Mercury Insurance 2010 Annual Report Download - page 30

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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.
The failure of any of the loss limitation methods employed by the Company could have a material adverse
effect on its financial condition or results of operations.
Various provisions of the Company’s policies, such as limitations or exclusions from coverage which are
intended to limit the Company’s risks, may not be enforceable in the manner the Company intends. In addition,
the Company’s policies contain conditions requiring the prompt reporting of claims and the Company’s right to
decline coverage in the event of a violation of that condition. While the Company’s insurance product exclusions
and limitations reduce the Company’s loss exposure and help eliminate known exposures to certain risks, it is
possible that a court or regulatory authority could nullify or void an exclusion or legislation could be enacted
modifying or barring the use of such endorsements and limitations in a way that would adversely affect the
Company’s loss experience, which could have a material adverse effect on its financial condition or results of
operations.
The Company’s business is vulnerable to significant catastrophic property loss, which could have an
adverse effect on its financial condition and results of operations.
The Company faces a significant risk of loss in the ordinary course of its business for property damage
resulting from natural disasters, man-made catastrophes and other catastrophic events, particularly hurricanes,
earthquakes, hail storms, explosions, tropical storms, fires, sinkholes, war, acts of terrorism, severe winter
weather and other natural and man-made disasters. Such events typically increase the frequency and severity of
automobile and other property claims. Because catastrophic loss events are by their nature unpredictable,
historical results of operations may not be indicative of future results of operations, and the occurrence of claims
from catastrophic events is likely to result in substantial volatility in the Company’s financial condition and
results of operations from period to period. Although the Company attempts to manage its exposure to such
events, the occurrence of one or more major catastrophes in any given period could have a material and adverse
impact on the Company’s financial condition and results of operations and could result in substantial outflows of
cash as losses are paid.
The Company depends on independent agents and brokers who may discontinue sales of its policies at
any time.
The Company sells its insurance policies through approximately 5,700 independent agents and brokers. The
Company must compete with other insurance carriers for these agents’ and brokers’ business. Some competitors
offer a larger variety of products, lower prices for insurance coverage, higher commissions, or more attractive
non-cash incentives. To maintain its relationship with these independent agents, the Company must pay
competitive commissions, be able to respond to their needs quickly and adequately, and create a consistently high
level of customer satisfaction. If these independent agents find it preferable to do business with the Company’s
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