Mercury Insurance 2015 Annual Report Download - page 48

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Unexpected losses are fairly infrequent but can have a large impact on the Company’s losses. To mitigate this risk, the
Company has established claims handling and review procedures. However, it is still possible that these procedures will not prove
entirely effective, and the Company may have material unexpected losses in future periods. It is also possible that the Company
has not identified and established a sufficient loss reserve for all material unexpected losses occurring in the older accident years,
even though a comprehensive claims file review was undertaken. The Company may experience additional development on these
loss reserves.
Discussion of losses and loss reserves and prior period loss development at December 31, 2015
At December 31, 2015 and 2014, the Company recorded its point estimate of approximately $1.15 billion and $1.09 billion,
respectively, in losses and loss adjustment expense liabilities, which include approximately $440.7 million and $440.8 million,
respectively, of IBNR. IBNR includes estimates, based upon past experience, of ultimate developed costs, which may differ from
case estimates, unreported claims that occurred on or prior to December 31, 2015 and 2014, and estimated future payments for
reopened claims. 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; however, since the provisions are necessarily based upon estimates,
the ultimate liability may be more or less than such provisions.
The Company evaluates its loss reserves quarterly. When management determines that the estimated ultimate claim cost
requires a decrease for previously reported accident years, favorable development occurs and a reduction in losses and loss
adjustment expenses is reported in the current period. If the estimated ultimate claim cost requires an increase for previously
reported accident years, unfavorable development occurs and an increase in losses and loss adjustment expenses is reported in the
current period. For 2015, the Company reported unfavorable development of approximately $13 million on the 2014 and prior
accident years’ losses and loss adjustment expense reserves, which at December 31, 2014 totaled approximately $1.09 billion.
The unfavorable development in 2015 was primarily from the California homeowners and automobile lines of insurance business
outside of California, which was partially offset by favorable development in the California personal automobile line of insurance
business.
During 2015, the Company recorded catastrophe losses of approximately $19 million which were primarily the result of
severe storms outside of California, and rainstorm and wildfire losses in California.
Investments
The Company’s fixed maturity and equity investments are classified as "trading" and carried at fair value as required when
applying the fair value option, with changes in fair value reflected in net realized investment gains or losses in the consolidated
statements of operations. The majority of equity holdings, including non-redeemable preferred stocks, are actively traded on
national exchanges or trading markets, and are valued at the last transaction price on the balance sheet dates.
Fair Value of Financial Instruments
Financial instruments recorded in the consolidated balance sheets include investments, receivables, total return swaps,
accounts payable, options sold, and secured and unsecured notes payable. The fair value of a financial instrument is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Due to their short-term maturity, the carrying values of receivables and accounts payable approximate their
fair market values. All investments are carried on the consolidated balance sheets at fair value, as described in Note 2. Fair Value
of Financial Instruments, of the Notes to Consolidated Financial Statements in Item 8. "Financial Statements and Supplementary
Data."
The Company’s financial instruments include securities issued by the U.S. government and its agencies, securities issued
by states and municipal governments and agencies, certain corporate and other debt securities, equity securities, and exchange
traded funds. 99.7% of the fair value of financial instruments held at December 31, 2015 is based on observable market prices,
observable market parameters, or is derived from such prices or parameters. The availability of observable market prices and
pricing parameters can vary by financial instrument. Observable market prices and pricing parameters of a financial instrument,
or a related financial instrument, are used to derive a price without requiring significant judgment.
The Company may hold or acquire financial instruments that lack observable market prices or market parameters because
they are less actively traded currently or in future periods. The fair value of such instruments is determined using techniques
appropriate for each particular financial instrument. These techniques may involvesome degree of judgment. The price transparency
of the particular financial instrument will determine the degree of judgment involved in determining the fair value of the Company’s
financial instruments. Price transparency is affected by a wide variety of factors, including the type of financial instrument, whether