Mercury Insurance 2011 Annual Report Download - page 24

Production and Servicing of Business
The Company sells its policies through approximately 6,700 independent agents, of which, over 1,200 are
located in each of California and Florida. The remaining agents are located in Georgia, Illinois, Texas,
Oklahoma, New York, New Jersey, Virginia, Pennsylvania, Arizona, Nevada, and Michigan. Over half of the
Company’s agents in California have represented the Company for more than ten years. The agents, most of
whom also represent one or more competing insurance companies, are independent contractors selected and
contracted by the Company. No independent agent accounted for more than 2% of the Company’s direct
premiums written during 2011, 2010, and 2009.
The Company believes that it compensates its agents above the industry average. During 2011, total
commissions incurred were approximately 16% of net premiums written.
The Company’s advertising budget is allocated among television, radio, newspaper, internet, and direct
mailing media to provide the best coverage available within targeted media markets. While the majority of these
advertising costs are borne by the Company, a portion of these costs are reimbursed by the Company’s
independent agents based upon the number of account leads generated by the advertising. The Company believes
that its advertising program is important to create brand awareness and to remain competitive in the current
insurance climate. During 2011, net advertising expenditures were $21 million.
Underwriting
The Company sets its own automobile insurance premium rates, subject to rating regulations issued by the
Department of Insurance or similar governmental agency in each state in which it is licensed to operate
(“DOI”). Each state has different rate approval requirements. See “Regulation—Department of Insurance
Oversight.”
The Company offers standard, non-standard, and preferred private passenger automobile insurance. Private
passenger automobile policies in force for non-California operations represented approximately 20% of total
private passenger automobile policies in force at December 31, 2011. In addition, the 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” (as defined by the California Insurance Code) accounted for approximately
82% of all California voluntary private passenger automobile policies in force at December 31, 2011, while
higher risk categories accounted for approximately 18%. The private passenger automobile renewal rate in
California (the rate of acceptance of offers to renew) averages approximately 96%.
Claims
The Company conducts the majority of claims processing without the assistance of outside adjusters. The
claims staff administer all claims and direct all legal and adjustment aspects of claims processing.
Losses and Loss Adjustment Expenses Reserves and Reserve Development
The Company maintains losses and loss adjustment expenses reserves for both reported and unreported
claims. Losses and loss adjustment expenses reserves for reported claims are estimated based upon a
case-by-case evaluation of the type of claim involved and the expected development of such claims. Losses and
loss adjustment expenses reserves for unreported claims are determined on the basis of historical information by
line of insurance. Inflation is reflected in the reserving process through analysis of cost trends and review of
historical reserve settlement.
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