Mercury Insurance 2010 Annual Report Download - page 61

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Cost (1) Fair Value
(Amounts in thousands)
Equity securities:
Common stock:
Public utilities ................................................. 22,575 27,214
Banks, trusts and insurance companies .............................. 19,052 20,520
Industrial and other ............................................. 285,217 302,104
Non-redeemable preferred stock ....................................... 9,913 9,768
336,757 359,606
Short-term investments .................................................. 143,378 143,371
Total investments .............................................. $3,097,791 $3,155,257
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at
cost.
At December 31, 2010, 77.0% of the Company’s total investment portfolio at fair value and 91.6% of its
total fixed maturity investments at fair value were invested in tax-exempt state and municipal bonds. Equity
holdings consist of non-redeemable preferred stocks and dividend-bearing common stocks on which dividend
income is partially tax-sheltered by the 70% corporate dividend received deduction. At December 31, 2010,
88.1% of short-term investments consisted of highly rated short-duration securities redeemable on a daily or
weekly basis. The Company does not have any direct investment in subprime lenders.
During 2010, the Company recognized approximately $57.1 million in net realized investment gains, which
include approximately $5.9 million and $46.5 million related to fixed maturity securities and equity securities,
respectively. Included in the gains were $1.0 million and $45.7 million in gains due to changes in the fair value
of the Company’s fixed maturity portfolio and equity security portfolio, respectively, as a result of applying the
fair value option.
During 2009, the Company recognized approximately $346.4 million in net realized investment gains,
which include approximately $255.2 million and $83.5 million related to fixed maturity securities and equity
securities, respectively. Included in the gains were $261.9 million and $133.6 million in gains due to changes in
the fair value of the Company’s fixed maturity portfolio and equity security portfolio, respectively, as a result of
applying the fair value option. Partially offsetting these gains were approximately $6.7 million and $50.1 million
in losses from the sale of fixed maturity securities and equity securities, respectively.
Fixed Maturity Securities
Fixed maturity securities include debt securities and redeemable preferred stocks, which may have fixed or
variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of the
Company’s asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/
reward characteristics, liquidity needs, tax planning considerations or other economic factors. A primary
exposure for the fixed maturity securities is interest rate risk. The longer the duration, the more sensitive the asset
is to market interest rate fluctuations. As assets with longer maturity dates tend to produce higher current yields,
the Company’s historical investment philosophy has resulted in a portfolio with a moderate duration. The
nominal average maturities of the overall bond portfolio were 11.8 years and 12.8 years (11.3 years and 12.2
years including all short-term instruments) at December 31, 2010 and 2009, respectively. The portfolio is heavily
weighted in investment grade tax-exempt municipal bonds. Fixed maturity investments purchased by the
Company typically have call options attached, which further reduce the duration of the asset as interest rates
decline. The call-adjusted average maturities of the overall bond portfolio were 6.3 years and 7.2 years (6.0 years
and 6.8 years including all short-term instruments) at December 31, 2010 and 2009, respectively, related to
holdings which are heavily weighted with high coupon issues that are expected to be called prior to maturity. The
modified durations of the overall bond portfolio reflecting anticipated early calls were 4.7 years and 5.4 years,
(4.5 years and 5.1 years including all short-term instruments), including collateralized mortgage obligations with
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