Mercury Insurance 2010 Annual Report Download - page 34

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The ability of the Company to attract, develop and retain talented employees, managers and executives,
and to maintain appropriate staffing levels, is critical to the Company’s success.
As the Company expands its operations, it hires and trains new employees and retains current employees to
handle the resulting increase in new inquiries, policies, customers, and claims. The failure to successfully hire
and retain a sufficient number of skilled employees could result in the Company having to slow the growth of its
business. In addition, the failure of adequate staffing of claims and underwriting departments could result in
decreased quality of the Company’s operations.
The Company’s success also depends upon the continued contributions of its executive officers, both
individually and as a group. The Company’s future performance will be substantially dependent on its ability to
retain and motivate its management team. The loss of the services of any of the Company’s executive officers
could prevent the Company from successfully implementing its business strategy, which could have a material
adverse effect on the Company’s business, financial condition, and results of operations.
Continuing negative economic conditions may negatively affect the Company’s business and operating
results.
Continuing negative economic conditions could adversely affect the Company in the form of consumer
behavior and pressure on its investment portfolio. Consumer behavior could include policy cancellations,
modifications, or non-renewals, which may reduce cash flows from operations and investments, may harm the
Company’s financial position, and may reduce the Insurance Companies’ statutory surplus. Challenging
economic conditions also may impair the ability of the Company’s customers to pay premiums as they fall due,
and as a result, the Company’s bad debt reserves and write-offs could increase. It is also possible that claims
fraud may increase. The Company’s investment portfolios could be adversely affected as a result of deteriorating
financial and business conditions affecting the issuers of the securities in the Company’s investment portfolio. In
addition, declines in the Company’s profitability could result in a charge to earnings for the impairment of
goodwill, which would not affect the Company’s cash flow but could decrease its earnings, and its stock price
could be adversely affected.
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, and in California,
where the majority of the Company’s business is produced. If economic conditions do not show significant
improvement, the adverse impact on the Company’s financial condition, results of operations, and liquidity may
continue.
The presence of defective Chinese-made drywall in homes subject to our homeowner policies may lead to
additional losses and expenses.
Some homeowners in southern Florida have experienced unpleasant odors and unusual air-conditioning
problems, which have been linked to the use of defective Chinese-made drywall. It is difficult to accurately
estimate any covered losses that may develop as a result of these problems. However, if and to the extent the
scope of the Chinese-made drywall problems proves to be significant, the Company could incur costs or
liabilities related to this issue that could have a material adverse effect on its financial condition, results of
operations, and liquidity.
The Company’s business is vulnerable to significant losses related to sinkhole claims, which could have
an adverse effect on its results of operations.
In December 2010, the Florida Senate issued a 47-page report entitled “Issues Relating to Sinkhole
Insurance.” The report states that the “Florida Insurance Commissioner has identified sinkhole claims as a major
cost driver and has expressed concern that such claims could threaten the solvency of domestic insurers and have
a destabilizing effect on an already fragile market.” While the Company, with approximately 8,000 homeowners
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