Mercury Insurance 2008 Annual Report Download - page 54

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Redeemable Preferred Stock
Included in fixed maturities securities are redeemable preferred stock, which represents less than 1% of the total
investment portfolio at December 31, 2008, and had an overall credit quality rating less than investment grade.
Equity securities
Equity holdings consist of non-redeemable preferred stocks and dividend-bearing common stocks on which dividend
income is partially tax-sheltered by the 70% corporate dividend exclusion. The following table summarizes the equity security
portfolio by sector for 2008 and 2007:
Cost Fair Value Cost Fair Value
Equity securities:
Basic materials 15,355$ 5,816$ 7,875$ 8,058$
Communications 12,285 8,252 12,288 13,463
Consumer - cyclical 17,305 9,674 14,048 13,056
Consumer - non-cyclical 4,779 3,584 4,044 3,582
Energy 219,397 127,594 150,243 213,563
Financial 33,221 19,709 41,956 40,475
Funds 7,306 5,340 6,663 7,722
Government 5,000 130 5,000 4,750
Industrial 47,810 23,946 40,102 44,278
Technology 8,978 4,157 11,586 11,675
Utilities 32,337 39,189 37,190 67,615
403,773$ 247,391$ 330,995$ 428,237$
2008 2007
December 31,
(Amounts in thousands)
Short-term investments
At December 31, 2008, short-term investments include money market accounts, options, and short-term bonds which are
highly rated short duration securities redeemable on a daily or weekly basis.
Debt
Effective January 1, 2009, the Company acquired AIS for $120 million. The acquisition was financed by a $120 million
credit facility. The loan matures on January 2, 2012 with interest payable quarterly at an annual floating rate of LIBOR rate plus
125 basis points. In addition, the Company may be required to pay up to $34.7 million over the next two years as additional
consideration for the AIS acquisition. The Company plans to fund that portion of the purchase price, if necessary, from cash on
hand and cash flow from operations. On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR
rate plus 125 basis points on the loan for a fixed rate of 3.18%. The swap is not designated as a hedge. Changes in the fair value
are adjusted through the consolidated statement of operations in the period of change.
In February 2008, the Company acquired an 88,300 square foot office building in Folsom, California for approximately
$18.4 million. The Company financed the transaction through an $18 million secured bank loan. The loan matures on March 1,
2013 with interest payable quarterly at an annual floating rate of LIBOR plus 50 basis points. On March 3, 2008, the Company
entered into an interest rate swap of its floating LIBOR rate plus 50 basis points on the loan for a fixed rate of 4.25%. The swap
agreement terminates on March 1, 2013. The swap is designated as a cash flow hedge under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Changes in fair value of the swap are recorded as a
component of accumulated other comprehensive income.
On August 7, 2001, the Company completed a public debt offering issuing $125 million of senior notes. The notes are
unsecured, senior obligations of the Company with a 7.25% annual coupon payable on August 15 and February 15 each year
commencing February 15, 2002. These notes mature on August 15, 2011. The Company used the proceeds from the senior notes
to retire amounts payable under existing revolving credit facilities, which were terminated. Effective January 2, 2002, the
Company entered into an interest rate swap of its fixed rate obligation on the senior notes for a floating rate of LIBOR plus 107
basis points. The swap significantly reduced the interest expense in 2008 and 2007 when the effective interest rate was 3.3% and
6.4%, respectively. However, if the LIBOR interest rate increases in the future, the Company will incur higher interest expense in
the future. The swap is designated as a fair value hedge under SFAS No. 133.