Mercury Insurance 2008 Annual Report Download - page 31

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Funding for the Company’s future growth may depend upon obtaining new financing, which may be difficult to
obtain given prevalent economic conditions and the general credit crisis.
To accommodate the Company’s expected future growth, the Company may require funding in addition to cash provided
from current operations. The Company’s ability to obtain financing may be constrained by current economic conditions affecting
global financial markets. Specifically, the recent credit crisis and other related trends affecting the banking industry have caused
significant operating losses and bankruptcies throughout the banking industry. Many lenders and institutional investors have
ceased funding even the most credit-worthy borrowers. If the Company is unable to obtain necessary financing, it may be unable
to take advantage of opportunities with potential business partners or new products or to otherwise expand its business as planned.
Risks Related to the Company’s Industry
The private passenger automobile insurance business is highly competitive, and the Company may not be able to
compete effectively against larger, better-capitalized companies.
The Company competes with many property and casualty insurance companies selling private passenger automobile
insurance in the states in which the Company operates, many of which are better capitalized than the Company and have higher
A.M. Best ratings. The superior capitalization of many of the Company’s competitors may enable them to offer lower rates, to
withstand larger losses, and to take advantage more effectively of new marketing opportunities. The Company’s competition may
also become increasingly better capitalized in the future as the traditional barriers between insurance companies and banks and
other financial institutions erode and as the property and casualty industry continues to consolidate. The Company’s ability to
compete against these larger, better-capitalized competitors depends importantly on its ability to deliver superior service and its
strong relationships with independent agents.
The Company may from time to time undertake strategic marketing and operating initiatives to improve its competitive
position and drive growth. If the Company is unable to successfully implement new strategic initiatives or if the Company’s
marketing campaigns do not attract new customers, the Company’s competitive position may be harmed, which could adversely
affect the Company’s business and results of operations.
Additionally, in a highly competitive industry such as the automobile insurance industry, some of the Company’s competitors may
fail from time to time. In the event of a failure of a major insurance company, the Company could be adversely affected, as the
Company and other insurance companies would likely be required by state law to absorb the losses of the failed insurer, and as the
Company would be faced with an unexpected surge in new business from the failed insurer’s former policyholders.
The Company may be adversely affected by changes in the personal automobile insurance business.
Approximately 83.7% of the Company’s direct written premiums for the year ended December 31, 2008 were generated
from personal automobile insurance policies. Adverse developments in the market for personal automobile insurance, or the
personal automobile insurance industry in general, whether related to changes in competition, pricing or regulations, could cause
the Company’s results of operations to suffer. This industry is also exposed to the risks of severe weather conditions, such as
rainstorms, snowstorms, hail and ice storms, hurricanes, tornadoes, earthquakes and, to a lesser degree, explosions, terrorist
attacks and riots. The automobile insurance business is also affected by cost trends that impact profitability. Factors which
negatively affect cost trends include inflation in automobile repair costs, automobile parts costs, used car prices and medical care.
Increased litigation of claims, particularly those involving allegations of bad faith or seeking extra contractual and punitive
damages, may also adversely affect loss costs.
The insurance industry is subject to extensive regulation, which may affect the Company’s ability to execute its
business plan and grow its business.
The Company is subject to comprehensive regulation and supervision by government agencies in each of the states in
which its insurance subsidiaries is domiciled, as well as in the states where its insurance subsidiaries sell insurance products, issue
policies and handle claims. Some states impose restrictions or require prior regulatory approval of specific corporate actions,
which may adversely affect the Company’s ability to operate, innovate, obtain necessary rate adjustments in a timely manner or
grow its business profitably. These regulations provide safeguards for policyholders and are not intended to protect the interests of
shareholders. The Company’s ability to comply with these laws and regulations, and to obtain necessary regulatory action in a
timely manner, is and will continue to be critical to its success. Some of these regulations include:
Required Licensing. The Company operates under licenses issued by the Departments of Insurance in the states in which
the Company sells insurance. If a regulatory authority denies or delays granting a new license, the Company’s ability to enter that
market quickly or offer new insurance products in that market may be substantially impaired. Also, if the Department of Insurance
in any state in which the Company currently operates suspends, non-renews, or revokes an existing license, the Company would
not be able to offer affected products in the state.