Mercury Insurance 2008 Annual Report Download - page 32

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Transactions Between Insurance Companies and Their Affiliates. Transactions between the Company’ s insurance
subsidiaries and their affiliates (including the Company) generally must be disclosed to state regulators, and prior approval of the
applicable regulator generally is required before any material or extraordinary transaction may be consummated. State regulators
may refuse to approve or delay approval of some transactions, which may adversely affect the Company’ s ability to innovate or
operate efficiently.
Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which the Company
conducts business require insurance companies to file insurance rate schedules and insurance policy forms for review and
approval. If, as permitted in some states, the Company begins using new rates before they are approved, it may be required to
issue refunds or credits to the Company’ s policyholders if the new rates are ultimately deemed excessive or unfair and
disapproved by the applicable state regulator. Accordingly, the Company’ s ability to respond to market developments or increased
costs in that state can be adversely affected.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company operates have laws
and regulations that limit its ability to exit a market. For example, these states may limit a private passenger auto insurer’ s ability
to cancel and non-renew policies or they may prohibit the Company from withdrawing one or more lines of insurance business
from the state unless prior approval is received from the state insurance department. In some states, these regulations extend to
significant reductions in the amount of insurance written, not just to a complete withdrawal. Laws and regulations that limit the
Company’ s ability to cancel and non-renew policies in some states or locations and that subject withdrawal plans to prior approval
requirements may restrict the Company’ s ability to exit unprofitable markets, which may harm its business and results of
operations.
Other Regulations. The Company must also comply with regulations involving, among other things:
• the use of non-public consumer information and related privacy issues;
• the use of credit history in underwriting and rating;
• limitations on the ability to charge policy fees;
• limitations on types and amounts of investments;
• the payment of dividends;
• the acquisition or disposition of an insurance company or of any company controlling an insurance company;
• involuntary assignments of high-risk policies, participation in reinsurance facilities and underwriting associations,
assessments and other governmental charges;
• reporting with respect to financial condition;
• periodic financial and market conduct examinations performed by state insurance department examiners; and
• the other regulations discussed in this Annual Report on Form 10-K.
Compliance with laws and regulations addressing these and other issues often will result in increased administrative
costs. In addition, these laws and regulations may limit the Company’ s ability to underwrite and price risks accurately, prevent it
from obtaining timely rate increases necessary to cover increased costs and may restrict its ability to discontinue unprofitable
relationships or exit unprofitable markets. These results, in turn, may adversely affect the Company’ s profitability or its ability or
desire to grow its business in certain jurisdictions, which could have an adverse effect on the market value of the Company’ s
common stock. The failure to comply with these laws and regulations may also result in actions by regulators, fines and penalties,
and in extreme cases, revocation of the Company’ s ability to do business in that jurisdiction. In addition, the Company may face
individual and class action lawsuits by insureds and other parties for alleged violations of certain of these laws or regulations.
Regulation may become more extensive in the future, which may adversely affect the Company’s business and results
of operations.
No assurance can be given that states will not make existing insurance-related laws and regulations more restrictive in the
future or enact new restrictive laws. New or more restrictive regulation in any state in which the Company conducts business
could make it more expensive for it to continue to conduct business in these states, restrict the premiums the Company is able to
charge or otherwise change the way the Company does business. In such events, the Company may seek to reduce its writings in,
or to withdraw entirely from, these states. In addition, from time to time, the United States Congress and certain federal agencies
investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Company
cannot predict whether and to what extent new laws and regulations that would affect its business will be adopted, the timing of
any such adoption and what effects, if any, they may have on the Company’ s operations, profitability and financial condition.