Mercury Insurance 2011 Annual Report Download - page 44

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The Company’s success also depends upon the continued contributions of its executive officers, both
individually and as a group. The Company’s future performance will be substantially dependent on its ability to
retain and motivate its management team. The loss of the services of any of the Company’s executive officers
could prevent the Company from successfully implementing its business strategy, which could have a material
adverse effect on the Company’s business, financial condition, and results of operations.
Challenging economic conditions may negatively affect the Company’s business and operating results.
Challenging economic conditions could adversely affect the Company in the form of consumer behavior and
pressure on its investment portfolio. Consumer behavior could include policy cancellations, modifications, or
non-renewals, which may reduce cash flows from operations and investments, may harm the Company’s
financial position, and may reduce the Insurance Companies’ statutory surplus. Challenging economic conditions
also may impair the ability of the Company’s customers to pay premiums as they fall due, and as a result, the
Company’s bad debt reserves and write-offs could increase. It is also possible that claims fraud may increase.
The recent sovereign debt crisis in Europe is leading to weaker global economic growth, heightened financial
vulnerabilities and some negative rating actions. The Company’s investment portfolios could be adversely
affected as a result of deteriorating financial and business conditions affecting the issuers of the securities in the
Company’s investment portfolio. In addition, declines in the Company’s profitability could result in a charge to
earnings for the impairment of goodwill, which would not affect the Company’s cash flow but could decrease its
earnings, and its stock price could be adversely affected.
Many economists believe that the severe economic recession is over but they expect the recovery to be slow
with many businesses feeling the effects of the downturn for years to come. The Company is unable to predict
the duration and severity of the current disruption in the financial markets in the United States, and in California,
where the majority of the Company’s business is produced. If economic conditions do not show significant
improvement, there could be an adverse impact on the Company’s financial condition, results of operations, and
liquidity.
The Company may be adversely affected if economic conditions result in either inflation or deflation. In an
inflationary environment, established reserves may become inadequate and increase the Company’s loss ratio,
and market interest rates may rise and reduce the value of the Company’s fixed maturity portfolio, while
increasing interest expense on its LIBOR based debt. The DOIs may not approve premium rate increases in time
for the Company to adequately mitigate inflated loss costs. In a deflationary environment, some fixed maturity
issuers may have difficulty meeting their debt service obligations and thereby reduce the value of the Company’s
fixed maturity portfolio; equity investments may decrease in value; and policyholders may experience difficulties
paying their premiums to the Company, which could adversely affect premium revenue.
The presence of defective Chinese-made drywall in homes subject to our homeowner policies may lead to
additional losses and expenses.
Some homeowners in southern Florida have experienced unpleasant odors and unusual air-conditioning
problems, which have been linked to the use of defective Chinese-made drywall. It is difficult to accurately
estimate any covered losses that may develop as a result of these problems. However, if and to the extent the
scope of the Chinese-made drywall problems proves to be significant, the Company could incur costs or
liabilities related to this issue that could have a material adverse effect on its financial condition, results of
operations, and liquidity.
The Company’s business is vulnerable to significant losses related to sinkhole claims, which could have
an adverse effect on its results of operations.
In December 2010, the Florida Senate issued a 47-page report entitled “Issues Relating to Sinkhole
Insurance.” The report states that the “Florida Insurance Commissioner has identified sinkhole claims as a major
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