Mercury Insurance 2012 Annual Report Download - page 32

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For a discussion of current regulatory matters in California, see “Regulatory and Legal Matters” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
The operations of the Company are dependent on the laws of the states in which it does business and changes in those laws
can materially affect the revenue and expenses of the Company. The Company retains its own legislative advocates in
California. The Company made direct financial contributions of $237,400 and $32,150 to officeholders and candidates in 2012
and 2011, respectively. The Company believes in supporting the political process and intends to continue to make such contributions
in amounts which it determines to be appropriate.
Risk-Based Capital
The Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations,
and must have adequate reserves for claims. The minimum statutory capital requirements differ by state and are generally based
on balances established by statute, a percentage of annualized premiums, a percentage of annualized loss, or risk-based capital
(“RBC”) requirements. The RBC formula was designed to capture the widely varying elements of risks undertaken by writers of
different lines of insurance having differing risk characteristics, as well as writers of similar lines where differences in risk may
be related to corporate structure, investment policies, reinsurance arrangements, and a number of other factors. At December 31,
2012, each of the Insurance Companies had sufficient capital to exceed the highest level of minimum required capital.
Insurance Assessments
The California Insurance Guarantee Association (“CIGA”) was created to pay claims on behalf of insolvent property and
casualty insurers. Each year, these claims are estimated by CIGA and the Company is assessed for its pro-rata share based on prior
year California premiums written in the particular line. These assessments are limited to 2% of premiums written in the preceding
year and are recouped through a mandated surcharge to policyholders in the year after the assessment. There were no CIGA
assessments in 2012.
During 2012, the Company paid approximately $2 million in assessments to the New Jersey Unsatisfied Claim and Judgment
Fund and the New Jersey Property-Liability Insurance Guaranty Association for assessments relating to its personal automobile
line of insurance. As permitted by state law, the New Jersey assessments paid during 2012 are recoupable through a surcharge to
policyholders. The Company recouped a portion of these assessments in 2012 and expects to continue to recoup them in the
future. It is likely that there will be additional assessments in 2013.
The CEA is a quasi-governmental organization that was established to provide a market for earthquake coverage to California
homeowners. The Company places all new and renewal earthquake coverage offered with its homeowner policy directly with the
CEA. The Company receives a small fee for placing business with the CEA, which is recorded as other revenue in the consolidated
statements of operations. Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies
for losses. These assessments are made after CEA capital has been expended and are based upon each company’s participation
percentage multiplied by the amount of the total assessment. Based upon the most recent information provided by the CEA, the
Company’s maximum total exposure to CEA assessments at April 1, 2012, the most recent date at which information was available,
was $52.2 million. There was no assessment made in 2012.
The Insurance Companies in other states are also subject to the provisions of similar insurance guaranty associations. There
were no material assessment payments during 2012 in other states.
Holding Company Act
The California Companies are subject to California DOI regulation pursuant to the provisions of the California Insurance
Holding Company System Regulatory Act (the “Holding Company Act”). The California DOI may examine the affairs of each of
the California Companies at any time. The Holding Company Act requires disclosure of any material transactions among affiliates
within a Holding Company System. Some transactions and dividends defined to be of an “extraordinary” type may not be made
if the California DOI disapproves the transaction within 30 days after notice. Such transactions include, but are not limited to,
extraordinary dividends; management agreements, service contracts, and cost-sharing arrangements; all guarantees that are not
quantifiable; derivative transactions or series of derivative transactions; certain reinsurance transactions or modifications thereof
in which the reinsurance premium or a change in the insurer’s liabilities equals or exceeds 5 percent of the policyholders’ surplus
as of the preceding December 31; sales, purchases, exchanges, loans, and extensions of credit; and investments, in the net aggregate,
involving more than the lesser of 3% of the respective California Companies’ admitted assets or 25% of statutory surplus as regards
policyholders as of the preceding December 31. An extraordinary dividend is a dividend which, together with other dividends or
distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company’s statutory policyholders’
surplus as of the preceding December 31 or the insurance company’s statutory net income for the preceding calendar year.