Mercury Insurance 2011 Annual Report Download - page 27

consist primarily of premium receivables outstanding more than 90 days, deferred tax assets that do not
meet statutory requirements for recognition, furniture, equipment, leasehold improvements, capitalized
software, and prepaid expenses.
• Amounts related to ceded reinsurance are shown gross as prepaid reinsurance premiums and
reinsurance recoverables, rather than netted against unearned premium reserves and losses and loss
adjustment expenses reserves, respectively, as required by SAP.
• Fixed-maturity securities are reported at fair value rather than at amortized cost, or the lower of
amortized cost or fair value, depending on the specific type of security as required by SAP.
• Goodwill is reported as the excess of cost of an acquired entity over the fair value of the underlying
assets and assessed periodically for impairment. Intangible assets are amortized over their useful lives.
Under SAP, goodwill is reported as the excess of cost of an acquired entity over the statutory book
value and amortized over 10 years. Its carrying value is limited to 10% of adjusted surplus. Intangible
assets are not recognized.
• The differing treatment of income and expense items results in a corresponding difference in federal
income tax expense. Changes in deferred income taxes are reflected as an item of income tax benefit or
expense, rather than recorded directly to statutory surplus as regards policyholders, as required by
SAP. Admittance testing under SAP may result in a charge to unassigned surplus for non-admitted
portions of deferred tax assets. Under GAAP, a valuation allowance may be recorded against the
deferred tax assets and reflected as an expense.
• Certain assessments paid to regulatory agencies that are recoverable from policyholders in future
periods are expensed whereas these amounts are recorded as receivables under SAP.
Operating Ratios (SAP basis)
Loss and Expense Ratios
Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance
companies. Under SAP, losses and loss adjustment expenses are stated as a percentage of premiums earned
because losses occur over the life of a policy, while underwriting expenses are stated as a percentage of
premiums written rather than premiums earned because most underwriting expenses are incurred when policies
are written and are not spread over the policy period. The statutory underwriting profit margin is the extent to
which the combined loss and expense ratios are less than 100%. The Insurance Companies’ loss ratio, expense
ratio, combined ratio, and the private passenger automobile industry combined ratio, on a statutory basis, are
shown in the following table. The Insurance Companies’ ratios include lines of insurance other than private
passenger automobile. Since these other lines represent only 18.4% of premiums written, the Company believes
its ratios can be compared to the industry ratios included in the following table.
Year Ended December 31,
2011 2010 2009 2008 2007
Loss Ratio .............................................. 71.2% 71.0% 67.8% 73.3% 68.0%
Expense Ratio ........................................... 27.4% 29.1% 28.6% 28.5% 27.1%
Combined Ratio ......................................... 98.6% 100.1% 96.4% 101.8% 95.1%
Industry combined ratio (all writers)(1) ........................ 100.8%(2) 100.4% 100.8% 99.8% 98.3%
Industry combined ratio (excluding direct writers)(1) ............. N/A 101.1% 100.5% 100.8% 96.2%
(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.”
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