Mercury Insurance 2009 Annual Report Download - page 36

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changing and unprecedented credit and equity market conditions could materially impact the valuation of
securities as reported within the Company’s financial statements, and the period-to-period changes in value could
vary significantly. Decreases in value may have a material adverse effect on the Company’s results of operations
or financial condition.
Changes in the financial strength ratings of financial guaranty insurers issuing policies on bonds held in
the Company’s investment portfolio may have an adverse effect on the Company’s investment results.
In an effort to enhance the bond rating applicable to certain bond issues, some bond issuers purchase
municipal bond insurance policies from private insurers. The insurance generally guarantees the payment of
principal and interest on a bond issue if the issuer defaults. By purchasing the insurance, the financial strength
ratings applicable to the bonds are based on the credit worthiness of the insurer rather than the underlying credit
of the bond issuer. Several financial guaranty insurers that have issued insurance policies covering bonds held by
the Company are facing financial strength rating downgrades due to risk exposures on insurance policies that
guarantee mortgage debt and related structured products. These financial guaranty insurers are subject to DOI
oversight. As the financial strength ratings of these insurers are reduced, the ratings of the insured bond issues
correspondingly decrease. Although the Company has determined that the financial strength rating of the
underlying bond issues in its investment portfolio are within the Company’s investment policy without the
enhancement provided by the insurance policies, any further downgrades in the financial strength ratings of these
insurance companies or any defaults on the insurance policies written by these insurance companies may reduce
the fair value of the underlying bond issues and the Company’s investment portfolio or may reduce the
investment results generated by the Company’s investment portfolio, which could have a material adverse effect
on the Company’s financial condition, results of operations, and liquidity.
Deterioration of the municipal bond market in general or of specific municipal bonds held by the
Company may result in a material adverse effect on the Company’s results of operations and its financial
condition.
At December 31, 2009, approximately 77.4% of the Company’s total investment portfolio at fair value and
90.0% of its total fixed maturity investments at fair value were invested in tax-exempt municipal
bonds. Approximately 59.3% of the net realized gain held in the Company’s investment portfolio at
December 31, 2009 related to the Company’s municipal bond holdings. With such a large percentage of the
Company’s investment portfolio invested in municipal bonds, the performance of the Company’s investment
portfolio, including the cash flows generated by the investment portfolio is significantly dependent on the
performance of municipal bonds. If the value of municipal bond markets in general or any of the Company’s
municipal bond holdings deteriorate, the performance of the Company’s investment portfolio, results of
operations, financial condition, and cash flows may be materially and adversely affected.
Acquired companies can be difficult to integrate, disrupt the Company’s business and adversely affect its
operating results. The benefits anticipated in an acquisition may not be realized in the manner anticipated.
Effective January 1, 2009, the Company acquired all of the issued and outstanding membership interests of
AISM, which is the parent company of AIS and PoliSeek, with the expectation that the acquisition would result
in various benefits including, enhanced revenue and profits, greater market presence and development, and
enhancements to the Company’s product portfolio and customer base. These benefits may not be realized as
rapidly as, or to the extent, anticipated by the Company. Costs incurred in the integration of the AIS operations
with the Company’s operations also could have an adverse effect on the Company’s business, financial condition,
and operating results. The acquisition of AIS, as with all acquisitions, involves numerous risks, including:
• difficulties in integrating AIS operations, technologies, services and personnel;
• potential loss of AIS customers;
• diversion of financial and management resources from existing operations;
• potential loss of key AIS employees;
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