Mercury Insurance 2011 Annual Report Download - page 115

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES STATEMENTS TO CONSOLIDATED FINANCIAL—(Continued)
17. Commitments and Contingencies
Operating Leases
The Company is obligated under various non-cancellable lease agreements providing for office space,
automobiles, and office equipment that expire at various dates through the year 2019. For leases that contain
predetermined escalations of the minimum rentals, the Company recognizes the related rent expense on a
straight-line basis and records the difference between the recognized rental expense and amounts payable under
the leases as deferred rent in other liabilities. This liability amounted to approximately $1,642,000 and
$1,159,000 at December 31, 2011 and 2010, respectively. Total rent expense under these lease agreements was
$18,207,000, $17,076,000, and $17,529,000 for 2011, 2010, and 2009, respectively.
The following table presents future minimum commitments for operating leases as of December 31, 2011:
Year Ending December 31, Operating Leases
(Amounts in thousands)
2012 ................................................... $15,821
2013 ................................................... 10,551
2014 ................................................... 5,410
2015 ................................................... 3,185
2016 ................................................... 2,436
Thereafter ............................................... 1,624
California Earthquake Authority (“CEA”)
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 homeowners policies through the CEA. The Company receives a small fee for placing business with the CEA,
which is recorded as other income in the consolidated statements of operations. Upon the occurrence of a major
seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made
after CEA capital has been expended and are based upon each company’s participation percentage multiplied by
the amount of the total assessment. Based upon the most recent information provided by the CEA, the
Company’s maximum total exposure to CEA assessments at April 1, 2011, the most recent date at which
information was available, was approximately $55.8 million. There was no assessment made in 2011.
Regulatory Matters
On April 9, 2010, the California DOI issued a Notice of Non-Compliance (“2010 NNC”) to MIC, MCC, and
CAIC based on a Report of Examination of the Rating and Underwriting Practices of these companies issued by
the California DOI on February 18, 2010. The 2010 NNC includes allegations of 35 instances of noncompliance
with applicable California insurance law and seeks to require that each of MIC, MCC, and CAIC change its
rating and underwriting practices to rectify the alleged noncompliance and may also seek monetary penalties. On
April 30, 2010, the Company submitted a Statement of Compliance and Notice of Defense to the 2010 NNC, in
which it denied the allegations contained in the 2010 NNC and provided specific defenses to each allegation. The
Company also requested a hearing in the event that the Statement of Compliance and Notice of Defense does not
establish to the satisfaction of the California DOI that the alleged noncompliance does not exist, and the matters
described in the 2010 NNC are not otherwise able to be resolved informally with the California DOI. The
California DOI has recently advised the Company that it is continuing to review this matter and it continues to
question certain past practices. No final determination has been made by the California DOI on how it will
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