Mercury Insurance 2008 Annual Report Download - page 53

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43
Municipal Securities
The Company had approximately $2.2 billion at fair value ($2.4 billion at amortized cost) in municipal bonds at
December 31, 2008, which comprised approximately 45% of net losses held in the portfolio. Approximately half of the municipal
bond positions are insured by bond insurers. For insured municipal bonds that have underlying ratings, the average underlying
rating was A+ at December 31, 2008.
MBIA, FSA, AMBAC, ASSURED GTY and RADIAN maintained investment grade ratings at December 31, 2008 while
XLCA, CIFG and FGIC were downgraded to below investment grade during 2008. Many FGIC-insured bonds were reinsured by
MBIA. Based on the uncertainty surrounding the financial condition of these insurers, it is possible that there will be additional
downgrades to below investment grade ratings by the rating agencies in the future, and such downgrades could impact the
estimated fair value of municipal bonds. The following table shows the Company’s insured municipal bond portfolio by bond
insurer at December 31, 2008:
Municipal bond insurer Rating Fair value Rating Fair value
MBIA BBB 606,301$ AAA 415,098$
FSA AA 205,249 AAA 277,965
AMBAC BBB 193,701 AAA 220,820
XLCA CCC 38,393 AAA 41,636
ASSURED GTY AA 16,664 AAA 16,431
CIFG B 16,278 AAA 17,972
RADIAN BBB 15,155 AA 15,918
ACA NR 13,899 CCC 17,444
FGIC CCC 9,048 AAA 175,562
Other N/A 81,283 N/A 85,548
1,195,971$ 1,284,394$
2008
December 31,
2007
(Amounts in thousands)
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 principle amounts upon maturity, avoiding forced sales,
prior to maturity, of bonds that have declined in market value due to the bond insurers’ rating downgrades.
At December 31, 2008, municipal securities include auction rate securities. The Company owned $3 million and $18.7
million at fair value of adjustable rate short-term securities, including auction rate securities, at December 31, 2008 and 2007,
respectively.
Mortgage Backed Securities
The entire mortgage-backed securities portfolio is categorized as loans to “prime” borrowers except for approximately
$16.3 million ($20.0 million amortized cost) of Alt-A mortgages at December 31, 2008. 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
stronger credit profiles than sub-prime borrowers, but do not qualify for prime financing terms due to high loan-to-value ratios or
limited supporting documentation.
The average rating of the Company’s Alt-A mortgages is AA and the average rating of the entire mortgage backed
securities portfolio is AAA. The valuation of these securities is based on Level 2 inputs that can be observed in the market.
Corporate Securities
Included in the fixed maturity securities are $65.7 million of fixed rate corporate securities which have a duration of 4.2
years and an overall credit quality rating of A.