Mercury Insurance 2011 Annual Report Download - page 67

Expenses
Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance
companies. The following table presents the Company’s consolidated loss, expense, and combined ratios
determined in accordance with GAAP:
2011 2010
Loss ratio ............................................................. 71.3% 71.1%
Expense ratio .......................................................... 27.2% 29.6%
Combined ratio ........................................................ 98.5% 100.7%
Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The
Company’s loss ratio for 2011 was generally consistent with the 2010 loss ratio. The loss ratio was affected by
unfavorable development of approximately $18 million and favorable development of approximately $13 million
on prior accident years’ losses and loss adjustment expense reserves for the years ended December 31, 2011 and
2010, respectively. The unfavorable development in 2011 is largely the result of re-estimates of California BI
losses which have experienced higher average severities than originally estimated at December 31, 2010. The
2011 loss ratio was also negatively impacted by severe losses due to California winter storms, Hurricane Irene,
and Georgia tornadoes during 2011. The 2010 loss ratio was impacted by severe rainstorms in California and
homeowner’s losses in Florida as a result of sinkhole claims during 2010.
Expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses by
net premiums earned. The Company’s expense ratio for 2010 was impacted by contributions made in support of a
California legislative initiative totaling $12.1 million and would have been 29.1% without those financial
contributions. The 2011 expense ratio decreased as a result of decreased agent contingent commissions,
consulting, advertising, and information technology expenditures.
Combined ratio is the key measure of underwriting performance traditionally used in the property and
casualty insurance industry. A combined ratio under 100% generally reflects profitable underwriting results; and
a combined ratio over 100% generally reflects unprofitable underwriting results.
Income tax expenses were $53.9 million and $30.2 million for the years ended December 31, 2011 and
2010, respectively. The increase in income tax expense resulted from increased taxable income in 2011.
Investments
The following table presents the investment results of the Company:
2011 2010
(Amounts in thousands)
Average invested assets at cost(1) ........................................ $3,004,588 $3,121,366
Net investment income:
Before income taxes .............................................. $ 140,947 $ 143,814
After income taxes ............................................... $ 124,708 $ 128,888
Average annual yield on investments:
Before income taxes .............................................. 4.7% 4.6%
After income taxes ............................................... 4.2% 4.1%
Net realized investment gains ........................................... $ 58,397 $ 57,089
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at
cost.
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