Mercury Insurance 2013 Annual Report Download - page 29

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14
The information discussed below should be considered carefully with the other information contained in this Annual Report
on Form 10-K and the other documents and materials filed by the Company with the SEC, as well as news releases and other
information publicly disseminated by the Company from time to time.
Risks Related to the Company’s Business
The Company remains highly dependent upon California and several other key states to produce revenues and operating
profits.
For the year ended December 31, 2013, the Company generated 79.9% of its direct automobile insurance premiums written
in California and 6.9% in Florida. The Company’s financial results are subject to prevailing regulatory, legal, economic,
demographic, competitive, and other conditions in these states and changes in any of these conditions could negatively impact the
Company’s results of operations.
Mercury General is a holding company that relies on regulated subsidiaries for cash operating profits to satisfy its
obligations.
As a holding company, Mercury General maintains no operations that generate revenue sufficient to pay operating expenses,
shareholders’ dividends, or principal or interest on its indebtedness. Consequently, Mercury General relies on the ability of the
Insurance Companies, particularly the California Companies, to pay dividends for Mercury General to meet its obligations. The
ability of the Insurance Companies to pay dividends is regulated by state insurance laws, which limit the amount of, and in certain
circumstances may prohibit the payment of, cash dividends. Generally, these insurance regulations permit the payment of dividends
only out of earned surplus in any year which, together with other dividends or distributions made within the preceding 12 months,
do not exceed the greater of 10% of statutory surplus as of the end of the preceding year or the net income for the preceding year,
with larger dividends payable only after receipt of prior regulatory approval. The inability of the Insurance Companies to pay
dividends in an amount sufficient to enable the Company to meet its cash requirements at the holding company level could have
a material adverse effect on the Company’s results of operations, financial condition, and its ability to pay dividends to its
shareholders.
The Insurance Companies are subject to minimum capital and surplus requirements, and any failure to meet these
requirements could subject the Insurance Companies to regulatory action.
The Insurance Companies are subject to risk-based capital standards and other minimum capital and surplus requirements
imposed under applicable laws of their state of domicile. The risk-based capital standards, based upon the Risk-Based Capital
Model Act adopted by the NAIC, require the Insurance Companies to report their results of RBC calculations to state departments
of insurance and the NAIC. If any of the Insurance Companies fails to meet these standards and requirements, the DOI regulating
such subsidiary may require specified actions by the subsidiary.
The Company’s success depends on its ability to accurately underwrite risks and to charge adequate premiums to
policyholders.
The Company’s financial condition, results of operations, and liquidity depend on its ability to underwrite and set premiums
accurately for the risks it assumes. Premium rate adequacy is necessary to generate sufficient premium to offset losses, loss
adjustment expenses, and underwriting expenses and to earn a profit. In order to price its products accurately, the Company must
collect and properly analyze a substantial volume of data; develop, test, and apply appropriate rating formulae; closely monitor
and timely recognize changes in trends; and project both severity and frequency of losses with reasonable accuracy. The Company’s
ability to undertake these efforts successfully, and as a result, price accurately, is subject to a number of risks and uncertainties,
including but not limited to:
• availability of sufficient reliable data;
• incorrect or incomplete analysis of available data;
• uncertainties inherent in estimates and assumptions, generally;
• selection and application of appropriate rating formulae or other pricing methodologies;
• successful innovation of new pricing strategies;
• recognition of changes in trends and in the projected severity and frequency of losses;
• the Company’s ability to forecast renewals of existing policies accurately;
• unanticipated court decisions, legislation or regulatory action;