Mercury Insurance 2012 Annual Report Download - page 42

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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 businesses are experiencing a slow recovery from the severe economic recession, and economic uncertainty is
expected to continue due in large part to continuing political disagreements in Washington that may cause businesses and consumers
to hold back spending. The Company is unable to predict the duration and severity of the current global economic conditions and
their impact on 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 Company’s business is vulnerable to significant losses related to sinkhole claims, which could have an adverse effect
on its results of operations.
In 2011, the Company began its withdrawal from the Florida homeowners market due to the high incidence of sinkhole
claims. While the Company has closed many sinkhole claims, and believes it has adequately reserved for the remaining open
claims, it remains possible for legal or legislative action to require opening closed claims that could impair profitability. The
Company completed its withdrawal from the Florida homeowners market in September 2012.
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