Mercury Insurance 2008 Annual Report Download - page 30

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The insurance industry has been the target of litigation, and the Company faces litigation risks which, if decided
adversely to the Company, could impact its financial results.
In recent years, insurance companies have been named as defendants in lawsuits including class actions, relating to
pricing, sales practices and practices in claims handling, among other matters. A number of these lawsuits have resulted in
substantial jury awards or settlements involving other insurers. Future litigation relating to these or other business practices may
negatively affect the Company by requiring it to pay substantial awards or settlements, increasing the Company’ s legal costs,
diverting management attention from other business issues or harming the Company’ s reputation with customers. Such litigation
is inherently unpredictable.
The Company and its insurance subsidiaries are named as defendants in a number of lawsuits. These lawsuits are
described more fully in “Item 3. Legal Proceedings.” Litigation, by its very nature, is unpredictable and the outcome of these
cases is uncertain. The precise nature of the relief that may be sought or granted in any lawsuits is uncertain and may, if these
lawsuits are determined adversely to the Company, negatively impact the manner in which the Company conducts its business and
its results of operations, which could materially increase the Company’ s costs and expenses.
In addition, potential litigation involving new claim, coverage and business practice issues could adversely affect the
Company’ s business by changing the way policies are priced, extending coverage beyond its underwriting intent or increasing the
size of claims. The effects of these and other unforeseen emerging claim, coverage and business practice issues could negatively
impact the Company’ s financial condition, revenues or its methods of doing business.
The failure of any of the loss limitation methods employed by the Company could have a material adverse effect on its
financial condition or results of operations.
Various provisions of the Company’ s policies, such as limitations or exclusions from coverage which are intended to
limit the Company’ s risks, may not be enforceable in the manner the Company intends. In addition, the Company’ s policies
contain conditions requiring the prompt reporting of claims and the Company’ s right to decline coverage in the event of a
violation of that condition. While the Company’ s insurance product exclusions and limitations reduce the Company’ s loss
exposure and help eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or
void an exclusion or legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that
would adversely affect the Company’ s loss experience, which could have a material adverse effect on its financial condition or
results of operations.
General economic conditions may affect the Company’s revenue and profitability and harm its business.
Financial markets in the United States, Europe and Asia have experienced and continue to experience extreme disruption
in recent months, and the United States and other countries are currently in a severe economic recession. Unfavorable changes in
economic conditions, including continuing stock market declines, inflation, recession, declining consumer confidence or other
changes, may reduce the Company’ s premium volume through policy cancellations, modifications or non-renewals, may reduce
cash flows from operations and investments, may harm the Company’ s financial position and may reduce the Insurance
Companies’ statutory surplus. Challenging economic conditions also may impair the ability of the Company’ s customers to pay
premiums as they fall due, and as a result, the Company’ s reserves and write-offs could increase. The significant losses in the
Company’ s investment portfolio could also continue if the losses in the financial markets in general continue. The Company is
unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the
United States and other countries. If economic conditions in the United States continue to deteriorate or do not show
improvement, the adverse impact on the Company’ s results of operations, financial position and cash flows may continue.
Continued deterioration in the public debt and equity markets could lead to additional investment losses and
materially and adversely affect the Company’s business.
The prolonged and severe disruptions in the public debt and equity markets, including among other things, widening of
credit spreads, bankruptcies and government intervention in a number of large financial institutions, have resulted in significant
losses in the Company’ s investment portfolio. For the year ended December 31, 2008, the Company incurred substantial realized
investment losses, as described in Item 7. Management’ s Discussion and Analysis of Financial Condition and Results of
Operations in Part I. Continued deterioration in the financial markets could lead to additional investment losses.