Mercury Insurance 2008 Annual Report Download - page 51

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41
The following table shows estimated fair value of fixed maturity securities at December 31, 2008 by contractual maturity
in the next five years.
Fixed maturities
(Amounts in thousands)
Due in one year or less 24,813$
Due after one year through two years 26,617
Due after two years through three years 30,758
Due after three years through four years 48,902
Due after four years through five years 102,473
233,563$
Invested Assets
An important component of the Company’ s financial results is the return on its investment portfolio. The Company’ s
investment strategy emphasizes safety of principal and consistent income generation, within a total return framework. The
investment strategy has historically focused on the need for risk-adjusted spread to support the underlying liabilities to achieve
return on capital and profitable growth. The Company believes that investment spread is maximized by selecting assets that
perform favorably on a long-term basis and by disposing of certain assets to minimize the effect of downgrades and defaults. The
Company believes that this strategy maintains the investment spread necessary to sustain investment income over time. The
Company’ s portfolio management approach utilizes a recognized market risk and asset allocation strategy as the primary basis for
the allocation of interest sensitive, liquid and credit assets as well as for determining overall below investment grade exposure and
diversification requirements. Within the ranges set by the asset allocation strategy, tactical investment decisions are made in
consideration of prevailing market conditions.
Portfolio Composition
The following table sets forth the composition of the investment portfolio of the Company as of December 31, 2008:
Amortized cost Fair value
Fixed maturity securities:
U.S. government bonds and agencies 9,633$ 9,898$
States, municipalities and political subdivisions 2,370,879 2,187,668
Mortgage-backed securities 216,483 202,326
Corporate securities 77,097 65,727
Redeemable preferred stoc
k
54,379 16,054
2,728,471 2,481,673
Equity securities:
Common stock:
Public utilities 32,293 39,148
Banks, trusts and insurance companies 20,451 11,328
Industrial and other 330,030 186,294
Non-redeemable preferred stoc
k
20,999 10,621
403,773 247,391
Short-term investments 208,278 204,756
Total investments 3,340,522$ 2,933,820$
(Amounts in thousands)
The investment markets have experienced substantial volatility due to uncertainty in the credit markets and a global
economic recession which began in late 2007. In the third and fourth quarters of 2008, asset values experienced severe declines
which resulted from extreme volatility in the capital markets and a widening of credit spreads beyond historic
norms. Consequently, during 2008, the Company recognized approximately $550.5 million in net realized investment losses, of
which, approximately $274 million was related to fixed maturity securities and approximately $254 million was related to equity
securities. Included in this loss is $531.1 million related to the change in fair value of the total investment portfolio. As a result of
the adoption of SFAS No. 159 on January 1, 2008, the change in unrealized gains and losses on all investments are recorded as
realized gains and losses on the consolidated statements of operations.