Mercury Insurance 2008 Annual Report Download - page 52

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Fixed maturity securities
Fixed maturity securities include debt securities and redeemable preferred stocks. 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 resulted in a portfolio with a moderate duration. Fixed maturity investment made by the Company typically have call
options attached, which further reduce the duration of the asset as interest rates decline. The modified duration of the fixed
maturity securities is 7.2 years at December 31, 2008 compared to 4.4 years at December 31, 2007.
Another exposure related to the fixed maturity securities is credit risk, which is managed by maintaining a minimum
average portfolio credit quality rating of AA, unchanged from December 31, 2007. Bond holdings are broadly diversified
geographically, within the tax-exempt sector. Holdings in the taxable sector consist principally of investment grade issues.
As reported for the year ended December 31, 2007, the Company had more than 85% of its fixed maturity assets invested
in municipal securities with another 10% invested in AAA-rated mortgage-backed securities and U.S. government bonds. Less
than 5% of its fixed maturity securities were invested in corporate securities at December 31, 2007. More than half of the
Company’s municipal securities were insured by companies with AAA ratings. The majority of mortgage-backed securities were
collateralized by prime borrowers and had AAA ratings. Uninsured municipal securities had an average credit rating of AA,
while insured municipal securities had an underlying average credit rating of AA-. Due to the strong underlying credit ratings of
the Company’s municipal securities, the government backing of most of mortgage-backed securities, and the relatively small
corporate security exposure, the Company has been able to maintain a very strong overall credit rating of AA on the fixed
maturity portfolio at December 31, 2008. The following table presents the credit quality rating of the Company’s fixed maturity
portfolio by types of security at December 31, 2008 at fair value:
AAA AA ABBB Non Rated/Other Total
U.S. government bonds and agencies:
Treasuries 6,902$ -$ -$ -$ -$ 6,902$
Government Agenc
y
2,996 - - - - 2,996
Total 9,898 - - - - 9,898
100.0% 100.0%
Municipal securities:
Insured * 15,918 597,146 527,395 36,224 19,288 1,195,971
Uninsured 305,455 323,670 161,973 149,909 50,690 991,697
Total 321,373 920,816 689,368 186,133 69,978 2,187,668
14.7% 42.1% 31.5% 8.5% 3.2% 100.0%
Mortgage-backed securities:
Agencies 164,861 - - - - 164,861
Non-agencies:
Prime 12,050 5,275 3,151 - 713 21,189
Alt-A 10,829 - 1,352 3,422 673 16,276
Total 187,740 5,275 4,503 3,422 1,386 202,326
92.8% 2.6% 2.2% 1.7% 0.7% 100.0%
Corporate securities:
Communications - - - 5,855 - 5,855
Consumer - cyclical - - - - 105 105
Energy - - - - 7,774 7,774
Financial (GSE) 2,297 - - - - 2,297
Financial 9,139 - 20,954 7,496 10,196 47,785
Utilities - - - - 1,911 1,911
Total 11,436 - 20,954 13,351 19,986 65,727
17.4% 31.9% 20.3% 30.4% 100.0%
Redeemable Preferred stock:
Reverse Convertible - 2,491 - - - 2,491
Corporate - Hybrid (CDO) - - - - 13,119 13,119
Redeemable Preferred Stoc
k
- - - - 444 444
Total - 2,491 - - 13,563 16,054
15.5% 84.5% 100.0%
Total 530,447$ 928,582$ 714,825$ 202,906$ 104,913$ 2,481,673$
21.4% 37.4% 28.8% 8.2% 4.2% 100.0%
(Amounts in thousands)
December 31, 2008
* Insured municipal bonds based on underlying ratings: AAA: $7,611, AA: $361,438, A: $581,533, BBB: $73,645, Non
rated/Other: $171,744