Mercury Insurance 2013 Annual Report Download - page 26

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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 $18,100 and $237,400 to officeholders and candidates in 2013
and 2012, 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.
The risk-based capital (“RBC”) formula is used by insurance regulators to monitor capital and surplus levels. It 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. The Company periodically monitors the RBC level of each of the Insurance Companies.
As of December 31, 2013, 2012, and 2011 each of the Insurance Companies exceeded the minimum required RBC levels, as
determined by the NAIC and adopted by the state insurance regulators. None of the Insurance Companies’ RBC ratio was less
than 500% of the authorized control level RBC as of December 31, 2013, 2012, and 2011, respectively. Generally, an RBC ratio
of 200% or less would require some form of regulatory or company action.
Own Risk and Solvency Assessment
Beginning in 2015, insurance companies will be required to file an Own Risk and Solvency Assessment (“ORSA”) with
the insurance regulators in their state of domicile. The ORSA is required to cover, among many items, a company’s risk management
policies, the material risks to which the company is exposed, how the company measures, monitors, manages and mitigates material
risks, and how much economic and regulatory capital is needed to continue to operate in a strong and healthy manner. The ORSA
will be used by the state insurance regulator to evaluate the risk exposure and quality of the risk management processes within
the insurance companies to assist in conducting risk-focused financial examinations and for determining the overall financial
condition of the insurance company.
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 2.25% 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 2013.
During 2013, the Company paid approximately $1.5 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 2013 are recoupable through a
surcharge to policyholders. It is likely that there will be additional assessments in 2014.
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, 2013, the most recent date at which information was available,
was $60.4 million. There was no assessment made in 2013.
The Insurance Companies in other states are also subject to the provisions of similar insurance guaranty associations. There
were no material assessment payments during 2013 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