Mercury Insurance 2015 Annual Report Download - page 28

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coverage beyond its underwriting intent or by increasing the number or size of claims. In some instances, these changes may not
become apparent until sometime after the Company has issued insurance policies that are affected by the changes. As a result, the
full extent of liability under the Company’s insurance policies may not be known for many years after a policy is issued.
Loss of, or significant restriction on, the use of credit scoring in the pricing and underwriting of personal lines products
could reduce the Company’s future profitability.
The Company uses credit scoring as a factor in pricing and underwriting decisions where allowed by state law. Some
consumer groups and regulators have questioned whether the use of credit scoring unfairly discriminates against some groups of
people and are seeking to prohibit or restrict the use of credit scoring in underwriting and pricing. Laws or regulations that
significantly curtail or regulate the use of credit scoring, if enacted in a large number of states in which the Company operates,
could negatively impact the Company’s future results of operations.
If the Company cannot maintain its A.M. Best ratings, it may not be able to maintain premium volume in its insurance
operations sufficient to attain the Company’s financial performance goals.
The Company’s ability to retain its existing business or to attract new business in its Insurance Companies is affected by
its rating by A.M. Best Company. A.M. Best Company currently rates all of the Insurance Companies with sufficient operating
history to be rated as either A+ (Superior) or A- (Excellent). If the Company is unable to maintain its A.M. Best ratings, the
Company may not be able to grow its premium volume sufficiently to attain its financial performance goals, and the result may
adversely affect the Company’s business, financial condition, and results of operations. Two of the smaller Insurance Companies,
CGU and WAIC, are not rated by A.M. Best Company.
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, including to fund future growth opportunities, depend on many factors,
including its ability to underwrite new business successfully, its ability to establish premium rates and reserves at levels sufficient
to cover losses, the success of its expansion plans, the performance of its investment portfolio and the Company’s ability to obtain
financing. The Company may seek to obtain financing through equity or debt issuances, or sales of all or a portion of its investment
portfolio or other assets. The Company’s ability to obtain financing also depends on economic conditions affecting financial
markets and financial strength and claims-paying ability ratings, which are assigned based upon an evaluation of the Company’s
ability to meet its financial obligations. The Company’s current financial strength rating with Fitch is A+. If the Company were
to seek financing through the capital markets in the future, it may need to apply for Standard and Poor’s and Moody’s ratings and
there can be no assurance that the Company would obtain favorable ratings from either agency. 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.
Changes in market interest rates, defaults on securities and tax considerations may have an adverse effect on the
Company’s investment portfolio, which may adversely affect the Company’s financial results.
The Company’s financial results are affected, in part, by the performance of its investment portfolio. The Company’s
investment portfolio contains interest rate sensitive-investments, such as municipal and corporate bonds. Increases in market
interest rates may have an adverse impact on the value of the investment portfolio by decreasing the value of fixed income securities.
Declining market interest rates could have an adverse impact on the Company’s investment income as it invests positive cash
flows from operations and as it reinvests proceeds from maturing and called investments in new investments that could yield lower
rates than the Company’s investments have historically generated. Defaults in the Company’s investment portfolio may produce
operating losses and negatively impact the Company’s results of operations.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international
economic and political conditions, and other factors beyond the Company’s control. Market interest rates have been at historic
lows for the last several years. Many observers, including the Company, believe that market interest rates will rise as the economy
improves. Although the Company takes measures to manage the risks of investing in a changing interest rate environment, it may
not be able to mitigate interest rate sensitivity effectively. The Company’s mitigation efforts include maintaining a high quality
portfolio and managing the duration of the portfolio to reduce the effect of interest rate changes. Despite its mitigation efforts, a
significant change in interest rates could have a material adverse effect on the Company’s financial condition and results of
operations. In addition, changes in loss experience, growth rates and profitability of the Company's investment portfolio
significantly impact the Company’s exposure to AMT liability. The Company seeks to manage its AMT liability and maximize
after-tax yield through the appropriate investment asset mix between taxable bonds, tax-exempt bonds, and equities. Although the