Mercury Insurance 2011 Annual Report Download - page 45

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cost driver and has expressed concern that such claims could threaten the solvency of domestic insurers and have
a destabilizing effect on an already fragile market.” While the Company, with approximately 4,000 homeowners
policies in-force in Florida at December 31, 2011, does not believe that the sinkhole issue creates solvency
concerns, it does impair profitability. Although the Company expects to complete its withdrawal from the Florida
homeowners market by September 2012, it expects that losses may continue 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.
81.6% of the Company’s direct written premiums for the year ended December 31, 2011 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 Company cannot predict the impact that changing climate conditions, including legal, regulatory
and social responses thereto, may have on its business.
Various scientists, environmentalists, international organizations, regulators and other commentators believe
that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of
natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, other storms and fires) in certain
parts of the world. In response, a number of legal and regulatory measures and social initiatives have been
introduced in an effort to reduce greenhouse gas and other carbon emissions that may be chief contributors to
global climate change. The Company cannot predict the impact that changing climate conditions, if any, will
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