Mercury Insurance 2010 Annual Report Download - page 25

Download and view the complete annual report

Please find page 25 of the 2010 Mercury Insurance annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126

Item 1A. Risk Factors
The Company’s business involves various risks and uncertainties in addition to the normal risks of business,
some of which are discussed in this section. It should be noted that the Company’s business and that of other
insurers may be adversely affected by a downturn in general economic conditions and other forces beyond the
Company’s control. In addition, other risks and uncertainties not presently known or that the Company currently
believes to be immaterial may also adversely affect the Company’s business. If any such risks or uncertainties, or
any of the following risks or uncertainties, develop into actual events, there could be a materially adverse effect
on the Company’s business, financial condition, results of operations, or liquidity.
The information discussed below should be considered carefully with the other information contained in this
Annual Report on Form 10-K and the other documents and materials filed by the Company with the SEC, as well
as news releases and other information publicly disseminated by the Company from time to time.
Risks Related to the Company’s Business
The Company remains highly dependent upon California and several other key states to produce
revenues and operating profits.
For the year ended December 31, 2010, the Company generated approximately 76.6% of its direct
automobile insurance premiums written in California, 7.8% in Florida, 3.9% in New Jersey, and 3.2% in Texas.
The Company’s financial results are subject to prevailing regulatory, legal, economic, demographic, competitive,
and other conditions in these states and changes in any of these conditions could negatively impact the
Company’s results of operations.
Mercury General is a holding company that relies on regulated subsidiaries for cash operating profits to
satisfy its obligations.
As a holding company, Mercury General maintains no operations that generate revenue sufficient to pay
operating expenses, shareholders’ dividends, or principal or interest on its indebtedness. Consequently, Mercury
General relies on the ability of the Insurance Companies, particularly the California Companies, to pay dividends
for Mercury General to meet its debt payment and other obligations. The ability of the Insurance Companies to
pay dividends is regulated by state insurance laws, which limit the amount of, and in certain circumstances may
prohibit the payment of, cash dividends. Generally, these insurance regulations permit the payment of dividends
only out of earned surplus in any year which, together with other dividends or distributions made within the
preceding 12 months, do not exceed the greater of 10% of statutory surplus as of the end of the preceding year or
the net income for the preceding year, with larger dividends payable only after receipt of prior regulatory
approval. The inability of the Insurance Companies to pay dividends in an amount sufficient to enable the
Company to meet its cash requirements at the holding company level could have a material adverse effect on the
Company’s results of operations, financial condition, and its ability to pay dividends to its shareholders. On
December 16, 2010, the California DOI notified the Company that MCC was authorized to pay a $270 million
extraordinary dividend to Mercury General in 2011. Mercury General intends to use the proceeds from the
dividend to repay the $125 million senior notes and to fund shareholder dividends.
The Company’s insurance subsidiaries are subject to minimum capital and surplus requirements, and
any failure to meet these requirements could subject the Company’s insurance subsidiaries to regulatory
action.
The Company’s insurance subsidiaries are subject to risk-based capital standards and other minimum capital
and surplus requirements imposed under applicable laws of their state of domicile. The risk-based capital
standards, based upon the Risk-Based Capital Model Act adopted by the NAIC, require the Company’s insurance
subsidiaries to report their results of RBC calculations to state departments of insurance and the NAIC. If any of
the Company’s insurance subsidiaries fails to meet these standards and requirements, the DOI regulating such
subsidiary may require specified actions by the subsidiary.
15