Mercury Insurance 2012 Annual Report Download - page 30

9
Investment Results
The following table presents the investment results of the Company for the most recent five years:
Year Ended December 31,
2012 2011 2010 2009 2008
(Amounts in thousands)
Average invested assets at cost(1) $ 3,011,143 $ 3,004,588 $ 3,121,366 $ 3,196,944 $ 3,452,803
Net investment income(2)
Before income taxes $ 131,896 $ 140,947 $ 143,814 $ 144,949 $ 151,280
After income taxes $ 115,359 $ 124,708 $ 128,888 $ 130,070 $ 133,721
Average annual yield on investments(2)
Before income taxes 4.4% 4.7% 4.6% 4.5% 4.4%
After income taxes 3.8% 4.2% 4.1% 4.1% 3.9%
Net realized investment gains (losses) after
income taxes(3) $ 43,147 $ 37,958 $ 37,108 $ 225,189 $ (357,838)
__________
(1) Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at cost. Average
invested assets at cost is based on the monthly amortized cost of the invested assets for each respective period.
(2) Net investment income and average annual yield decreased primarily due to the maturity and replacement of higher yielding
investments, purchased when market interest rates were higher, with lower yielding investments purchased during the
current low interest rate environment.
(3) Effective January 1, 2008, the Company adopted the fair value option with changes in fair value reflected in net realized
investment gains or losses in the consolidated statements of operations.
Competitive Conditions
The Company operates in the highly competitive property and casualty insurance industry subject to competition on pricing,
claims handling, consumer recognition, coverage offered and other product features, customer service, and geographic coverage.
Some of the Company’s competitors are larger and well-capitalized national companies which have broad distribution networks
of employed or captive agents.
Reputation for customer service and price are the principal means by which the Company competes with other automobile
insurers. In addition, the marketing efforts of independent agents can provide a competitive advantage. Based on the most recent
regularly published statistical compilations of premiums written in 2012, the Company was the fifth largest writer of private
passenger automobile insurance in California and the thirteenth largest in the United States.
The property and casualty insurance industry is highly cyclical, with alternating hard and soft market conditions. The
Company has historically seen significant premium growth during hard markets. The Company believes that the market may be
hardening as growth has begun to improve throughout 2012.
Reinsurance
The Company has reinsurance through the Florida Hurricane Catastrophe Trust Fund (“FHCF”) that provides coverage
equal to approximately 90 percent of $19 million in excess of $8 million per occurrence based on the latest information provided
by FHCF. As of December 31, 2012, the Company no longer has any Florida homeowners policies-in-force and will not be renewing
FHCF coverage in 2013.
The Company has reinsurance for PIP claims in Michigan through the Michigan Catastrophic Claims Association, a private
non-profit unincorporated association created by the Michigan Legislature in 1978. The reinsurance covers losses in excess of
$500,000 per person and has no maximum limit. Michigan law provides for unlimited lifetime coverage for medical costs caused
by automobile accidents.
For California homeowners policies, the Company has reduced its catastrophe exposure from earthquakes by placing
earthquake risks directly with the California Earthquake Authority (“CEA”). However, the Company continues to have catastrophe
exposure to fires following an earthquake. For more detailed discussion, see “Regulation—Insurance Assessments.”