Mercury Insurance 2010 Annual Report Download - page 35

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policies in-force in Florida, does not believe that the sinkhole issue creates solvency concerns, it does impair
profitability. The Company is in the process of withdrawing from the Florida homeowners market and expects to
complete the withdrawal in 2012. The Company expects that it will continue to experience losses and claims
frequency could increase through the completion of the withdrawal.
Risks Related to the Company’s Industry
The private passenger automobile insurance industry is highly competitive, and the Company may not be
able to compete effectively against larger, better-capitalized companies.
The Company competes with many property and casualty insurance companies selling private passenger
automobile insurance in the states in which the Company operates. Many of these competitors are better
capitalized than the Company and have higher A.M. Best ratings. The superior capitalization of the competitors
may enable them to offer lower rates, to withstand larger losses, and to more effectively take advantage of new
marketing opportunities. The Company’s competition may also become increasingly better capitalized in the
future as the traditional barriers between insurance companies and banks and other financial institutions erode
and as the property and casualty industry continues to consolidate. The Company’s ability to compete against
these larger, better-capitalized competitors depends on its ability to deliver superior service and its strong
relationships with independent agents.
The Company may undertake strategic marketing and operating initiatives to improve its competitive
position and drive growth. If the Company is unable to successfully implement new strategic initiatives or if the
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 82.7% of the Company’s direct written premiums for the year ended December 31, 2010
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, sell insurance products, issue policies, or 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:
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