Mercury Insurance 2012 Annual Report Download - page 61

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40
(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.
Included in net income are net realized investment gains of $66.4 million and $58.4 million in 2012 and 2011, respectively.
Net realized investment gains include gains of $45.5 million and $31.3 million in 2012 and 2011, respectively, due to changes in
the fair value of total investments pursuant to application of the fair value accounting option. The net gains during 2012 arise from
$36.3 million and $9.2 million increases in the market value of the Company’s fixed maturity and equity securities, respectively.
The Company’s municipal bond holdings represent the majority of the fixed maturity portfolio, which was positively affected by
the overall municipal market improvement for 2012. The primary cause of the increase in the value of the Company’s equity
securities was the overall improvement in the equity markets for 2012. The net gains during 2011 arise from a $62.1 million
increase in the market value of the Company’s fixed maturity securities offset by a $30.9 million decline in the market value of
the Company’s equity securities.
Net Income
Net income was $116.9 million or $2.13 per diluted share and $191.2 million or $3.49 per diluted share in 2012 and 2011,
respectively. Diluted per share results were based on a weighted average of 54.9 million and 54.8 million shares in 2012 and 2011,
respectively. Basic per share results were $2.13 and $3.49 in 2012 and 2011, respectively. Included in net income per share were
net realized investment gains, net of income taxes, of $0.79 and $0.69 per share (basic and diluted) in 2012 and 2011, respectively.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Net premiums earned in 2011 were essentially the same as 2010 while net premiums written in 2011 increased by
approximately $20 million from 2010. Net premiums written by the Company’s California operations were approximately $2
billion in 2011, a 0.4% decrease from 2010. Net premiums written by the Company’s non-California operations were approximately
$632 million in 2011, a 4.5% increase from 2010. Growth outside of California resulted from expanded and improved product
offerings and higher average premiums per policy.
The following is a reconciliation of total net premiums written to net premiums earned:
2011 2010
(Amounts in thousands)
Net premiums written $ 2,575,383 $ 2,555,481
Change in net unearned premium (9,326) 11,204
Net premiums earned $ 2,566,057 $ 2,566,685
Expenses
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%
The 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 a total of $18 million of
catastrophe 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.
The 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.