Mercury Insurance 2015 Annual Report Download - page 31

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may not be successful in providing increased revenues or profitability. If the Company’s cash flows 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.
Any inability of the Company to realize its deferred tax assets, if and when they arise, 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 an appropriate character and in a sufficient amount to utilize these tax benefits in the future. Any determination that the
Company would not be able to realize all or a portion of its deferred tax assets in the future would result in 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 period-
to-period based on changes in tax laws or variances between the Company’s projected operating performance and actual results.
As a result, significant management judgment is required in assessing the possible need for a deferred tax asset valuation allowance.
For these reasons and because changes in these assumptions and estimates can materially affect the Company’s results of operations
and financial condition, management has included the assessment of a deferred tax asset valuation allowance as a critical accounting
estimate.
The carrying value of the Company’s goodwill and other intangible assets could be subject to an impairment write-down.
At December 31, 2015, the Company’s consolidated balance sheets reflected approximately $43 million of goodwill and
$32 million of other intangible assets. The Company evaluates whether events or circumstances have occurred that suggest that
the fair values of its intangible assets are below their respective carrying values. The determination that the fair value of the
Company’s intangible assets is less than its carrying value may result in an impairment write-down. An impairment write-down
would be reflected as expense and could have a material adverse effect on the Company’s results of operations during the period
in which it recognizes the expense. In the future, the Company may incur impairment charges related to goodwill and other
intangible assets already recorded or arising out of future acquisitions.
The Company relies on its information technology systems to manage many aspects of its business, and any failure of
these systems to function properly or any interruption in their operation could result in a material adverse effect on the
Company’s business, financial condition, and results of operations.
The Company depends on the accuracy, reliability, and proper functioning of its information technology systems. The
Company relies on these information technology systems to effectively manage many aspects of its business, including
underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, and
to maintain its policyholder data. The Company is developing and deploying new information technology systems that are designed
to manage many of these functions across all of the states in which it operates and all of the lines of insurance it offers. See
"Overview—A. General—Technology" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations." The failure of hardware or software that supports the Company’s information technology systems, the loss of data
contained in the systems, or any delay or failure in the full deployment of the Company’s new information technology systems
could disrupt its business and could result in decreased premiums, increased overhead costs, and inaccurate reporting, all of which
could have a material adverse effect on the Company’s business, financial condition, and results of operations.
In addition, despite system redundancy, the implementation of security measures, and the existence of a disaster recovery
plan for the Company’s information technology systems, these systems are vulnerable to damage or interruption from:
• earthquake, fire, flood and other natural disasters;
• terrorist attacks and attacks by computer viruses or hackers;
• power loss;
• unauthorized access; and
• computer systems, internet, telecommunications or data network failure.
It is possible that a system failure, accident, or security breach could result in a material disruption to the Company’s
business. In addition, substantial costs may be incurred to remedy the damages caused by these disruptions. Following
implementation of information technology systems, the Company may from time to time install new or upgraded business