Mercury Insurance 2010 Annual Report Download - page 107

Download and view the complete annual report

Please find page 107 of the 2010 Mercury Insurance annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In the 2004 and 2010 NNC matters, the Company believes that no monetary penalties are warranted and
intends to defend the issues vigorously. The Company has been subject to fines and penalties by the California
DOI in the past due to alleged violations of the California Insurance Code. The largest and most recent of these
was settled in 2008 for $300,000. However, prior settlement amounts are not necessarily indicative of the
potential results in the current Notice of Non-Compliance matters. Based upon its understanding of the facts and
the California Insurance Code, the Company does not expect that the ultimate resolution of the 2004 and 2010
NNC matters will be material to the Company’s financial position. The Company has accrued a liability for the
estimated cost to defend itself in the regulatory matters described above.
Litigation
The Company is, from time to time, named as a defendant in various lawsuits incidental to its insurance
business. In most of these actions, plaintiffs assert claims for punitive damages, which are not insurable under
judicial decisions. The Company has established reserves for lawsuits in which the Company is able to estimate
its potential exposure and the likelihood that the court will rule against the Company is probable. Additionally,
from time to time, regulators may take actions to challenge the Company’s business practices. The Company
vigorously defends these actions, unless a reasonable settlement appears appropriate. An unfavorable ruling
against the Company in the actions currently pending may have a material impact on the Company’s results of
operations in the period of such ruling, however, none is expected to be material to the Company’s financial
position.
The Company is also involved in proceedings relating to assessments and rulings made by the FTB. See
Note 10.
18. Risks and Uncertainties
Many economists believe that the severe economic recession is over, but they expect the recovery to be slow
with many businesses feeling the effects of the downturn for years to come. The Company is unable to predict
the duration and severity of the current disruption in the financial markets in the United States. The recession,
with continuing high unemployment rates, has contributed to declining premium revenues and could lead to
further premium revenue declines in the future. If economic conditions in the United States, and in California,
where the majority of the Company’s business is produced, do not show improvement, the adverse impact on the
Company’s results of operations, financial position, and cash flows may continue.
The Company applies the fair value option to its investment portfolio. Rapidly changing and unprecedented
credit and equity market conditions could materially impact the valuation of securities as reported within the
Company’s financial statements, and the period-to-period changes in value could vary significantly. Decreases in
market value may have a material adverse effect on the Company’s financial condition or results of operations.
The Company is taking steps to align expenses with declining revenues, however, not all expenses can be
effectively reduced and continued declines in premium volumes could lead to higher expense ratios. The impact
from the recession would also affect the capital and surplus of the Insurance Companies, which could indirectly
impact the ability and capacity to pay shareholder dividends.
97