Mercury Insurance 2008 Annual Report Download - page 89

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79
(15) Risks and Uncertainties
The economies of California, the United States and the world are experiencing a deepening recession. There has been a
rise in the unemployment rate and significant disruption in the capital markets. While some economists have predicted an end to
this recession by sometime in the second half of 2009, the actual length and depth of the recession and the disruption in the capital
markets is currently unknown.
The Company is affected by the recession, particularly in how it impacts the state of California. The deepening recession
with rising unemployment has contributed to declining premium revenues and could lead to further premium revenue declines in
the future. The disruption in the capital markets has led to reductions in the fair value of the Company’s investments which led to
significant capital losses in 2008. Should the capital markets continue to be strained, it is likely that further capital losses will be
realized.
The Company is taking steps to align expenses with declining revenues, however, not all expenses can be effectively
reduced and continued declines in premium volumes could lead to higher expense ratios.
The Company has recorded a deferred tax asset as a result of the fair value declines in the investment portfolio. Should
the value of the portfolio continue to decline, additional deferred tax assets would be recorded and it is possible that a valuation
allowance would be required if the realization of the deferred tax assets becomes unlikely.
The impact on the Company from the recession would also affect the net income and surplus of the Insurance Companies
which could impact the ability and capacity of the Company to pay shareholder dividends.
(16) Subsequent Event
On October 10, 2008, MCC, the primary insurance subsidiary of the Company, entered into the Purchase Agreement
with Aon Corporation and Aon Services Group, Inc. Pursuant to the terms of the Purchase Agreement, effective January 1, 2009,
MCC acquired all of the membership interests of AIS Management LLC, which is the parent company of AIS and PoliSeek AIS
Insurance Solutions, Inc. AIS is a major producer of automobile insurance in the state of California and the Company’s largest
independent broker producing over $400 million of direct premiums written, which represented approximately 15% and 14% of
the Company’s direct premiums written during 2008 and 2007, respectively. This preexisting relationship did not require
measurement at the date of acquisition as there was no settlement of executory contracts between the Company and AIS as part of
the acquisition.
The preliminary estimate of goodwill of $36.4 million arising from the acquisition consists largely of the efficiency and
economies of scale expected from combining the operations of the Company and AIS. Goodwill in the amount of $37.3 million is
expected to be deductible for income tax purposes and exceeds recorded goodwill due to the capitalization of transaction costs for
tax purposes.