Mercury Insurance 2011 Annual Report Download - page 38

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.
The Company may require additional capital in the future, which may not be available or may only be
available on unfavorable terms.
The Company’s future capital requirements depend on many factors, including its ability to underwrite new
business successfully, its ability to establish premium rates and reserves at levels sufficient to cover losses, the
success of its current expansion plans and the performance of its investment portfolio. The Company may need to
raise additional funds through equity or debt financing, sales of all or a portion of its investment portfolio or
curtail its growth and reduce its assets. Any equity or debt financing, if available at all, may not be available on
terms that are favorable to the Company. In the case of equity financing, the Company’s shareholders could
experience dilution. In addition, such securities may have rights, preferences, and privileges that are senior to
those of the Company’s current shareholders. If the Company cannot obtain adequate capital on favorable terms
or at all, its business, financial condition, and results of operations could be adversely affected.
Funding for the Company’s future growth may depend upon obtaining new financing, which may be
difficult to obtain given prevalent economic conditions.
To accommodate the Company’s expected future growth, the Company may require funding in addition to
cash provided from current operations. The Company’s ability to obtain financing may be constrained by current
economic conditions affecting global financial markets. Specifically, with the recent trends affecting the banking
industry, many lenders and institutional investors have ceased funding even the most credit-worthy borrowers. In
addition, financial strength and claims-paying ability ratings have become an increasingly important factor in the
Company’s ability to access capital markets. Rating agencies assign ratings based upon an evaluation of an
insurance company’s ability to meet its financial obligations. The Company’s current financial strength rating
with Fitch is A+. If the Company were to seek financing through the capital markets in the future, it may need to
apply for Standard and Poor’s and Moody’s ratings. The ratings could limit the Company’s access to the capital
markets or adversely affect pricing of new debt sought in the capital markets in the future. If the Company is
unable to obtain necessary financing, it may be unable to take advantage of opportunities with potential business
partners or new products or to otherwise expand its business as planned.
Changes in market interest rates or defaults may have an adverse effect on the Company’s investment
portfolio, which may adversely affect the Company’s financial results.
The Company’s results are affected, in part, by the performance of its investment portfolio. The Company’s
investment portfolio contains interest rate sensitive-investments, such as municipal and corporate bonds.
Increases in market interest rates may have an adverse impact on the value of the investment portfolio by
decreasing the value of fixed income securities. Declining market interest rates could have an adverse impact on
the Company’s investment income as it invests positive cash flows from operations and as it reinvests proceeds
from maturing and called investments in new investments that could yield lower rates than the Company’s
investments have historically generated. Defaults in the Company’s investment portfolio may produce operating
losses and negatively impact the Company’s results of operations.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and
international economic and political conditions, and other factors beyond the Company’s control. Although the
Company takes measures to manage the risks of investing in a changing interest rate environment, it may not be
able to mitigate interest rate sensitivity effectively. The Company’s mitigation efforts include maintaining a high
quality portfolio and managing the duration of the portfolio to reduce the effect of interest rate changes. Despite
its mitigation efforts, a significant change in interest rates could have a material adverse effect on the Company’s
financial condition and results of operations.
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