Mercury Insurance 2015 Annual Report Download - page 30

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If the Company’s loss reserves are inadequate, its business and financial position could be harmed.
The process of establishing property and liability loss reserves is inherently uncertain due to a number of factors, including
underwriting quality, the frequency and amount of covered losses, variations in claims settlement practices, the costs and uncertainty
of litigation, and expanding theories of liability. While the Company believes that its actuarial techniques and databases are
sufficient to estimate loss reserves, the Company’s approach may prove to be inadequate. If any of these contingencies, many of
which are beyond the Company’s control, results in loss reserves that are not sufficient to cover its actual losses, the Company’s
financial condition, results of operations, and liquidity may be materially and adversely affected.
There is uncertainty involved in the availability of reinsurance and the collectability of reinsurance recoverable.
The Company reinsures a portion of its potential losses on the policies it issues to mitigate the volatility of the losses on its
financial condition and results of operations. The availability and cost of reinsurance is subject to market conditions, which are
outside of the Company’s control. From time to time, market conditions have limited, and in some cases, prevented insurers from
obtaining the types and amounts of reinsurance that they consider adequate for their business needs. As a result, the Company
may not be able to successfully purchase reinsurance and transfer a portion of the Company’s risk through reinsurance arrangements.
In addition, as is customary, the Company initially pays all claims and seeks to recover the reinsured losses from its reinsurers.
Although the Company reports as assets the amount of claims paid which the Company expects to recover from reinsurers, no
assurance can be given that the Company will be able to collect from its reinsurers. If the amounts actually recoverable under the
Company’s reinsurance treaties are ultimately determined to be less than the amount it has reported as recoverable, the Company
may incur a loss during the period in which that determination is made.
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 primarily through approximately 9,700 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 flows from operations. The expansion may not occur, or if it does occur,