Mercury Insurance 2010 Annual Report Download - page 62

a modified duration of 2.2 years and 1.8 years at December 31, 2010 and 2009, respectively, and short-term
bonds that carry no duration. Modified duration measures the length of time it takes, on average, to receive the
present value of all the cash flows produced by a bond, including reinvestment of interest. As it measures four
factors (maturity, coupon rate, yield and call terms), which determine sensitivity to changes in interest rates;
modified duration is considered a better indicator of price volatility than simple maturity alone.
Another exposure related to the fixed maturity securities is credit risk, which is managed by maintaining a
weighted-average portfolio credit quality rating of AA-, at fair value, consistent with December 31, 2009. To
calculate the weighted-average credit quality ratings as disclosed throughout this Annual Report on Form 10-K,
individual securities were weighted based on fair value and a credit quality numeric score that was assigned to
each rating grade. Bond holdings are broadly diversified geographically, within the tax-exempt sector. Holdings
in the taxable sector consist principally of investment grade issues. At December 31, 2010, fixed maturity
holdings rated below investment grade and non-rated bonds totaled $139.4 million and $34.9 million,
respectively, at fair value, and represented approximately 5.3% and 1.3%, respectively, of total fixed maturity
securities. At December 31, 2009, fixed maturity holdings rated below investment grade and non-rated bonds
totaled $92.0 million and $109.9 million, respectively at fair value, and represented approximately 3.4% and
4.1%, respectively, of total fixed maturity securities.
The following table presents the credit quality ratings of the Company’s fixed maturity portfolio by security
type at December 31, 2010 at fair value. The Company’s estimated credit quality ratings are based on the average
of ratings assigned by nationally recognized securities rating organizations. Credit ratings for the Company’s
fixed maturity portfolio were stable as compared to the prior year, with 71.7% of fixed maturity securities at fair
value experiencing no change in their overall rating. 11.2% of fixed maturity securities at fair value experienced
downgrades during the period, offset by 17.1% in credit upgrades. The majority of the downgrades were due to
continued downgrading of the monoline insurance carried on much of the municipal holdings. The majority of
the downgrades were slight and still within the investment grade portfolio, although $8.4 million, at fair value,
was downgraded to below investment grade.
December 31, 2010
AAA AA(2) A(2) BBB(2) Non-Rated/Other Total
(Amounts in thousands)
U.S. government bonds and
agencies:
Treasuries ............... $ 6,729 $ — $ — $ — $ — $ 6,729
Government agency ........ 2,076 — — — — 2,076
Total ............... 8,805 — — — — 8,805
100.0% 100.0%
Municipal securities:
Insured (1) ................ 8,288 635,815 618,805 143,126 45,348 1,451,382
Uninsured ............... 229,328 312,182 265,841 140,638 35,842 983,831
Total ............... 237,616 947,997 884,646 283,764 81,190 2,435,213
9.8% 38.9% 36.3% 11.7% 3.3% 100.0%
Mortgage-backed securities:
Agencies ................ 32,830 — — — — 32,830
Non-agencies:
Prime ............... 5,235 2,185 431 119 5,115 13,085
Alt-A ............... 1,948 2,660 4,179 1,003 1,662 11,452
Total ............... 40,013 4,845 4,610 1,122 6,777 57,367
69.7% 8.5% 8.0% 2.0% 11.8% 100.0%
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