Mercury Insurance 2013 Annual Report Download - page 76

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method provides a reasonable basis for evaluating ultimate losses, particularly in the Company’s larger, more established
lines of business which have a long operating history.
• The average severity method analyzes historical loss payments and/or incurred losses divided by closed claims and/
or total claims to calculate an estimated average cost per claim. From this, the expected ultimate average cost per claim
can be estimated. The average severity method coupled with the claim count development method provide meaningful
information regarding inflation and frequency trends that the Company believes is useful in establishing reserves. The
claim count development method analyzes historical claim count development to estimate future incurred claim count
development for current claims. The Company applies these development factors against current claim counts by
accident period to calculate ultimate expected claim counts.
• The paid loss development method analyzes historical payment patterns to estimate the amount of losses yet to be paid.
The Company uses this method for losses and loss adjustment expenses.
The Company analyzes catastrophe losses separately from non-catastrophe losses. For catastrophe losses, the Company
determines claim counts based on claims reported and development expectations from previous catastrophes and applies an average
expected loss per claim based on reserves established by adjusters and average losses on previous similar catastrophes.
Derivative Financial Instruments
The Company accounts for all derivative instruments, other than those that meet the normal purchases and sales exception,
as either an asset or liability, measured at fair value, which is based on information obtained from independent parties. In addition,
changes in fair value are recognized in earnings unless specific hedge accounting criteria are met. The Company’s derivative
instruments include a total return swap and interest rate swaps. See Note 7.
Earnings Per Share
Basic earnings per share excludes dilution and reflects net income divided by the weighted average shares of common stock
outstanding during the period presented. Diluted earnings per share is based on the weighted average shares of common stock and
potential dilutive common stock outstanding during the period presented. At December 31, 2013 and 2012, potential dilutive
common stocks consist of outstanding stock options. Note 15 contains the required disclosures relating to the calculation of basic
and diluted earnings per share.
Segment Reporting
Operating segments are components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company
does not have any operations that require separate disclosure as reportable operating segments for the periods presented.
The annual direct premiums written attributable to the Company's lines of insurance were as follows:
Year Ended December 31,
2013 2012 2011
(Amounts in thousands)
Private passenger automobile $ 2,165,557 $ 2,140,531 $ 2,105,602
Homeowners 340,013 318,295 285,188
Commercial automobile 104,689 74,655 75,642
Other lines 127,213 122,239 113,251
Total $ 2,737,472 $ 2,655,720 $ 2,579,683
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial reporting basis and the respective tax basis of the Company’s assets and liabilities, and expected benefits of utilizing
net operating loss, capital loss, and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in earnings in the period that
includes the enactment date.