Mercury Insurance 2011 Annual Report Download - page 66

The Company’s effective income tax rate can be affected by several factors. These generally include tax
exempt investment income, non-deductible expenses, investment gains and losses, and periodically, non-routine
tax items such as adjustments to unrecognized tax benefits related to tax uncertainties. The effective tax rate for
2011 was 22.0%, compared to 16.6% for 2010. The increase in the effective tax rate is mainly due to an increase
in taxable income relative to tax exempt investment income. The Company’s effective tax rate for the year ended
December 31, 2011 was lower than the statutory tax rate primarily as a result of tax exempt investment income
earned.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise as a result of business acquisitions and consist of the excess of the
cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed and identifiable
intangible assets acquired. The Company annually evaluates goodwill and other intangible assets for impairment.
The Company also reviews its goodwill and other intangible assets for impairment whenever events or changes
in circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible
assets may exceed the implied fair value. As of December 31, 2011, the fair value of the Company’s reporting
units exceeded their carrying value.
Contingent Liabilities
The Company has known, and may have unknown, potential liabilities which include claims, assessments,
lawsuits, or regulatory fines and penalties relating to the Company’s business. The Company continually
evaluates these potential liabilities and accrues for them and/or discloses them in the notes to the consolidated
financial statements where required. The Company does not believe that the ultimate resolution of currently
pending legal or regulatory proceedings, either individually or in the aggregate, will have a material adverse
effect on its financial condition, results of operations, or cash flows. See also “Regulatory and Legal Matters”
and Note 17 of Notes to Consolidated Financial Statements.
For a discussion of recently issued accounting standards, see Note 1 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Net premiums earned in 2011 were essentially the same as 2010 while net premiums written in 2011
increased by approximately $20 million from 2010. Net premiums written by the Company’s California
operations were approximately $2 billion in 2011, a 0.4% decrease 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 is a non-GAAP financial measure which represents the premiums charged on policies
issued during a fiscal period less any applicable reinsurance. Net premiums written is a statutory measure
designed to determine production levels. Net premiums earned, the most directly comparable GAAP measure,
represents the portion of net premiums written that is recognized as revenue in the financial statements for the
period presented and earned on a pro-rata basis over the term of the policies. The following is a reconciliation of
total net premiums written to net premiums earned:
2011 2010
(Amounts in thousands)
Net premiums written ......................................... $2,575,383 $2,555,481
Change in unearned premium ................................... (9,326) 11,204
Net premiums earned ..................................... $2,566,057 $2,566,685
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