Mercury Insurance 2015 Annual Report Download - page 57

45
The following table presents the composition of the total investment portfolio of the Company at December 31, 2015:
Cost(1) Fair Value
(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies $ 22,542 $ 22,507
Municipal securities 2,417,046 2,505,039
Mortgage-backed securities 49,639 49,839
Corporate securities 255,606 243,372
Collateralized loan obligations 50,710 50,548
Other asset-backed securities 8,732 8,698
2,804,275 2,880,003
Equity securities:
Common stock 275,479 280,263
Non-redeemable preferred stock 25,161 24,668
Private equity funds 12,888 10,431
313,528 315,362
Short-term investments 185,353 185,277
Total investments $ 3,303,156 $ 3,380,642
__________
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at cost.
At December 31, 2015, 72.9% of the Company’s total investment portfolio at fair value and 85.6% 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, dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate
dividend received deduction, and private equity funds. At December 31, 2015, 56.9% 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 sub-
prime lenders.
Fixed Maturity Securities and Short-Term Investments
Fixed maturity securities include debt securities, 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. Short-term investments include money market accounts, options, and short-term bonds that are highly rated
short duration securities and redeemable within one year.
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 12.6 years and 12.6 years (12.2 years and 11.4 years when including short-term instruments) at December 31,
2015 and 2014, 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 3.4 years and 3.4 years (3.3 years
and 3.1 years when including short-term instruments) at December 31, 2015 and 2014, 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 3.2 years and 2.8 years, (3.1 years and 2.6 years when including short-term
instruments) at December 31, 2015 and 2014, respectively, including collateralized mortgage obligations with a modified duration
of 1.9 years and 1.8 years at December 31, 2015 and 2014, 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.