Mercury Insurance 2013 Annual Report Download - page 22

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7
Operating Ratios (SAP basis)
Loss and Expense Ratios
Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies.
Under SAP, losses and loss adjustment expenses are stated as a percentage of premiums earned because losses occur over the life
of a policy, while underwriting expenses are stated as a percentage of premiums written rather than premiums earned because
most underwriting expenses are incurred when policies are written and are not spread over the policy period. The statutory
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. Though the Insurance Companies’ ratios include lines of insurance other than private passenger
automobile, which represent 20.9% of premiums written, the Company believes its ratios can be compared to the industry ratios
included in the following table.
Year Ended December 31,
2013 2012 2011 2010 2009
Loss Ratio 72.7% 76.1% 71.2% 71.0% 67.8%
Expense Ratio 27.2% 26.7% 27.4% 29.1% 28.6%
Combined Ratio 99.9% 102.8% 98.6% 100.1% 96.4%
Industry combined ratio (all writers)(1) 100.8% (2) 101.3% 101.6% 100.4% 100.8%
Industry combined ratio (excluding direct
writers)(1) N/A 102.6% 101.1% 101.1% 100.5%
(1) Source: A.M. Best, Aggregates & Averages (2010 through 2013), 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, 2014.”
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,
2013 2012 2011 2010 2009
(Amounts in thousands, except ratios)
Net premiums written $ 2,728,999 $ 2,651,731 $ 2,575,383 $ 2,555,481 $ 2,589,972
Policyholders’ surplus $ 1,528,682 $ 1,440,973 $ 1,497,609 $ 1,322,270 $ 1,517,864
Ratio 1.8 to 1 1.8 to 1 1.7 to 1 1.9 to 1 1.7 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 and