Mercury Insurance 2009 Annual Report Download - page 37

• integrating personnel with diverse business and cultural backgrounds;
• preserving AIS’ important industry, marketing and customer relationships;
• assumption of liabilities held by AIS; and
• inability to generate sufficient revenue and cost savings to offset the cost of the acquisition.
The Company’s acquisition of AIS may also cause it to:
• assume and otherwise become subject to certain liabilities;
• incur additional debt to finance operations;
• incur write-offs, restructuring, and other related expenses; and
• have significant impairment charges on goodwill or other intangible assets.
If these risks materialize, the Company’s financial condition, results of operations, and stock price could be
materially adversely affected.
If the Company’s loss reserves are inadequate, its business and financial position could be harmed.
The process of establishing property and liability loss reserves is inherently uncertain due to a number of
factors, including underwriting quality, the frequency and amount of covered losses, variations in claims
settlement practices, the costs and uncertainty of litigation, and expanding theories of liability. While the
Company believes that improved actuarial techniques and databases have assisted in estimating loss reserves, the
Company’s methods may prove to be inadequate. If any of these contingencies, many of which are beyond the
Company’s control, results in loss reserves that are not sufficient to cover its actual losses, the Company’s
financial condition, results of operations, and liquidity may be materially adversely affected.
There is uncertainty involved in the availability of reinsurance and the collectability of reinsurance
recoverable.
The Company reinsures a portion of its potential losses on the policies it issues to mitigate the volatility of
the losses on its financial condition and results of operations. The availability and cost of reinsurance is subject to
market conditions, which are outside of the Company’s control. From time to time, market conditions have
limited, and in some cases prevented, insurers from obtaining the types and amounts of reinsurance that they
consider adequate for their business needs. As a result, the Company may not be able to successfully purchase
reinsurance and transfer a portion of the Company’s risk through reinsurance arrangements. In addition, as is
customary, the Company initially pays all claims and seeks to recover the reinsured losses from its reinsurers.
Although the Company reports as assets the amount of claims paid which the Company expects to recover from
reinsurers, no assurance can be given that the Company will be able to collect from its reinsurers. If the amounts
actually recoverable under the Company’s reinsurance treaties are ultimately determined to be less than the
amount it has reported as recoverable, the Company may incur a loss during the period in which that
determination is made.
In addition, A.M. Best, credit rating agency, has expressed a concern regarding the FHCF’s ability to fund
all obligations in the case of a severe hurricane. Based on its projected claims-paying capacity, coverage
provided by the FHCF’s mandatory layer will be reduced, and given the lack of funding regarding the Temporary
Increase in Coverage Limits, no credit will be provided for this layer. A.M. Best will continue to assess the
amount of credit afforded to reinsurance from the FHCF related to events of the hurricane season, as well as
credit market conditions, and such assessment is subject to change since this ongoing evaluation is critical in the
assignment of ratings.
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