Mercury Insurance 2015 Annual Report Download - page 60

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48
U.S. government bonds and agencies
The Company had $26.7 million, or 0.9% of its fixed maturity portfolio, at fair value, in U.S. government bonds and agencies
and mortgage-backed securities (Agencies) at December 31, 2015. In April 2015, Fitch affirmed its AAA rating for U.S.
government-issued debt, although a significant increase in government deficits and debt could lead to a downgrade. Standard and
Poor’s affirmed the U.S. Treasury’s short-term credit rating of AAA indicating that the short-term capacity of the U.S. to meet its
financial commitment on its outstanding obligations is strong. The Company understands that market participants continue to use
rates of return on U.S. government debt as a risk-free rate and have continued to invest in U.S. Treasury securities.
Municipal Securities
The Company had $2.5 billion at fair value ($2.4 billion at amortized cost) in municipal bonds at December 31, 2015, of
which $799.6 million were insured by bond insurers. For insured municipal bonds that have underlying ratings, the average
underlying rating was AA- at December 31, 2015.
At December 31, 2015, the average rating of the Company’s municipal bonds insured by bond insurers was A+, with an
underlying rating of A-. Most of the insured bonds’ ratings were investment grade and reflected the credit of underlying issuers.
9.0% of the remaining insured bonds are non-rated or below investment grade, and the Company does not believe that bond insurers
provide credit enhancement to the municipal bonds that they insure.
The Company considers the strength of the underlying credit as a buffer against potential market value declines which may
result from future rating downgrades of the bond insurers. In addition, the Company has a long-term time horizon for its municipal
bond holdings which generally allows it to recover the full principal amounts upon maturity and avoid forced sales prior to maturity
of bonds that have declined in market value due to the bond insurers’ rating downgrades. Based on the uncertainty surrounding
the financial condition of these insurers, it is possible that there will be additional downgrades to below investment grade ratings
by the rating agencies in the future, and such downgrades could impact the estimated fair value of municipal bonds.
Mortgage-Backed Securities
At December 31, 2015 and 2014, respectively, the mortgage-backed securities portfolio of $49.8 million and $47.7 million
at fair value ($49.6 million and $45.5 million at amortized cost) was categorized as loans to "prime" borrowers except for $5.4
million and $6.2. million ($5.3 million and $5.5 million at amortized cost) of Alt-A mortgages. Alt-A mortgage backed securities
are at fixed or variable rates and include certain securities that are collateralized by residential mortgage loans issued to borrowers
with credit profiles stronger than those of sub-prime borrowers, but do not qualify for prime financing terms due to high loan-to-
value ratios or limited supporting documentation. The Company had holdings of $37.3 million and $32.5 million ($37.6 million
and $32.3 million at amortized cost) in commercial mortgage-backed securities at December 31, 2015 and 2014, respectively.
The weighted-average rating of the Company’s Alt-A mortgage-backed securities at December 31, 2015 was B, consistent
with the weighted-average rating at December 31, 2014. The weighted-average rating of the entire mortgage backed securities
portfolio was A- at December 31, 2015, compared to BBB+ at December 31, 2014 .
Corporate Securities
Included in fixed maturity securities are $243.3 million and $256.9 million of corporate securities, which had durations of
2.8 and 2.3 years, at December 31, 2015 and 2014, respectively. The weighted-average rating was BBB as of December 31, 2015
and 2014.
Collateralized Loan Obligations
Included in fixed maturities securities are collateralized loan obligations of $50.5 million and $22.2 million, which
represented 1.5% and 0.7% of the total investment portfolio, and had durations of 5.7 years and 5.4 years at December 31, 2015
and 2014, respectively.
Equity Securities
Equity holdings of $315.4 million consist of non-redeemable preferred stocks, common stocks on which dividend income
is partially tax-sheltered by the 70% corporate dividend received deduction, and private equity funds. The net losses in 2015 due
to changes in fair value of the Company’s equity portfolio were $23.0 million. The primary cause of the decrease in the value of
the Company's equity securities was the overall decline in the utilities and industrial sectors in 2015.