Mercury Insurance 2013 Annual Report Download - page 62

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47
F. Regulatory Capital Requirement
The Insurance Companies must comply with minimum capital requirements under applicable state laws and regulations.
The 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 800% 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.
Among other considerations, industry and regulatory guidelines suggest that the ratio of a property and casualty insurer’s
annual net premiums written to statutory policyholders’ surplus should not exceed 3.0 to 1. Based on the combined surplus of all
the Insurance Companies of $1.5 billion at December 31, 2013, and net premiums written of $2.7 billion, the ratio of premiums
written to surplus was 1.8 to 1.
Beginning in 2015, insurance companies will be required to file an 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.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2013, the Company had no off-balance sheet arrangements as defined under Regulation S-K 303(a)
(4) and the instructions thereto.
CONTRACTUAL OBLIGATIONS
The Company’s significant contractual obligations at December 31, 2013 are summarized as follows:
Contractual Obligations Total 2014 2015 2016 2017 2018 Thereafter
(Amounts in thousands)
Debt (including interest)(1) $ 216,806 $ 1,905 $ 21,787 $ 121,491 $ 1,082 $ 70,541 $ 0
Lease obligations(2) 44,633 13,282 11,214 9,510 7,345 3,112 170
Losses and loss adjustment
expenses(3) 1,038,984 587,906 254,798 124,583 47,740 23,957 0
Total Contractual
Obligations $ 1,300,423 $ 603,093 $ 287,799 $ 255,584 $ 56,167 $ 97,610 $ 170
__________
(1) The Company’s debt contains various terms, conditions and covenants which, if violated by the Company, would result in
a default and could result in the acceleration of the Company’s payment obligations. Amounts differ from the balance
presented on the consolidated balance sheets as of December 31, 2013 because the debt amounts above include interest,
calculated at the most recent LIBOR rate and bank margin in effect, and an additional draw of $20 million made subsequent
to December 31, 2013.
(2) The Company is obligated under various non-cancellable lease agreements providing for office space, automobiles, and
office equipment that expire at various dates through the year 2019.
(3) Reserve for losses and loss adjustment expenses is an estimate of amounts necessary to settle all outstanding claims, including
IBNR as of December 31, 2013. The Company has estimated the timing of these payments based on its historical experience
and expectation of future payment patterns. However, the timing of these payments may vary significantly from the amounts
shown above. The ultimate cost of losses may vary materially from recorded amounts which are the Company’s best
estimates.
(4) The table excludes liabilities of $8.4 million related to uncertainty in tax settlements as the Company is unable to reasonably
estimate the timing and amount of related future payments.