Mercury Insurance 2012 Annual Report Download - page 40

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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.
The carrying value of the Company’s goodwill and other intangible assets could be subject to an impairment write-down.
At December 31, 2012, the Company’s consolidated balance sheet reflected approximately $43 million of goodwill and
$48 million of other intangible assets. The Company evaluates whether events or circumstances have occurred that suggest that
the fair values of its intangible assets are below their respective carrying values. The determination that the fair value of the
Company’s intangible assets is less than its carrying value may result in an impairment write-down. The impairment write-down
would be reflected as expense and could have a material adverse effect on the Company’s results of operations during the period
in which it recognizes the expense. In the future, the Company may incur impairment charges related to the goodwill and other
intangible assets already recorded or arising out of future acquisitions.
The Company relies on its information technology systems to manage many aspects of its business, and any failure of
these systems to function properly or any interruption in their operation could result in a material adverse effect on the
Company’s business, financial condition, and results of operations.
The Company depends on the accuracy, reliability, and proper functioning of its information technology systems. The
Company relies on these information technology systems to effectively manage many aspects of its business, including
underwriting, policy acquisition, claims processing and handling, accounting, reserving and actuarial processes and policies, and
to maintain its policyholder data. The Company is developing and deploying new information technology systems that are designed
to manage many of these functions across all of the states in which it operates and all of the lines of insurance it offers. See
“Overview—Technology” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” The failure of hardware or software that supports the Company’s information technology systems, the loss of data
contained in the systems, or any delay or failure in the full deployment of the Company’s new information technology systems
could disrupt its business and could result in decreased premiums, increased overhead costs, and inaccurate reporting, all of which
could have a material adverse effect on the Company’s business, financial condition, and results of operations.
In addition, despite system redundancy, the implementation of security measures, and the existence of a disaster recovery
plan for the Company’s information technology systems, these systems are vulnerable to damage or interruption from:
• earthquake, fire, flood and other natural disasters;
• terrorist attacks and attacks by computer viruses or hackers;
• power loss;
• unauthorized access; and
• computer systems, Internet, telecommunications or data network failure.
It is possible that a system failure, accident, or security breach could result in a material disruption to the Company’s
business. In addition, substantial costs may be incurred to remedy the damages caused by these disruptions. Following
implementation of its new information technology systems, the Company may from time to time install new or upgraded business
management systems. To the extent that a critical system fails or is not properly implemented and the failure cannot be corrected
in a timely manner, the Company may experience disruptions to the business that could have a material adverse effect on the
Company’s results of operations.
Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of internal or policyholder
systems and data could result in damages to the Company's reputation and/or subject us to expenses, fines or lawsuits.
The Company collects and retains large volumes of internal and policyholder data, including personally identifiable
information, for business purposes including underwriting, claims and billing purposes, and relies upon the various information
technology systems that enter, process, summarize and report such data. The Company also maintains personally identifiable
information about its employees. The confidentiality and protection of our policyholder, employee and Company data are critical