Mercury Insurance 2009 Annual Report Download - page 70

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(1) Municipal Securities
The Company had approximately $2.4 billion at fair value ($2.4 billion at amortized cost) in municipal
bonds at December 31, 2009, with an unrealized gain of $21.2 million. Over 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, 2009.
The following table shows the Company’s insured municipal bond portfolio by bond insurer at
December 31, 2009 and 2008:
December 31,
2009 2008
Municipal bond insurer Rating(1) Fair Value Rating(1) Fair Value
(Amounts in thousands)
NATL-RE (MBIA) ......................................... BBB $ 736,741 BBB $ 606,301
AMBAC .................................................. CC 223,262 BBB 193,701
FSA ..................................................... AA 199,386 AA 205,249
XLCA .................................................... CC 46,060 CCC 38,393
ASSURED GTY ........................................... AA 42,966 AA 16,664
CIFG .................................................... CC 17,262 B 16,278
ACA ..................................................... NR 14,469 NR 13,899
RADIAN ................................................. BB 14,074 BBB 15,155
FGIC .................................................... NR 3,885 CCC 9,048
Other .................................................... NR 92,553 NR 81,283
$1,390,658 $1,195,971
(1) Management’s estimate of average of ratings issued by Standard & Poor’s, Moody’s, and Fitch.
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 principal
amounts upon maturity, avoiding forced sales prior to maturity, of bonds that have declined in market value due
to the bond insurers’ rating downgrades. 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.
At December 31, 2009 and 2008, municipal securities included auction rate securities. The Company owned
$3.3 million and $3.0 million at fair value of auction rate securities at December 31, 2009 and 2008, respectively.
Auction rate securities were valued based on a discounted cash flow model with certain inputs that were not
observable in the market and are considered Level 3 inputs.
(2) Mortgage Backed Securities
The mortgage-backed securities portfolio is categorized as loans to “prime” borrowers except for
approximately $14.0 million and $16.3 million ($13.2 million and $20.0 million amortized cost) of Alt-A
mortgages at December 31, 2009 and 2008, respectively. 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. At December 31, 2009, the Company had
no holdings in commercial mortgage-backed securities, but had approximately $12.2 million, at fair value, in
interest-only mortgage-backed securities. While these interest-only mortgage-backed securities are AAA rated
U.S. Government Agency issues, their projected future cash flows can be adversely affected due to increased
prepayment activity on the underlying collateral.
The weighted-average rating of the Company’s Alt-A mortgage-backed securities is BBB+ and the
weighted-average rating of the entire mortgage backed securities portfolio is AA+.
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