Mercury Insurance 2009 Annual Report Download - page 66

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Included in net (loss) income are net realized investment losses of $550.5 million in 2008 compared with net
realized investment gains of $20.8 million in 2007. Net realized investment losses of $550.5 million in 2008
include losses of $525.7 million due to changes in the fair value of total investments pursuant to election of the
fair value accounting option. These losses, primarily in fixed maturity securities, arise from the market value
declines on the Company’s holdings during 2008 resulting from ongoing downgrades of municipal bond insurers,
widening credit spreads, economic downturn impacting municipalities and the lack of liquidity in the market.
Net (Loss) Income
Net (loss) income was $(242.1) million or $(4.42) per diluted share and $237.8 million or $4.34 per diluted
share in 2008 and 2007, respectively. Diluted per share results were based on a weighted average of 54.9 million
shares and 54.8 million shares in 2008 and 2007, respectively. Basic per share results were $(4.42) and $4.35 in
2008 and 2007, respectively. Included in net income were net realized investment (losses) gains, net of income
taxes, of $(6.54) and $0.25 per share (diluted and basic) in 2008 and 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES
A. General
The Company is largely dependent upon dividends received from its insurance subsidiaries to pay debt
service costs and to make distributions to its shareholders. Under current insurance law, the Insurance Companies
are entitled to pay ordinary dividends of approximately $153.3 million in 2010. Actual ordinary dividends paid
from the Insurance Companies to Mercury General during 2009 were $110 million. As of December 31, 2009,
Mercury General also had approximately $68 million in investments and cash that could be utilized to satisfy its
direct holding company obligations.
The principal sources of funds for the Insurance Companies are premiums, sales and maturity of invested
assets, and dividend and interest income from invested assets. The principal uses of funds for the Insurance
Companies are the payment of claims and related expenses, operating expenses, dividends to Mercury General,
and the purchase of investments.
B. Cash Flows
The Company has generated positive cash flow from operations for over twenty consecutive years. Because
of the Company’s long track record of positive operating cash flows, it does not attempt to match the duration
and timing of asset maturities with those of liabilities. Rather, the Company manages its portfolio with a view
towards maximizing total return with an emphasis on after-tax income. With combined cash and short-term
investments of $341.7 million at December 31, 2009, the Company believes its cash flow from operations is
adequate to satisfy its liquidity requirements without the forced sale of investments. However, the Company
operates in a rapidly evolving and often unpredictable business environment that may change the timing or
amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that the
Company’s sources of funds will be sufficient to meet its liquidity needs or that the Company will not be
required to raise additional funds to meet those needs, including future business expansion, through the sale of
equity or debt securities or from credit facilities with lending institutions.
Net cash provided by operating activities in 2009 was $189.0 million, an increase of $124.4 million over
2008. The increase was primarily due to a decrease in losses and loss adjustment expenses paid and tax expenses
paid in 2009 compared with 2008. Additionally, the Company had operating cash flows in 2009 generated by
AIS after the acquisition. The Company utilized the cash provided from operating activities primarily for the
payment of dividends to its shareholders and the purchase and development of information technology. Funds
derived from the sale, redemption or maturity of fixed maturity investments of $456.3 million were primarily
reinvested by the Company in high grade fixed maturity securities.
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