Mercury Insurance 2008 Annual Report Download - page 25

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Acquired companies can be difficult to integrate, disrupt the Company’s business and adversely affect its operating
results. The benefits anticipated in an acquisition may not be realized in the manner anticipated.
Effective January 1, 2009, the Company acquired all of the issued and outstanding membership interests of AIS
Management, LLC, which is the parent company of Auto Insurance Specialists, LLC, and PoliSeek AIS Insurance Solutions, Inc.
with the expectation that the acquisition would result in various benefits including, among other things, enhanced revenue and
profits, greater market presence and development, and enhancements to the Company’s product portfolio and customer
base. These benefits may not be realized as rapidly as, or to the extent, anticipated by the Company. Costs incurred in the
integration of the AIS operations with the Company’s operations also could have an adverse effect on the Company’s business,
financial condition and operating results. If these risks materialize, the Company’s stock price could be materially adversely
affected. The acquisition of AIS, as with all acquisitions, involves numerous risks, including:
• difficulties in integrating AIS operations, technologies, services and personnel;
• potential loss of AIS customers;
• diversion of financial and management resources from existing operations;
• potential loss of key AIS employees;
• integrating personnel with diverse business and cultural backgrounds;
• preserving AIS’s important industry, marketing and customer relationships;
• assumption of liabilities held by AIS; and
• inability to generate sufficient revenue and cost savings to offset the cost of the acquisition.
The Company’s acquisition of AIS may also cause it to:
• assume and otherwise become subject to certain liabilities;
• incur additional debt, such as the $120 million debt incurred to fund the acquisition;
• make write-offs and incur restructuring and other related expenses; and
• create goodwill or other intangible assets that could result in significant impairment charges and/or amortization
expense.
As a result, if the Company fails to properly evaluate, execute the acquisition of and integrate AIS, its business and
prospects may be seriously harmed.
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 operations is affected by
its rating by A.M. Best Company. A.M. Best Company currently rates all of the Company’s insurance subsidiaries 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 if A.M. Best
were to downgrade the Company’s rating, the Company could lose significant premium volume.
The Company’s ability to access capital markets, its financing arrangements, and its business operations are
dependent on favorable evaluations and ratings by credit and other rating agencies.
Financial strength and claims-paying ability ratings issued by firms such as Standard & Poor’s, Fitch, and Moody’s have
become an increasingly important factor in establishing the competitive position of insurance companies. The Company’s ability
to attract and retain policies is affected by its ratings with these agencies. Rating agencies assign ratings based upon their
evaluations of an insurance company’s ability to meet its financial obligations. The Company’s financial strength ratings with
Standard & Poor’s, Fitch, and Moody’s are AA-, AA-, and Aa3, respectively; its respective debt ratings are A-, A, and A3. In
February, 2009, the ratings were affirmed by Standard & Poor’s and Fitch, but the outlook for the ratings was changed from stable
to negative while Moody’s maintained a stable outlook. Since these ratings are subject to continuous review, the Company cannot
guarantee the continuation of the favorable ratings. If the ratings were lowered significantly by any one of these agencies relative
to those of the Company’s competitors, its ability to market products to new customers and to renew the policies of current
customers could be harmed. A lowering of the ratings could also limit the Company’s access to the capital markets or adversely
affect pricing of new debt sought in the capital markets. These events, in turn, could have a material adverse effect on the
Company’s net income and liquidity.