Mercury Insurance 2015 Annual Report Download - page 42

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of underwriting capacity followed by periods of severe price competition and excess capacity. These cycles can have a significant
impact on the Company’s ability to grow and retain business.
The Company is headquartered in Los Angeles, California and operates primarily as a personal automobile insurer selling
policies through a network of independent agents, 100% owned insurance agents and direct channels, in thirteen states: Arizona,
California, Florida, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Texas, and Virginia.
The Company also offers homeowners, commercial automobile, commercial property, mechanical breakdown, fire, and umbrella
insurance. Private passenger automobile lines of insurance business accounted for 77.9% of the $3.0 billion of the Company’s
direct premiums written in 2015 and 83% of the private passenger automobile premiums were written in California.
This section discusses some of the relevant factors that management considers in evaluating the Company’s performance,
prospects, and risks. It is not all-inclusive and is meant to be read in conjunction with the entirety of management’s discussion
and analysis, the Company’s consolidated financial statements and notes thereto, and all other items contained within this Annual
Report on Form 10-K.
2015 Financial Performance Summary
The Company’s net income for the year ended December 31, 2015 decreased to $74.5 million, or $1.35 per diluted share,
from $177.9 million, or $3.23 per diluted share, for the same period in 2014. Included in net income is $126.3 million of pre-tax
investment income that was generated during 2015 on a portfolio of $3.4 billion at fair value at December 31, 2015, compared to
$125.7 million of pre-tax investment income that was generated during 2014 on a portfolio of $3.4 billion at fair value at
December 31, 2014. Included in net income are net realized investment losses of $83.8 million and gains of $81.2 million in 2015
and 2014, respectively.
During 2015, the Company continued its marketing efforts to enhance name recognition and lead generation. The Company
believes that its marketing efforts, combined with its ability to maintain relatively low prices and a strong reputation, make the
Company competitive in California and in other states.
The Company believes its thorough underwriting process gives it an advantage over competitors. The Company’s agent
relationships and underwriting and claims processes are its most important competitive advantages.
The Company’s operating results and growth have allowed it to consistently generate positive cash flow from operations,
which was approximately $190 million and $247 million in 2015 and 2014, respectively. Cash flow from operations has been used
to pay shareholder dividends and help support growth.
Economic and Industry Wide Factors
• Regulatory Uncertainty—The insurance industry is subject to strict state regulation and oversight and is governed by
the laws of each state in which each insurance company operates. State regulators generally have substantial power
and authority over insurance companies including, in some states, approving rate changes and rating factors, and
establishing minimum capital and surplus requirements. In many states, insurance commissioners may emphasize
different agendas or interpret existing regulations differently than previous commissioners. There is no certainty that
current or future regulations and the interpretation of those regulations by insurance commissioners and the courts will
not have an adverse impact on the Company.
•Cost Uncertainty—Because insurance companies pay claims after premiums are collected, the ultimate cost of an
insurance policy is not known until well after the policy revenues are earned. Consequently, significant assumptions
are made when establishing insurance rates and loss reserves. While insurance companies use sophisticated models
and experienced actuaries to assist in setting rates and establishing loss reserves, there can be no assurance that current
rates or current reserve estimates will be adequate. Furthermore, there can be no assurance that insurance regulators
will approve rate increases when the Company’s actuarial analyses indicate that they are needed.
• Economic Conditions—Many businesses are still experiencing the effects of uncertain conditions in the global economy
and capital markets, reduced consumer spending and confidence, and continued volatility, which could adversely impact
the Company’s financial condition, results of operations, and liquidity. Further, the volatility and disruptions in global
capital markets could adversely affect the Company’s investment portfolio. Although the disruption in the global
financial markets has moderated, not all global financial markets are functioning normally. The Company is unable to
predict the impact of current and future global economic conditions on the United States, and California, where the
majority of the Company’s business is produced.