Mercury Insurance 2013 Annual Report Download - page 53

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38
RESULTS OF OPERATIONS
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenues
Net premiums written and net premiums earned in 2013 increased 2.9% and 4.8%, respectively, from 2012. The increase
in net premiums written was primarily due to higher average premiums per policy which primarily resulted from the October 2012
4% rate increase on California private passenger automobile policies as well as rate increases taken in non-California states. In
addition, the Company implemented a 6.9% rate increase in July 2013 on private passenger automobile policies written in CAIC,
which represented approximately 22% of total California private passenger automobile net premiums written as of December 31,
2013.
Net premiums written is a non-GAAP financial measure which represents the premiums charged on policies issued during
a fiscal period less any applicable reinsurance. Net premiums written is a statutory measure designed to determine production
levels. Net premiums earned, the most directly comparable GAAP measure, represents the portion of net premiums written that
is recognized as revenue in the financial statements for the period presented and earned on a pro-rata basis over the term of the
policies. The following is a reconciliation of total net premiums written to net premiums earned:
2013 2012
(Amounts in thousands)
Net premiums written $ 2,728,999 $ 2,651,731
Change in net unearned premium (30,812)(76,811)
Net premiums earned $ 2,698,187 $ 2,574,920
Expenses
Loss and expense ratios are used to interpret the underwriting experience of property and casualty insurance companies.
The following table presents the Company’s consolidated loss, expense, and combined ratios determined in accordance with
GAAP:
2013 2012
Loss ratio 72.7% 76.2%
Expense ratio 26.9% 26.6%
Combined ratio 99.6% 102.8%
Loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned. The Company’s loss ratio
was affected by unfavorable development of approximately $3 million and $42 million on prior accident years’ losses and loss
adjustment expense reserves for the years ended December 31, 2013 and 2012, respectively. The 2013 loss ratio was also negatively
impacted by a total of $17 million of catastrophe losses mostly due to tornadoes in Oklahoma and severe storms in the Midwest
and Southeast regions during 2013. The unfavorable development in 2012 was largely the result of re-estimates of California BI
losses which experienced both higher average severities and more late reported claims than originally estimated at December 31,
2012. The 2012 loss ratio was also negatively impacted by a total of $39 million of catastrophe losses mostly due to Hurricane
Sandy and wind and hail storms in the Midwest region during 2012. Excluding the effect of estimated prior periods' loss development
and catastrophe losses, the loss ratio was 72.0% and 73.0% for the years ended December 31, 2013 and 2012, respectively.
Expense ratio is calculated by dividing the sum of policy acquisition costs plus other operating expenses by net premiums
earned and did not materially change in 2013 compared to 2012. The 2013 expense ratio was affected by the consolidation of
claims and underwriting operations located outside of California into hub locations, which resulted in approximately $10 million
of pre-tax office closure costs and severance related expense during the first quarter of 2013. The charges added 0.1 point to the
expense ratio and 0.3 point to the loss adjustment expense portion of the loss ratio. The Company expects future savings of
approximately $12 million per year as a result of the workforce reduction and operational consolidation.
Combined ratio is equal to loss ratio plus expense ratio and is the key measure of underwriting performance traditionally
used in the property and casualty insurance industry. A combined ratio under 100% generally reflects profitable underwriting
results; and a combined ratio over 100% generally reflects unprofitable underwriting results.