Mercury Insurance 2015 Annual Report Download - page 20

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The following table presents, on a statutory basis, the Insurance Companies’ loss, expense and combined ratios, and the
private passenger automobile industry combined ratio. Although the Insurance Companies’ ratios include lines of insurance
business other than private passenger automobile that accounted for 22.1% of direct premiums written in 2015, the Company
believes its ratios can be compared to the industry ratios.
Year Ended December 31,
2015 2014 2013 2012 2011
Loss Ratio 72.6% 71.0% 72.7% 76.1% 71.2%
Expense Ratio 26.7% 27.7% 27.2% 26.7% 27.4%
Combined Ratio 99.3% 98.8% (2) 99.9% 102.8% 98.6%
Industry combined ratio (all writers)(1) N/A 101.9% 103.4% 101.3% 101.6%
Industry combined ratio (excluding direct
writers)(1) N/A 99.8% 100.7% 102.6% 101.1%
(1) Source: A.M. Best, Aggregates & Averages (2011 through 2014), for all property and casualty insurance companies
(private passenger automobile line only, after policyholder dividends).
(2) Combined ratio for 2014 does not sum due to rounding.
Premiums to Surplus Ratio
The following table presents the Insurance Companies’ statutory ratios of net premiums written to policyholders’
surplus. Guidelines established by the National Association of Insurance Commissioners (the "NAIC") indicate that this ratio
should be no greater than 3 to 1.
Year Ended December 31,
2015 2014 2013 2012 2011
(Amounts in thousands, except ratios)
Net premiums written $ 2,999,392 $ 2,840,922 $ 2,728,999 $ 2,651,731 $ 2,575,383
Policyholders’ surplus $ 1,451,950 $ 1,438,281 $ 1,528,682 $ 1,440,973 $ 1,497,609
Ratio 2.1 to 1 2.0 to 1 1.8 to 1 1.8 to 1 1.7 to 1
Investments
The Company’s investments are directed by the Chief Investment Officer under the supervision of the Board of Directors. The
Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total return framework.
The investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a well
diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve a return on capital and
profitable growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-
term basis and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and
defaults. The Company believes that this strategy maintains the optimal investment performance necessary to sustain investment
income over time. The Company’s portfolio management approach utilizes a market risk and asset allocation strategy as the primary
basis for the allocation of interest sensitive, liquid and credit assets as well as for monitoring credit exposure and diversification
requirements. Within the ranges set by the asset allocation strategy, tactical investment decisions are made in consideration of
prevailing market conditions.
Tax considerations, including the impact of the alternative minimum tax ("AMT"), are important in portfolio
management. Changes in loss experience, growth rates, and profitability produce significant changes in the Company’s exposure
to AMT liability, requiring appropriate shifts in the investment asset mix between taxable bonds, tax-exempt bonds, and equities
in order to maximize after-tax yield. The Company closely monitors the timing and recognition of capital gains and losses and
the generation of ordinary income to maximize the realization of any deferred tax assets arising from capital losses or AMT credit
carryforwards, respectively. The Company had no capital loss carryforward at December 31, 2015.