Mercury Insurance 2013 Annual Report Download - page 39

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particular, such as those related to allegations for failure to pay claims, termination or non-renewal of coverage, interpretation f
policy language, policy sales practices, reinsurance matters, and other similar 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 in any of the actions companies defend
in excess of amounts budgeted for defense.
The Company and the Insurance Companies are named as defendants in a number of lawsuits. Those that management
believes could have a material effect on the Company's consolidated financial statements 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 Companies.
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 Companies, 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 consistently paid cash dividends 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 be restricted by
financial, regulatory or tax constraints, and by the terms of the Company’s debt instruments. In addition, there can be no assurance
that the Company will continue to pay dividends even if the necessary financial and regulatory conditions are met and if sufficient
cash is available for distribution.
Item 1B. Unresolved Staff Comments
None.