Mercury Insurance 2007 Annual Report Download - page 55

Download and view the complete annual report

Please find page 55 of the 2007 Mercury Insurance annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 92

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92

2007 MERCURYNOW 53
MANAGEMENT’S DISCUSSION & ANALYSIS
The principal sources of funds for the Insurance Companies are premiums, sales and maturity of invested assets and dividend and interest
income from invested assets. The principal uses of funds for the Insurance Companies are the payment of claims and related expenses, operating
expenses, dividends to Mercury General and the purchase of investments.
CASH FLOWS
Through the Insurance Companies, the Company has generated positive cash flow from operations for over twenty consecutive years, in excess of
$100 million every year since 1994. During this same period, the Company has not been required to liquidate any of its fixed maturity investments
to settle claims or other liabilities. Because of the Company’s long track record of positive operating cash flows, it does not attempt to match the
duration and timing of asset maturities with those of liabilities. Rather, the Company manages its portfolio with a view towards maximizing
total return with an emphasis on after-tax income. With combined cash and short-term investments of $320.9 million at December 31, 2007, the
Company believes its cash flow from operations is adequate to satisfy its liquidity requirements without the forced sale of investments. However,
the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future
cash receipts and expenditures. Accordingly, there can be no assurance that the Company’s sources of funds will be sufficient to meet its liquidity
needs or that the Company will not be required to raise additional funds to meet those needs, including future business expansion, through the
sale of equity or debt securities or from credit facilities with lending institutions.
Net cash provided from operating activities in 2007 was $216.1 million, a decrease of $147.1 million over the same period in 2006. This
decrease was primarily due to the slowdown in growth of premiums reflecting a softening market condition in personal automobile insurance
coupled with an increase in loss and loss adjustment expenses paid in 2007. The Company has utilized the cash provided from operating activities
primarily to increase its investment in fixed maturity securities, the purchase and development of information technology such as the NextGen
and IBS computer systems and the payment of dividends to its shareholders. Funds derived from the sale, redemption or maturity of fixed maturity
investments of $1,754.6 million, were primarily reinvested by the Company in high grade fixed maturity securities.
INVESTED ASSETS
At December 31, 2007, the average rating of the $2,887.8 million bond portfolio at fair value (amortized cost $2,860.5 million) was AA, the same
as the average rating at December 31, 2006. 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, 2007, bond holdings rated below investment grade totaled $47.7
million at fair value (cost $46.8 million) representing 1.3% of total investments. This compares to approximately $48.6 million at fair value (cost
$43.8 million) representing 1.4% of total investments at December 31, 2006.
The following table sets forth the composition of the investment portfolio of the Company as of December 31, 2007:
Amounts in thousands Amortized cost Fair value
Fixed maturity securities available for sale:
U.S. government bonds and agencies $ 36,157 $ 36,375
Municipal bonds 2,435,215 2,464,541
Mortgage-backed securities 245,731 246,072
Corporate bonds 141,273 138,701
Redeemable preferred stock 2,079 2,071
$ 2,860,455 $ 2,887,760
Equity securities available for sale:
Common stock:
Public utilities $ 34,555 $ 64,895
Banks, trusts and insurance companies 20,284 21,371
Industrial and other 233,117 299,201
Non-redeemable preferred stock 29,913 27,656
$ 317,869 $ 413,123
Equity securities trading:
Common stock:
Public utilities $ 1,148 $ 1,280
Industrial and other 11,978 13,834
$ 13,126 $ 15,114
Short-term investments $ 272,678 $ 272,678