Mercury Insurance 2009 Annual Report Download - page 114

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table outlines future minimum commitments for operating leases as of December 31, 2009:
Year Ending December 31, Operating Leases
(Amounts in thousands)
2010 ............................................... $15,150
2011 ............................................... 12,522
2012 ............................................... 10,148
2013 ............................................... 5,145
2014 ............................................... 1,691
Thereafter ........................................... 1,614
California Earthquake Authority (“CEA”)
The CEA is a quasi-governmental organization that was established to provide a market for earthquake
coverage to California homeowners. The Company places all new and renewal earthquake coverage offered with
its homeowners policies through the CEA. The Company receives a small fee for placing business with the CEA,
which is recorded as other income in the consolidated statements of operations. Upon the occurrence of a major
seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made
after CEA capital has been expended and are based upon each company’s participation percentage multiplied by
the amount of the total assessment. Based upon the most recent information provided by the CEA, the
Company’s maximum total exposure to CEA assessments at April 30, 2009, the most recent date at which
information was available, was approximately $53 million.
Litigation
The Company is, from time to time, named as a defendant in various lawsuits incidental to its insurance
business. In most of these actions, plaintiffs assert claims for punitive damages, which are not insurable under
judicial decisions. The Company has established reserves for lawsuits in which the Company is able to estimate
its potential exposure and the likelihood that the court will rule against the Company is probable. Additionally,
from time to time, regulators may take actions to challenge the Company’s business practices. The Company
vigorously defends these actions, unless a reasonable settlement appears appropriate. An unfavorable ruling
against the Company in the actions currently pending may have a material impact on the Company’s results of
operations in the period of such ruling, however, none is expected to be material to the Company’s financial
position.
The Company is also involved in proceedings relating to assessments and rulings made by the FTB. See
Note 10.
18. Risks and Uncertainties
Many economists believe that the severe economic recession is over, but they expect the recovery to be slow
with many businesses feeling the effects of the downturn for years to come. The Company is unable to predict
the duration and severity of the current disruption in the financial markets in the United States. The recession,
with rising unemployment, has contributed to declining premium revenues and could lead to further premium
revenue declines in the future. If economic conditions in the United States, and in California, where the majority
of the Company’s business is produced, 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.
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 impact
from the recession would also affect the capital and surplus of the Insurance Companies, which could indirectly
impact the ability and capacity to pay shareholder dividends.
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