Mercury Insurance 2011 Annual Report Download - page 69

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year 2009 California BI losses which have experienced both lower average severities and fewer late reported
claims (claim count development) than were originally estimated at December 31, 2009. Excluding the effect of
prior accident years’ loss development, the loss ratios were 71.6% and 70.0% in 2010 and 2009, respectively.
The increase is primarily due to severe losses in California from heavy rainstorms in December 2010, and to
sinkhole claims in Florida.
The Company’s expense ratio increased primarily due to the decreased net premiums earned, the
Company’s financial contributions of $12.1 million related to its support of the Continuous Auto Insurance
Discount Act in California, and a premium deficiency reserve of $6.0 million recorded in the Florida
homeowners line of business.
Income tax expenses were $30.2 million and $168.5 million for the years ended December 31, 2010 and
2009, respectively. The decrease in income tax expense resulted primarily from decreased net premium earned,
decreased gains on the fair value of the investment portfolio, and increased losses and loss adjustment expenses.
Investments
The following table presents the investment results of the Company:
2010 2009
(Amounts in thousands)
Average invested assets at cost(1) .......................................... $3,121,366 $3,196,944
Net investment income:
Before income taxes ................................................ $ 143,814 $ 144,949
After income taxes ................................................. $ 128,888 $ 130,070
Average annual yield on investments:
Before income taxes ................................................ 4.6% 4.5%
After income taxes ................................................. 4.1% 4.1%
Net realized investment gains ............................................. $ 57,089 $ 346,444
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at
cost.
Included in net income are net realized investment gains of $57.1 million and $346.4 million in 2010 and
2009, respectively. Net realized investment gains include gains of $46.6 million and $395.5 million in 2010 and
2009, respectively, due to changes in the fair value of total investments pursuant to application of the fair value
accounting option. The net gains during 2010 arise from $1.0 million and $45.7 million increases in the market
value of the Company’s fixed maturity and equity securities, respectively. The primary cause of the gains on the
Company’s equity securities was the overall improvement in the equity markets.
Net Income
Net income was $152.2 million or $2.78 per diluted share and $403.1 million or $7.32 per diluted share in
2010 and 2009, respectively. Diluted per share results were based on a weighted average of 54.8 million shares
and 55.1 million shares in 2010 and 2009, respectively. Basic per share results were $2.78 and $7.36 in 2010 and
2009, respectively. Included in net income per share were net realized investment gains, net of income taxes, of
$0.68 and $4.11 per basic share, and $0.68 and $4.09 per diluted share in 2010 and 2009, respectively.
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