Mercury Insurance 2013 Annual Report Download - page 33

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The failure of any of the loss limitation methods employed by the Company could have a material adverse effect on its
financial condition or results of operations.
Various provisions of the Company’s policies, such as limitations or exclusions from coverage which are intended to limit
the Company’s risks, may not be enforceable in the manner the Company intends. In addition, the Company’s policies contain
conditions requiring the prompt reporting of claims and the Company’s right to decline coverage in the event of a violation of that
condition. While the Company’s insurance product exclusions and limitations reduce the Company’s loss exposure and help
eliminate known exposures to certain risks, it is possible that a court or regulatory authority could nullify or void an exclusion or
legislation could be enacted modifying or barring the use of such endorsements and limitations in a way that would adversely
affect the Company’s loss experience, which could have a material adverse effect on its financial condition or results of operations.
The Company’s business is vulnerable to significant catastrophic property loss, which could have an adverse effect on
its financial condition and results of operations.
The Company faces a significant risk of loss in the ordinary course of its business for property damage resulting from
natural disasters, man-made catastrophes and other catastrophic events, particularly hurricanes, earthquakes, hail storms,
explosions, tropical storms, fires, sinkholes, war, acts of terrorism, severe weather and other natural and man-made disasters. Such
events typically increase the frequency and severity of automobile and other property claims. Because catastrophic loss events
are by their nature unpredictable, historical results of operations may not be indicative of future results of operations, and the
occurrence of claims from catastrophic events may result in substantial volatility in the Company’s financial condition and results
of operations from period to period. Although the Company attempts to manage its exposure to such events, the occurrence of one
or more major catastrophes in any given period could have a material and adverse impact on the Company’s financial condition
and results of operations and could result in substantial outflows of cash as losses are paid.
The Company depends on independent agents who may discontinue sales of its policies at any time.
The Company sells its insurance policies through approximately 8,300 independent agents. The Company must compete
with other insurance carriers for these agents’ business. Some competitors offer a larger variety of products, lower prices for
insurance coverage, higher commissions, or more attractive non-cash incentives. To maintain its relationship with these independent
agents, the Company must pay competitive commissions, be able to respond to their needs quickly and adequately, and create a
consistently high level of customer satisfaction. If these independent agents find it preferable to do business with the Company’s
competitors, it would be difficult to renew the Company’s existing business or attract new business. State regulations may also
limit the manner in which the Company’s producers are compensated or incentivized. Such developments could negatively impact
the Company’s relationship with these parties and ultimately reduce revenues.
The Company’s expansion plans may adversely affect its future profitability.
The Company intends to continue to expand its operations in several of the states in which the Company has operations
and into states in which it has not yet begun operations. The intended expansion will necessitate increased expenditures. The
Company expects to fund these expenditures out of cash flow from operations. The expansion may not occur, or if it does occur,
may not be successful in providing increased revenues or profitability. If the Company’s cash flow from operations is insufficient
to cover the increased costs of the expansion, or if the expansion does not provide the benefits anticipated, the Company’s financial
condition, results of operations, and ability to grow its business may be harmed.
Any inability of the Company to realize its deferred tax assets may have a material adverse effect on the Company’s
financial condition and results of operations.
The Company recognizes deferred tax assets and liabilities for the future tax consequences related to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. The
Company evaluates its deferred tax assets for recoverability based on available evidence, including assumptions about future
profitability and capital gain generation. Although management believes that it is more likely than not that the deferred tax assets
will be realized, some or all of the Company’s deferred tax assets could expire unused if the Company is unable to generate taxable
income of an appropriate character and in a sufficient amount to utilize these tax benefits in the future. Any determination that the
Company would not be able to realize all or a portion of its deferred tax assets in the future would result in 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.