Mercury Insurance 2013 Annual Report Download - page 75

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Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise as a result of business acquisitions and consist of the excess of the cost of the
acquisitions over the tangible and intangible assets acquired and liabilities assumed and identifiable intangible assets acquired.
Identifiable intangible assets consist of the value of customer relationships, trade names, software and technology, and favorable
leases, which are all subject to amortization.
The Company annually evaluates goodwill and other intangible assets for impairment. The Company also reviews its
goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that it is more likely
than not that the carrying amount of goodwill may exceed its implied fair value. The Company qualitatively determines whether,
more likely than not, the fair value exceeds the carrying amount of a reporting unit. There are numerous assumptions and estimates
underlying the qualitative assessments including future earnings, long-term strategies, and the Company’s annual planning and
forecasting process. If these planned initiatives do not accomplish the targeted objectives, the assumptions and estimates underlying
the qualitative assessments could be adversely affected and have a material effect upon the Company’s financial condition and
results of operations. As of December 31, 2013 and 2012, goodwill and other intangible impairment assessments indicated that
there was no impairment.
Premium Revenue Recognition
Premium revenue is recognized on a pro-rata basis over the term of the policies in proportion to the amount of insurance
protection provided. Premium revenue includes installment and other fees for services which are recognized in the periods the
services are rendered. Unearned premiums represent the portion of the premium related to the unexpired policy term. Unearned
premiums are predominantly computed on a monthly pro-rata basis and are stated gross of reinsurance deductions, with the
reinsurance deduction recorded in other receivables. Net premiums written, a statutory measure designed to determine production
levels, were $2.73 billion, $2.65 billion, and $2.58 billion in 2013, 2012, and 2011, respectively.
Losses and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses are determined in amounts estimated to cover incurred losses and loss adjustment
expenses and established based upon the Company’s assessment of claims pending and the development of prior years’ loss
liabilities. These amounts include liabilities based upon individual case estimates for reported losses and loss adjustment expenses
and estimates of such amounts that are incurred but not reported. Changes in the estimated liability are charged or credited to
operations as the losses and loss adjustment expenses are reestimated. The liability is stated net of anticipated salvage and
subrogation recoveries. The amount of reinsurance recoverable is included in other receivables.
Estimating loss reserves is a difficult process as many factors can ultimately affect the final settlement of a claim and,
therefore, the reserve that is required. Changes in the regulatory and legal environment, results of litigation, medical costs, the
cost of repair materials, and labor rates, among other factors, can impact ultimate claim costs. In addition, time can be a critical
part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of a claim,
the more variable the ultimate settlement amount could be. Accordingly, short-tail claims, such as property damage claims, tend
to be more reasonably predictable than long-tail liability claims, such as those involving the Company’s bodily injury (BI)
coverages. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net
cost of losses and loss adjustment expenses incurred to date. Since the provisions for loss reserves are necessarily based upon
estimates, the ultimate liability may be more or less than such provisions.
The Company analyzes loss reserves quarterly primarily using the incurred loss, claim count development, and average
severity methods described below. The Company also uses the paid loss development method to analyze loss adjustment expense
reserves as part of its reserve analysis. When deciding among methods to use, the Company evaluates the credibility of each
method based on the maturity of the data available and the claims settlement practices for each particular line of business or
coverage within a line of business. When establishing the reserve, the Company will generally analyze the results from all of the
methods used rather than relying on a single method. While these methods are designed to determine the ultimate losses on claims
under the Company’s policies, there is inherent uncertainty in all actuarial models since they use historical data to project outcomes.
The Company believes that the techniques it uses provide a reasonable basis in estimating loss reserves.
• The incurred loss development method analyzes historical incurred case loss (case reserves plus paid losses)
development to estimate ultimate losses. The Company applies development factors against current case incurred losses
by accident period to calculate ultimate expected losses. The Company believes that the incurred loss development