Mercury Insurance 2012 Annual Report Download - page 28

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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 19.4% of premiums written, the Company believes its ratios can be compared
to the industry ratios included in the following table.
Year Ended December 31,
2012 2011 2010 2009 2008
Loss Ratio 76.1% 71.2% 71.0% 67.8% 73.3%
Expense Ratio 26.7% 27.4% 29.1% 28.6% 28.5%
Combined Ratio 102.8% 98.6% 100.1% 96.4% 101.8%
Industry combined ratio (all writers)(1) 99.6% (2) 101.6% 100.4% 100.8% 99.8%
Industry combined ratio (excluding direct
writers)(1) N/A 101.1% 101.1% 100.5% 100.8%
(1) Source: A.M. Best, Aggregates & Averages (2009 through 2012), 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 4, 2013.”
Premiums to Surplus Ratio
The following table presents, for the periods indicated, the Insurance Companies’ statutory ratios of net premiums written
to policyholders’ surplus. Guidelines established by the National Association of Insurance Commissioners (the “NAIC”) indicate
that this ratio should be no greater than 3 to 1.
Year Ended December 31,
2012 2011 2010 2009 2008
(Amounts in thousands, except ratios)
Net premiums written $ 2,651,731 $ 2,575,383 $ 2,555,481 $ 2,589,972 $ 2,750,226
Policyholders’ surplus $ 1,440,973 $ 1,497,609 $ 1,322,270 $ 1,517,864 $ 1,371,095
Ratio 1.8 to 1 1.7 to 1 1.9 to 1 1.7 to 1 2.0 to 1
Investments
The Company’s investments are directed by the Chief Investment Officer under the supervision of the Board of Directors. The
Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total return framework.
The investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a well
diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve a return on capital and
profitable growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-
term basis and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and
defaults. The Company believes that this strategy maintains the optimal investment performance necessary to sustain investment
income over time. The Company’s portfolio management approach utilizes a market risk and asset allocation strategy as the primary
basis for the allocation of interest sensitive, liquid and credit assets as well as for monitoring credit exposure and diversification
requirements. Within the ranges set by the asset allocation strategy, tactical investment decisions are made in consideration of
prevailing market conditions.
Tax considerations, including the impact of the alternative minimum tax (“AMT”), are important in portfolio
management. Changes in loss experience, growth rates, and profitability produce significant changes in the Company’s exposure
to AMT liability, requiring appropriate shifts in the investment asset mix between taxable bonds, tax-exempt bonds, and equities
in order to maximize after-tax yield. The Company closely monitors the timing and recognition of capital gains and losses to
maximize the realization of any deferred tax assets arising from capital losses. The Company had no capital loss carryforward at
December 31, 2012.