Mercury Insurance 2010 Annual Report Download - page 27

The Company’s insurance rates are subject to prior approval by the departments of insurance in most of
the states in which the Company operates, and to political influences.
In most of the states in which the Company operates, it must obtain prior approval from the state department
of insurance of insurance rates charged to its customers, including any increases in those rates. If the Company is
unable to receive approval of the rate changes it requests, the Company’s ability to operate its business in a
profitable manner may be limited and its financial condition, results of operations, and liquidity may be adversely
affected.
From time to time, the auto insurance industry comes under pressure from state regulators, legislators, and
special interest groups to reduce, freeze, or set rates at levels that do not correspond with underlying costs, in the
opinion of the Company’s management. The homeowners insurance business faces similar pressure, particularly as
regulators in catastrophe-prone states seek an acceptable methodology to price for catastrophe exposure. In addition,
various insurance underwriting and pricing criteria regularly come under attack by regulators, legislators, and
special interest groups. The result could be legislation, regulations, or new interpretations of existing regulations
that would adversely affect the Company’s business, financial condition, and results of operations.
The Company may be unable to refinance its outstanding debt obligations or obtain sufficient capital to
repay the obligations on acceptable terms, or at all.
The Company has an aggregate of $263 million in the following long-term debt obligations:
• $125 million senior notes, which mature in August 2011;
• $120 million secured credit facility, which matures in January 2012, incurred in connection with the
AIS acquisition; and
• $18 million secured bank loan, which matures in March 2013, incurred in connection with the Folsom,
California building acquisition.
The Company’s ability to generate cash depends on many factors beyond its control, and the Company may
not generate sufficient cash flow to repay the debt at maturity. The Company’s ability to repay or refinance its
long term debt at maturity also creates financial risk, particularly if the Company’s business or prevailing
financial market conditions are not conducive to refinancing the outstanding debt obligations or obtaining new
financing. If the Company is unable to generate sufficient cash flow to repay the debt obligations at maturity or
to refinance the obligations on commercially reasonable terms, the Company’s business, financial condition, and
results of operations may be harmed.
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 a portion of the
proceeds from the dividend to repay the $125 million senior notes that mature on August 15, 2011.
If the Company cannot maintain its A.M. Best ratings, it may not be able to maintain premium volume in
its insurance operations sufficient to attain the Company’s financial performance goals.
The Company’s ability to retain its existing business or to attract new business in its insurance operations is
affected by its rating by A.M. Best Company. A.M. Best Company currently rates all of the Company’s
insurance subsidiaries with sufficient operating history to be rated as either A+ (Superior) or A- (Excellent). If
the Company is unable to maintain its A.M. Best ratings, the Company may not be able to grow its premium
volume sufficiently to attain its financial performance goals, and if A.M. Best were to downgrade the Company’s
ratings, the result may adversely affect the Company’s business, financial condition, and results of operations.
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