Mercury Insurance 2010 Annual Report Download - page 31

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competitors, it would be difficult to renew the Company’s existing business or attract new business. State
regulations may also limit the manner in which the Company’s producers are compensated or incentivized. Such
developments could negatively impact the Company’s relationship with these parties and ultimately reduce
revenues.
The Company’s expansion plans may adversely affect its future profitability.
The Company intends to continue to expand its operations in several of the states in which the Company has
operations and into states in which it has not yet begun operations. The intended expansion will necessitate
increased expenditures. The Company expects to fund these expenditures out of cash flow from operations. The
expansion may not occur, or if it does occur may not be successful in providing increased revenues or
profitability. If the Company’s cash flow from operations is insufficient to cover the increased costs of the
expansion, or if the expansion does not provide the benefits anticipated, the Company’s financial condition,
results of operations, and ability to grow its business may be harmed.
The Company may require additional capital in the future, which may not be available or may only be
available on unfavorable terms.
The Company’s future capital requirements depend on many factors, including its ability to write new
business successfully, its ability to establish premium rates and reserves at levels sufficient to cover losses, the
success of its current expansion plans and the performance of its investment portfolio. The Company may need to
raise additional funds through equity or debt financing, sales of all or a portion of its investment portfolio or
curtail its growth and reduce its assets. Any equity or debt financing, if available at all, may not be available on
terms that are favorable to the Company. In the case of equity financing, the Company’s shareholders could
experience dilution. In addition, such securities may have rights, preferences, and privileges that are senior to
those of the Company’s current shareholders. If the Company cannot obtain adequate capital on favorable terms
or at all, its business, financial condition, and results of operations could be adversely affected.
Funding for the Company’s future growth may depend upon obtaining new financing, which may be
difficult to obtain given prevalent economic conditions.
To accommodate the Company’s expected future growth, the Company may require funding in addition to
cash provided from current operations. The Company’s ability to obtain financing may be constrained by current
economic conditions affecting global financial markets. Specifically, with the recent trends affecting the banking
industry, many lenders and institutional investors have ceased funding even the most credit-worthy borrowers. If
the Company is unable to obtain necessary financing, it may be unable to take advantage of opportunities with
potential business partners or new products or to otherwise expand its business as planned.
Any inability of the Company to realize its deferred tax assets may have a material adverse effect on the
Company’s financial condition and results of operations.
The Company recognizes deferred tax assets and liabilities for the future tax consequences related to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases, and for tax credits. The Company evaluates its deferred tax assets for recoverability based on available
evidence, including assumptions about future profitability and capital gain generation. Although management
believes that it is more likely than not that the deferred tax assets will be realized, some or all of the Company’s
deferred tax assets could expire unused if the Company is unable to generate taxable income of a sufficient
nature in the future sufficient to utilize them.
If the Company determines that it would not be able to realize all or a portion of its deferred tax assets in the
future, the Company would reduce the deferred tax asset through a charge to earnings in the period in which the
determination is made. This charge could have a material adverse effect on the Company’s results of operations
and financial condition. In addition, the assumptions used to make this determination are subject to change from
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