Mercury Insurance 2010 Annual Report Download - page 60

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Net cash provided by operating activities in 2010 was $91.8 million, a decrease of $97.3 million over
2009. The decrease was primarily due to the increased payment of accrued expenses, decreased premiums
collected, and the contributions related to Proposition 17 in 2010 compared with 2009. The Company utilized the
cash provided by operating activities primarily for the payment of dividends to its shareholders and the purchase
and development of information technology. Funds derived from the sale, redemption or maturity of fixed
maturity investments of $490.0 million were primarily reinvested by the Company in high grade fixed maturity
securities.
The following table presents the estimated fair value of fixed maturity securities held by the Company at
December 31, 2010 by contractual maturity in the next five years.
Fixed Maturities
(Amounts in thousands)
Due in one year or less ............................................. $ 24,989
Due after one year through two years .................................. 44,720
Due after two years through three years ................................ 108,045
Due after three years through four years ............................... 138,714
Due after four years through five years ................................ 79,062
$395,530
See “D. Debt” for cash flow related to outstanding debts.
C. Invested Assets
Portfolio Composition
An important component of the Company’s financial results is the return on its investment portfolio. The
Company’s investment strategy emphasizes safety of principal and consistent income generation, within a total
return framework. The investment strategy has historically focused on maximizing after-tax yield with a primary
emphasis on maintaining a well diversified, investment grade, fixed income portfolio to support the underlying
liabilities and achieve return on capital and profitable growth. The Company believes that investment yield is
maximized by selecting assets that perform favorably on a long-term basis and by disposing of certain assets to
enhance after-tax yield and minimize the potential effect of downgrades and defaults. The Company continues to
believe that this strategy maintains the optimal investment performance necessary to sustain investment income
over time. The Company’s portfolio management approach utilizes a market risk and consistent asset allocation
strategy as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for
determining overall below investment grade exposure and diversification requirements. Within the ranges set by
the asset allocation strategy, tactical investment decisions are made in consideration of prevailing market
conditions.
The following table presents the composition of the total investment portfolio of the Company at
December 31, 2010:
Cost (1) Fair Value
(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies ................................... $ 8,691 $ 8,805
States, municipalities and political subdivisions ........................... 2,424,674 2,435,213
Mortgage-backed securities .......................................... 53,185 57,367
Corporate securities ................................................. 91,859 95,203
Collateralized debt obligations ........................................ 39,247 55,692
2,617,656 2,652,280
50