Mercury Insurance 2008 Annual Report Download - page 28

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Any inability of the Company to realize its deferred tax assets may have a material adverse affect on the Company’s
results of operations and its financial condition.
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 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 capital gains in the future sufficient to utilize them or the Company enters into one or more transactions that limit its right
to realize all of the deferred tax assets.
If the Company determines that it would not be able to realize all or a portion of its deferred tax assets in the future, the
Company would reduce the deferred tax asset through a charge to earnings in the period in which the determination is made. This
charge could have a material adverse affect 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 future 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.
Continued deterioration of the municipal bond market in general or of specific municipal bonds held by the Company
may result in a material adverse affect on the Company’s results of operations and its financial condition.
At December 31, 2008, approximately 74% of the Company’s total investment portfolio at fair value and 88% of its total
fixed maturity investments at fair value were invested in tax-exempt municipal bonds. Approximately 45% of the net losses held
in the Company’s investment portfolio at December 31, 2008 related to the Company’s municipal bond holdings. With such a
large percentage of the Company’s investment portfolio invested in municipal bonds, the performance of the Company’s
investment portfolio, including the cash flows generated by the investment portfolio is significantly dependent on the performance
of municipal bonds. If the value of municipal bond markets in general or any of the Company’s municipal bond holdings continue
to deteriorate, the performance of the Company’s investment portfolio, results of operations, financial position and cash flows
may be materially and adversely affected.
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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Technology.” 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 its new information technology systems, the Company may from time to time install new or upgraded business
management systems. To the extent that a critical system fails or is not properly implemented and the failure cannot be corrected
in a timely manner, the Company may experience disruptions to the business that could have a material adverse effect on the
Company’s results of operations.