Mercury Insurance 2012 Annual Report Download - page 45

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The insurance industry faces risks related to litigation, which, if resolved unfavorably, could result in substantial penalties
and/or monetary damages, including punitive damages. In addition, insurance companies incur material expenses in the
defense of litigation and their results of operations or financial condition could be adversely affected if they fail to accurately
project litigation expenses.
Insurance companies are subject to a variety of legal actions including employee benefit claims, wage and hour claims,
breach of contract actions, tort claims, and fraud and misrepresentation claims. In addition, insurance companies incur and likely
will continue to incur potential liability for claims related to the insurance industry in general and the Company’s business in
particular, such as claims by policyholders alleging failure to pay for, termination or non-renewal of coverage, interpretation of
policy language, sales practices, claims related to reinsurance matters, and other matters. Such actions can also include allegations
of fraud, misrepresentation, and unfair or improper business practices and can include claims for punitive damages.
Court decisions and legislative activity may increase exposures for any of the types of claims insurance companies face.
There is a risk that insurance companies could incur substantial legal fees and expenses, including discovery expenses, in any of
the actions companies defend in excess of amounts budgeted for defense.
The Company and its insurance subsidiaries are named as defendants in a number of lawsuits. These lawsuits are described
more fully at “Overview—B. Regulatory and Legal Matters” in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Note 16 of Notes to Consolidated Financial Statements. Litigation, by its very nature,
is unpredictable and the outcome of these cases is uncertain. The precise nature of the relief that may be sought or granted in any
lawsuit is uncertain and may negatively impact the manner in which the Company conducts its business and results of operations,
which could materially increase the Company’s legal expenses. In addition, potential litigation involving new claim, coverage,
and business practice issues could adversely affect the Company’s business by changing the way policies are priced, extending
coverage beyond its underwriting intent, or increasing the size of claims.
Risks Related to the Company’s Stock
The Company is controlled by small number of shareholders who will be able to exert significant influence over matters
requiring shareholder approval, including change of control transactions.
George Joseph and Gloria Joseph collectively own more than 50% of the Company’s common stock. Accordingly, George
Joseph and Gloria Joseph have the ability to exert significant influence on the actions the Company may take in the future, including
change of control transactions. This concentration of ownership may conflict with the interests of the Company’s other shareholders
and lenders.
Future sales of common stock may affect the market price of the Company’s common stock and the future exercise of
options and warrants will result in dilution to the Company’s shareholders.
The Company may raise capital in the future through the issuance and sale of shares of its common stock. The Company
cannot predict what effect, if any, such future sales will have on the market price of its common stock. Sales of substantial amounts
of its common stock in the public market could adversely affect the market price of the Company’s outstanding common stock,
and may make it more difficult for shareholders to sell common stock at a time and price that the shareholder deems appropriate.
In addition, the Company has issued options to purchase shares of its common stock. In the event that any options to purchase
common stock are exercised, shareholders will suffer dilution in their investment.
Applicable insurance laws may make it difficult to effect a change of control of the Company or the sale of any of its
insurance subsidiaries.
Before a person can acquire control of a U.S. insurance company or any holding company of a U.S. insurance company,
prior written approval must be obtained from the DOI of the state where the insurer is domiciled. Prior to granting approval of an
application to acquire control of the insurer or holding company, the state DOI will consider a number of factors relating to the
acquirer and the transaction. These laws and regulations may discourage potential acquisition proposals and may delay, deter or
prevent a change of control of the Company or the sale by the Company of any of its insurance subsidiaries, including transactions
that some or all of the Company’s shareholders might consider to be desirable.
Although the Company has consistently paid cash dividends in the past, it may not be able to pay cash dividends in the
future.
The Company has paid cash dividends on a consistent basis since the public offering of its common stock in November
1985. However, future cash dividends will depend upon a variety of factors, including the Company’s profitability, financial
condition, capital needs, future prospects, and other factors deemed relevant by the Board of Directors. The Company’s ability to
pay dividends may also be limited by the ability of the Insurance Companies to make distributions to the Company, which may