Mercury Insurance 2008 Annual Report Download - page 27

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Changes in the financial strength ratings of financial guaranty insurers issuing policies on bonds held in the
Company’s investment portfolio may have an adverse effect on the Company’s investment results.
In an effort to enhance the bond rating applicable to a certain bond issues, some bond issuers purchase municipal bond
insurance policies from private insurers. The insurance generally guarantees the payment of principal and interest on a bond issue
if the issuer defaults. By purchasing the insurance, the financial strength ratings applicable to the bonds are based on the credit
worthiness of the insurer rather than the underlying credit of the bond issuer. Several financial guaranty insurers that have issued
insurance policies covering bonds held by the Company are facing financial strength rating downgrades due to risk exposures on
insurance policies that guarantee mortgage debt and related structured products. These financial guaranty insurers are subject to
DOI oversight. As the financial strength ratings of these insurers are reduced, the ratings of the insured bond issues
correspondingly decrease. Although the Company has determined that the financial strength rating of the underlying bond issues
in its investment portfolio are within the Company’ s investment policy without the enhancement provided by the insurance
policies, any further downgrades in the financial strength ratings of these insurance companies or any defaults on the insurance
policies written by these insurance companies may reduce the fair value of the underlying bond issues and the Company’ s
investment portfolio or may reduce the investment results generated by the Company’ s investment portfolio, which could have a
material adverse effect on the Company’ s financial condition, liquidity and results of operations.
The Company’s business is vulnerable to significant catastrophic property loss, which could have an adverse effect on
its results of operations.
The Company faces a significant risk of loss in the ordinary course of its business for property damage resulting from
natural disasters, man-made catastrophes and other catastrophic events, particularly hurricanes, earthquakes, hail storms,
explosions, tropical storms, fires, war, acts of terrorism, severe winter weather and other natural and man-made disasters. Such
events typically increase the frequency and severity of automobile and other property claims. Because catastrophic loss events are
by their nature unpredictable, historical results of operations may not be indicative of future results of operations, and the
occurrence of claims from catastrophic events is likely to result in substantial volatility in the Company’ s financial condition and
results of operations from period to period. Although the Company attempts to manage its exposure to such events, the occurrence
of one or more major catastrophes in any given period could have a material and adverse impact on the Company’ s financial
condition and results of operations and could result in substantial outflows of cash as losses are paid.
The Company’s expansion plans may adversely affect its future profitability.
The Company is currently expanding and intends to further 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 and 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, operating results and financial condition could be adversely affected.