Mercury Insurance 2010 Annual Report Download - page 59

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Included in net income (loss) are net realized investment gains of $346.4 million in 2009 compared with net
realized investment losses of $550.5 million in 2008. Net realized investment gains include gains of $395.5
million in 2009 due to changes in the fair value of total investments pursuant to application of the fair value
accounting option compared with losses of $525.7 million in 2008. The net gains during 2009 arise from the
market value improvements on the Company’s fixed maturity ($261.9 million) and equity securities ($133.6
million). The primary cause of the significant gains in the Company’s portfolio was the overall improvement in
the bond and equity markets. The Company’s municipal bond holdings represent the majority of the fixed
maturity portfolio, which was positively affected by the overall municipal market improvement during 2009. The
Company’s large holdings of energy related stocks also experienced growth in value during 2009, in excess of
the 23.5% growth in the S&P 500 Index.
Net Income (Loss)
Net income (loss) was $403.1 million or $7.32 per diluted share and $(242.1) million or $(4.42) per diluted
share in 2009 and 2008, respectively. Diluted per share results were based on a weighted average of 55.1 million
shares and 54.9 million shares in 2009 and 2008, respectively. Basic per share results were $7.36 and $(4.42) in
2009 and 2008, respectively. Included in net income (loss) per share were net realized investment gains (losses),
net of income taxes, of $4.11 and $(6.54) per basic share, and $4.09 and $(6.54) per diluted share in 2009 and
2008, respectively.
LIQUIDITY AND CAPITAL RESOURCES
A. General
The Company is largely dependent upon dividends received from its insurance subsidiaries to pay debt
service costs and to make distributions to its shareholders. Under current insurance law, the Insurance Companies
are entitled to pay ordinary dividends of approximately $31.9 million in 2011 to Mercury General. Actual
ordinary dividends paid from the Insurance Companies to Mercury General during 2010 were $130 million. On
December 16, 2010, the California DOI notified the Company that MCC was authorized to pay a $270 million
extraordinary dividend to Mercury General in 2011. Mercury General intends to use the proceeds from the
dividend to repay the $125 million senior notes and to fund shareholder dividends. As of December 31, 2010,
Mercury General also had approximately $63 million in investments and cash that could be utilized to satisfy its
direct holding company obligations.
The principal sources of funds for the Insurance Companies are premiums, sales and maturity of invested
assets, and dividend and interest income from invested assets. The principal uses of funds for the Insurance
Companies are the payment of claims and related expenses, operating expenses, dividends to Mercury General,
payment of debt, and the purchase of investments.
B. Cash Flows
The Company has generated positive cash flow from operations for over twenty consecutive years. Because
of the Company’s long track record of positive operating cash flows, it does not attempt to match the duration
and timing of asset maturities with those of liabilities. Rather, the Company manages its portfolio with a view
towards maximizing total return with an emphasis on after-tax income. With combined cash and short-term
investments of $324.8 million at December 31, 2010, the Company believes its cash flow from operations is
adequate to satisfy its liquidity requirements without the forced sale of investments. However, the Company
operates in a rapidly evolving and often unpredictable business environment that may change the timing or
amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that the
Company’s sources of funds will be sufficient to meet its liquidity needs or that the Company will not be
required to raise additional funds to meet those needs, including future business expansion, through the sale of
equity or debt securities or from credit facilities with lending institutions.
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