Mercury Insurance 2013 Annual Report Download - page 31

16
Company may not be able to grow its premium volume sufficiently to attain its financial performance goals, and the result may
adversely affect the Company’s business, financial condition, and results of operations.
The Company may require additional capital in the future, which may not be available or may only be available on
unfavorable terms.
The Company’s future capital requirements depend on many factors, including its ability to underwrite new business
successfully, its ability to establish premium rates and reserves at levels sufficient to cover losses, the success of its expansion
plans and the performance of its investment portfolio. The Company may need to raise additional funds through equity or debt
financing, sales of all or a portion of its investment portfolio or other assets. Any equity or debt financing, if available at all, may
not be available on terms that are favorable to the Company. In the case of equity financing, the Company’s shareholders could
experience dilution. In addition, such securities may have rights, preferences, and privileges that are senior to those of the
Company’s current shareholders. If the Company cannot obtain adequate capital on favorable terms or at all, its business, financial
condition, and results of operations could be adversely affected.
Funding for the Company’s future growth may depend upon obtaining new financing, which may be difficult to obtain.
To accommodate the Company’s expected future growth, the Company may require funding in addition to cash provided
from current operations. The Company’s ability to obtain financing may be constrained by economic conditions affecting global
financial markets at the time the Company seeks additional financing. In addition, financial strength and claims-paying ability
ratings have become an increasingly important factor in the Company’s ability to access capital markets. Rating agencies assign
ratings based upon an evaluation of an insurance company’s ability to meet its financial obligations. The Company’s current
financial strength rating with Fitch is A. If the Company were to seek financing through the capital markets in the future, it may
need to apply for Standard and Poor’s and Moody’s ratings. The ratings could limit the Company’s access to the capital markets
or adversely affect pricing of new debt sought in the capital markets. If the Company is unable to obtain necessary financing, it
may be unable to take advantage of opportunities with potential business partners or new products or to otherwise expand its
business as planned.
Changes in market interest rates or defaults may have an adverse effect on the Company’s investment portfolio, which
may adversely affect the Company’s financial results.
The Company’s financial results are affected, in part, by the performance of its investment portfolio. The Company’s
investment portfolio contains interest rate sensitive-investments, such as municipal and corporate bonds. Increases in market
interest rates may have an adverse impact on the value of the investment portfolio by decreasing the value of fixed income securities.
Declining market interest rates could have an adverse impact on the Company’s investment income as it invests positive cash
flows from operations and as it reinvests proceeds from maturing and called investments in new investments that could yield lower
rates than the Company’s investments have historically generated. Defaults in the Company’s investment portfolio may produce
operating losses and negatively impact the Company’s results of operations.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international
economic and political conditions, and other factors beyond the Company’s control. Market interest rates have been at historic
lows for last several years as a result of government action and economic pressures from the recession in 2008 and 2009. Many
observers, including the Company, believe that market interest rates will rise as the economy improves. Although the Company
takes measures to manage the risks of investing in a changing interest rate environment, it may not be able to mitigate interest rate
sensitivity effectively. The Company’s mitigation efforts include maintaining a high quality portfolio and managing the duration
of the portfolio to reduce the effect of interest rate changes. Despite its mitigation efforts, a significant change in interest rates
could have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s valuation of financial instruments may include methodologies, estimates, and assumptions that are
subject to differing interpretations and could result in changes to valuations that may materially adversely affect the Company’s
financial condition or results of operations.
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable
data are not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed
to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets
at fair value are categorized based on the level of judgment associated with the input used to measure their fair value and the level
of market price observability.