concern that such claims could threaten the solvency of domestic insurers and have a destabilizing effect on an already fragile market." While the Company, with approximately 4,000 homeowners policies in-force in Florida at December 31, 2011, does not believe that the ...

  • Page 46
    ... 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 47
    ... 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 48
    ... Company conducts its business and results of operations, which could materially increase the Company's legal expenses. In addition, potential litigation involving new claim, coverage, and business practice issues could adversely affect the Company's business by changing the way policies are priced...

  • Page 49
    ... by the Company at December 31, 2011 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 50
    ...its financial condition, results of operations, or cash flows. In all cases, the Company vigorously defends itself unless a reasonable settlement appears appropriate. For a discussion of legal matters, see "Overview-B. Regulatory and Legal Matters" in "Item 7. Management's Discussion and Analysis of...

  • Page 51
    ... to notify the California DOI of any dividend after declaration, but prior to payment. There are similar limitations imposed by other states on the Insurance Companies' ability to pay dividends. As of December 31, 2011, the Insurance Companies are permitted to pay in 2012, without obtaining DOI...

  • Page 52
    ...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 53
    .... The Company's Board of Directors authorized a $200 million stock repurchase on July 30, 2011, and the authorization will expire in June 2012. 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 54
    ... 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 to market and distribute its policies; the...

  • Page 55
    ... retain business. The Company is headquartered in Los Angeles, California and operates primarily as a personal automobile insurer selling policies through a network of independent agents in thirteen states. The Company also offers homeowners, commercial automobile and property, mechanical breakdown...

  • Page 56
    ... enhance its internet agency portal, Mercury First. Mercury First is a single entry point for agents providing a broad suite of capabilities. One of its most powerful tools is a point of sale (POS) system that allows agents to easily obtain and compare quotes and write new business. Mercury First 36

  • Page 57
    ... for all underwriting, billing, claims, and commission functions supporting the private passenger auto line in seven states (Virginia, New York, Florida, California, Georgia, Illinois, and Texas). During 2010, the Company launched Guidewire, a commercially available software solution, to replace...

  • Page 58
    ... to pay for insurance by the amount of a fee charged 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...

  • Page 59
    ...provide the annual actuarial opinions required under state statutory accounting requirements. The Company does not rely on actuarial consultants for GAAP reporting or periodic report disclosure purposes. The Company analyzes loss reserves quarterly primarily using the incurred loss, claim count, and...

  • Page 60
    ... other coverages. BI coverage in the Company's policies includes injuries sustained by any person other than the insured, except in the case of uninsured or underinsured motorist BI coverage, which covers damages to the insured for BI caused by uninsured or underinsured motorists. BI payments are...

  • Page 61
    ...) but increasing the total number of claims (frequency). Mercury has historically used this approach to handle its BI claims. Beginning late in 2008 and continuing through the end of 2009, the Company changed its claims handling procedures and discontinued the practice of providing small settlement...

  • Page 62
    ... rate in 2010 and 2009 is skewed by the change in claims handling process noted above. The Company believes the comparison between 2011 and 2008 is more indicative of the actual severity trend. This results in an annualized implied inflation rate of 2.4%. (2) Claim Count Development The Company...

  • Page 63
    ... than such provisions. During 2011, the Company experienced severe losses due to Georgia tornadoes, Hurricane Irene, and California winter storms occurring between November 30 and December 3, which resulted in increased homeowners and automobile claims. The Company estimates that total losses from...

  • Page 64
    ...of re-estimates of accident years 2008 through 2010 California BI losses which have experienced higher average severities than were originally estimated at December 31, 2010. Premiums The Company's insurance premiums are recognized as income ratably over the term of the policies and in proportion to...

  • Page 65
    ... has an established history of generating capital gain premiums earned through its common stock call option program. Based on the continued existence of the options market, the substantial amount of capital committed to supporting the call option program, and the Company's favorable track record in...

  • Page 66
    ... from 2010. Net premiums written by the Company's non-California operations were approximately $632 million in 2011, a 4.5% increase from 2010. Growth outside of California has come as a result of expanded and improved product offerings and higher average premiums per policy. Net premiums written...

  • Page 67
    ... Georgia tornadoes during 2011. The 2010 loss ratio was impacted by severe rainstorms in California and homeowner's losses in Florida as a result of sinkhole claims during 2010. Expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses by net premiums...

  • Page 68
    ... and $46.6 million in 2011 and 2010, respectively, due to changes in the fair value of total investments pursuant to application of the fair value accounting option. The net gains during 2011 arise from a $62.1 million increase in the market value of the Company's fixed maturity securities offset by...

  • Page 69
    ... to the decreased net premiums earned, the Company's financial contributions of $12.1 million related to its support of the Continuous Auto Insurance Discount Act in California, and a premium deficiency reserve of $6.0 million recorded in the Florida homeowners line of business. Income tax expenses...

  • Page 70
    ... in 2011 was $158.5 million, an increase of $66.7 million over 2010. The increase was primarily due to the decreased payment of tax and operating expenses. The Company reduced agent contingent commissions, consulting, advertising, and information technology expenditures in 2011. The Company utilized...

  • Page 71
    ... ...Corporate securities ...Collateralized debt obligations ...Equity securities: Common stock: Public utilities ...Banks, trusts and insurance companies ...Industrial and other ...Non-redeemable preferred stock ...Partnership interest in a private credit fund ...Short-term investments ...Total...

  • Page 72
    ...securities is credit risk, which is managed by maintaining a weighted-average portfolio credit quality rating of AA-, at fair value, consistent with the average rating at December 31, 2010. To calculate the weighted-average credit quality ratings as disclosed throughout this Annual Report on Form 10...

  • Page 73
    ... 2011 A(1) BBB(1) Non-Rated/Other (Amounts in thousands) Total U.S. government bonds and agencies: Treasuries ...Government Agency ...Total ...Municipal securities: Insured ...Uninsured ...Total ...Mortgage-backed securities: Agencies ...Non-agencies: Prime ...Alt-A ...Total ...Corporate securities...

  • Page 74
    ... 31, 2011, the bond insurers providing credit enhancement were Assured Guaranty Corporation and National Public Finance Guarantee Corporation, which covered approximately 10% of the insured municipal securities. The average rating of the Company's insured municipal bonds by these bond insurers was...

  • Page 75
    ..., short-term investments include money market accounts, options, and short-term bonds which are highly rated short duration securities and redeemable within one year. D. Debt The Company retired all of its $125 million 7.25% senior notes on the August 15, 2011 maturity date by using a portion of the...

  • Page 76
    Effective August 4, 2011, the Company extended the maturity date of the $120 million Bank of America credit facility from January 1, 2012 to January 2, 2015 with interest payable at a floating rate of LIBOR rate plus 40 basis points. On October 4, 2011, the Company refinanced its Bank of America $18...

  • Page 77
    ... profitability and returns. The Company manages exposures to market risk through the use of asset allocation, duration, and credit ratings. Asset allocation limits place restrictions on the total funds that may be invested within an asset class. Duration limits on the fixed maturities portfolio...

  • Page 78
    ...at fair value at December 31, 2011: States Fair Value (Amounts in thousands) Average Rating Texas ...California ...Florida ...Illinois ...Washington ...Other states ...Total ... $337,678 265,731 176,959 159,642 132,233 1,199,032 $2,271,275 AAA+ A+ A AAA+ The portfolio is broadly diversified among...

  • Page 79
    ...a hypothetical parallel increase of 100 or 200 basis points in interest rates, the fair value of the bond portfolio at December 31, 2011 would decrease by $90.8 million or $181.6 million, respectively. Interest rate swaps are used to manage interest rate risk associated with the Company's loans with...

  • Page 80
    ... 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, 2011 and 2010 ...Consolidated Statements of Operations for Each of the Years in the Three...

  • Page 81
    ... 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, 2011, based on criteria established in Internal Control-Integrated Framework issued by the...

  • Page 82
    ... the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and...

  • Page 83
    ...' EQUITY Losses and loss adjustment expenses ...Unearned premiums ...Notes payable ...Accounts payable and accrued expenses ...Current income taxes ...Other liabilities ...Total liabilities ...Commitments and contingencies Shareholders' equity: Common stock without par value or stated value...

  • Page 84
    MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) 2011 Year Ended December 31, 2010 2009 Revenues: Net premiums earned ...Net investment income ...Net realized investment gains ...Other ...Total revenues ...Expenses: ...

  • Page 85
    MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) Year Ended December 31, 2011 2010 2009 Net income ...Other comprehensive gain (loss), before tax: Gains (losses) on hedging instrument ...Other comprehensive gain (loss), before tax ...

  • Page 86
    MERCURY GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in thousands) Year Ended December 31, 2011 2010 2009 Common stock, beginning of year ...Proceeds of stock options exercised ...Share-based compensation expense ...Tax benefit on sales of incentive ...

  • Page 87
    ... of stock options ...(Increase) decrease in premiums receivable ...Decrease in current and deferred income taxes ...(Increase) decrease in deferred policy acquisition costs ...Decrease in unpaid losses and loss adjustment expenses ...Increase (decrease) in unearned premiums ...(Decrease) increase in...

  • Page 88
    ...Companies in a number of states, principally California. The Company also writes homeowners, commercial automobile and property, mechanical breakdown, fire, and umbrella insurance. The private passenger automobile lines of insurance exceeded 81% of the Company's direct premiums written in 2011, 2010...

  • Page 89
    ...the 70% corporate dividend received deduction, and a partnership interest in a private credit fund. Short-term investments include money market accounts, options, and short-term bonds which are highly rated short duration securities redeemable within one year. The Company writes covered call options...

  • Page 90
    ...15, 2011 maturity date. The related interest rate swap agreement expired concurrently. 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...

  • Page 91
    ...of the Company's direct premiums written during 2011, 2010, and 2009. Losses and Loss Adjustment Expenses Unpaid losses and loss adjustment expenses are determined in amounts estimated to cover incurred losses and loss adjustment expenses and established based upon the Company's assessment of claims...

  • Page 92
    ... of a loss and the payment or settlement of a claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail property damage claims tend to be more reasonably predictable than longtail liability claims, such as those involving the Company's BI coverages. Management believes...

  • Page 93
    ... period presented. At December 31, 2011 and 2010, potential dilutive common stocks consist of outstanding stock options. Note 16 contains the required disclosures relating to the calculation of basic and diluted earnings per share. Segment Reporting Operating segments are components of an enterprise...

  • Page 94
    MERCURY GENERAL CORPORATION AND SUBSIDIARIES NOTES STATEMENTS TO CONSOLIDATED FINANCIAL-(Continued) The annual direct premiums written attributable to private passenger automobile, homeowners, commercial automobile, and other lines of insurance were as follows: Year Ended December 31, 2011 2010 2009...

  • Page 95
    ... 2005 Incentive Award Plan (the "2005 Plan"), the Compensation Committee of the Company's Board of Directors granted performance vesting restricted stock units to the Company's senior management and key employees in March 2011. The restricted stock units vest at the end of a three-year performance...

  • Page 96
    ... directly to the successful acquisition of new or renewal insurance contracts, and will be effective for fiscal years and interim periods beginning after December 15, 2011 and may be applied either prospectively or retrospectively. The Company completed its assessment using the prospective method...

  • Page 97
    ... At December 31, 2011, fixed maturity holdings rated below investment grade and non-rated comprised 3.7% of total investments at fair value. Additionally, the Company owns securities that are credit enhanced by financial guarantors that are subject to uncertainty related to market perception of the...

  • Page 98
    ... liabilities in non-active markets; or Either directly or indirectly observable inputs as of the reporting date. Level 3 Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair value requires significant management judgment or estimation...

  • Page 99
    ... 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, 2011 and December 31, 2010, the Company had no holdings in commercial mortgage-backed securities. Corporate securities...

  • Page 100
    ... ...Banks, trusts and insurance companies ...Industrial and other ...Non-redeemable preferred stock ...Partnership interest in a private credit fund ...Short-term bonds ...Money market instruments ...Total assets at fair value ...Liabilities Equity contracts ...Interest rate swap agreements ...Total...

  • Page 101
    ...: 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 102
    ... 2010, and 2009, respectively. 5. Deferred Policy Acquisition Costs Deferred policy acquisition costs are as follows: 2011 December 31, 2010 2009 (Amounts in thousands) Balance, beginning of year ...Acquisition costs deferred ...Amortization ...Balance, end of year ...6. Notes Payable Notes payable...

  • Page 103
    ... each bond. Effective August 4, 2011, the Company extended the maturity date of the $120 million credit facility from January 1, 2012 to January 2, 2015 with interest payable at a floating rate of LIBOR plus 40 basis points. On October 4, 2011, the Company refinanced its Bank of America $18 million...

  • Page 104
    ...hedge and the fair market value of the interest rate swap was reported as a component of other comprehensive income and amortized into earnings over the term of the hedged transaction. On October 4, 2011, the Company refinanced its Bank of America $18 million LIBOR plus 50 basis points loan that was...

  • Page 105
    ..., 2011 2010 2009 (Amounts in thousands) Interest rate contract-Other revenue (expense) ...Equity contracts-Net realized investment gains ...Total ... $ 1,232 9,000 $10,232 $ (457) 4,615 $4,158 $(1,446) 7,801 $ 6,355 Most equity contracts consist of covered calls. The Company writes covered calls...

  • Page 106
    ...Amount (Amounts in thousands) Useful Lives (in years) As of December 31, 2011: Customer relationships ...Trade names ...Software ...Technology ...Favorable leases ...Total intangible assets, net ...As of December 31, 2010: Customer relationships ...Trade names ...Software ...Technology ...Favorable...

  • Page 107
    ... tax provision The Company and its subsidiaries file a consolidated federal income tax return. The provision for income tax expense consists of the following components: Year Ended December 31, 2011 2010 2009 (Amounts in thousands) Federal Current ...Deferred ...State Current ...Deferred ...Total...

  • Page 108
    ...: December 31, 2011 2010 (Amounts in thousands) Deferred tax assets: 20% of net unearned premium ...Capital loss carryforward ...Discounting of loss reserves and salvage and subrogation recoverable for tax purposes ...Write-down of impaired investments ...Tax credit carryforward ...Expense accruals...

  • Page 109
    ... total amount of unrecognized tax benefits related to tax uncertainties during 2011. The increase was the result of tax positions taken based on management's best judgment given the facts, circumstances, and information available at the reporting date. The Company does not expect any further changes...

  • Page 110
    ... to in-house counsel. The decrease in the provision for insured events of prior years in 2010 of approximately $13 million primarily resulted from the re-estimate of accident year 2009 California BI losses which have experienced lower average severities and fewer late reported claims than were...

  • Page 111
    ...of the Insurance Companies exceeded the highest level of minimum regulatory required capital. 14. Profit Sharing Plan The Company's employees are eligible to become members of the Profit Sharing Plan (the "Plan"). The Company, at the option of the Board of Directors, may make annual contributions to...

  • Page 112
    ...years. The Plan includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue Code. The matching contributions, at a rate set by the Board of Directors, totaled $7.2 million, $7.0 million, and $3.1 million for 2011, 2010, and 2009, respectively. Substantially...

  • Page 113
    ...non-vested stock options is expected to be recognized over a weighted-average period of 1.1 years. Under the 2005 Plan, the Compensation Committee of the Company's Board of Directors granted performance vesting restricted stock units to the Company's senior management and key employees in March 2011...

  • Page 114
    MERCURY GENERAL CORPORATION AND SUBSIDIARIES NOTES STATEMENTS TO CONSOLIDATED FINANCIAL-(Continued) The fair value of the restricted stock grant was determined based on the market price on the date of grant. Compensation cost has been recognized based on management's best estimates that performance ...

  • Page 115
    ...) 2012 ...2013 ...2014 ...2015 ...2016 ...Thereafter ...California Earthquake Authority ("CEA") $15,821 10,551 5,410 3,185 2,436 1,624 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...

  • Page 116
    ... to pay for insurance by the amount of a fee charged 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...

  • Page 117
    ... in the financial markets in the United States, and in California, where the majority of the Company's business is produced. The Company believes that the recession, with continuing high unemployment rates, has negatively affected premium revenues and could continue to affect premium revenue in the...

  • Page 118
    ...quarter of 2010 were declines in the fair value of the Company's municipal securities due to the overall decline in the municipal markets, severe losses in California from heavy rainstorms, and increased losses and a premium deficiency reserve recorded in the Florida homeowners line of business. 98

  • Page 119
    ..., 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 120
    ..., Executive Officers, and Corporate Governance Item 11. Executive Compensation Item 12. Security 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...

  • Page 121
    ... Restated Bylaws of the Company. Shareholders' Agreement dated as of October 7, 1985 among the Company, George Joseph and Gloria Joseph. Form of Agency Contract. Profit Sharing Plan, as Amended and Restated as of March 11, 1994. Amendment 1994-I to the Mercury General Corporation Profit Sharing Plan...

  • Page 122
    ... 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 123
    ...not to be incorporated by reference into any filing of the Company. The following financial statements from the Annual Report on Form 10-K for the year ended December 31, 2011, filed on February 13, 2012, formatted in XBRL (Extensible Business Reporting Language) and funished electronically herewith...

  • Page 124
    ... on August 5, 2011, 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 of...

  • Page 125
    ... Date /S/ GEORGE JOSEPH George Joseph Chairman of the Board February 13, 2012 /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...

  • Page 126
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  • Page 127
    ... The Board of Directors and Shareholders Mercury General Corporation: Under date of February 13, 2012, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive...

  • Page 128
    ... securities ...Corporate securities ...Collateralized debt obligations ...Total fixed maturity securities ...Equity securities: Common stock: Public utilities ...Banks, trust and insurance companies ...Industrial and other ...Non-redeemable preferred stock ...Private credit fund ...Total equity...

  • Page 129
    ...-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 ...Non-redeemable preferred stock ...Total equity securities ...Short...

  • Page 130
    ...' EQUITY Notes payable ...Accounts payable and accrued expenses ...Income tax payable to affiliates ...Deferred income taxes ...Other liabilities ...Total liabilities ...Shareholders' equity: Common stock ...Additional paid in capital ...Accumulated other comprehensive loss ...Retained earnings...

  • Page 131
    SCHEDULE II, Continued MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS Year Ended December 31, 2011 2010 2009 (Amounts in thousands) Revenues: Net investment income ...Net realized investment (losses) gains ...Total revenues ...Expenses: Other ...

  • Page 132
    SCHEDULE II, Continued MERCURY GENERAL CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS Year Ended December 31, 2011 2010 2009 (Amounts in thousands) Cash flows from operating activities: Net cash (used in) provided by operating activities ...Cash flows from ...

  • Page 133
    ... of Florida Mercury Indemnity Company of America Mercury Select Management 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. The method...

  • Page 134
    SCHEDULE IV MERCURY GENERAL CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, Property and Liability Insurance Earned Premiums 2011 2010 (Amounts in thousands) 2009 Direct amounts ...Ceded to other companies ...Assumed ...Net amounts ... $2,569,661 (4,134) 530 $2,566,057 $2,...

  • Page 135
    ...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 Computershare 480 Washington Blvd. Jersey City, NJ 07310-1900 Telephone number...

  • Page 136
    Environmental Benefits Statement To minimize our environmental impact, the Mercury General Corporation 2011 Annual Report was printed on paper containing fibers from environmentally appropriate, socially beneficial and economically viable forest resources.