64996--2/27/2007--MERCURY_GENERAL

related topics

{loss, insurance, financial}

{financial, litigation, operation}

{stock, price, share}

{control, financial, internal}

{regulation, change, law}

{customer, product, revenue}

{acquisition, growth, future}

{cost, regulation, environmental}

{capital, credit, financial}

{debt, indebtedness, cash}

{competitive, industry, competition}

{stock, price, operating}

{regulation, government, change}

{loan, real, estate}

{personnel, key, retain}

{operation, natural, condition}

{system, service, information}

{provision, law, control}

{product, liability, claim}

Risks Related to the Company and its Business The Company is a holding company that relies on regulated subsidiaries for cash to satisfy its obligations. If the Company s loss reserves are inadequate, its business and financial position could be harmed. The Company s success depends on its ability to accurately underwrite risks and to charge adequate premiums to policyholders. The effects of emerging claim and coverage issues on the Company s business are uncertain and may have an adverse effect on the Company s business. The Company s private passenger insurance rates are subject to prior approval by the departments of insurance in most of the states in which the Company operates, and to political influences. The Company remains highly dependent upon California and several other key states to produce revenues and operating profits. If the Company cannot maintain its A.M. Best ratings, it may not be able to maintain premium volume in its insurance operations sufficient to attain the Company s financial performance goals. The Company s insurance subsidiaries are subject to minimum capital and surplus requirements, and any failure to meet these requirements could subject the Company s insurance subsidiaries to regulatory action. There is uncertainty involved in the availability of reinsurance and the collectibility of reinsurance recoverables. The Company depends on independent agents who may discontinue sales of its policies at any time. One independent broker of the Company is responsible for a significant amount of the Company s revenues, and the loss of business provided by that broker could adversely affect the Company s results of operations and financial condition. 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 business is vulnerable to significant catastrophic property loss, which could have an adverse effect on its results of operations. The Company s expansion plans may adversely affect its future profitability. The Company may require additional capital in the future, which may not be available or may only be available on unfavorable terms. The Company relies on its information technology systems to manage many aspects of its business, and any failure of these systems to function properly or any interruption in their operation could result in a material adverse effect on the Company s business, financial condition and results of operations. Changes in accounting standards issued by the Financial Accounting Standards Board ( FASB ) or other standard-setting bodies may adversely affect the Company s consolidated financial statements. The Company s disclosure controls and procedures may not prevent or detect all acts of fraud. Failure to maintain an effective system of internal control over financial reporting may have an adverse effect on the Company s stock price. The ability of the Company to attract, develop and retain talented employees, managers and executives, and to maintain appropriate staffing levels, is critical to the Company s success. The Company faces litigation risks which, if decided adversely to the Company, could impact its financial results. 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. Risks Related to the Company s Industry The private passenger insurance business is highly competitive, and the Company may not be able to compete effectively against larger, better-capitalized companies. The Company may be adversely affected by changes in the personal automobile insurance business. The insurance industry is subject to extensive regulation, which may affect the Company s ability to execute its business plan and grow its business. Regulation may become more extensive in the future, which may adversely affect the Company s business and results of operations. Assessments and other surcharges for guaranty funds, second-injury funds, catastrophe funds and other mandatory pooling arrangements may reduce the Company s profitability. Loss or significant restriction of the use of credit scoring in the pricing and underwriting of personal lines products could reduce the Company s future profitability. Risks Related to the Company s Stock The Company is controlled by a few large shareholders who will be able to exert significant influence over matters requiring shareholder approval, including change of control transactions. 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. Applicable insurance laws may make it difficult to effect a change of control of the Company or the sale of any of its insurance subsidiaries. Although the Company has consistently paid cash dividends in the past, it may not be able to pay cash dividends in the future.

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64996--2/27/2007--MERCURY_GENERAL_CORP