Mercury Insurance 2008 Annual Report Download - page 33

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Assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds and other mandatory
pooling arrangements may reduce the Company’s profitability.
Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some
insureds as the result of impaired or insolvent insurance companies. Many states also have laws that established second-injury
funds to provide compensation to injured employees for aggravation of a prior condition or injury which are funded by either
assessments based on paid losses or premium surcharge mechanisms. In addition, as a condition to the ability to conduct business
in various states, the insurance subsidiaries must participate in mandatory property and casualty shared market mechanisms or
pooling arrangements, which provide various types of insurance coverage to individuals or other entities that otherwise are unable
to purchase that coverage from private insurers. The effect of these assessments and mandatory shared-market mechanisms or
changes in them could reduce the Company’s profitability in any given period or limit its ability to grow its business.
Loss or significant restriction of the use of credit scoring in the pricing and underwriting of personal lines products
could reduce the Company’s future profitability.
The Company uses credit scoring as a factor in pricing decisions where allowed by state law. Some consumer groups and
regulators have questioned whether the use of credit scoring unfairly discriminates against people with low incomes, minority
groups and the elderly and are calling for the prohibition or restriction on the use of credit scoring in underwriting and pricing.
Laws or regulations that significantly curtail the use of credit scoring, if enacted in a large number of states, could reduce the
Company’s future profitability.
Risks Related to the Company’s Stock
The Company is controlled by a few large shareholders who will be able to exert significant influence over matters
requiring shareholder approval, including change of control transactions.
George Joseph and Gloria Joseph collectively own more than 50% of the Company’s common stock. Accordingly,
George Joseph and Gloria Joseph have the ability to exert significant influence on the actions the Company may take in the future,
including change of control transactions. This concentration of ownership may conflict with the interests of the Company’s other
shareholders and the holders of its debt securities.
Future sales of common stock may affect the market price of the Company’s common stock and the future exercise of
options and warrants will result in dilution to the Company’s shareholders.
The Company may raise capital in the future through the issuance and sale of shares of its common stock. The Company
cannot predict what effect, if any, such future sales will have on the market price of its common stock. Sales of substantial
amounts of its common stock in the public market could adversely affect the market price of the Company’s outstanding common
stock, and may make it more difficult for shareholders to sell common stock at a time and price that the shareholder deems
appropriate. In addition, the Company has issued options to purchase shares of its common stock. In the event that any options to
purchase common stock are exercised, shareholders will suffer dilution in their investment.
Applicable insurance laws may make it difficult to effect a change of control of the Company or the sale of any of its
insurance subsidiaries.
Before a person can acquire control of a U.S. insurance company or any holding company of a U.S. insurance company,
prior written approval must be obtained from the DOI of the state where the insurer is domiciled. Prior to granting approval of an
application to acquire control of the insurer or holding company, the state DOI will consider a number of factors relating to the
acquiror and the transaction. These laws and regulations may discourage potential acquisition proposals and may delay, deter or
prevent a change of control of the Company or the sale by the Company of any of its insurance subsidiaries, including transactions
that some or all of the Company’s shareholders might consider to be desirable.
Although the Company has consistently paid cash dividends in the past, it may not be able to pay cash dividends in the
future.
The Company has paid cash dividends on a consistent basis since the public offering of its common stock in November
1985. However, future cash dividends will depend upon a variety of factors, including the Company’s profitability, financial
condition, capital needs, future prospects and other factors deemed relevant by the Board of Directors. The Company’s ability to
pay dividends may also be limited by the ability of the Insurance Companies to make distributions to the Company, which may be
restricted by financial, regulatory or tax constraints, and by the terms of the Company’s debt instruments. In addition, there can
be no assurance that the Company will continue to pay dividends even if the necessary financial and regulatory conditions are met
and if sufficient cash is available for distribution.