Mercury Insurance 2011 Annual Report Download - page 26

The Company experienced unfavorable development of approximately $18 million on the 2010 and prior
accident years’ loss and loss adjustment expenses reserves due primarily to an increase in the estimated loss
severity for accident years 2008 through 2010 California BI losses, an increase in PIP reserves in Florida
resulting from court decisions that were adverse to the insurance industry, and development on 2007 and prior
accident year New Jersey BI reserves that settled for more than anticipated. These were partially offset by
reductions in estimates for loss adjustment expenses, particularly for the 2010 accident year, related to the
transfer of a higher proportion of litigated claims to house counsel and a reduction in the estimate for Florida
sinkhole claims for accident year 2010, resulting from many of those claims being denied due to the absence of
sinkhole activity or structural damage to the houses. See “Critical Accounting Estimates—Reserves” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
For the years 2008 and 2009, the Company experienced unfavorable development of approximately $8
million and $31 million, respectively, on prior accident years’ losses and loss adjustment expenses resrves. The
unfavorable development is primarily due to an increase in the estimated loss severity for accident years 2008
and 2009 California BI losses, an increase in PIP reserves in Florida resulting from court decisions that were
adverse to the insurance industry, and development on 2007 and prior accident years New Jersey BI reserves that
settled for more than anticipated.
For the years 2005 through 2007, the Company experienced unfavorable development of approximately
$110 million to $164 million on prior accident years’ losses and loss adjustment expenses reserves. The
unfavorable development from these years relates primarily to increases in loss severity estimates and loss
adjustment expense estimates for the 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 in estimates for
loss severity for the 2004 accident year reserves for California and New Jersey automobile lines of business
contributed to the deficiencies.
For 2003, the favorable development largely relates to lower inflation than originally expected on the BI
coverage reserves for the California automobile line of insurance. In addition, the Company experienced a
reduction in expenditures to outside legal counsel for the defense of personal automobile claims in California.
This led to a reduction in the ultimate expense amount expected to be paid out and therefore favorable
development in the reserves at December 31, 2003, partially offset by unfavorable development in the Florida
automobile lines of business.
For the years 2001 and 2002, the Company’s previously estimated loss reserves produced deficiencies that
were reflected in the subsequent years’ incurred losses. The Company attributes a large portion of the
unfavorable development to increases in the ultimate liability for BI, physical damage, and collision claims over
what was originally estimated. The increases in these losses relate to increased severity over what was originally
recorded and were the result of inflationary trends in health care, auto parts, and body shop labor costs.
Statutory Accounting Principles
The Company’s results are reported in accordance with GAAP, which differ in some respects from amounts
reported under SAP prescribed by insurance regulatory authorities. Some of the significant differences under
GAAP are described below:
• Policy acquisition costs such as commissions, premium taxes, and other costs that vary with and are
primarily related to the acquisition of new and renewal insurance contracts, are capitalized and
amortized on a pro rata basis over the period in which the related premiums are earned, rather than
expensed as incurred, as required by SAP.
• Certain assets are included in the consolidated balance sheets whereas, under SAP, such assets
are designated as “nonadmitted assets,” and charged directly against statutory surplus. These assets
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