Mercury Insurance 2015 Annual Report Download - page 75

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The Company periodically assesses long-lived assets or asset groups including building and equipment, for recoverability
when events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the Company identifies
an indicator of impairment, the Company assesses recoverability by comparing the carrying amount of the asset to the sum of the
undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized
when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. There were no
impairment charges during 2015, 2014, and 2013.
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, and an insurance license which is not subject to amortization.
The Company evaluates goodwill and other intangible assets for impairment annually or whenever events or changes in
circumstances indicate that it is more likely than not that the carrying amount of goodwill and other intangible assets may exceed
their implied fair values. 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. In addition, the Company
evaluates other intangible assets using methods similar to those used for goodwill described above. As of December 31, 2015 and
2014, 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 terms 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 in
which the services are rendered. Unearned premiums represent the portion of the written premium related to the unexpired policy
term. Unearned premiums are predominantly computed monthly on a 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 $3.00 billion, $2.84 billion, and $2.73 billion in 2015, 2014, and 2013, 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 re-estimated. 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 loss reserve that is required. A key assumption in estimating loss reserves is the degree to which the historical data
used to analyze reserves will be predictive of ultimate claim costs on incurred claims. Changes in the regulatory and legal
environments, results of litigation, medical costs, the cost of repair materials, and labor rates, among other factors, can impact this
assumption. 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. However, 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, paid loss, claim count development, and
average severity methods described below. 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 insurance business
or coverage within a line of insurance business. The Company may also evaluate qualitative factors such as known changes in
laws or legal ruling that could affect claims handling or other external environmental factors or internal factors that could affect
the settlement of claims. When establishing the loss reserve, the Company will generally analyze the results from all of the methods