Mercury Insurance 2011 Annual Report Download - page 37

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business by either extending coverage beyond its underwriting intent or by increasing the number or size of
claims. In some instances, these changes may not become apparent until sometime after the Company has issued
insurance policies that are affected by the changes. As a result, the full extent of liability under the Company’s
insurance policies may not be known for many years after a policy is issued.
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.
Loss of, or significant restriction on, the use of credit scoring in the pricing and underwriting of personal
lines products could reduce the Company’s future profitability.
The Company uses credit scoring as a factor in pricing and underwriting decisions where allowed by state
law. Some consumer groups and regulators have questioned whether the use of credit scoring unfairly
discriminates against some groups of people and are calling to prohibit or restrict the use of credit scoring in
underwriting and pricing. Laws or regulations that significantly curtail or regulate the use of credit scoring, if
enacted in a large number of states in which the Company operates, could impact the Company’s future 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 $140 million in long-term debt obligations, including a $120 million
secured credit facility that was originally incurred in connection with the AIS acquisition and matures in January
2015; and a $20 million secured bank loan that matures in January 2015.
The Company’s ability to repay these debt obligations 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.
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
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