Mercury Insurance 2011 Annual Report Download - page 41

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historical results of operations may not be indicative of future results of operations, and the occurrence of claims
from catastrophic events may 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 who may discontinue sales of its policies at any time.
The Company sells its insurance policies through approximately 6,700 independent agents. The Company
must compete with other insurance carriers for these agents’ 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 competitors, it would be difficult
to renew the Company’s existing business or attract new business. State regulations may also limit the manner in
which the Company’s producers are compensated or incentivized. Such developments could negatively impact
the Company’s relationship with these parties and ultimately reduce revenues.
The Company’s expansion plans may adversely affect its future profitability.
The Company intends to continue to expand its operations in several of the states in which the Company has
operations and into states in which it has not yet begun operations. The intended expansion will necessitate
increased expenditures. The Company expects to fund these expenditures out of cash flow from operations. The
expansion may not occur, or if it does occur may not be successful in providing increased revenues or
profitability. If the Company’s cash flow from operations is insufficient to cover the increased costs of the
expansion, or if the expansion does not provide the benefits anticipated, the Company’s financial condition,
results of operations, and ability to grow its business may be harmed.
Any inability of the Company to realize its deferred tax assets may have a material adverse effect on the
Company’s financial condition and results of operations.
The Company recognizes deferred tax assets and liabilities for the future tax consequences related to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases, and for tax credits. The Company evaluates its deferred tax assets for recoverability based on available
evidence, including assumptions about future profitability and capital gain generation. Although management
believes that it is more likely than not that the deferred tax assets will be realized, some or all of the Company’s
deferred tax assets could expire unused if the Company is unable to generate taxable income of a sufficient
nature in the future sufficient to utilize them.
If the Company determines that it would not be able to realize all or a portion of its deferred tax assets in the
future, the Company would reduce the deferred tax asset through a charge to earnings in the period in which the
determination is made. This charge could have a material adverse effect on the Company’s results of operations
and financial condition. In addition, the assumptions used to make this determination are subject to change from
period to period based on changes in tax laws or variances between the Company’s projected operating
performance and actual results. As a result, significant management judgment is required in assessing the
possible need for a deferred tax asset valuation allowance. For these reasons and because changes in these
assumptions and estimates can materially affect the Company’s results of operations and financial condition,
management has included the assessment of a deferred tax asset valuation allowance as a critical accounting
estimate.
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