Mercury Insurance 2009 Annual Report Download - page 26

reduce the duration of the asset as interest rates decline. The call-adjusted average maturity of the overall bond
portfolio, including short-term bonds, was approximately 6.8 years, related to holdings which are heavily
weighted with high coupon issues that are expected to be called prior to maturity. The modified duration of the
overall bond portfolio reflecting anticipated early calls was 5.1 years at December 31, 2009, including
collateralized mortgage obligations with modified durations of approximately 1.8 years and short-term bonds that
carry no duration. Modified duration measures the length of time it takes, on average, to receive the present value
of all the cash flows produced by a bond, including reinvestment of interest. As it measures four factors
(maturity, coupon rate, yield, and call terms) which determine sensitivity to changes in interest rates, modified
duration is considered a better indicator of price volatility than simple maturity alone. The longer the duration,
the greater the price volatility in relation to changes in interest rates.
Equity holdings consist of perpetual preferred stocks and dividend-bearing common stocks on which
dividend income is partially tax-sheltered by the 70% corporate dividend exclusion. At year end, 96.1% of short-
term investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis. The
Company does not have any material direct equity investment in subprime lenders.
Investment Results
The following table summarizes the investment results of the Company for the most recent five years:
Year Ended December 31,
2009 2008 2007 2006 2005
(Amounts in thousands)
Average invested assets at cost(1) .............. $3,196,944 $3,452,803 $3,468,399 $3,325,435 $3,058,110
Net investment income:
Before income taxes .................... 144,949 151,280 158,911 151,099 122,582
After income taxes ..................... 130,070 133,721 137,777 127,741 105,724
Average annual yield on investments:
Before income taxes .................... 4.5% 4.4% 4.6% 4.5% 4.0%
After income taxes ..................... 4.1% 3.9% 4.0% 3.8% 3.5%
Net realized investment gains (losses) after income
taxes(2)(3) ................................ 225,189 (357,838) 13,525 10,033 10,504
Net increase (decrease) in unrealized gains/losses
on investments after income taxes(3) .......... $ — $ — $ 10,905 $ 3,103 $ (14,000)
(1) Fixed maturities and short-term bonds at amortized cost; and equities and other short-term investments at
cost.
(2) Includes investment impairment write-down, net of tax benefit, of $14.7 million in 2007, $1.3 million in
2006, and $1.4 million in 2005. 2007 also includes $1.3 million gain, net of tax, and $0.9 million loss, net of
tax benefit, related to the change in the fair value of trading securities and hybrid financial instruments,
respectively.
(3) Effective January 1, 2008, the Company adopted the fair value option with changes in fair value reflected in
net realized investment gains or losses in the consolidated statements of operations.
Competitive Conditions
The Company operates in the highly competitive property-casualty industry subject to competition on
pricing, claims, consumer recognition, coverage offered and other product features, customer service, and
geographic coverage. Some of the Company’s competitors are larger and well-capitalized national companies
which have broad distribution networks of employed or captive agents.
Reputation for customer service and price are the principal means by which the Company competes with
other automobile insurers. In addition, the marketing efforts of independent agents and brokers can also provide a
8