Mercury Insurance 2009 Annual Report Download - page 43

Company’s marketing campaigns do not attract new customers, the Company’s competitive position may be
harmed, which could adversely affect the Company’s business and results of operations. Additionally, in the
event of a failure of any competitor, the Company and other insurance companies would likely be required by
state law to absorb the losses of the failed insurer and would be faced with an unexpected surge in new business
from the failed insurer’s former policyholders.
The Company may be adversely affected by changes in the private passenger automobile insurance
industry.
Approximately 83.2% of the Company’s direct written premiums for the year ended December 31, 2009
were generated from private passenger automobile insurance policies. Adverse developments in the market for
personal automobile insurance or the personal automobile insurance industry in general, whether related to
changes in competition, pricing or regulations, could cause the Company’s results of operations to suffer. The
property-casualty insurance industry is also exposed to the risks of severe weather conditions, such as rainstorms,
snowstorms, hail and ice storms, hurricanes, tornadoes, wild fires, sinkholes, earthquakes and, to a lesser degree,
explosions, terrorist attacks and riots. The automobile insurance business is also affected by cost trends that
impact profitability. Factors which negatively affect cost trends include inflation in automobile repair costs,
automobile parts costs, used car prices, and medical care.
The insurance industry is subject to extensive regulation, which may affect the Company’s ability to
execute its business plan and grow its business.
The Company is subject to comprehensive regulation and supervision by government agencies in each of the
states in which its insurance subsidiaries are domiciled, as well as in the states where its insurance subsidiaries
sell insurance products, issue policies, and handle claims. Some states impose restrictions or require prior
regulatory approval of specific corporate actions, which may adversely affect the Company’s ability to operate,
innovate, obtain necessary rate adjustments in a timely manner or grow its business profitably. These regulations
provide safeguards for policyholders and are not intended to protect the interests of shareholders. The Company’s
ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is
and will continue to be, critical to its success. Some of these regulations include:
Required Licensing. The Company operates under licenses issued by the DOI in the states in which the
Company sells insurance. If a regulatory authority denies or delays granting a new license, the Company’s ability
to enter that market quickly or offer new insurance products in that market may be substantially impaired. Also,
if the DOI in any state in which the Company currently operates suspends, non-renews, or revokes an existing
license, the Company would not be able to offer affected products in the state.
Transactions Between Insurance Companies and Their Affiliates. Transactions between the Insurance
Companies and their affiliates (including the Company) generally must be disclosed to state regulators, and prior
approval of the applicable regulator is required before any material or extraordinary transaction may be
consummated. State regulators may refuse to approve or delay approval of some transactions, which may
adversely affect the Company’s ability to innovate or operate efficiently.
Regulation of Insurance Rates and Approval of Policy Forms. The insurance laws of most states in which
the Company conducts business require insurance companies to file insurance rate schedules and insurance
policy forms for review and approval. If, as permitted in some states, the Company begins using new rates before
they are approved, it may be required to issue refunds or credits to the Company’s policyholders if the new rates
are ultimately deemed excessive or unfair and disapproved by the applicable state regulator. Accordingly, the
Company’s ability to respond to market developments or increased costs in that state can be adversely affected.
Restrictions on Cancellation, Non-Renewal or Withdrawal. Most of the states in which the Company
operates have laws and regulations that limit its ability to exit a market. For example, these states may limit a
private passenger auto insurer’s ability to cancel and non-renew policies or they may prohibit the Company from
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